sentence
stringlengths 478
32.8k
| label
int64 0
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 board of directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. stock based compensation – initial measurement of fair value description of the matter as described in note 2 of the consolidated financial statements, the company measures stock-based awards at fair value and recognizes compensation expense related to such awards over the requisite service period. the company uses the black-scholes option pricing model to determine the fair value of the awards. certain inputs in the model used for determination of fair value of the awards of the company and its subsidiary, such as the expected term, volatility, and fair value of stock, require management to make significant judgments. how we addressed the matter in our audit we reviewed the key assumptions utilized in calculation of volatility, and assessed the comparable companies used in the volatility calculation of the company’s subsidiary. we reviewed management’s determination of the expected term and the fair value of the subsidiary’s stock and compared to the terms of the compensation agreements, historical information, and market data. f-2table of contents 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 milestones and contingent payments are probable in estimating the research and development costs to accrue or disclose in the reporting period. recognition and disclosure of research and development costs were considered a critical audit matter due their material impact on disclosures in the consolidated financial statements and the nature and extend of audit effort required to evaluate the results of audit procedures. how we addressed the matter in our audit we reviewed third-party contracts, statements of work and purchase orders, discussed with personnel and obtained confirmations with external service providers as to 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. going concern – assessing the company’s ability to continue as a going concern description of the matter as described in note 3 of the consolidated financial statements, the company has adequate cash on hand, which will provide sufficient liquidity to finance the operating activities of the company for twelve months from the issuance of these consolidated financial statements. we determined that the company’s ability to continue as a going concern is a critical audit matter due to significant management’s judgments and assumptions used in estimating future cash flows. how we addressed the matter in our audit we reviewed forecasted information, assessed reasonableness of the forecasted operating results and uses and sources of cash used in management’s assessment. this testing included inquiries with management, comparison of prior period forecasts to actual results, assessment of available financing, consideration of positive and negative evidence impacting management’s forecasts, market and industry factors. /s/ friedman llp we have served as the company’s auditor since 2020. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of labcorp diagnostics segment (dx) net accounts receivable as described in notes 2 and 7 to the consolidated financial statements, the dx business’s revenues are distributed among four payer portfolios - clients, patients, medicare and medicaid, and third-party. dx accounts receivable due from these payer portfolios was $1,515.5 million as of december 31, 2020. management has a formal process to estimate implicit price concessions for uncollectable accounts. management considers negotiated discounts and anticipated adjustments, including historical collection experience for each of the payer portfolios, when revenues and accounts receivable are recorded. anticipated write-offs are recorded as an adjustment to revenue and at an amount considered necessary to record the revenue at its net realizable value. in addition to contractual discounts, other adjustments including anticipated payer denials and other external factors that could affect the collectibility of its receivables are considered when determining revenue and the net receivable amount.the principal considerations for our determination that performing procedures relating to the valuation of dx net accounts receivable is a critical audit matter are the significant judgment and estimation by management to determine net accounts receivable related to the dx segment, which led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the audit evidence related to the valuation of net dx accounts receivable. 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 dx net accounts receivable. these procedures also included, among others, testing management's process for developing the estimate of net accounts receivable, and the relevance of historical billing and collection data as an input to the analysis; testing the accuracy of a sample of revenue transactions and a sample of cash collections from the historical billing and collection data which is used in management’s analysis; and performing a retrospective comparison of actual cash collected to the prior year estimate of net accounts receivable.revenue recognition - estimating costs to complete for clinical research services as described in note 21 to the consolidated financial statements, labcorp drug development (dd) revenue was $4,877.7 million for the year ended december 31, 2020. clinical services utilizing the input-based measure of progress account for 50% of dd revenue. the majority of clinical development and commercialization service long-term contracts within the dd segment are service contracts for clinical research that represent a single performance obligation (e.g., management of a clinical study). revenue for these service contracts is recognized over time based on the progress of the performance obligation which was measured by the proportion of the actual costs incurred to the total costs expected to complete the contract (including labor and pass-through costs such as investigator grants and reimbursable out-of-pocket expenses). this cost-based method of revenue recognition required management to estimate the costs to complete these service contracts on an ongoing basis. the principal considerations for our determination that performing procedures relating to estimating costs to complete for clinical research services is a critical audit matter are the significant judgment and estimation by management when developing the costs to complete, including the labor and third party costs to complete the service contracts, which led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating evidence related to the cost estimates made by management. f-3index 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 estimated costs to complete. these procedures also included, among others, testing management's process for estimating cost to complete the service contracts, testing, for certain contracts, actual costs incurred and evaluating the reasonableness of management’s estimation of costs to complete projects, including labor and third party costs to complete service contracts; and evaluating whether the assumptions used were reasonable by performing a retrospective comparison of current year project costs to historical cost estimates made by management.goodwill impairment assessment - two reporting units within the dd segment as described in notes 1 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $7,751.5 million as of december 31, 2020, and the goodwill associated with the company’s dd segment was $3,951.3 million. for the year ended december 31, 2020, the company recorded goodwill impairment of $418.7 million for one of its reporting units within the dd segment. management assesses goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. the company recognizes an impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. fair value of a reporting unit is estimated using both income-based and market-based valuation methods. management’s impairment analysis for certain reporting units utilized significant judgments and assumptions related to the market comparable method analysis, such as selected market multiples, and related to cash flow projections, such as revenue and terminal growth rates, projected operating margin, and the discount rate.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the two reporting units within the dd segment is a critical audit matter are the significant judgment by management when developing the fair value estimate of the reporting units, which led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures to evaluate management’s market comparable method analysis and cash flow projections, including significant assumptions for the selected market multiples, revenue and terminal growth rates, projected operating margin, and the discount rate. also, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the significant assumptions used in the valuation of the reporting units. these procedures also included, among others, testing management's process for estimating the fair value of the reporting units which involved evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions used in the market comparable method analysis and cash flow projections, including the selected market multiples, revenue and terminal growth rates, projected operating margin, and the discount rate. evaluating the reasonableness of the revenue and terminal growth rates and projected operating margin involved considering the past performance of the reporting unit and considering 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 appropriateness of the company’s valuation methods and the reasonableness of (i) the terminal growth rates impacting the reporting units' future cash flows, (ii) the selected market multiple applied to the reporting units' financial information and (iii) the discount rate. /s/ pricewaterhouse coopers llp raleigh, north carolina february 25, 2021we have served as the company’s auditor since 1997. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.realizability of deferred tax assets related to research and development tax credits as described in note 10 to the consolidated financial statements, the company has recorded $4.0 million in deferred tax assets related to u.s. federal and state research and development tax credits (“r&d credits”) as of december 31, 2020. in evaluating the need, or continued need, for a valuation allowance relating to these r&d credits, management’s assessment involved complex and significant judgment in determining forecasts of future taxable income in relation to the duration of statutory carryforward periods for the use of these r&d credits. we identified the realizability of deferred tax assets related to r&d credits to be a critical audit matter. the principal consideration for our determination is the significant audit effort that was necessary in evaluating the company’s significant judgment and inputs used in determining the forecasts of future taxable income during the duration of statutory carryforward periods to utilize these assets.56table of contents the primary procedures we performed to address this critical audit matter included:·tested the completeness and accuracy of the underlying data used in the future taxable income forecasts.·evaluated the future taxable income forecasts including the trends of both the historical financial results and the projected sources of taxable income.·utilized personnel with specialized knowledge and skill in tax to assess the reasonableness of positive and negative evidence applied to determine realizability of the deferred tax assets related to r&d credits./s/bdo usa, llp we have served as the company's auditor since 2019. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment – adtalem brazil reporting unit as described in notes 4 and 10 to the consolidated financial statements, the company’s consolidated goodwill balance was $874 million at june 30, 2019, and the amount of goodwill associated with the adtalem brazil reporting unit was $187 million. management conducts an annual impairment assessment as of may 31 of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill balances may be impaired. if the carrying value of a reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss to goodwill is recognized. as of the annual impairment assessment performed during the fourth quarter, the amount of excess estimated fair value over the carrying value was 13% for the adtalem brazil reporting unit. the estimated fair value of the reporting unit is based on management’s projection of revenues, gross margin, operating costs and cash flows considering planned business and operational strategies over a long-term planning horizon of five years along with a terminal value calculated based on discounted cash flows. the key assumptions utilized in calculating the fair value of the adtalem brazil reporting unit were the discount rate, revenue growth rate over the forecast period, and terminal growth rate.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the adtalem brazil reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit, which in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s cash flow projections and significant assumptions, including the discount rate, revenue growth rate over the forecast period, and terminal growth rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment assessment, including controls over the valuation of the company’s 128table of contentsreporting units. these procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including the discount rate, revenue growth rate over the forecast period, and terminal growth rate. professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow model and certain significant assumptions, including the discount rate and terminal growth rate. evaluating the assumption related to the revenue growth rate over the forecast period involved evaluating whether the assumption used was reasonable by considering the current and past performance of the reporting unit, consistency with external market and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit./s/ pricewaterhouse coopers llp chicago, illinois august 28, 2019we have served as the company’s auditor since 1991. | 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. petroleum segment’s inventory finished goods valuation as described in note 2 to the consolidated financial statements, the company utilizes the ability-to-bear methodology to determine the valuation of its petroleum segment’s finished goods inventories, which was $123 million at december 31, 2020. management makes certain estimates based on observable inputs, including monthly sales prices and current market prices to determine how much raw materials and production costs are capitalized into inventories. management then assesses if a lower of cost or net realizable value adjustment is required. changes in these estimates could have a significant impact on the company’s valuation of finished goods inventory.december 31, 2020 | 65table of contents we identified the company’s petroleum segment’s finished goods inventory valuation process as a critical audit matter. the principal consideration for our determination that the inventory valuation process is a critical audit matter is the degree of complexity and subjectivity inherent in determining management’s valuation estimates.our audit procedures to evaluate the company’s valuation of finished goods inventory, included the following procedures to test management’s process, among others:•we tested the design and operating effectiveness of management’s processes and controls for determining the valuation of finished goods inventory.•we obtained a sample of invoices to verify the accuracy of the production costs used in estimates.•we tested or evaluated the reasonableness of inputs including sales volumes, monthly sales prices and current market prices for each product by obtaining third-party market prices and a sample of sales transactions by product to verify the accuracy of the information used by management.•we tested management’s process of calculating the lower of cost or net realizable value including verifying the reasonableness of the methodology used and accuracy of the inputs such as selling prices for refined fuels and market pricing.nitrogen fertilizer segment’s goodwill impairment assessment as described in note 2 to the consolidated financial statements, annually or as facts or circumstances may dictate, management performs a valuation of the coffeyville reporting unit to determine if a goodwill impairment exists. during the second quarter of 2020 following the completion of the spring planting season and observation of certain market and other conditions described in note 2, the company’s nitrogen fertilizer segment’s coffeyville fertilizer facility reporting unit concluded a triggering event occurred and performed an interim quantitative impairment assessment. the identification of a triggering event and the determination of the fair value of the reporting unit required management to make significant estimates and develop assumptions related to cash flow forecasts using estimates of future nitrogen fertilizer product pricing, volumes to be sold, costs to be incurred for key process inputs and other operating expenses as well as estimating appropriate discount rates and growth rates for future periods. changes in these assumptions could have had a significant impact on the identification of a triggering event as well as the reporting unit’s estimated fair value. as a result of the quantitative impairment assessment, a full goodwill impairment of $41 million was recorded during the year ended december 31, 2020.we identified the goodwill impairment assessment of the nitrogen fertilizer segment’s coffeyville fertilizer facility reporting unit as a critical audit matter. the principal consideration for our determination that the goodwill impairment assessment is a critical audit matter was the degree of complexity and subjectivity inherent in determining management’s estimates.our audit procedures related to the nitrogen fertilizer segment’s coffeyville fertilizer facility reporting unit’s goodwill impairment assessment included the following, among others:•we tested the design and operating effectiveness of management’s processes and controls over the identification of a triggering event and the fair value assessment of the coffeyville reporting unit.•we evaluated the reasonableness of a triggering event by considering the current market conditions following the completion of the spring planting season as well as the economic uncertainty surrounding the covid-19 pandemic.•we evaluated the reasonableness of future nitrogen fertilizer pricing assumptions by comparing the prices used by management to current industry and economic trends considering the impacts of the covid-19 pandemic as well as comparing those prices to the historical performance of the coffeyville reporting unit, performed sensitivity analyses to evaluate the change in the fair value estimates that would result from changes in those price assumptions, and recalculated management’s estimates.•we compared forecasted sales volumes and expenses to historical operating results.•we utilized valuation professionals with specialized skills and knowledge to assist in evaluating the nitrogen fertilizer segment’s coffeyville fertilizer facility’s discounted cash flow model and guideline public company methods and certain significant assumptions, including the discount rate, terminal growth rate, and cost of capital.•we evaluated whether the assumptions used were consistent with evidence obtained in other areas of the audit./s/ grant thornton llp we have served as the company’s auditor since 2013. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that werecommunicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are materialto the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, bycommunicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts ordisclosures to which they relate. complex financing transactions descriptionof the matter: asdiscussed in note 6 to the consolidated financial statements, the company’s financing transactions include warrants thatare denominated in a currency other than the company’s functional currency which requires derivative accounting. derivativeaccounting is complex, involves judgements, and estimation. how we addressed the matter in our audit: wereviewed the underlying warrant agreements, evaluated management’s selection of a valuation method, tested the inputs usedin the black-scholes calculation by agreeing terms to the warrant agreements and market information to third-party sites, andrecalculated the derivative liability. we also reviewed the company’s convertible note agreements to determine if therewere unidentified derivatives. /s/ haynie & company haynie & company salt lake city, utah march 30, 2021 wehave served as the company’s auditor since 2018. | 1 |
critical audit matters thecritical audit matters communicated below are matters arising fromthe current period audit of the financial statements that werecommunicated or required to be communicated to the general partnerand that: (1) relate to accounts or disclosures that are materialto the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, bycommunicating the critical audit matters below, providing separateopinions on the critical audit matters or on the accounts ordisclosures to which they relate. f1 to the partners commonwealth income & growth fund vii, lp(continued) impairment of long-lived assets asdiscussed in note 2, topic, long-lived assets, once an asset comesoff lease or is released, the partnership reassesses the usefullife of an asset. the partnership evaluates its long-lived assetswhen events or circumstances indicate that the value of the assetmay not be recoverable. the partnership determines whetherimpairment exists by estimating the undiscounted cash flows to begenerated by each asset. if the estimated undiscounted cash flowsare less than the carrying value of the asset then impairmentexists. the amount of the impairment is determined based on thedifference between the carrying value and the fair value. fairvalue is determined based on estimated discounted cash flows to begenerated by the asset, third party appraisals, or comparable salesof similar assets, as applicable, based on asset type. theprincipal considerations for our determination that performingprocedures relating to the impairment of long-lived assets is acritical audit matter are the use of significant judgment andsubjective factors in the partnership’s assessment of anychanges in events or circumstances that may affect the carryingamount of its long-lived assets. addressingthe matter involved performing procedures and evaluating auditevidence in connection with forming our overall opinion on thefinancial statements. these procedures included thefollowing:●reviewed theinternal controls over the partnership’s impairmentassessment process for equipment●reviewed thevaluation method for appropriateness●reviewed thespecialized skills and knowledge of the valuationprofessional●tested theestimated fair value to an independent service reimbursable expenses asdiscussed in note 2, topic, reimbursable expenses, reimbursableexpenses are ongoing operational expenses and fees associated withthe allocation of salaries and benefits which are charged to the partnership by commonwealth capital corp. (ccc) in connection withthe administration and operation of the partnership are allocatedto the partnership based upon several factors including, but notlimited to, the number of investors, compliance issues, and thenumber of existing leases. weidentified the allocation of reimbursable expenses as a criticalaudit matte due to a high degree of subjectivity in the selectionof certain key factors. thefollowing are the primary procedures we performed to address thiscritical audit matter. we evaluated the design and tested theoperating effectiveness of certain internal controls over ccc’s allocation process. addressingthe matter involved performing procedures and evaluating auditevidence in connection with forming our overall opinion on thefinancial statements. these procedures included thefollowing:●evaluated that thereimbursement is in compliance with the partnership agreement●evaluated thereasonableness and consistency of key factors used by ccc toallocate the ongoing operational expenses●tested the dollaramounts in the key factors to the accounting records of thepartnerships included in the allocation●tested thecalculation of the allocation percentage applied to the partnership●confirmed that theoperational expenses do not include costs of controlpersons /s/morison cogen llp we haveserved as the partnership’s auditors since 2021. | 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. completenessof litigation and claims accruals asdisclosed in note 16 to the consolidated financial statements, the company is involved in various legal proceedings. the company assessesthe need to make a provision or to disclose a contingent liability on a case-by-case basis considering the underlying facts of each litigation.the eventual outcome of the litigations is uncertain and estimation at the balance sheet date involves extensive judgement of managementincluding input from legal counsel due to the complexity of each litigation.adverseoutcomes could significantly impact the company’s reported operations and balance sheet position. considering the judgement involvedin determining the need to make a provision or disclose litigation, the matter is considered a critical audit matter.ouraudit procedures included, among others, obtaining a list of litigation company’s management and legal counsel, identifying materiallitigations from the aforementioned list and performing inquiries with the said counsel, obtaining and reading the underlying documentsto assess the assumptions used by management in arriving at the conclusions; circulating, obtaining, and reading legal confirmationsfrom the company’s external legal counsels in respect of material litigations and considered that in our assessment; and verifyingthe disclosures related to provisions and contingent liabilities in the financial statements to assess consistency with underlying documents. revenuerecognition in relation to fraud asdescribed in note 2 to the consolidated financial statements, management applies fasb topic 606, revenue from contacts with customers(“asc 606”) to recognize revenue. management recognizes revenue in a manner that reasonably reflects the delivery of itsservices to customers in return for expected consideration. the company’s revenue, inclusive of related party revenue, is it servicesrevenue recorded on a monthly basis as services are provided. theprincipal considerations for our determination that performing procedures over the full completion of revenue contracts and subsequentpayment collections is a critical audit matter. this in turn led to significant effort in performing our audit procedures which weredesigned to evaluate whether the contractual terms, the timing of revenue recognition and the subsequent collections were appropriatelyidentified and accounted for by management under asc 606. ouraudit procedures included, among others, understanding of controls relating to management’s revenue recognition process, examiningtransaction related documents, confirming revenues and outstanding receivables at the balance sheet date with a sample of the customers,and testing collections subsequent to the balance sheet date. /s/ | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition—clinical services—refer to notes 2 and 14 to the financial statements critical audit matter description as discussed in note 14 to the financial statements, revenue for the company’s clinical services is recognized once the diagnostic services have been performed and the results have been delivered to the ordering physician. revenue is recorded for all payers based on the amount expected to be collected, which considers implicit price concessions. implicit price concessions represent differences between amounts billed and the estimated consideration the company expects to receive based on negotiated discounts, historical collection experience and other anticipated adjustments, including anticipated payer denials. we identified management’s estimation of implicit price concessions related to neo genomics revenue recorded that has not been received in cash as a critical audit matter due to management’s manual process used to determine the estimate, and the significant judgments required by management to estimate payer behavior. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions related to expected receipts that were applied in the estimate of implicit price concessions. 54table of contents neogenomics, inc.how the critical audit matter was addressed in the audit our audit procedures related to management’s judgments in the estimate of implicit price concessions included the following, among others: •we tested the effectiveness of controls over management’s determination of assumptions used to calculate implicit price concessions.•we tested the methodology used by the company to estimate implicit price concessions.•we tested the assumptions used by management to calculate implicit price concessions by:–testing the mathematical accuracy of management’s calculation of implicit price concessions. –testing the historical cash receipts compared to the amounts billed to payers, which are used in the estimate of implicit price concessions, by making selections and agreeing the selected information to source documents. –testing management’s ability to estimate implicit price concessions accurately by comparing recorded net revenue to cash receipts received through january 2021. –evaluating trends in revenue and accounts receivable compared to previous periods to identify any evidence that may contradict management’s assertion regarding implicit price concessions. investment in non-consolidated affiliate—inivata—refer to notes 8 and 19 to the financial statements critical audit matter description as discussed in note 8, on may 22, 2020, the company entered into an investment agreement with inivata limited, a company incorporated in england and wales (“inivata”), pursuant to which the company acquired preference shares, resulting in a minority interest in inivata’s outstanding equity, and a purchase option. inivata is required to be evaluated for consolidation, which includes determining whether inivata is a variable interest entity (“vie”), and if so, whether the company is the primary beneficiary. significant judgment is required by management to determine whether the company has the power to direct the activities that most significantly impact inivata’s economic performance. the company determined that inivata is a vie, but that it does not control inivata due to the company not having the power to direct the activities that most significantly impact inivata’s economic performance. given the complexities associated with the determination by the company that inivata should not be consolidated because the company is not the primary beneficiary of inivata, performing audit procedures to evaluate the accounting for the investment in inivata involved especially complex and subjective auditor judgment.how the critical audit matter was addressed in the audit our audit procedures related to the initial accounting for the inivata preference shares and purchase option included the following, among others: •we tested the effectiveness of controls over the company’s evaluation of whether inivata is a vie and whether the company is the primary beneficiary.•with the assistance of professionals in our firm having expertise in consolidation accounting, we evaluated management’s judgments related to the application of u.s. gaap by evaluating management’s accounting analysis to determine whether we agree with management’s conclusion that inivata should not be consolidated./s/ deloitte & touche llp san diego, california february 25, 2021 we have served as the company's auditor since 2019. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the 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, 5, 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 the packaging reporting unit to its carrying value. the company determines the fair value of the packaging reporting unit using an income approach that utilizes discounted cash flows and requires management to make significant assumptions and estimates related to the forecasts of future revenues and the discount rate. changes to the assumptions and estimates may result in a significantly different estimate of the fair value of the reporting unit, which could result in a different assessment of the recoverability of goodwill. the goodwill balance was $99.6 million as of december 31, 2021. the fair value of the reporting unit exceeded its carrying value as of the measurement date, and therefore, no impairment was recognized.41table of contents we identified goodwill for the packaging reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of the reporting unit. 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 selection of the discount rate and forecasts of future revenues.how the critical audit matter was addressed in the audit our audit procedures related to the discount rate and forecasts of future revenues included the following, among others: •we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the packaging reporting unit, such as controls related to management’s selection of the discount rate and forecasts of future revenue.•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management.•we evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. •we evaluated the reasonableness of management’s forecasts of future revenue by comparing the forecasts to (1) historical revenues, (2) internal communications to management and the board of directors, and (3) forecasted industry information included in industry reports relevant to the reporting unit. •we considered the impact of changes in the industry on management’s forecasts./s/ deloitte & touche llp atlanta, georgia march 1, 2022we have served as the company's auditor since 2013. | 1 |
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 to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material tothe consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financialstatements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. allowance for credit losses on loans held-in-portfolio – quantitative models, and qualitative adjustments to the puerto rico portfolios as described in notes 2 and 8 to the consolidated financial statements, the corporation follows thecurrent expected credit loss (“cecl”) model, to establish and evaluate the adequacy of the allowance for credit losses (“acl”) to provide for expected losses in the loan portfolio. as of december 31, 2020, the allowance forcredit losses was $896 million on total loans of $29 billion. this cecl model establishes aforward-looking methodology that reflects the expected credit losses over the lives of financial assets. the quantitative modeling framework includes competing risk models to generate lifetime defaults and prepayments, and other loan level modelingtechniques to estimate loss severity. as part of this methodology, management evaluates various macroeconomic scenarios, and may apply probability weights to the outcome of the selected scenarios. the acl also includes a qualitative framework thataddresses losses that are expected but not captured within the quantitative modeling framework. in order to identify potential losses that are not captured through the models, management evaluated model limitations as well as the different riskscovered by the variables used in each quantitative model. to complement the analysis, management also evaluated sectors that have low levels of historical defaults, but current conditions show the potential for future losses. the principal considerations for ourdetermination that performing procedures relating to the allowance for credit losses on loans held-in-portfolio quantitative models, and qualitative adjustments to the puerto rico portfolios is a 73 critical audit matter are (i) the significant judgment by management indetermining the allowance for credit losses, including qualitative adjustments to the puerto rico portfolios, which in turn led to a high degree of auditor effort, judgment, and subjectivity in performing procedures and evaluating auditevidence relating to the allowance for credit losses, including management’s selection of macroeconomic scenarios and probability weights applied; and (ii) the audit effort involved the use of professionals with specialized skill andknowledge. addressing thematter 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 allowancefor credit losses for loans held-in-portfolio, including qualitative adjustments to the puerto rico portfolios. these procedures also included, among others, testing management’s process for estimating the allowance for credit losses by (i)evaluating the appropriateness of the methodology, including models used for estimating the acl; (ii) evaluating the reasonableness of management’s selection of various macroeconomic scenarios including probability weights applied to theexpected loss outcome of the selected macroeconomic scenarios; (iii) evaluating the reasonableness of the qualitative adjustments to puerto rico portfolios allowance for credit losses; and (iv) testing the data used in the allowance for creditlosses. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the methodology and models,the reasonableness of management’s selection and weighting of macroeconomic scenarios used to estimate current expected credit losses and reasonableness of the qualitative adjustments to puerto rico portfolios allowance for creditlosses. goodwill annual impairment assessment – banco popular de puerto rico and popular bank reporting units as described in note 14to the consolidated financial statements, the corporation’s consolidated goodwill balance was $671 million as of december 31, 2020, of which a significantportion relates to the banco popular de puerto rico (“bppr”) and popular bank (“pb”) reporting units. management conducts an impairment test as of july 31 of each year and on a more frequent basis if events or circumstancesindicate an impairment could have taken place. in determining the fair value of each reporting unit, management generally uses a combination of methods, including market price multiples of comparable companies andtransactions, as well as discounted cash flow analysis. management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology and the weights applied to each valuation methodology,as applicable. the computations require management to make estimates, assumptions and calculations related to: (i) a selection of comparable publicly traded companies, based on the nature of business, location and size; (ii) calculation of average price multiples of relevant valuedrivers from a group of selected comparable companies; (iii) the discount rate applied to future earnings, based on an estimate of the cost of equity; (iv) thepotential future earnings of the reporting units; and (v) the market growth and new business assumptions. furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units tothe market capitalization of the corporation concluding that the fair value results determined for the reporting units were reasonable.the principal considerations for our determination that performing procedures relating to goodwill annual impairment assessments of the banco popular de puerto rico and popular bank reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value measurements of the reporting units which led to a high degree of auditor judgment, subjectivity, and effort inperforming procedures and evaluating evidence relating tothe calculation of average price multiples of relevant value drivers from a group of selected comparable companies; the potential future earnings of the reporting unit; the estimated cost of equity; and the market growth and new businessassumptions; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment process, including controls over the valuation of banco popular de puerto rico and popular bank reporting units. theseprocedures also included, among others, (i) testingmanagement’s process for determining the fair value estimates of banco popular de puerto rico and popular bank reporting units; (ii) evaluating the appropriateness of the discounted cash flow analyses and market price multiples of comparablecompanies methods including the weights applied to each valuation method; (iii) testing the 74 underlying data used in the estimates; (iv) evaluating the appropriateness of the calculation ofaverage price multiples of relevant value drivers from a group of selected comparable companies; and (v) evaluating the potential future earnings of the reportingunits; the estimated cost of equity; and the marketgrowth and new business assumptions, including whether the assumptions used by management were reasonable considering, as applicable, (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 wereused to assist in evaluating the appropriateness of themethods and the reasonableness of certain significant assumptions. san juan, puerto rico march 1, 2021 we have served as the corporation’s auditor since 1971, | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition - refer to note 2 to the financial statements critical audit matter description the company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company offers products and services including its proprietary communication badges, perpetual software licenses, professional services, maintenance and support services, and extended hardware warranties. product revenue was $118 million and service revenue was $116 million for the year ended december 31, 2021. 56table of contents significant judgment is exercised by the company in determining revenue recognition for the company’s customer contracts, and includes the following: •identification and evaluation of terms and conditions within contracts that impact revenue recognition•determination of whether promised goods or services, such as hardware and software licenses, are capable of being distinct and are distinct in the context of the company’s customer contracts which leads to whether they should be accounted for as individual or combined performance obligations•determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately•determination of transaction price and allocation of transaction price to identified performance obligations we identified revenue recognition as a critical audit matter because of these significant judgments required by management. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether revenue was recognized to depict the transfer of promised products or services to customers in an amount that reflects the consideration the company expects to be entitled to in exchange for those goods or services.how the critical audit matter was addressed in the audit our principal audit procedures related to the company’s revenue recognition for these customer agreements included the following: •we tested the effectiveness of controls related to the identification and evaluation of terms and conditions in contracts, determination of distinct performance obligations, determination of the standalone selling prices, determination of transaction price, allocation of the transaction price to the performance obligations in the contract, and recognition of revenue when, or as, the company satisfies a performance obligation. •we evaluated management’s significant accounting policies related to revenue recognition for reasonableness.•we selected a sample of recorded revenue transactions and performed the following procedures:◦obtained and read customer purchase orders and the underlying contract for each selection, including master agreements and related amendments to evaluate if relevant contractual terms have been appropriately considered by management.◦evaluated management’s application of their accounting policy and tested revenue recognition for specific performance obligations by comparing management’s conclusions to the underlying master agreement and any related amendments.◦tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. •we evaluated the reasonableness of management’s estimate of standalone selling prices for products and services that are not sold separately by performing the following:◦assessed the appropriateness of the company’s methodology and mathematical accuracy of the determined standalone selling prices.◦tested the completeness and accuracy of the source data utilized in management’s calculations.business acquisitions — refer to note 12 to the financial statements critical audit matter description as described in note 12, the company completed the acquisition of patient safe solution, llc (“pss”) for capital consideration of $36 million on may 4, 2021. the company accounted for the acquisition of pss under the acquisition method of accounting for business combinations. accordingly, the purchase price was allocated on a preliminary basis, to the assets acquired and liabilities assumed based on their respective fair values, including developed technology intangible assets with an aggregate fair value of approximately $5.3 million. the company estimated the fair value of the developed technology intangible assets using an income-based valuation methodology, which is a specific relief-from-royalty method. significant judgment is exercised by the company in determining the fair value of the acquired developed technology intangible assets, including the following: •future expected revenue for acquired developed technology,57table of contents•useful life of acquired developed technology, •valuation methodology, and •discount and royalty rates. given the fair value determination of developed technology intangible assets acquired requires management to make significant estimates related to the above assumptions, performing audit procedures to evaluate the reasonableness of these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. thus, we deemed this to be a critical audit matter.how the critical audit matter was addressed in the audit our audit procedures related to the fair value of developed technology intangible assets acquired for pss included the following, among others:•we tested the effectiveness of controls over the purchase price allocation, including management’s controls over the forecast utilized, and the valuation methodology and inputs for estimating the fair value of developed technology intangible assets acquired. •our internal valuation specialists assisted us in evaluating the reasonableness of the (1) valuation techniques used for developed technology intangible assets acquired, (2) valuation assumptions used in the relief-from-royalty method including royalty rate, obsolescence factor, and discount rates, and (3) testing the mathematical accuracy of the calculation of estimated fair value of the developed technology intangible acquired assets, and developing a range of independent estimates and comparing our estimates to those used by management.•we assessed the reasonableness of management’s projections of economic useful life of developed technology intangible assets acquired, and percentage of revenue attributable to the intangible asset by comparing the assumptions used in the projections to external market sources, existing contracts, historical data, and results from other areas of the audit./s/ deloitte & touche llp san jose, california february 22, 2022we have served as the company's auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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. business combinations description of the matter as described in note 6 to the consolidated financial statements, the company completed business combinations during 2019 for total consideration, net of cash acquired of $1,096 million. the most significant of these were (1) the acquisition of all outstanding equity of ortho space, ltd. for total consideration, net of cash acquired of $208 million; and (2) the acquisition of all outstanding equity of mobius imaging and cardan robotics for total consideration, net of cash acquired of $473 million. the acquisitions were accounted for as business combinations. the recognition, measurement and disclosure of the company’s business combinations in the 2019 consolidated financial statements was considered especially challenging and required significant auditor judgment due to the complex determination by management of the appropriate assumptions, such as discount rates, revenue growth rates, and projected profit margins, for the valuation of acquired assets and expected probabilities of key outcomes for the valuation of assumed liabilities, including, but not limited to, developed technology and contingent consideration. the company used a discounted cash flow model to measure the developed technology and a probability weighted discounted cash flow approach to measure the contingent consideration.dollar amounts in millions except per share amounts or as otherwise specified.16stryker corporation 2019 form 10-k how we addressed the matter in our audit we tested the effectiveness of controls over the accounting for business combinations, including testing controls over the estimation process supporting the recognition and measurement of consideration transferred, developed technology and contingent consideration. we also tested management’s review of assumptions used in the valuation models. to test the valuation of acquired assets and expected probabilities of key outcomes for the valuation of assumed liabilities, we performed audit procedures that included, among others, evaluating management’s identification of assets acquired and liabilities assumed and assessing the fair value measurements prepared by management and their third-party valuation specialists, including the discount rates, revenue growth rates and projected profit margins as used in valuing the developed technology, as well as the inputs used in valuing contingent consideration, such as expected probabilities of key outcomes. we involved our valuation specialists to assist with the evaluation of methodologies used by the company and significant assumptions included in the fair value estimates. for example, to evaluate the revenue growth rates and projected profit margins, we compared the amounts to historical results of the company’s business and current industry and market trends for those in which the company operates and performed sensitivity analyses on key assumptions. we also evaluated the adequacy of the company’s disclosures included in note 6 related to these acquisitions. product recall liabilities description of the matter as described in note 7 to the consolidated financial statements, the company recorded $275 million of liabilities at december 31, 2019 for product recall matters relating to rejuvenate and abg ii modular-neck hip stems and lfit anatomic co cr v40 femoral heads settlements. the company establishes liabilities for product recall claims to the extent probable future losses are estimable based on quantitative and qualitative information from various sources. the company engages, when required, external specialists to perform an actuarial analysis to estimate the outstanding liabilities. auditing management’s estimate of product recall liabilities was especially challenging due to the significant measurement uncertainty associated with the product recall liabilities estimate that involved management’s significant judgment and actuarial analysis. further, the product recall liability is sensitive to significant management assumptions, including average costs per claim and the number of future claims, including those resulting in revision surgery.how we addressed the matter in our audit we obtained an understanding, evaluated management’s design and tested the operating effectiveness of the controls over the company’s product recall liability estimation process, including management's assessment of the assumptions, and the completeness and accuracy of the data underlying the product recall liabilities.to evaluate the liabilities for product recall claims, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims and average cost per claim data provided to management's actuarial specialist and obtaining legal confirmation letters to evaluate the reserves recorded. we involved our actuarial specialists in the evaluation of the methodologies applied by the company in determining the actuarially calculated range of loss and assessment of significant assumptions, including number of future claims and revision surgeries factored into the resulting estimated product recall liabilities. we also evaluated the adequacy of the company’s disclosures included in note 7 related to these liabilities. uncertain tax positions description of the matter as described in note 11 to the consolidated financial statements, the company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. uncertainty in a tax position may arise because tax laws are subject to interpretation. the company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. at december 31, 2019, the company had accrued liabilities of $472 million relating to uncertain tax positions.auditing management’s analysis of the company’s uncertain tax positions and the related unrecognized tax benefits was especially challenging as the analysis involved significant auditor judgment due to complex interpretations of tax laws, legal rulings and determination of arm’s length pricing for intercompany transactions. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s accounting process for uncertain tax positions. for example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles, including management’s review of the inputs and calculations of unrecognized income tax benefits.our audit procedures included, among others, evaluating the assumptions the company used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. we also tested the completeness and accuracy of the underlying data used by the company to calculate its uncertain tax positions. for example, we compared the estimated liabilities for unrecognized income tax benefits to similar positions in prior periods and assessed management’s consideration of current tax controversy and litigation and trends in similar positions challenged by tax authorities. we also assessed the historical accuracy of management’s estimates of its unrecognized income tax benefits by comparing the estimates with the resolution of those positions. we involved our tax professionals to evaluate tax technical merits, which included, for certain intercompany transactions, assessing the company’s assumptions and pricing methodology to determine they were arm’s length and complied with local jurisdictional laws and regulations. we also evaluated the adequacy of the company’s disclosures included in note 11 related to these tax matters./s/ ernst & young llp we have served as the company's auditor since 1974g | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures thatare material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, takenas a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical auditmatters or on the accounts or disclosures to which they relate. goodwill impairment assessment asdescribed in notes 1 and 6 to the consolidated financial statements, the company’s consolidated goodwill balance was $11.5million as of december 31, 2020. management evaluates goodwill, at the reporting unit level, for impairment annually during thefourth quarter, or more frequently, if events occur or circumstances change which would indicate that goodwill might be impaired.as a result of declining demand of signal processing hardware from a single customer in one of the company’s reportingunits, comm agility, as well as the high uncertainty associated with the ultimate trajectory of the covid-19 pandemic, managementperformed a quantitative analysis of the fair value of the comm agility reporting unit and determined its fair value was belowits carrying value. fair value of the reporting unit was estimated using a combination of the income approach and the market approach.the company used a discounted cash flow model for the income approach valuation method and the guideline public company and guidelinetransaction methods for the market approach valuation method. the determination of the fair value of the reporting unit requiredmanagement to make significant estimates and assumptions related to projected revenue growth, future operating margins, discountrates and terminal values. as disclosed by management, changes in these estimates and assumptions could have a significant impacton the fair value of the reporting unit, the amount of the goodwill impairment, or both. as a result of the quantitative impairmentanalysis discussed above, the company recorded a goodwill impairment of $4.7 million during the year ended december 31, 2020. 34 reportof independent registered public accounting firm wireless telecom group, inc. theprincipal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the comm agility reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fairvalue measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing proceduresand evaluating management’s significant estimates and assumptions in determining the fair value of the reporting unit; and(iii) the audit effort involved the use of professionals with specialized skill and knowledge. ouraudit procedures related to management’s evaluation of goodwill impairment included (i) evaluating the appropriateness ofthe income approach and market approach methods; (ii) testing the underlying data used by the company in its analysis; and (iii)evaluating the reasonableness of significant estimates and assumptions used by management. evaluating management’s estimatesand assumptions involved evaluating whether the estimates and assumptions used by management were reasonable considering (i) thecurrent and past performance of the reporting unit and (ii) whether these assumptions were consistent with evidence obtained inother areas of the audit. we utilized our valuation specialist to assist in evaluating the reasonableness of the company’svaluation methodology. furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements. business combination – acquisition of holzworth instrumentation, inc. (“holzworth”) in february 2020, the company completed the acquisition of holzworth for a purchase price of approximately $12 million, which includes$2.4 million of contingent consideration, estimated at the acquisition date. the company accounted for the acquisition under theacquisition method of accounting for business combinations. accordingly, the purchase price was allocated to the assets acquiredand liabilities assumed based on their respective fair values, including total intangible assets of $4.3 million. management,with the assistance of an independent valuation expert, estimated the fair value of the intangible assets using the multi-periodexcess earnings method and the relief from royalty methodology, which are both variations of the income approach. additionally,management, with the assistance of an independent valuation expert, estimated the fair value of the contingent consideration usingthe monte carlo simulation model. giventhe fair value determination of the intangible assets and contingent consideration requires management to make significant estimatesand assumptions related to the forecasts of future cash flows and the selection of the discount rate, performing audit proceduresto evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increasedextent of effort, including the need to involve our valuation specialists. ourauditing procedures related to the forecasts of future cash flows and the selection of the discount rate included (i) obtainingan understanding of management’s key assumptions in developing the forecast; (ii) assessing the reasonableness of management’sforecasts of future cash flows by comparing the projections to historical results; (iii) evaluating whether the estimated futurecash flows were consistent with projections used by the company, as well as evidence obtained in other areas of the audit; (iv)evaluating the reasonableness of the discount rate and (v) testing the mathematical accuracy of the calculations. furthermore,we assessed the appropriateness of the disclosures in the consolidated financial statements. /s/pkf o’connor davies, llp new york, new york march19, 2021 wehave served as the company’s auditor since 2006. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of lease classification for ongoing modifications to the gathering and compression assets as discussed in note 7 to the consolidated financial statements, the company determined that the gathering and compression agreement with antero resources is an operating lease. the company continues to expand its gathering and compression system to serve its customer and, as a result, the minimum volume commitments and the lease payments increase for the expanded system. the increases in volume commitments and lease payments are modifications of the arrangement that require reconsideration of the lease classification.we identified the evaluation of lease classification for ongoing modifications to the gathering and compression assets as a critical audit matter. the evaluation of lease classification for these modified leases, including evaluating economic life as a key estimate, required significant judgment.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s process for identifying lease modifications and determining lease classification for those modifications, including controls related to the review and approval of the company’s lease modifications and the company’s review of the lease classification. we evaluated the company’s accounting memoranda and other documentation underlying the accounting conclusions reached, including application of relevant accounting guidance in regards to the modification accounting and subsequent lease classification. we evaluated the economic life used in the determination of lease classification. we evaluated fixed assets that are placed in service for new minimum volume commitments which would require reassessment of the lease.evaluation of the initial measurement of property and equipment and customer relationships acquired in the antero midstream partners lp business combination as discussed in note 3 to the consolidated financial statements, on march 12, 2019, the company acquired antero midstream partners lp in a business combination. as a result of the transaction, the company recognized property and equipment of $3,371,427 thousand and customer relationships intangible assets of $1,567,000 thousand. we identified the evaluation of the initial measurement of property and equipment and the customer relationships acquired in the antero midstream partners lp business combination as a critical audit matter. there was a high degree of subjectivity in evaluating the key assumptions used to calculate the acquisition date fair value of the property and equipment and the customer relationships intangible assets. the company used the indirect cost and market approaches to value the property and equipment. the key assumptions included the inflationary trend and the useful lives of the underlying assets for the indirect cost method and comparable price per acre for the market approach. the company used a discounted cash flow to value the customer relationships for which the key assumptions included forecasted revenue and the discount rate.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s business combination process, including controls related to the selection of the key assumptions used to determine the acquisition date fair value of property and equipment and customer relationships intangible assets. for the customer relationships intangible assets we evaluated the company’s forecasts of revenues based on the company’s f-3table of contentsbudgets and the antero midstream partners lp historical performance. in addition, we involved valuation professionals with specialized skills and knowledge who assisted in:●evaluating the approaches used to value the respective assets; ●evaluating the inflationary trends, useful lives, and recent transactions based on publicly available information related to the estimated values for the property and equipment;●independently developing range of estimates of the fair value of the property and equipment and comparing it to the company’s estimated fair values for the property and equipment; ●evaluating the company’s discount rate applied in the valuation of the customer relationships intangible assets by comparing the company’s inputs to publicly available data, the implied rate of return on the transaction, and the return on other acquired assets; and●testing the estimate of the customer relationships intangible assets fair value using the company’s cash flow assumptions and discount rate, and evaluated the result with the company’s fair value estimate. /s/ kpmg llp we have served as the company’s auditor since 2016. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated 66financial 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 –reporting unit within the international segment as described in notes 1 and 4 to the consolidated financial statements, the company’s consolidated goodwill balance was $3,461.5 million as of december 31, 2020, of which $1,423.1 million was allocated to the international reportable segment. management conducts an impairment test in the fourth quarter of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. management performed a quantitative impairment test for all reporting units. to determine the fair value of each reporting unit, management uses a combination of an income approach, using the discounted cash flow method, and a market approach, using the guideline public company method. for each reporting unit, management compares the fair value to its carrying value including goodwill. if the fair value of the reporting unit is less than its carrying value, management records an impairment charge based on that difference, up to the amount of goodwill recorded in that reporting unit. the quantitative impairment analysis requires the application of a number of significant assumptions by management, including estimates of future revenue growth rates, ebitda margins, discount rates, and market multiples. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of a reporting unit within the international segment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement 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 estimates of future revenue growth rates, ebitda margins, the discount rate, and market multiple; 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 within the international segment. these procedures also included, among others (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow method and guideline public company method; (iii) testing the completeness and accuracy of underlying data used in the fair value estimate; and (iv) evaluating the significant assumptions used by management related to the estimates of future revenue growth rates, ebitda margins, the discount rate, and market multiple. evaluating management’s assumptions related to the estimates of future revenue growth rates and ebitda margins 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 market 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 management’s discounted cash flow method and guideline public company method, and the discount rate and market multiple assumptions./s/ pricewaterhouse coopers llp chicago, illinois february 16, 2021we have served as the company’s auditor since 2020. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit 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— refer to notes 1 & 10 to the financial statements critical audit matter description during 2020 the company’s contract revenues were $733.6 million, all of which represented revenue recognized over time as work progressed on individual contracts. the company recognizes revenue on its contracts utilizing the cost-to-cost method for determining progress toward completion of each contract. revenue is recognized using contract fulfillment costs incurred to date compared to total estimated fulfillment costs at completion. daily costs and project duration are significant factors in management’s estimate of fulfillment costs at completion.55we identified estimated contract fulfillment costs at completion used in revenue recognition as a critical audit matter because of the judgments inherent in management’s estimates related to contracts that were in progress at december 31, 2020. this required extensive audit effort and a high degree of auditor judgment when performing audit procedures on the total estimated contract fulfillment costs which underlie management’s determination of revenue on contracts in progress.how the critical audit matter was addressed in the audit our audit procedures related to contract fulfillment costs incurred to date and management’s estimates of the total costs at completion for contracts in progress included the following, among others: •we tested the effectiveness of controls over revenue recognition, including management’s controls over contract fulfillment costs incurred to date and estimated total costs at completion.•we selected a sample of contracts with customers and we performed the following: •compared the total revenue amounts used by management to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed with the customers. •evaluated management’s ability to achieve the estimates of total cost by inquiring with the company’s project managers and engineers, comparing the estimates to management’s work plans, and comparing expected profit margins to those achieved on similar contracts. •for certain contracts, we performed virtual meetings with the project site managers and utilized global positioning system tracking technology to virtually validate equipment deployed on-site and discuss the contract activities with operational management. •tested the mathematical accuracy of management’s calculation of revenue•we tested the accuracy and occurrence of contract fulfillment costs incurred to date by selecting a sample of costs from contract cost general ledger detail and obtaining supporting documentation in the form of invoices or pay statements and time-charged records.•we compared total actual costs incurred on projects completed during the year to management’s estimates as of the prior year end to evaluate management’s ability to accurately forecast total contract fulfillment costs at completion. /s/ deloitte & touche llp chicago, illinois february 24, 2021 we have served as the company's auditor since 1991. | 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.accrued medicaid rebates as described in notes 2 and 10 to the consolidated financial statements, the company has accrued government rebates and chargebacks of $172.9 million as of december 31, 2020. a significant portion of these accruals relates to the company’s medicaid rebates. management calculates the medicaid rebate allowance using the expected value method. management accrues estimated rebates based on estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and records the rebates as a reduction of revenue. the principal considerations for our determination that performing procedures relating to accrued medicaid rebates is a critical audit matter are (i) the significant judgment by management when determining the allowance, and (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management's estimate and significant assumptions related to estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients. 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 accrued medicaid rebates, including controls over the assumptions used to estimate the allowance. these procedures also included, among others, (i) developing an independent estimate of the accrued medicaid rebates by utilizing third-party prescription data, the terms of the specific rebate programs, and the historical trend of actual rebate claims paid, (ii) comparing the independent estimate to management’s estimate to evaluate the reasonableness of the estimate, (iii) testing rebate claims processed by the company, including evaluating those claims for consistency with the terms of the specific rebate programs, (iv) testing the completeness, accuracy and relevance of underlying data used by management, and (v) evaluating the significant assumptions used by management related to estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients. evaluating management’s assumptions involved evaluating whether the assumptions were reasonable considering (i) the consistency of the assumptions with historical trends, (ii) comparing assumptions and inputs to government prices, invoices, current payment trends, and other third-party data on a test basis where relevant, (iii) whether relevant company and industry specific considerations have been incorporated into the assumptions, and (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp chicago, illinois february 24, 2021 we have served as the company’s auditor since 2009. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. self-insurance reserves and related expenses as described further in note 1 in the consolidated financial statements, the company self-insures, up to certain policy-specified limits, certain risks related to general and workers’ compensation liability costs. the estimated cost of claims under these self-insurance programs is estimated and accrued as the claims are incurred (although actual settlement of the claims may not be made until future periods) and may subsequently be revised based on developments relating to such claims. we identified self-insurance reserves (“self-insurance”) as a critical audit matter. the principal considerations for our determination that self-insurance reserves and is a critical audit matter are that the accrual for self-insurance has higher risk of estimation uncertainty due to the loss development factors and inherent assumptions in actuarial methods used in determining the required reserves. the estimation uncertainty and complexity of the actuarial methods utilized involved especially subjective auditor judgment and an increased extent of effort, including the need to involve an auditor-engaged actuarial specialist. our audit procedures related to the self-insurance reserves included the following, among others: •obtained an understanding, evaluated the design and tested the operating effectiveness of key internal controls over financial reporting relating to self-insurance, including, but not limited to controls that (i) determine that claims were reported and submitted accurately and timely, and (ii) determine that internal claims data was reconciled to claims data maintained by the third-party administrator and submitted to the company’s actuary. 83 •utilized an auditor-engaged actuarial specialist in evaluating management’s methods and assumptions, including the reasonableness of the selected loss development factors utilized by management. •performed a retrospective review of prior projections to current projections to evaluate the reasonableness of changes in estimated ultimate losses. •reconciled claims data maintained by the third-party administrator to the claims data submitted to the company’s actuary used in the development of the loss triangles and selecting loss development factors. •selected a sample of underlying claims and reviewed the information utilized by management such as accident reports, insurance claims and legal records to (i) test management’s estimation process to determine if the reserve was reasonable and (ii) test the accuracy of the significant claim data attributes. evaluation of idle facilities for impairment as described further in note 1 in the consolidated financial statements, the company had property and equipment, net of $2 billion as of december 31, 2021, including approximately $282 million related to nine idle facilities. the company tests idle facilities for impairment upon notification that the facilities will no longer be utilized by the customer. in addition, the company performs the impairment analysis on an annual basis for each of the idle facilities. the estimates of recoverability are based on projected undiscounted cash flows associated with actual marketing efforts, where available, third-party appraisals, or, in other instances, projected undiscounted cash flows that are comparable to historical cash flows from management contracts at similar facilities and sensitivity analyses that consider reductions to such cash flows. when the estimated undiscounted cash flows associated with the asset or group of assets are less than their carrying value, an impairment is recognized as the difference between the carrying value of the asset and its fair value. we identified management’s evaluation of idle facilities for impairment as a critical audit matter. the principal considerations for our determination that management’s evaluation of idle facilities for impairment is a critical audit matter is the higher risk of estimation uncertainty due to the subjective nature of management’s estimates used in the projected undiscounted cash flows. these estimates are particularly sensitive to the assumption as to whether the company will obtain contracts to utilize idle facilities or be able to sell the facilities in the future, which can be affected by expectations about market developments and public policy as well as management’s intent to hold and operate each facility over the term and in the manner assumed in the analysis. our audit procedures related to management’s evaluation of idle facilities for impairment included the following, among others: •obtained an understanding, evaluated the design and tested the operating effectiveness of key internal controls over financial reporting relating to management’s evaluation of idle facilities for impairment, including controls over management’s review of the key inputs into the projected undiscounted cash flows, including management’s review of evidence supporting projected utilization of idle facilities and the recoverability of net book values based on estimated cash flows. •we evaluated the reasonableness of management’s projected undiscounted cash flow by evaluating evidence to support the projected utilization of the facilities, including actual marketing efforts, comparing the projections to historical cash flows from management contracts at similar facilities, or third-party appraisals and performed sensitivity analyses to evaluate the impact of potential changes in the projected undiscounted cash flows. •performed a retrospective review of prior projections to current projections by idle facility to evaluate the reasonableness of changes in the projected undiscounted cash flows. •performed a retrospective review of the company’s historical experience in securing new facility management contracts to utilize facilities that had been previously idled for periods comparable to or in excess of the periods the company's currently idle facilities have been idle, including assessing the recoverability of the net book value of the previously idled facilities. /s/ grant thornton llp we have served as the company’s auditor since 2006. | 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.asbestos liability — refer to note 13, commitments and contingencies, to the financial statements critical audit matter description the company is a defendant in cases filed in numerous state and federal courts alleging injury or death of exposure to asbestos. the company records an estimated liability related to the resolution cost of pending and future claims projected to be filed against the company for which management believes are probable of occurring and reasonably estimable. the model utilized by the company to estimate its asbestos liability has several factors that involve the application of significant judgement and estimates with a significant measurement of uncertainty. the most significant factors affecting the asbestos liability are (1) the number of new mesothelioma claims filed against the company, (2) the average settlement costs for mesothelioma claims, (3) the percentage of mesothelioma claims dismissed against the company and (4) the aggregate defense costs incurred by the company. these factors are interdependent, and no one factor predominates in determining the liability estimate. changes in these estimates and assumptions could have a significant impact on the asbestos liability. the current and non-current liability as of december 31, 2021 was $62.3 million and $549.8 million, respectively.37given the subjectivity of estimating the asbestos liability, future claims, and underlying assumptions utilized by management, auditing management’s judgments regarding the significant factors listed above involved especially subjective auditor judgment, including the need to involve our actuarial specialists.how the critical audit matter was addressed in the audit our audit procedures performed on the recorded asbestos liability included the following, among others:•we tested the design and effectiveness of controls over the asbestos liability, including those over the projection of settlement value of current and future claims.•we obtained the system and organization control report (soc) 1 reports for the outside service providers to evaluate the processes and controls relevant to the company’s asbestos claims administration.•with the assistance of our internal actuarial specialists, we:•evaluated the reasonableness of the underlying methodology for estimating the liability.•tested the completeness and accuracy of underlying source data that served as the basis for the actuarial analysis and estimates, including historical claims, to test that the inputs to the actuarial estimate were reasonable.•compared management’s prior-year assumptions of expected development and ultimate loss to actual incurred during the current year to identify potential bias in the determination of the liability.•we assessed the reasonableness of the forecast period used by the company to estimate the liability.•developed a range of independent estimates based on loss information and historical and industry claim development factors and compared our estimates to the company’s estimates.•we considered the impact of changes in the regulatory and litigation environments on management’s assumptions by performing corroborating inquires with the company’s internal and external legal counsel.•we evaluated management’s ability to accurately estimate the future liability by comparing actual results to management’s historical estimates./s/ deloitte & touche llp stamford, connecticut february 28, 2022we have served as the company's auditor since 1979. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of 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. - 44 - allowance for loan losses – loans collectively evaluated for impairment – qualitative factors description of the matter as described in note 1 (summary of significant accounting policies) and note 6 (loans) to the consolidated financial statements, the company maintains an allowance representing an amount which, in management’s judgement, is appropriate to absorb the probable and estimable losses on existing loans and other extensions of credit that may become uncollectible. the company’s allowance for loan losses consists of three elements: (1) segregating the loan portfolio into pools based upon similar characteristics and risk profiles and applying a loss factor to the pools based on historical losses within those pools; (2) applying qualitative factors to the loan pools that consider economic and other factors, both internal and external, affecting the company and the pools; and (3) determining specific reserves based on individual evaluation of impaired loans that are not included in the pools discussed above. the qualitative factors are established by applying a loss percentage to the loan pools and made up approximately $2.2 million of the total $3.7 million of allowance for loan losses as of december 31, 2021. qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. management evaluates qualitative factors by loan segment, primarily considering current economic conditions, changes in concentrations, delinquency and loan grading trends, movements in interest rates, lending policies and procedures, and may also consider the experience and tenure of the lending team, loan review system, and other legislative and regulatory factors external to the company. qualitative factors contribute significantly to the allowance for loan losses. management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. we identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. how we addressed the matter in our audit the primary audit procedures we performed to address this critical audit matter included: ● substantively testing management’s process, including evaluating their judgments and assumptions for developing the quantitative and qualitative allocations, which included: o evaluating the completeness and accuracy of data inputs used as a basis for the quantitative and qualitative allocations. o evaluating the reasonableness of management’s judgments related to the determination of quantitative and qualitative allocations. o evaluating the quantitative and qualitative allocations for directional consistency and for reasonableness. o testing the mathematical accuracy of the allowance calculation, including the application of the quantitative and qualitative allocations. /s/ yount, hyde & barbour, p.c. we have served as the company's auditor since 2021. | 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.evaluation of transaction price adjustments as discussed in notes 2 and 4 to the consolidated financial statements, net revenue is reported at the net realizable value amount that reflects the consideration the company expects to receive in exchange for providing services. revenues are from government payers, commercial payers, and patients for infusion therapy and other ancillary health care services. the company estimates the transaction price adjustments based on the verification of the patient’s insurance coverage and historical price concessions, historical payments, and management’s manual price concession adjustments. we identified the evaluation of the transaction price adjustments related to recognizing revenue as a critical audit matter. subjective and complex auditor judgment was required to evaluate the transaction price adjustments. specifically, auditor judgment was required to evaluate the relevance and reliability of historical price concessions, historical payments, and management’s manual price concession adjustments.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s transaction price adjustment process, including controls related to the historical price concessions, historical payments, and management’s manual price concession adjustments. we tested the relevance and reliability of the underlying data that served as the basis for the transaction price 43table of contentsadjustments which included the historical price concessions and historical payments within the classes of payors by selecting certain historical price concessions and historical payments and agreeing to underlying support. we evaluated management’s manual price concession adjustments by comparing management’s prior-year recorded balance to actual write-offs during the current year.evaluation of the realizability of deferred tax assets as discussed in note 6 to the consolidated financial statements, the company recorded a reduction in its valuation allowance on its deferred tax assets during the year ended december 31, 2021. in assessing the realizability of deferred tax assets, management considered the application of tax regulations, including those that limit the use of net operating losses following previous ownership changes. the company had gross deferred tax assets of $174.9 million as of december 31, 2021.we identified the evaluation of the realizability of deferred tax assets as a critical audit matter. specifically, auditor judgment was required to evaluate the company’s application of tax regulations, including those that limit the use of net operating losses following previous ownership changes. this matter required involvement of tax professionals with 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 company’s evaluation of the realizability of deferred tax assets, including controls related to the application of tax regulations that limit the use of net operating losses following previous ownership changes. we involved tax professionals with specialized skills and knowledge, who assisted by evaluating the company’s analysis of tax regulations that limit the use of net operating losses following previous ownership changes./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 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 - platform subscription and visits as described in notes 1, 2 and 3 to the consolidated financial statements, the company generates revenue primarily from contracts with customers who purchase subscriptions to access the company’s hosted telehealth platform. customers can also purchase access to the company’s co-branded telehealth practice hosted on the company’s shared services platform. the company also generates revenue when either the enterprise telehealth platform or the shared services platform is utilized to conduct a medical visit. the company’s revenue for platform subscription and visits was $224.9 million for the year ended december 31, 2021.the principal considerations for our determination that performing procedures relating to revenue recognition for platform subscription and visits is a critical audit matter are a high degree of auditor effort in performing procedures and evaluating audit evidence related to accuracy and occurrence of revenue transactions.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to revenue recognition, including controls over the accuracy and occurrence of revenue transactions. these procedures also included, among others, evaluating the accuracy and occurrence of a sample of revenue transactions by obtaining and inspecting source documents, including sales contracts, project access approvals, medical records and cash receipts from customers, when applicable. valuation of customer relationships and technology intangible assets - silver cloud health holdings, inc.as described in notes 1 and 9 to the consolidated financial statements, on august 27, 2021, the company completed the acquisition of silver cloud health holdings, inc. the total purchase consideration transferred was $226.2 million. the preliminary purchase price allocation included identifiable assets acquired of a customer relationships intangible asset and a technology intangible asset of $32.4 million and $35 million, respectively. the estimated fair value of the customer relationships intangible asset was determined using the excess earnings method and the estimated fair value of the technology intangible asset was determined using a relief from royalty method. determining the fair value of assets acquired and liabilities assumed, and the allocation of the purchase price, requires management to use judgment and estimates, with regards to the selection of valuation methodologies. critical estimates in valuing the customer relationships and technology intangible assets include, but are not limited to, significant assumptions related to estimates of future revenue and cash flows, expected long-term market growth, expected revenue growth rates, future expected operating expenses, earnings before interest, taxes, depreciation and amortization margin, and discount rates.f-3 the principal considerations for our determination that performing procedures relating to the valuation of the customer relationships and technology intangible assets from the acquisition of silver cloud health holdings, inc. is a critical audit matter are (i) the significant judgment by management when determining the fair values of the customer relationships and technology intangible assets acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to expected revenue growth rates and discount rates for both the customer relationships and technology intangible assets, as well as earnings before interest, taxes, depreciation and amortization margin for the customer relationships intangible asset; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships and technology intangible assets. these procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for determining the fair values of the customer relationships and technology intangible assets acquired; (iii) evaluating the appropriateness of the excess earnings method for the customer relationships intangible asset and the relief from royalty method for the technology intangible asset; (iv) testing the completeness and accuracy of the underlying data used in the excess earnings method and the relief from royalty method; and (v) evaluating the reasonableness of the significant assumptions used by management related to expected revenue growth rates and discount rates for both the customer relationships and technology intangible assets, as well as earnings before interest, taxes, depreciation and amortization margin for the customer relationships intangible asset. evaluating management’s significant assumptions related to expected revenue growth rates and earnings before interest, taxes, depreciation and amortization margin involved evaluating whether the significant assumptions used by management were reasonable considering (i) the current and past performance of silver cloud health holdings, inc.; (ii) the consistency with external market and industry data; and (iii) whether the significant assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the excess earnings and relief from royalty methods and (ii) the reasonableness of the significant assumptions related to the discount rates. valuation of technology intangible asset - conversa health, inc. as described in notes 1 and 9 to the consolidated financial statements, on august 9, 2021, the company completed the acquisition of conversa health, inc. the total purchase consideration transferred was $118.6 million. the preliminary purchase price allocation included an identifiable asset acquired of a technology intangible asset of $20.4 million. the estimated fair value of the technology intangible asset was determined using a relief from royalty method. determining the fair value of assets acquired and liabilities assumed, and the allocation of the purchase price, requires management to use judgment and estimates, with regards to the selection of valuation methodologies. critical estimates in valuing the technology intangible asset include, but are not limited to, significant assumptions related to estimates of future revenue and cash flows, expected long-term market growth, expected revenue growth rates, future expected operating expenses, earnings before interest, taxes, depreciation and amortization, and discount rates.the principal considerations for our determination that performing procedures relating to the valuation of the technology intangible asset acquired from the acquisition of conversa health, inc. is a critical audit matter are (i) the significant judgment by management when determining the fair value of the technology intangible asset acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to expected revenue growth rates and discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the technology intangible asset. these procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for determining the fair value of the technology intangible asset acquired; (iii) evaluating the appropriateness of the relief from royalty method; (iv) testing the completeness and accuracy of the underlying data used in the relief from royalty method; and (v) evaluating the reasonableness of the significant assumptions used by management related to expected revenue growth rates and discount rate. evaluating management’s significant assumption related to expected revenue growth rates involved evaluating whether the significant assumption used by management was reasonable considering (i) the current and past performance of conversa health, inc.; (ii) the consistency with external market and industry data; and (iii) whether the assumption was consistent with evidence obtained in other areas of the audit. professionals with specialized skill and f-4 knowledge were used to assist in evaluating (i) the appropriateness of the relief from royalty method and (ii) the reasonableness of the significant assumption related to the discount rate. /s/ pricewaterhouse coopers llp boston, massachusetts february 28, 2022we have served as the company’s auditor since 2016. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. income taxes – deferred tax assets and amounts payable under tax receivable agreements as described in notes 2 and 11 to the consolidated financial statements, the company has recorded a deferred tax assets (“dta”) balance of $436 million as of december 31, 2019 while the amount payable under the tax receivable agreements (“tra”) was $375 million. dt as are determined by management based upon the future tax consequences attributable to temporary differences between the financial statement carrying amounts and tax bases of assets. the tr as generally provide for payment of 85% of the applicable cash savings, if any, of u.s. federal, state and local income taxes that the company actually realizes (or is deemed to realize in certain circumstances) as a result of certain tax attributes or benefits. the cash savings are calculated by comparing the company’s actual income tax liability to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the tr as. the increase in tax basis, which results in a dta, as well as the amount and timing of any payments under these agreements, will vary depending on a number of factors, which include the timing of sales or exchanges by the holders of limited partnership units, the price of the class a common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income the company generates in the future and the tax rate then applicable, and the portion of the company’s payments under the tr as constituting imputed interest or depreciable basis or amortizable basis.the principal considerations for our determination that performing procedures relating to deferred tax assets and amounts payable under tax receivable agreements is a critical audit matter are (i) the significant audit effort necessary in performing procedures related to the aforementioned factors utilized in the estimate and the assessment of the application of the tax laws, and (ii) the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to income taxes, including controls over the deferred tax assets and tax receivable agreements. these procedures also included, among others, testing management’s process for estimating the deferred tax assets and amounts payable under tax receivable agreements, including (i) testing the factors to the company’s estimates, including the timing of sales or exchanges by the holders of limited partnership units and the price of the class a common stock at the time of such sales or exchanges, (ii) evaluating the reasonableness of the factors used in the company’s estimates, including the likelihood of the company having sufficient future taxable income to utilize the deferred tax asset and the tax rate then applicable as well as the portion of the company’s payments under the tra constituting imputed interest or depreciable basis or amortizable basis, and (iii) testing the impact of sales or exchanges of limited partnership units on the deferred tax asset and amounts payable under tax receivable agreements. professionals with specialized skill and knowledge were used to assist in testing the estimates and evaluating the appropriateness of the application of the tax laws, including evaluating whether the sales or exchanges of partnership units are taxable. /s/ pricewaterhouse coopers llp chicago, illinois february 18, 2020we have served as the company’s auditor since 1995. | 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 company’s 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.93part ii item 8 revenue recognition — refer to note 1 to the financial statements critical audit matter description the company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.significant judgment is exercised by the company in determining revenue recognition for these customer agreements, and includes the following: •determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. •determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. •the pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. •estimation of variable consideration when determining the amount of revenue to recognize (e.g., customer credits, incentives, and in certain instances, estimation of customer usage of products and services).given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.how the critical audit matter was addressed in the audit our principal audit procedures related to the company’s revenue recognition for these customer agreements included the following: •we tested the effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. •we evaluated management’s significant accounting policies related to these customer agreements for reasonableness. •we selected a sample of customer agreements and performed the following procedures: •obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. •tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration. •assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. •we evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately. •we tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.94part ii item 8 income taxes — uncertain tax positions — refer to note 12 to the financial statements critical audit matter description the company’s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the internal revenue service (“irs”). the company remains under irs audit, or subject to irs audit, for tax years subsequent to 2003. while the company has settled a portion of the irs audits, resolution of the remaining matters could have a material impact on the company’s financial statements. conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the internal revenue code, related regulations, tax case laws, and prior-year audit settlements. given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the irs, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.how the critical audit matter was addressed in the audit our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following: •we evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. •we read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. •we tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. •for those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. •we evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments./s/ deloitte & touche llp seattle, washington august 1, 2019we have served as the company’s auditor since 1983. | 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.acquisitions —intangible assets — refer to note 4 to the financial statements critical audit matter description as discussed in note 4 of the consolidated financial statements, during the year ended december 31, 2021, the company completed multiple acquisitions, and evaluated each acquisition to determine whether it should be accounted for as a business combination or asset acquisition. the two significant acquisitions were of envision tec and ex one, with total purchase prices of $303.6 million and $613.0 million. the acquisition of envision tec resulted in the recording of $195.7 million and $137.3 million in goodwill and intangible assets acquired and the acquisition of ex one resulted in the recording of $374.6 million and $82.1 million in f-2table of contentsgoodwill and intangible assets acquired, respectively. the acquired intangibles included $77.8 million in acquired technology and $50.9 million in acquired customer relationships related to envision tec and $72.9 million in acquired technology and $7.9 million in acquired customer relationships related to ex one. the significant assumptions used to estimate the fair value of the intangible assets included revenue growth rates, technology migration curves, customer attrition rates and discount rates. these significant assumptions are forward-looking and could be affected by future economic and market conditions.the procedures used to audit the valuation of the acquired technology and customer relationship assets acquired in the acquisition envision tec and ex one include (i) a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of intangible assets acquired due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort in evaluating the significant assumptions relating to the estimate, such as revenue growth rates, technology migration curves, the customer attrition rate, and discount rates; and (iii) the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence.how the critical audit matter was addressed in the audit our audit procedures related to the valuation of the acquired technology and customer relationship assets acquired in the acquisition envision tec and ex one included, among others:●we read the purchase agreements and understood management’s process for estimating fair value of intangible assets.●we obtained an understanding of the design and implementation of the company’s internal controls related to the determination of fair value for the acquired technology and customer relationship assets for envision tec and ex one. ●with the assistance of our fair value specialists, we evaluated management’s process including the appropriateness of valuation models selected, the reasonableness of significant assumptions including revenue growth rates, the technology migration rate, the customer attrition rate, discount rates, and discounted cash flow models. ●the assumptions related to revenue growth rates and the customer attrition rate were evaluated by considering whether the assumptions used were reasonable considering the past performance of the acquiree. ●the assumptions related to the technology migration curve were evaluated by considering the life of the technology. ●the discount rates were evaluated by considering the cost of capital of comparable businesses and other industry factors. /s/ deloitte & touche llp boston, massachusetts march 15, 2022 we have served as the company's auditor since 2016. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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 loss — refer to notes 2 and 8 to the financial statements critical audit matter description starting with the january 1, 2020 adoption of cecl, the company recognizes an allowance for loan loss immediately upon the origination of a loan and reassesses that estimate in each subsequent reporting period. the allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivables that f-2table of contentsconsiders forecasts of future economic conditions in addition to information about past events and current conditions. the estimate under the cecl model is significantly influenced by the composition, characteristics and quality of the company’s portfolio of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized. in estimating its allowance for loan loss, the company segregates its credit card receivables into four groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score. the company then determines the estimated life of each group of credit card receivables. management applies significant judgment in estimating its allowance for loan loss for each identified group, utilizing various models, historical data, statistical analysis, behavioral relationships of credit performance, and forecasted economic factors. in addition to the quantitative estimate of expected credit losses, management also applies significant judgment by incorporating qualitative adjustments for certain factors such as company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, and other relevant factors to ensure the allowance for loan loss reflects the company’s best estimate of current expected credit losses. given the significant judgments made by management in estimating its allowance for loan loss, performing audit procedures to evaluate the reasonableness of the estimated allowance for loan loss, including procedures to evaluate the qualitative adjustments, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit modeling specialists. how the critical audit matter was addressed in the audit ●we tested the design and operating effectiveness of management’s controls over the various models and qualitative adjustments, including controls over the determination of the most significant risk characteristics for estimating expected credit losses, estimates of expected credit card payments applied to existing credit card balances, macroeconomic variables applied over the forecast period, qualitative adjustments, and changes in current economic conditions that may not be captured in the quantitatively derived results. ●we tested the completeness and accuracy of the historical data used in management’s models. ●we evaluated the reasonableness of the selection of forecasted macroeconomic variables, considered alternative forecasted scenarios and evaluated any contradictory evidence. ●we evaluated the reasonableness of the qualitative adjustments for factors such as company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, and other relevant factors. ●we used our credit modeling specialists to assist us in evaluating the various models and management’s assumptions, including the following: –the conceptual soundness of the approach to how expected credit card payments are applied to existing credit card balances. –the reasonableness of the determination of the most significant risk characteristics for estimating expected credit losses used to segregate the credit card and loan receivables into groups. –the reasonableness of the macroeconomic variables over the forecast period used by comparing such variables to independent sources. goodwill — brand loyalty reporting unit — refer to notes 2 and 14 to the financial statements critical audit matter description the company tests goodwill of the brand loyalty reporting unit for impairment annually, as of july 1, or when events and circumstances change that would indicate the carrying amount may not be recoverable. the company’s evaluation of goodwill for impairment involves the comparison of the fair value of the reporting unit to its carrying value. the company estimated the fair value of its reporting unit using an income-based approach. the company’s income approach utilizes a discounted cash flow model based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. the valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate, and other assumptions that are judgmental in nature. the fair value of the brand loyalty reporting unit exceeded its carrying value as of the measurement date by less than 10% and, therefore, no impairment was recognized. f-3table of contents given the significant judgments made by management to estimate the fair value, and the difference between the fair value over carrying value of the brand loyalty reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of revenue growth and profit performance and the selection of the discount rate required a high degree of auditor judgment and an increased extent of effort, including involvement of our fair value specialists. how the critical audit matter was addressed in the audit ●we tested the effectiveness of controls over goodwill, including those over the forecasts of future revenue growth and profit performance and the selection of the 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 of future revenues and profit performance, including operating margins, earnings before interest and taxes (ebit) and earnings before interest, taxes, depreciation and amortization (ebitda) by comparing the forecasts to: –historical results. –internal communications to management and the board of directors. –forecasted information included in company press releases, as well as analyst and industry reports for the company and certain peer companies. ●we evaluated the impact of actual results of revenues, operating margins, ebit, and ebitda from the measurement date through year-end to the forecasted amounts. ●with the assistance of our fair value specialists, we evaluated the valuation methodologies and the discount rate by: –testing the source information underlying the determination of the discount rate. –testing the mathematical accuracy of the calculations. –developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ deloitte & touche llp dallas, texas february 26, 2021 we have served as the company’s auditor since 1998. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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 the partnership’s goodwill is attributable to past acquisitions and is assigned to reporting units as of the acquisition date. as discussed in note 2 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. at december 31, 2019, the partnership’s goodwill in its powder river basin (“prb”) reporting unit was $80.3 million. auditing management’s annual goodwill impairment test for the prb reporting unit was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit and the sensitivity of the fair value compared to the carrying amount for this reporting unit. the fair value estimate was sensitive to significant assumptions, such as the weighted average cost of capital, revenue growth rate, operating margin, and terminal value, 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 partnership’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. to test the estimated fair value of the partnership’s prb reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the partnership in its analysis. we compared the significant assumptions used by management to current industry and economic trends, changes to the partnership’s business model, 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 prb reporting unit that would result from changes in the assumptions. we also involved our valuation specialist to assist in our evaluation of the valuation methodologies applied by the partnership and the significant assumptions used in estimating the fair value of the prb reporting unit. we also tested management’s reconciliation of the fair value of all the partnership’s reporting units to the market capitalization of the partnership. accounting for acquisition of jackalope gas gathering services102table of contents description of the matter as described in note 3 to the consolidated financial statements, during 2019, the partnership acquired the remaining 50% interest in jackalope gas gathering services, llc (“jackalope”) for $484.6 million. the transaction was accounted for as a business combination. auditing the partnership’s accounting for its acquisition of jackalope was complex due to the significant estimation uncertainty in the partnership’s determination of the fair value of the customer contract intangible asset of $306 million. the significant estimation uncertainty was primarily due to the sensitivity of the fair value to underlying assumptions about the future performance of the acquired business. the partnership used a discounted cash flow model to measure the customer contract intangible asset. the significant assumptions used to estimate the fair value of the customer contract intangible asset included the discount rate and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates and capital expenditures). these significant assumptions are forward looking and could be affected by future economic and market conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the partnership's controls over its accounting for the acquisition. for example, we tested controls over the estimation of the fair value of the customer contract intangible asset, including the valuation models and underlying assumptions used to develop such estimates. to test the estimated fair value of the customer contract intangible asset, we performed audit procedures that included, among others, evaluating the partnership's use of the income approach (the excess earnings method) and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. for example, we compared the significant assumptions to current industry, market and economic trends, to customer contract terms, to the historical results of the acquired business and to other guidelines used by companies within the same industry. we also involved our valuation specialist to assist in our evaluation of the valuation methodology applied by the partnership and the significant assumptions used in estimating the fair value of the customer contract intangible asset. revenue recognition - measuring variable consideration103table of contents description of the matter as described in note 2 to the consolidated financial statements, the partnership recognizes revenues for services and products under revenue contracts as obligations to perform services or deliver/sell products under the contracts are satisfied. for a significant customer contract associated with the partnership’s powder river basin gathering and processing assets, consideration to be received under the contact is estimated over the life of the contract and the contract’s transaction price is allocated to each performance obligation in the contract and recognized as revenue when, or as, the performance obligation is satisfied. auditing the partnership's measurement of variable consideration under this contract involved especially challenging judgment because the calculation involves subjective management assumptions about estimates of future revenues including forecasted production of its customer over the life of the contract. for example, the future revenues estimate reflects management's assumptions about future economic conditions and expected volumes to be gathered and processed, and changes in those assumptions can have a material effect on the amount of revenue recognized.how we addressed the matter in our audit our audit procedures included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in management's calculation. this included testing management's estimated future revenues by obtaining the customer’s forecasted volumes and the recalculation of revenue based on the volumes and executed contract rates. in addition, we performed sensitivity analyses to evaluate the changes in variable consideration that would result from changes in the partnership's significant assumptions. consolidation - voting interest model104table of contents description of the matter as disclosed in note 3 to the consolidated financial statements, on april 9, 2019, crestwood niobrara llc (“cwn”) issued $235 million of new series a-3 preferred units and amended the limited liability company (“llc”) agreement for the existing series a-2 preferred units in connection with the acquisition of jackalope gas gathering services, llc. the partnership consolidated cwn pursuant to the voting interest model. auditing management’s application of the voting interest model to this transaction, including the process of evaluating cwn for consolidation based on whether the holders of the preferred units have protective versus participating rights, required significant judgment. in particular, we had to make significant judgments to audit management’s determination of (1) whether cwn has sufficient equity at risk to finance its activities without additional subordinated financial support and (2) whether the holders of preferred units in cwn participate in significant financial and operating decisions of cwn that are made in the ordinary course of business.105table 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 partnership’s application of the voting interest model. for example, we tested controls over management’s process of evaluating whether the entity is a voting interest entity and whether the partnership controls the significant financial and operating decisions of cwn. to test whether cwn has sufficient equity at risk to finance its activities without additional subordinated financial support, our audit procedures included, among others, evaluating the equity that is considered “at risk,” testing the related fair value and evaluating whether the equity is sufficient to induce other investors to provide the funds necessary for cwn to conduct its activities. for example, we compared certain information to underlying legal documents and tested the fair value of the equity with the assistance of our valuation specialists. we also considered the amount of equity at risk at other similar entities that finance their operations with no additional subordinated financial support to assess whether cwn has sufficient equity. in addition, to test the partnership’s assertion that it has control over cwn’s significant financial and operating decisions, we performed audit procedures that included, among others, reviewing management’s analysis of the significant activities (e.g., financing decisions, capital decisions and operating decisions) and evaluating which party has the control over such activities. our evaluation considered the legal rights of the preferred unit holders (e.g., participating and protective) and whether these rights are substantive in nature such that they would prevent the partnership from controlling the significant financial and operating decisions of cwn. we also compared the rights of each party to underlying legal documents, the llc agreement, and management committee minutes./s/ ernst & young llp we have served as the partnership’s auditor since 2013. | 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 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.delta air lines, inc. 2020 form 10-k 58employee benefit plans description of the matter at december 31, 2020, the fair value of the company’s benefit plan assets measured at fair value on a recurring basis totaled $16.6 billion, of which $10.4 billion do not have a readily determinable fair value and are measured at net asset value per share (“nav assets”) as a practical expedient. management determines the fair value of nav assets by applying the methodologies described in note 11 to the consolidated financial statements. the company’s expected long-term rate of return on assets for net periodic benefit for the year ended december 31, 2020 was 8.97%. the expected return on plan assets provided net periodic benefit of $1.4 billion for the year ended december 31, 2020. as disclosed in note 11 to the consolidated financial statements, the expected long-term rate of return on plan assets is reviewed annually and is based primarily on plan-specific investment studies using historical market return and volatility data.auditing the fair value of the company’s nav assets required significant judgment in estimating the fair value of the nav assets, primarily resulting from the lag in the availability of data provided by the investment fund managers and the use of corroborating data from public markets to estimate fair value. auditing the expected long-term rate of return on plan assets required significant judgment due to the subjective nature of certain assumptions. in particular, the company incorporated excess return expectations compared to historical market return and volatility data based on the company’s investment strategy. net periodic benefit is sensitive to the expected long-term rate of return on plan assets, which is affected by expectations about future market and 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 accounting for its employee benefit plans, including controls over management’s assessment of the significant inputs and estimates included in the fair value measurements of nav assets and management’s review of the significant assumptions and the inputs used in estimating the expected long-term rate of return on plan assets.to test the fair value of plan assets measured at nav, our audit procedures included, among others, evaluating the valuation methodologies used by the company and comparing significant inputs and underlying data used in the company's valuations to information available from third-party sources and market data. additionally, we performed sensitivity analyses to evaluate the changes to the company’s net periodic benefit that would result from changes in the fair value measurement, and compared the company’s asset performance results to applicable third-party benchmarks and assessed management’s historical accuracy of estimating fair value by performing retrospective review procedures comparing the company’s estimates of fair value as of the prior year to the final fair value nav in the investment’s audited financial statements made available during the current year.to test the expected long-term rate of return on plan assets, our audit procedures included, among others, evaluating the methodology used, testing the significant assumptions used in the determination of the expected return and testing the underlying data used by the company. we involved an actuarial specialist to assist in evaluating the appropriateness of the company’s estimate, including independently calculating a range of expected long-term rates of return based on the company’s current investment portfolio and strategy, and assessed whether management’s assumption was consistent with a range of returns for a portfolio of comparative investments. additionally, we tested the completeness and accuracy of the data used by management and performed sensitivity analyses to evaluate the changes to the company’s net periodic benefit that would result from changes in the expected long-term rate of return on plan assets.delta air lines, inc. 2020 form 10-k 59fair value of fleet assets description of the matter for the year ended december 31, 2020, the company recognized $4.4 billion of impairment-related charges for certain owned and leased fleet assets. these impairment-related charges are classified within restructuring charges in the company’s consolidated statement of operations. as discussed in note 2 to the consolidated financial statements, the company retired or plans to early retire certain owned and leased fleet types from active service as part of capacity reductions in response to the negative effect on the company’s business from the global covid-19 pandemic. to assess assets for impairment, the company groups assets at the fleet type level or at the contract level for aircraft operated by third-party regional carriers. the company concluded that the management-initiated permanent retirements or planned early retirements of aircraft were impairment indicators which required the company to test the recoverability of the related asset groups. the company concluded the book value of these asset groups were not recoverable due to changes to the estimated future cash flows based primarily on the significant reductions to the remaining operating lives. as a result, the company recognized $4.4 billion in impairment-related charges for the amount by which book value of each asset group exceeded its related fair value. the impairment-related charges were estimated using fair value inputs based primarily upon recent market transactions and third-party bids and corroborated by published pricing guides and the company’s assessment of existing market conditions based on industry knowledge. auditing the company’s impairment analysis was highly subjective due to the significant estimation required in determining the fair value of the company’s aircraft. as a result of the covid-19 pandemic, there is currently a very limited market for aircraft and limited data on how the covid-19 pandemic has affected the fair value of aircraft.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 long-lived asset impairments. for example, we tested controls over management’s review over determining the relevant measures of fair value of fleet assets. to test the company’s estimate of the fair value of the aircraft, our audit procedures included, among others, obtaining an understanding of market conditions through inquiries of the company’s fleet management and comparing the aircraft fair value to recent market transactions, bids from third parties and published pricing guides. we also performed procedures to independently identify contrary or confirmatory evidence of the fair values used in the company’s analysis through review of other third-party sources of information.realizability of deferred tax assets description of the matter at december 31, 2020, the company had gross deferred tax assets of $9.5 billion and a related valuation allowance of $460 million. as discussed in notes 1 and 13 to the consolidated financial statements, the company records a valuation allowance based on the assessment of the realizability of the company’s deferred tax assets. deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, in management’s judgment it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. auditing management’s assessment of recoverability of deferred tax assets involved subjective estimation and complex auditor judgment in weighing the positive and negative evidence to determine whether a valuation allowance for deferred tax assets is needed including the company’s estimate of future taxable income that may be affected by market and economic conditions.delta air lines, inc. 2020 form 10-k 60how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets. this included controls over management’s scheduling of the future reversal of existing taxable temporary differences, identification and use of available tax planning strategies and estimate of future taxable income.to test the realizability of the company’s deferred tax assets, our audit procedures included, among others, evaluating the assumptions to develop the scheduling of the future reversal of existing taxable temporary differences, evaluating tax planning strategies and evaluating the assumptions used by the company to develop projections of future taxable income. we compared the projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. we also compared the projections of future taxable income with other forecasted financial information prepared by the company. in addition, we involved our tax specialists to evaluate the application of tax law in the performance of these procedures./s/ ernst & young llp we have served as the company's auditor since 2006. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the 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.regulation - impact of rate-regulation on the financial statements — refer to notes 1, 10 and 11 to the financial statements critical audit matter description south jersey gas company (“sjg”) and elizabethtown gas company (“etg”) are regulated natural gas utilities which distribute natural gas in new jersey. sjg and etg are subject to regulation by the new jersey board of public utilities (the “bpu”). management has determined it meets the requirements under accounting principles generally accepted in the united states of america to prepare its financial statements in accordance with asc 980, regulated operations. accounting for the economics of rate-regulation impacts multiple financial statement line items, including utility property, plant, and equipment; regulatory assets and liabilities; operating revenues; operations and maintenance expenses; and depreciation expense, and effects multiple disclosures in the company’s financial statements. 167the bpu approves the rates that are charged to rate-regulated customers for services provided and the terms of service under which sjg and etg operate. the rates and established terms of service are designed to enable sjg and etg to recover costs of service and obtain a fair and reasonable return on capital invested. the impact of the ratemaking process and decisions authorized by the bpu allow sjg and etg to capitalize and defer certain costs that are expected to be recovered from its customers as regulatory assets, and to recognize certain obligations representing amounts that are probable future expenditures as regulatory liabilities in accordance with accounting guidance applicable to regulated operations. decisions to be made by the bpu in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. while sjg and etg have indicated they expect to recover costs from customers through regulated rates, there is a risk that the bpu will not approve full recovery of the costs of providing utility service or recovery of all amounts invested in the utility business and a reasonable return on that investment. as a result, we identified the impact of rate-regulation as a critical audit matter due to the high degree of subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred as of december 31, 2021, and the judgments made by management to support its assertions about impacted account balances and disclosures. management judgments included assessing the likelihood of recovery in future rates of incurred costs or refunds to customers or future reduction in rates. given that management’s accounting judgements are based on assumptions about the outcome of future decisions by the bpu, auditing these rate-impacted account balances and disclosures, and the related judgments, requires specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities. how the critical audit matter was addressed in the audit our audit procedures related to the uncertainty of future decisions by the bpu included the following, among others:•we tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. we also tested the effectiveness of management’s controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates. •we evaluated the company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. •we read relevant regulatory orders issued by the bpu for sjg, etg and other public utilities in new jersey; regulatory statutes, interpretations, procedural memorandums, and filings made by intervenors; and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the bpu’s treatment of similar costs under similar circumstances. we also obtained and read the november 2021 bpu order adopting the stipulation of settlement for etg’s april 2021 base rate case as well as the publicly available filings made by sjg and etg and related attachments. we evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness. •for regulatory matters in process, we inspected sjg’s and etg’s filings with the bpu and the filings with the bpu by intervenors that may impact the company’s future rates, for any evidence that might contradict management’s assertions.•we obtained representation from management, as well as the regulatory orders, filings, and analysis, including letters from external legal counsel, as appropriate, regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery or future refund or reduction in rates. etg goodwill — refer to note 21 to the financial statements critical audit matter description sji’s acquisition of etg on july 1, 2018 resulted in a goodwill balance of $700 million. the value and economics of etg is primarily driven by the company earning a regulated return from its customer base on capital investments that are required to distribute gas from transmission pipelines to its customer base. these investments and the associated return are subject to scrutiny and approval from the bpu through base rate cases and other rate programs and approvals. 168the company performs a quantitative goodwill impairment test at the reporting unit level at least annually in the fourth quarter of each fiscal year. if an impairment triggering event occurs, the company performs a goodwill impairment test at the reporting unit level in the quarter applicable to that event. assumptions utilized in the quantitative goodwill impairment test include, among other things, revenue and operating margin forecasts, discount rate, growth rate and market-based valuation assumptions. we identified the valuation of etg goodwill as a critical audit matter due to the level of judgement involved in developing assumptions to estimate the fair value of etg. 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 estimates and assumptions related to the forecasts of revenue and operating margin and the selection of the discount rate, growth rate, and market-based valuation assumptions, specifically due to the sensitivity to changes in the macroeconomic environment due to covid-19. how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of revenue and operating margin and the selection of the discount rate, growth rate, and market-based valuation assumptions used by management to estimate the fair value of etg included the following, among others: •we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of etg, such as controls related to management’s selection of the discount rate, growth rate and market-based assumptions, and forecasts of revenue and operating margin. •we evaluated management’s ability to accurately forecast revenues and operating margins by comparing actual results to management’s historical forecasts. •we evaluated application of future revenue and operating margins in the etg goodwill valuation model by developing a range of independent estimates; and comparing independent valuation outcomes based on those independent estimates to the fair value of etg developed by management. •with the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate, growth rate, and market-based assumptions by: ◦testing the source information underlying the determination of the assumptions. ◦testing the mathematical accuracy of the underlying calculations. ◦developing a range of independent estimates and comparing those to the assumptions selected by management./s/ deloitte & touche llp philadelphia, pennsylvania february 24, 2022 we have served as the company's auditor since 1948. | 3 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that arematerial to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. thecommunication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on theaccounts or disclosures to which they relate. recognitionof stock-based compensation cost for stock options issued asdescribed in note 14 to the consolidated financial statements, the company granted stock options to its directors and employees and estimatedtotal stock compensation expense related to the issuance of stock options of $2,675,205 for the year ended december 31, 2021. the stockcompensation cost was valued at the grant date, and management evaluated the fair value of these stock options at the grant date andrecognized based on the vesting schedule. weidentified the recognition of stock options as a critical audit matter due to the significant judgments made by management when developingunderlying assumptions. thefollowing are the primary procedures we performed to address this critical audit matter. we obtained an understanding and evaluated thedesign and implementation of certain controls relating to significant judgments and assumptions developed by management. we evaluatedand tested sources of data and assumptions used by management. in addition, we tested the completeness and accuracy of the underlyingassumptions used by management. /s/kccw accountancy corp. wehave served as the company’s auditor since 2019. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. earn-out obligation — refer to notes 1 (goodwill and amortizable intangible assets) and 3 (business combinations) to the financial statements critical audit matter description the company’s acquisition purchase price for business combinations is typically based upon a multiple of average annual operating profit and/or revenue earned over a one to three-year period within a minimum and maximum price range. the recorded purchase price for most acquisitions includes an estimation of the fair value of liabilities associated with potential earn-out provisions, when an earn-out obligation is part of the negotiated transaction. the fair value of the earn-out obligations is based upon the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions contained in the respective purchase agreements. subsequent changes in the fair value of the earn-out obligations are recorded in the consolidated statement of income when incurred. in determining fair value of the earn-out obligation, the acquired business’s future performance is estimated using financial projections of future earnings developed by management that are discounted to a present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out obligation will be paid. the earn-out obligation balance was $291 million as of december 31, 2021 and the potential maximum earn-out obligation was $484.8 million. of the total earn-out obligation balance, $78.4 million is recorded in accounts payable and $212.6 million is recorded in other liabilities in the consolidated balance sheet. 81 we identified the earn-out obligation as a critical audit matter because of the increased auditor judgment and extent of effort required to evaluate whether an adjustment is required for the earn-out obligation in periods after the acquisition. specifically, there was a high degree of auditor judgment and an increased extent of effort to audit the reasonableness of management’s assumptions related to projections of future earnings of the acquired businesses. how the critical audit matter was addressed in the audit our audit procedures related to the forecasted future earnings assumptions used in determining the fair value of the earn-out obligation included the following, among others: •we tested the design and operating effectiveness of controls over management’s earn-out obligation calculation, including the controls over management’s determination of future earnings.•we read the asset/stock purchase agreements and associated addenda and agreed the provisions of the contracts to the earn-out obligation models for our testing selections.•we read any post-acquisition asset/stock purchase agreements and associated addenda modifications for any additional terms to evaluate the completeness and reasonableness of the models utilized to calculate the earn-out obligation for our testing selections.•we evaluated the reasonableness of projections of future earnings for the earn-out obligation models by comparing the projections to historical results and assessing management’s key assumptions for our testing selections.•we evaluated management’s ability to accurately forecast future earnings by comparing actual results to management’s historical forecast and forecasted growth rates to that of comparable subsidiaries for our testing selections. /s/ deloitte & touche llp tampa, florida february 22, 2022 we have served as the company's auditor since 2002. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters 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.valuation of goodwill description of the matter at june 27, 2020, the company’s goodwill was $3.7 billion. as discussed in note 1 of the financial statements, goodwill is tested by the company’s management for impairment at least annually, in the fourth quarter, unless there are indications of impairment at other points throughout the fiscal year. goodwill is tested for impairment at the reporting unit level. during the fiscal year ended june 27, 2020, the company recorded $203 million of impairment charges to goodwill.auditing management’s impairment tests for goodwill is complex and highly judgmental and required the involvement of a valuation specialist due to the significant estimation required to determine the fair value of the reporting units. in particular, the fair value estimates of reporting units with fair values that do not significantly exceed their carrying values are sensitive to assumptions such as changes in projected cash flows, weighted average cost of capital, and terminal growth rates. all of these assumptions are sensitive to and affected by expected future market or economic conditions and company-specific qualitative factors.62how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. we also tested controls over management’s review of the data used in their valuation models.to test the estimated fair value of the company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the company in its analysis. we compared projected cash flows to the company’s historical cash flows and other available industry information. we involved our valuation specialists to assist in reviewing the valuation methodology and testing the weighted average cost of capital and terminal growth rates. 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. in addition, we also tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the company.allowance for doubtful accounts description of the matter the company’s accounts receivable totaled $2.9 billion, net of allowance of doubtful accounts for $335 million, as of june 27, 2020. as discussed in note 1 of the financial statements, the company evaluates the collectability of accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors, including, among others, historical write-off experience, customer bankruptcies and accounts referred to outside collection agencies. due to the covid-19 pandemic, in addition to those factors, the allowance also incorporates the company’s historical write-off percentages experienced during local and regional disasters and the company’s current collection trends experienced during the pandemic.auditing management’s estimates of allowance for doubtful accounts involved subjectivity because the estimates rely on industry and economic factors. in particular, the covid-19 pandemic has had a significant and adverse impact on the credit worthiness of sysco’s customers in the foodservice industry, and there is a high degree of subjectivity around estimating the write-off percentages utilized in the allowance for doubtful accounts calculation.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 allowance for doubtful accounts review process, including controls over management’s review of historical write-off percentages experienced during local and regional disasters and current collection trends experienced during the pandemic. we also tested controls over management’s review of the data used in their calculation.to test the estimated allowance for doubtful accounts, we performed audit procedures that included, among others, testing the company’s write-off percentages and the data used by the company in its calculation. we compared the write-off percentages utilized in the calculation to the company’s historical write-off percentages experienced during local and regional disasters. we performed analyses on the company’s current collection trends experienced during the pandemic and obtained evidence for select accounts referred to outside collection agencies or customers that have filed for bankruptcy. additionally, we evaluated events subsequent to the balance sheet date in assessing the reasonableness of management’s estimates./s/ ernst & young llp we have served as the company’s auditor since 2002. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. recognition of the contingent note receivable as described in notes 2, 4 and 5 to the consolidated financial statements, on july 27, 2018, the company completed the sale of its 50% interest in the galore creek partnership and its 40% interest in the copper canyon mineral property (“the sale”). as part of the consideration for the sale, the company received a $75 million note (the “contingent note receivable”), which is contingent upon the approval of a galore greek construction plan by the owner(s). the company has not assigned a value to the contingent note receivable as management determined that galore creek project construction approval was not probable as of the closing of the galore creek sale. the company’s assessment did not change as of november 30, 2019. the contingent note will be recognized when, in management’s judgment, it is probable that the payment will occur, and that the amount recorded will not reverse in future periods. the principal consideration for our determination that performing procedures relating to the recognition of the contingent note receivable is a critical audit matter is that there was judgment made by management when determining if recognition was required, which in turn led to a high degree of subjectivity in performing audit procedures to evaluate management’s assessment as to the probability of whether a construction plan will be approved. 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 process of assessing the basis for recognizing the contingent note receivable. these procedures also included evaluating how management formulated their judgment as to the likelihood of the owner(s) of the project approving the galore greek construction plan. this included considering both publicly available information and the latest annual progress report provided by the owner(s) of the project to the company under the terms of the sale agreement. (signed) pricewaterhouse coopers llp chartered professional accountants vancouver, canada january 22, 2020 we 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 judgements. 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. 53accounting for business combinations description of the matter as described in note 3 of the consolidated financial statements, the company completed its merger with ge transportation for net consideration of approximately $10.3 billion on february 25, 2019. the transaction was accounted for as a business combination.auditing the company's accounting for its merger with ge transportation was complex due to the significant estimation in determining the fair value of the acquired intangible assets of approximately $3.2 billion, which included contract backlog, customer relationships and intellectual property, and assumed liabilities, which included certain off-market customer contract liabilities totaling $0.5 billion. the significant estimation in determining the fair value of such assets and liabilities was primarily due to the sensitivity of the respective fair values to underlying assumptions. the company used a discounted cash flow model to estimate the fair values of acquired contract backlog, customer relationships, and intellectual property intangibles and assumed off-market customer contract liabilities. the significant assumptions used to estimate the value of the intangible assets and off-market customer contract liabilities included revenue growth rates, projected profit margins, discount rates, royalty rates, customer attrition rates, revenue obsolescence rates and market participant profit margins. these significant assumptions are forward-looking and could be affected by future economic and market conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company's controls over accounting for acquisitions, including controls over the recognition and measurement of, identifiable intangible assets and off-market customer contract liabilities and management's judgments and evaluation of underlying assumptions with regard to the valuation models applied. we also tested management's controls to validate that the data used in the valuation models was complete and accurate.to test the estimated fair value of the company’s identifiable intangible assets and off-market customer contract liabilities, our audit procedures 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. for example, when evaluating the assumptions related to the revenue growth rates, projected profit margins, customer attrition rates, revenue obsolescence rates and market participant profit margins, we compared the assumptions to the past performance of ge transportation, contractual arrangements that ge transportation has with customers, the company's history related to similar acquisitions and third-party industry data where available. we also performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value that would result from changes in the assumptions. when evaluating the assumptions related to discount rates and royalty rates, we compared the assumptions 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, including the discount rates and royalty rates. our procedures also included comparison of the selected discount rates to the acquired business’s weighted average cost of capital, an evaluation of the relationship of the weighted average cost of capital, internal rate of return and weighted-average return on assets, and consideration of guideline public company benchmarking analyses reflecting the composition of purchase prices for similar transactions.54over time revenue recognition for long-term contracts description of the matter as described in note 2 to the consolidated financial statements, the company has long-term customer arrangements involving the design and production of highly engineered products that require revenue to be recognized over time. the company uses input-based measures for determining the amount of revenue, cost and gross margin to recognize over time for these customer arrangements. the input methods used for these arrangements include costs of material and labor. during the year ended december 31, 2019, a material amount of the company's total revenues were derived from performance obligations that are satisfied over time.auditing the company's measurement of revenue recognized over time on long-term contracts is especially challenging because it involves subjective management assumptions regarding the estimated remaining costs of the long-term contract that could span several years. these assumptions could be impacted by the future cost of materials, labor availability and productivity, complexity of the work to be performed, and the performance of suppliers, customers and subcontractors that may be associated with the contract and may be affected by future market or economic conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested (except for those contracts pertaining to ge transportation) the operating effectiveness of controls over the company's process to recognize revenue over time on long-term contracts, including controls over management’s review of the significant underlying assumptions described above. our audit procedures also included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in management's calculations. this included, for example, inspection of the executed contract and testing management's cost estimates by comparing the inputs to the company’s historical data or experience for similar contracts, the performance of sensitivity analysis and the performance of retrospective review analysis of prior management cost estimates to actual costs incurred for completed contracts. in addition, for a sample of contracts, we involved our construction and engineering specialists to assist in our evaluation of management’s cost estimates at completion./s/ ernst & young llp we have served as the company's auditor since 2002. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 55 table of contents evaluation of impairment on real estate investments held and used description of the matter at december 31, 2020, the company’s real estate investments (land, building, and improvements) held and used totaled $5.5 billion. as discussed in note 2 to the consolidated financial statements, the company reviews its real estate investments held and used periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. the company considers factors such as expected future undiscounted cash flows, estimated residual value, and market trends (such as the effects of leasing demand and competition) in assessing recoverability of these investments. key assumptions used in estimating future cash flows and fair values include recently quoted bid or ask prices, market prices of comparable investments, contractual and comparable market rents, leasing assumptions, capitalization rates, and expectations for the use of the asset. a real estate investment held and used is considered impaired if its carrying value exceeds its estimated undiscounted cash flows, and the impairment is calculated as the amount by which the carrying value of the asset exceeds its estimated fair value. auditing management’s evaluation of impairment on real estate investments held and used is judgmental due to the estimation required in determining undiscounted cash flows that can be generated from the investment and determining estimated fair value when the investment is not deemed recoverable from those estimated future cash flows. in particular, the impairment evaluation is sensitive to the investment’s estimated residual value that is derived from the key assumptions stated above, which can be affected by expectations about future market or economic conditions, demand, and competition. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the company’s impairment evaluation process. this included controls over management’s review of the key assumptions underlying the undiscounted cash flows and the fair value determination. to test the company’s evaluation of impairment of real estate investments, we performed audit procedures that included, among others, testing the key assumptions used by management in its recoverability analysis and in determining the fair value of investments that were impaired. we compared the key assumptions to observable market transaction information published by independent industry research sources to assess whether the assumptions were market supported. we involved a valuation specialist to assist in evaluating the key assumptions listed above. as part of our evaluation, we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of key assumptions to evaluate the changes in the valuation of certain properties that would result from changes in the assumptions or using alternative valuation techniques. in addition, we performed procedures to evaluate the completeness and accuracy of the data utilized in management’s impairment analysis. we also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management. 56 table of contents collectability of lease payments description of the matter the company recorded $479.9 million in rental income for the year ended december 31, 2020. as discussed in note 2 to the consolidated financial statements, the company evaluates the collectability of lease payments on a regular basis. the company considers certain key factors in assessing collectability, including: tenant’s payment history and financial condition, business conditions in the industry in which the tenant operates, economic conditions of the geographic location in which the tenant operates, as well as other relevant tenant specific circumstances. auditing management’s evaluation of collectability of lease payments requires judgement as the assessment is based on tenant specific circumstances and expectations of future economic and market conditions. in particular, the longer-term nature of repayments of covid-19 induced deferrals, the absence of cash receipts during the deferral period, and the current market environment requires the judgement of management in evaluating the collectability of billed and unbilled tenant receivables. given the tenant specific nature of this evaluation and the uncertainty associated with future economic and market conditions, the related reserves against revenue are sensitive to the economic and geographic considerations of individual tenants described above and management’s judgment in evaluating the collectability conclusion. 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 lease payment collectability process. to test the company’s assessment of collectability, our audit procedures included, among others, evaluating tenant specific financial information, current and historical tenant payment collection, and changes in the collectability conclusions made during the year. in addition, we tested the completeness and accuracy of the data used in management’s collectability analysis. we also assessed information and events subsequent to the balance sheet date, if any, to corroborate certain of the key assumptions used by management. /s/ ernst & young llp we have served as the company’s auditor since 2003. | 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.85table of contents claim and claim adjustment expense reserves – property & casualty — refer to notes 1 and 8 to the consolidated financial statements.critical audit matter description the estimation of property and casualty claim and claim adjustment expense reserves (“p&c claim and claim adjustment expense reserves”), including those claims that are incurred but not reported, requires significant judgment. estimating p&c claim and claim adjustment expense reserves is subject to a high degree of variability as it involves complex estimates that are generally derived using a variety of actuarial estimation techniques and numerous assumptions and expectations about future events, many of which are highly uncertain. modest changes in judgments and assumptions can materially impact the valuation of these liabilities, particularly for claims with longer-tailed exposures such as workers’ compensation, general liability and professional liability claims. given the significant judgments made by management in estimating p&c claim and claim adjustment expense reserves, auditing p&c claim and claim adjustment expense reserves required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists. how the critical audit matter was addressed in the audit our audit procedures related to p&c claim and claim adjustment expense reserves included the following, among others:• we tested the effectiveness of controls related to the determination of p&c claim and claim adjustment expense reserves, including those controls related to the estimation of and management’s review of p&c claim and claim adjustment expense reserves.• we tested the underlying data, including historical claims, that served as the basis for the actuarial analyses, to test that the inputs to the actuarial estimates were accurate and complete.• with the assistance of our actuarial specialists:o we developed a range of independent estimates of p&c claim and claim adjustment expense reserves and compared our estimates to the recorded reserves.o we compared our prior year estimates of expected incurred losses to actual experience during the most recent year to identify potential bias in the company’s determination of p&c claim and claim adjustment expense reserves.future policy benefit reserves – long term care — refer to notes 1 and 8 to the consolidated financial statements critical audit matter description the estimation of long term care future policy benefit reserves (“ltc future policy benefit reserves”) requires significant judgment in the selection of key assumptions, including morbidity, persistency (inclusive of mortality), discount rate and future premium rate increases.86table of contents a gross premium valuation (“gpv”) is performed annually to assess the adequacy of the ltc future policy benefit reserves. the actuarial assumptions underlying the recorded ltc future policy benefit reserves are “locked-in” absent an indicated premium deficiency. if the gpv indicates the recorded ltc future policy benefit reserves are not adequate (i.e. a premium deficiency exists), the assumptions are “unlocked” and the ltc future policy benefit reserves are increased to eliminate the premium deficiency.estimating future experience for long term care policies is subject to significant estimation risk as the required projection period spans several decades. morbidity and persistency experience can be volatile while discount rates and premium rate increases can be difficult to predict. modest changes in each of these assumptions can materially impact the valuation of these liabilities.given the significant judgments made by management in estimating ltc future policy benefit reserves, auditing ltc future policy benefit reserves required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists. how the critical audit matter was addressed in the audit our audit procedures related to ltc future policy benefit reserves included the following, among others:• we tested the effectiveness of controls related to the determination of ltc future policy benefit reserves, including those controls related to the estimation of and management’s review of ltc future policy benefit reserves.• we tested the underlying data, including demographic and historical claims data, that served as the basis for the actuarial analyses, to test that the inputs to the actuarial estimates were accurate and complete.• with the assistance of our actuarial specialists:o we independently recalculated a sample of ltc future policy benefit reserves and compared our estimates to the recorded reserves.o we evaluated the key assumptions applied in the gpv analysis, including comparing those assumptions to the company’s historical experience, underlying portfolio yield and market data.o we assessed the company’s projection of future cash flows to evaluate the reasonableness of the 2020 charge related to unlocking ltc future policy benefit reserves to recognize a premium deficiency as a result of the most recently completed gpv.impairment of long-lived assets– refer to notes 1 and 6 to the financial statements critical audit matter description the evaluation of offshore drilling equipment, specifically drilling rigs, for impairment occurs whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable.when the company determines that the carrying value of a drilling rig may not be recoverable, an undiscounted probability-weighted cash flow analysis is prepared to determine if there is a potential impairment. if the carrying value of a drilling rig is not recoverable, the carrying value is reduced to its fair value determined using a discounted probability-weighted cash flow analysis. these analyses utilize certain assumptions for each drilling rig under evaluation and consider multiple probability-weighted utilization and dayrate scenarios. the company’s development of the dayrate assumption involves significant judgment relative to the current and expected market for the drilling rigs and expectations of future oil and gas prices.87table of contents given the significant judgments made by management to identify indicators of impairment and to prepare probability-weighted cash flow analyses to determine if potential impairments exist and to measure fair value, auditing these impairment analyses required a high degree of auditor judgment, including the involvement of fair value specialists, and increased extent of effort related to evaluating indicators of impairment, including the utilization and dayrate assumptions used in the probability-weighted cash flow analyses.how the critical audit matter was addressed in the audit our audit procedures related to (i) the identification of indicators of impairment and (ii) the evaluation of the company’s probability-weighted cash flow analyses for those drilling rigs with factors that indicated potential impairment included the following, among others:• we evaluated the company’s identification of impairment indicators by:o corroborating information used to identify impairment indicators through independent inquiries of offshore drilling marketing and operations personnel and by performing an independent assessment of potential indicators of impairment utilizing the individual drilling rig history, asset class history for dayrates, backlog and potential drilling rig opportunities.o considering industry and analysts reports and the impact of macroeconomic factors, such as future oil and gas prices, on the company’s process for identifying indicators of impairment. o comparing the timing of impairments recorded by the company with the timing of impairments recorded by the company’s peers. • with the assistance of our fair value specialists, we evaluated the company’s probability-weighted cash flow analyses for those drilling rigs with factors that had indicators of potential impairment by:o evaluating the reasonableness of the utilization and dayrate assumptions utilized in the company’s probability-weighted cash flow analyses by evaluating potential drilling rig opportunities and considering industry reports and data.o comparing the assumptions used in the company’s previous probability-weighted cash flow analyses to the assumptions used in the current probability-weighted cash flow analyses to assess for management bias./s/ deloitte & touche llp new york, ny february 9, 2021 we have served as the company's auditor since 1969. | 3 |
critical audit matters the critical audit matterscommunicated 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 (i) relate to accounts or disclosures that are material tothe 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 arenot, 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. 27 table of contents the impact of proved oil and gas reserves on net profits interests in oil and gas properties, net the trusts net profits interests (npi) in oil and gas properties, net balance was $7,523 thousand as of december 31, 2020and amortization of net profits interests for the year ended december 31, 2020 was $639 thousand. as described in note 2, amortization of the net profits interests is calculated on a unit-of-production basis using proved reserves and charged directly to trust corpus. as disclosed by the trustee, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscienceand engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulation before the time atwhich contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operatingmethods in which the cost of the required equipment is relatively minor compared with the cost of a new well. physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factorssuch as changes in product prices, may justify revision of such estimates. because proved reserves are required to be estimated using 12-month average prices, based on the first-day-of-the-month price for each month in the period, estimated reserve quantities can be significantly impacted by changesin product prices. accordingly, oil and gas quantities ultimately recovered and the timing of production may be substantially different from original estimates. the proved oil and gas reserves for the underlying properties are estimated byindependent petroleum engineers (specialists). the principal considerations for our determination that performing procedures relating to theimpact of proved oil and gas reserves on net profits interests in oil and gas properties, net is a critical audit matter are (i) the significant judgment by the trustee, including the use of specialists, when developing the estimates of provedoil and gas reserves, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence related to the data, methods, and assumptions used by the trustee and itsspecialists in developing the estimates of the reserve quantities. addressing the matter involved performing procedures and evaluating audit evidence inconnection with forming our overall opinion on the financial statements. these procedures included, among others, testing the completeness and accuracy of the data related to estimates of reserve quantities. the work of the trusteesspecialists was used in performing the procedures to evaluate the reasonableness of the reserve quantities. as a basis for using this work, the specialists qualifications and objectivity were understood, as well as the methods used by thespecialists. the procedures performed also included tests of the data used by the specialists and an evaluation of the specialists results. second quarter impairment assessment of net profits interests in oil and gas properties, net the trusts net profits interest in oil and gas properties, net balance was $7,523 thousand as of december 31, 2020. as described in note 2, the trustee reviews the trusts npi in oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the npi may not be recoverable. if events and circumstances indicate the carrying value may not berecoverable, the trustee would use the estimated undiscounted future net cash flows from the npi to evaluate the recoverability of the trust assets. if the undiscounted future net cash flows from the npi are less than the npi carrying value, the trust would recognize an impairment loss for the difference between the npi carrying value and the estimated fair value of the npi. the determination as to whether the npi is impaired requires a significant amount of judgment by the trustee and isbased on the best information available to the trustee at the time of the evaluation, including commodity pricing and other information provided by xto energy such as estimates of future production and development and operating expenses. during thefirst and second quarter of 2020, trigger events occurred indicating a need for impairment assessments. impairment assessments were completed and no impairment was indicated. the principal considerations for our determination that performing procedures relating to the second quarter impairment assessment of net profits interest inoil and gas properties is a critical audit matter are (i) the significant judgment by the trustee, including the use of specialists, when developing the undiscounted future net cash flows; and (ii) a high degree of auditor judgment,subjectivity, and effort in performing procedures and evaluating the trustees significant assumptions related to future production and commodity prices. 28 table of contents addressing the matter involved performing procedures and evaluating audit evidence in connection withforming our overall opinion on the financial statements. these procedures included, among others (i) testing the trustees process for developing the undiscounted future net cash flows; (ii) evaluating the appropriateness of theundiscounted future net cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of significant assumptions used by the trustee related to future productionand commodity prices. evaluating the reasonableness of the trustees assumptions related to future commodity prices involved comparing the prices against observable market data and evaluating differentials through the use of historical data.the work of the trustees specialists was used in performing the procedures to evaluate the reasonableness of the proved reserve quantities as stated in the critical audit matter titled the impact of proved oil and gas reserves on net profits interests in oil and gas properties, net and the reasonableness of the future production. as a basis for using this work, the specialists qualifications and objectivity were understood, as well as the methods used by thespecialists. the procedures performed also included tests of the data used by the trustees specialists and an evaluation of the specialists findings. /s/ pricewaterhouse coopers llp dallas, texas april 13, 2021 we have served as the trusts auditorsince 2011. | 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.as described in notes 1 and 5 to the consolidated financial statements, the balance of the company’s consolidated allowance for credit losses – loans was $167.3 million at december 31, 2020. the allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets to present the net carrying value at the amount expected to be collected on such financial assets. the measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. the allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. these factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. management also considers qualitative, forecasted economic conditions and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio.we identified the estimation and application of forecasted economic conditions used in the allowance for credit losses – loans as a critical audit matter. the economic forecast component of the allowance for credit losses is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly. auditing management’s judgments regarding the estimation of forecasted economic conditions and the method by which management applied these forecasts to the allowance for credit losses involved a high degree of subjectivity and complexity. 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 credit losses, including controls over the determination of the forecasted economic conditions used.•obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses are reasonable and supportable based on the analysis provided by management.•testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, and testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions determined by management and used in the calculation, and recalculation of the allowance for credit losses balance.we identified the estimation of qualitative and environmental factors used in the allowance for credit losses – loans as a critical audit matter. the qualitative and environmental factors are used to estimate credit losses related to matters that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data. auditing management’s judgments regarding the qualitative and environmental factors applied to the allowance for credit 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 credit losses, including controls over the determination of the qualitative and environmental factors used.•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 credit 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 credit losses, and testing completeness and accuracy of the data 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 credit losses balance.we identified management’s risk ratings of loans which are used in the allowance for credit losses – loans as a critical audit matter. the company uses internally determined risk ratings as credit indicators to classify loans into pools and to estimate expected loss rates for each of the loan pools. those loan pools are then included in the calculation of the allowance for credit losses. auditing management’s judgments regarding risk ratings of loans 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 over the accuracy of risk ratings of loans.•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.•testing the completeness and accuracy of the loan data used in the allowance for credit losses calculation, including application of the loan risk ratings determined by management and used in the calculation, and recalculation of the allowance for credit losses balance.92spokane, washington february 23, 2021we have served as the company’s auditor since 2004. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.- 104 -related party transactions description of the matter as discussed in note 19 to the consolidated financial statements, the company has entered into multiple transactions with related parties, each of which are controlled by dr. patrick soon-shiong.as a result of the volume and the significance of related party transactions, assessing the sufficiency of procedures performed to identify related parties and related party transactions as well as to audit identified related party transactions was a critical audit matter.how we addressed the matter in our audit the audit procedures we performed to address this critical audit matter included testing the completeness and accuracy of the listing of significant related party transactions provided by management, testing the manner in which related party transactions were recorded, presented and disclosed, and performing searches for payments and other transactions with identified related parties. we also inspected questionnaires received from the company’s directors and officers, read employment and compensation contracts, proxy statements and other relevant filings with the securities and exchange commission and other regulatory agencies that relate to the company’s financial relationships and transactions with the company’s executive officers and with other entities controlled by dr. patrick soon-shiong. we confirmed related party transactions and balances with the counterparty. we made inquiries of management as well as members of the company's audit committee regarding the completeness of the identified related party transactions, and assessed the adequacy of financial statement footnote disclosure pertaining to related party transactions.goodwill allocation to discontinued operation description of the matter as described in note 9 to the consolidated financial statements, the company allocated $18.6 million of goodwill to discontinued operations as a result of the sale of the connected care business (“dcx”) in february, 2020. goodwill was allocated based on the relative fair values of dcx as a percentage of the total fair value of dcx and the company that remains after the sale.auditing the goodwill allocation was complex and required the involvement of our specialists due to the highly judgmental nature of the assumptions, such as weighted average cost of capital and discrete and terminal period revenue growth rates, used to develop the fair value estimates used to make the allocation.how we addressed the matter in our audit to test the goodwill allocation, our audit procedures included, among others, evaluating the methodologies used, including the significant assumptions discussed above, and the underlying data used by the company in making the relevant fair value estimates. to test the company’s forecasts and assumptions, we compared them to current industry, market and economic trends and performed sensitivity analyses to evaluate the changes in fair value that would result from changes in the significant assumptions, including the timing of projected revenue growth. in addition, we utilized our valuation specialists to assist in our evaluation of the significant assumptions used by the company, including the weighted average cost of capital and discrete and terminal period revenue growth rates used to develop the fair value estimates. we also tested the completeness and accuracy of underlying data, such as the projected financial information. further, we considered if there was any contrary evidence to the forecasted information and assumptions of management./s/ ernst & young llp we have served as the company's auditor since 2013. | 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. long-lived assets and intangible assets recoverability test—asset groupings in the contract drilling, pressure pumping, and directional drilling operating segments as of march 31, 2020 as described in notes 6 and 7 to the consolidated financial statements, the company’s consolidated net property and equipment and consolidated intangible assets balance were $2,761 million and $30 million, respectively, most of which relates to the contract drilling and pressure pumping asset groupings as of december 31, 2020. management reviews its long-lived assets, including property and equipment and intangibles, for impairment whenever events or changes in circumstances indicate that their carrying amounts of certain asset groupings may not be recovered over their estimated remaining useful lives. as a result of triggering events for the quarter ended march 31, 2020, management deemed it necessary to assess the recoverability of its contract drilling, pressure pumping, and directional drilling asset groups as of march 31, 2020. management performed an analysis to assess the recoverability of the asset groups within its contract drilling, pressure pumping and directional drilling operating segments as of march 31, 2020. with respect to these asset groups, future cash flows were estimated over the expected remaining life of the assets, and management determined that, on an undiscounted basis, expected cash flows exceeded the carrying value of the asset groups, and no impairment was indicated. for the assessment performed in 2020, the expected cash flows for the company’s asset groups included revenue growth rates and operating expense growth rates. the principal considerations for our determination that performing procedures relating to the long-lived assets and intangible assets recoverability test – asset groupings in the contract drilling, pressure pumping, and directional drilling operating segments as of march 31, 2020 is a critical audit matter are the significant judgment by management in estimating the future undiscounted cash flows of the asset groupings 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 significant assumptions in management’s cash flow projections related to revenue growth rates for all three asset groupings and operating expense growth rates for the directional drilling asset grouping. 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 long-lived assets and intangible assets recoverability test, including controls over the estimation of the undiscounted future cash flows of the company’s asset groupings. these procedures also included, among others, evaluating the appropriateness of the method, testing the completeness, accuracy, and relevance of the underlying data used in the cash flows, and evaluating the reasonableness of significant assumptions used by management in developing their estimate of undiscounted future cash flows including revenue growth rates and operating expense growth rates. evaluating management’s significant assumptions related to the revenue growth rates for all three asset groupings and operating expense growth rates for the directional drilling asset grouping, involved evaluating whether the significant assumptions used by management were reasonable considering the current and past performance of the asset groupings and considered whether they were consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp houston, texas february 9, 2021we have served as the company’s auditor since 1993. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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. 69table of contents landfill amortization description of the matter at december 31, 2021, the company’s landfill assets, net of accumulated amortization, totaled $7.3 billion and the associated amortization expense for 2021 was $731 million. as discussed in note 2 of the financial statements, the company updates the estimates used to calculate individual landfill amortization rates at least annually, or more often if significant facts change. landfill amortization rates are used in the computation of landfill amortization expense. auditing landfill amortization rates and related amortization expense is complex due to the highly judgmental nature of assumptions used in estimating the rates. significant assumptions used in the calculation of the rates include: estimated future development costs associated with the construction and retirement of the landfill, estimated remaining permitted airspace and unpermitted expansion airspace, airspace utilization factors, projected annual tonnage intakes, and projected timing of retirement activities. 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 determining landfill amortization rates and calculating amortization expense. our audit procedures included, among others, testing controls over: the company’s process for evaluating and updating the significant assumptions used in the development of the landfill amortization rates, management’s review of those significant assumptions, and the mathematical accuracy of the calculation and recording of amortization expense. to test the landfill asset amortization rates, our audit procedures included, among others, assessing methodologies 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 compared the significant assumptions used by management to historical trends and, when available, to comparable size landfills accepting a similar type of waste. regarding unpermitted expansion airspace, we evaluated the company’s criteria for inclusion in remaining airspace. in addition, we considered the professional qualifications and objectivity of management’s internal engineers responsible for developing the assumptions. we involved ey’s engineering specialists to assist with the evaluation of the company’s landfill future development cost and airspace assumptions. we also tested the completeness and accuracy of the historical data utilized in the development of the landfill amortization rates. 70table of contents landfill – final capping, closure and post-closure costs description of the matter at december 31, 2021, the carrying value of the company’s landfill asset retirement obligations related to final capping, closure and post-closure costs totaled $2.3 billion. as discussed in note 2 of the financial statements, the company updates the estimates used to measure the asset retirement obligations annually, or more often if significant facts change. auditing the landfill asset retirement obligation is complex due to the highly judgmental nature of the assumptions used in the measurement process. these assumptions include: estimated future costs associated with the capping, closure and post closure activities at each specific landfill; airspace consumed to date in relation to total estimated permitted airspace; the projected annual tonnage intake; and the projected timing of retirement activities. 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 calculation of asset retirement obligations. our audit procedures included, among others, testing the company’s controls over the landfill asset retirement obligation estimation process and management’s review of the significant assumptions used in the estimation of the liability, including the amount and timing of retirement costs. to test the landfill asset retirement obligation valuation, we performed audit procedures that included, among others, assessing methodologies used by the company, testing the completeness of activities included in the estimate (e.g., gas monitoring and extraction), and testing the significant assumptions discussed above, inclusive of the underlying data used by the company in its development of these assumptions. we compared the significant assumptions used by management to historical trends and, when available, to comparable size landfills accepting the same type of waste. in addition, we considered the professional qualifications and objectivity of management’s internal engineers responsible for developing the assumptions. we involved ey engineering specialists to assist us with these procedures. specifically, we utilized the ey engineering specialists to evaluate the reasons for significant changes in assumptions from the historical trend, and to determine whether the change from the historical trend was appropriate and identified timely. we also tested the completeness and accuracy of the historical data utilized in preparing the estimate. /s/ ernst & young llp we have served as the company’s auditor since 2002. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. 81table of contents evaluation of the estimated fair value of certain acquired tangible and intangible assets and liabilities in an asset acquisition as described in note 3, the company acquired $377.6 million of real estate properties during 2020 that were accounted for as acquisition of assets. the purchase price in an asset acquisition is allocated among the individual components of both the tangible assets and intangible assets and liabilities acquired based on their relative fair values. a portion of the fair value of each property is allocated to land as determined using comparable land sales. a portion of the fair value of the property is allocated to building and building improvements based on its “as-if” vacant fair value. the allocation of the purchase price to intangible lease assets represents the value associated with the in-place leases, which may include avoided lost rent, leasing commissions, tenant improvements, legal, and other related costs. the allocation of the purchase price to above-market lease assets and below-market lease liabilities are determined by comparing the in-place leases to estimated fair market rental rates at the acquisition date.we identified the evaluation of the estimated fair value of certain acquired tangible and intangible assets and liabilities in an asset acquisition, as a critical audit matter. these include land, buildings, in-place lease intangibles, including the above or below market rent component of in-place lease intangibles. specifically, subjective auditor judgment was required to evaluate the assumptions used in the company’s determination of the estimated fair value, which included comparable land sales, estimated replacement cost of the building, market rental rates, market rental growth rates, market leasing commissions, and discount rate.the following are the primary procedures we performed to address this critical audit matter. we involved valuation professionals with specialized skills and knowledge who assisted in evaluating the company’s estimated fair value of land, replacement cost of the building, market rental rates, market rental growth rates, market leasing commissions, and discount rate by comparing the company’s estimates to our independently developed ranges of comparable land sales, estimated replacement cost of the building, market rental rates, market growth rates, market leasing commissions, and discount rates.assessment of the expected hold periods for investments in real estate properties as described in note 3, the company had $1,954.6 million of net investment in real estate properties as of december 31, 2020. the company evaluates properties for impairment whenever events or changes in circumstances, including shortening the expected hold periods of such properties, indicate that the carrying amount of an asset may not be recoverable.we identified the assessment of the expected hold periods for investments in real estate properties as a critical audit matter. a high degree of subjective auditor judgment is required in assessing the events or changes in circumstances used by the company to evaluate the expected hold periods for investments in real estate assets.the following are the primary procedures we performed to address this critical audit matter. we evaluated the company’s hold periods by inquiring of management, considering the current economic environment, reading minutes of the meetings of the company’s board of directors, and analyzing documents prepared by the company regarding proposed real estate transactions and potential triggering events. we inquired of management and inspected documentation from the company regarding the status and evaluation of any potential disposal of properties, which we corroborated with others in the organization who are responsible for, and have authority over, disposition activities. /s/ kpmg llp we have served as the company’s auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of the recoverability of the carrying value of goodwill as described in notes 1 and 8 to the consolidated financial statements, the company’s goodwill was $11.37 billion as of may 30, 2021. annually, or whenever events or changes in circumstances indicate potential asset impairment has occurred, the company evaluates the recoverability of the carrying value of goodwill. the company performed a quantitative impairment test of goodwill for its sides, components & enhancers reporting unit in its first fiscal quarter of 2021, as a result of a reporting unit change. we identified the evaluation of the recoverability of the carrying value of the sides, components & enhancers reporting unit goodwill subsequent to the reporting unit change as a critical audit matter. subjective and challenging auditor judgment was required to evaluate certain assumptions used to determine the fair value of the reporting unit in the company’s first fiscal quarter quantitative impairment test. these assumptions included forecasted revenue growth rates including the terminal growth rates, margin growth rates used in determining the forecasted cash flows, and selection of the discount rate. the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s evaluation of the assumptions used to determine the fair value of the reporting unit. we evaluated the company’s ability to forecast cash flows by comparing historical forecasts to actual results and forecasted cash flows with the company’s most recent plans. we also considered current industry, macroeconomic and market conditions, and the company’s historical results in evaluating the assumptions described above. we involved our valuation professionals with specialized skills and knowledge who assisted in: •evaluating the terminal growth rates by comparing them with publicly available market data; •evaluating the discount rate used by the company by comparing the company’s inputs to the discount rate to publicly available data for comparable entities and assessing the resulting discount rate; and •testing the estimate of the fair value of the reporting unit using the company’s cash flow assumptions and discount rate and comparing the results to the company’s fair value estimate. evaluation of the recoverability of the carrying value of certain indefinite-lived intangible assets as described in notes 1 and 8 to the consolidated financial statements, the company’s indefinite-lived intangible assets (consisting primarily of brand names and trademarks) were $4.16 billion as of may 30, 2021. for the fiscal year ended may 30, 2021, the company recorded impairment charges totaling $90.9 million on indefinite-lived intangible assets. in assessing indefinite-lived intangible assets for impairment, the company performs either a qualitative or quantitative assessment at least annually or whenever circumstances indicate a potential impairment exists. when a quantitative assessment is performed, the company estimates the fair value of the intangibles by utilizing a discounted cash flow model that incorporates an estimated royalty rate that would be charged to a third party for the use of the brand. impairment charges are recorded for any intangibles with carrying values in excess of the estimated fair values. we identified the evaluation of the recoverability of the carrying value of certain indefinite-lived intangible assets for which a quantitative impairment assessment is performed as a critical audit matter. subjective and challenging auditor judgment was required to evaluate certain assumptions used in determining the fair value of these assets. these assumptions included the forecasted revenue growth rates including the terminal growth rates and forecasted margins, royalty rates, and discount rates.87 the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the quantitative impairment assessments, including controls over the development of the assumptions described above. to assess the company’s ability to forecast, we compared historical forecasts to actual results. we evaluated the forecasted revenue growth rates including terminal growth rates and forecasted margins used to support the royalty rates by considering current and past performance of the brand names, as well as external market and industry outlook data. we also involved valuation professionals with specialized skills and knowledge, who assisted for certain brand names intangibles in: •evaluating the terminal growth rates by comparing them to publicly available market data; •evaluating the royalty rates by determining that the selected royalty rates are supported by the associated brand name’s margin; •evaluating the discount rates used by the company by comparing the company’s inputs to the discount rates to publicly available data for comparable entities and assessing the resulting discount rate; and •testing the estimated brand names fair values using the company’s assumptions and comparing the results to the company’s fair value estimate. /s/ kpmg 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.revenue recognition - estimating variable consideration and identification of and accounting for performance obligations as discussed in notes 1 and 2 to the consolidated financial statements, the company recorded revenue of $1.758 billion for the year ended june 30, 2021. the company enters into contracts with its customers, which frequently contain multiple performance obligations and variable contract consideration. the amount of revenue recognized is based on the consideration the company expects to receive in exchange for transferring goods and services to the customer. the company’s contracts with its customers frequently contain some component of variable consideration. management estimates variable consideration in its contract primarily using the expected value method, based on both historical and current information. where appropriate, the company may constrain the estimated variable consideration included in the transaction price in the event of a high degree of uncertainty as to the final consideration amount. at contract inception, management assesses the solutions and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a solution or service (or bundle of solutions or services) that is distinct - that is, if the solution or service is separately identifiable from other items in the arrangement and if the customer can benefit from the solution or service on its own or together with other resources that are readily available. the company recognizes revenue when or as it satisfies each performance obligation by transferring control of a solution or service to the customer. significant judgment in revenue recognition for these customer contracts include, where relevant, (i) the estimation of variable consideration, principally, the varying volume of transactional activity over long-term contracts, and (ii) the identification of and accounting for all performance obligations.the principal considerations for our determination that performing procedures relating to the estimation of variable consideration and the identification of and accounting for performance obligations is a critical audit matter are significant judgment by management to estimate the variable consideration, principally, the varying volume of transactional activity and the identification of and accounting for all performance obligations in a contract. this in turn resulted in significant audit effort, a high degree of auditor judgment and subjectivity in performing our audit procedures and 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 revenue recognition process, including the estimation of variable consideration and identification of and accounting for each performance obligation. the procedures also included, among others, evaluating and testing management’s process for determining the variable consideration and testing the reasonableness of management’s estimation of variable consideration. testing the estimation of variable consideration included evaluating the terms and conditions of the long-term contracts and the related significant assumptions used in the estimate of the variable consideration, principally, the use of historical transaction volumes to estimate the varying volume of transactional activity. the procedures for testing the performance obligations and variable consideration included evaluation of the terms and conditions for a sample of contracts./s/ pricewaterhouse coopers llp kansas city, missouri august 25, 2021we have served as the company’s auditor since 2015. | 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.fair value — level 3 investments — refer to note 2 and note 3 to the financial statements critical audit matter description as of december 31, 2021, the fund has nonmarketable investments in loans of $484 million. there is no readily available market price or secondary market for the loans made by the fund to its borrowers; hence the fund determines fair value based on a hypothetical market and the estimates are subject to a higher degree of judgment and uncertainty. the fund’s loan investments are considered level 3 fair value measurements in the fair value hierarchy due to the lack of observability over certain significant inputs used in determining fair value.certain nonmarketable investments in loans held by the fund have exhibited indicators of potential credit deterioration subsequent to the initial funding date. the valuation of these loans has an elevated risk profile because the estimates of fair value involve a higher degree of management judgment and uncertainty associated with the expectation of timing and amount of future cash flows under various cash flow scenarios. the valuation of these loans required a high degree of auditor judgment and an increased extent of effort, including the possibility to involve our fair value specialists who possess significant valuation expertise, to evaluate the appropriateness of the model and methodology.we identified the completeness of loans exhibiting indicators of potential credit deterioration and the valuation of loans exhibiting credit deterioration as a critical audit matter.30how the critical audit matter was addressed in the audit our audit procedures related to the completeness of loans exhibiting indicators of potential credit deterioration and the unobservable inputs used by management to estimate the fair value of the loans with credit deterioration included the following, among others:a.we tested loan payments throughout the year and subsequent to year end to identify inconsistent payments or missed payments which could indicate a potential credit risk.b.with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation techniques used by management to estimate fair value.c.we tested and evaluated the appropriateness of the unobservable inputs by comparing them to external sources, including financial information provided by the borrower, and those used by management in the prior year./s/ deloitte & touche llp march 14, 2022san francisco, california we have served as the auditor of one or more venture lending & leasing investment companies since 2001. | 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. performance-based restricted stock awards with market conditions as described in notes 1 and 6 to the consolidated financial statements, the company granted performance-based restricted stock awards with market conditions that vest based on the company’s total shareholder return relative to total shareholder return of a peer group, as measured by the closing prices of the stock of the company and its peer group for the period as defined in the award agreement, which resulted in the company recognizing stock-based compensation expense of $3.5 million for the year ended june 30, 2019. with the assistance of a specialist, management determined the fair value of the performance-based restricted stock awards with market conditions using the monte carlo simulation model. the principal considerations for our determination that performing procedures relating to performance-based restricted stock awards with market conditions is a critical audit matter are there was significant judgment by management, including the use of a specialist, to determine the fair value of these stock awards using the monte carlo simulation model. this in turn led to a high degree of auditor subjectivity and judgment to evaluate the audit evidence obtained related to the valuation of the stock awards. the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of the performance-based restricted stock awards with market conditions, including management’s method, assumptions, and data. these procedures also included, among others, developing an independent estimate of the fair value of a sample of performance-based restricted stock awards with market conditions and comparing to management’s estimate to evaluate the reasonableness of the estimate. the independent estimate was calculated by (i) developing an independent monte carlo simulation model of the company’s expected total shareholder return relative to total shareholder return of a peer group as defined in the award agreement and (ii) testing the completeness and accuracy of historical stock prices and volatilities of the company and the peer group data used in the monte carlo simulation model by utilizing data obtained from an independent third-party source. professionals with specialized skill and knowledge were used to assist in developing the independent monte carlo simulation model and evaluating the audit evidence./s/ pricewaterhouse coopers llp minneapolis, minnesota august 22, 2019 we have served as the company’s auditor since at least 2003, | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.54table of contents rookery equity method investment - variable interest model description of the matter as disclosed in note 3 to the consolidated financial statements, in march 2019, the 50/50 jointly owned and governed entity (“covanta green”) between covanta and green investment group was used to fund an 80% investment in the rookery project, an energy from waste facility being built in bedfordshire, england (the “facility”). the company provides technical oversight and became a service provider for the facility. the company accounts for its 50% equity interest in covanta green under the equity method of accounting. for the year ended december 31, 2019, the company recorded a $56 million gain on sale of business and investments which is included in the “gain (loss) on sale of assets” in the consolidated statement of operations. auditing the assessment of whether the company has a controlling financial interest in covanta green, which was determined to be a variable interest entity, was complex and required significant judgment. management’s assessment of whether covanta is the primary beneficiary under the variable interest model is highly judgmental and could have a significant effect on the accounting for the company’s 50% equity interest in covanta green and the gain recorded in the consolidated statement of operations. how we addressed the matter in our audit we tested the controls over the company’s evaluation of the accounting conclusions with respect to the variable interest model.our audit procedures included, among others, evaluating whether covanta is the primary beneficiary of covanta green, which was determined to be a variable interest entity. we read and evaluated the key elements of all arrangements between covanta and the entities involved in the transaction and evaluated the underlying legal and governance documents to determine whether covanta has a controlling financial interest in covanta green. we made inquiries of management, obtained an understanding of and evaluated the business purpose of covanta green and the activities that most significantly impact the economic performance of the entity. for example, we evaluated how decisions about the most significant activities are made and the party or parties that make them, including evaluating whether covanta’s service agreement with the facility resulted in covanta’s power to direct the activities that most significantly impact performance or the obligation to absorb expected losses. income taxes - uncertain tax positions description of the matter as discussed in note 9 of the consolidated financial statements, the company has recorded a liability of $40 million related to uncertain tax positions as of december 31, 2019. the company conducts business in the us, various foreign countries and numerous states and is therefore subject to us federal and state income taxes, as well as income taxes of multiple foreign jurisdictions. due to the multinational and multistate operations of the company, changes in global, including us federal and state, income tax laws and regulations result in complexity in the accounting for and monitoring of income taxes including the provision for uncertain tax positions.auditing management’s identification and measurement of uncertain tax positions involved complex analysis and audit judgment related to the evaluation of the income tax consequences of significant business transactions, including legal entity rationalization and restructurings, and changes in income tax law and regulations in various jurisdictions, which is often subject to interpretation. 55table of contents how we addressed the matter in our audit we tested the controls over the company’s process to account for uncertain tax positions, including management’s review of the related tax technical analyses. for example, we tested controls over management’s identification and assessment of changes to tax laws and significant transactions, which may result in uncertain tax positions.we performed audit procedures, among others, to evaluate the company’s assumptions and underlying data used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. we obtained an understanding of the company’s legal structure through our review of organizational charts and related legal documents. we further considered the income tax consequences of significant transactions, including internal restructurings, and assessed management’s interpretation of those changes under the relevant jurisdiction’s tax law. due to the complexity of tax law, we involved our income tax professionals to assess the company’s interpretation of and compliance with tax laws in these jurisdictions, as well as to identify tax law changes. in certain circumstances, we involved our income tax professionals to evaluate the technical merits of the company’s tax positions, including assessing the company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the company. we also evaluated the company’s income tax disclosures included in note 9 to the consolidated financial statements in relation to these matters. impairment evaluation of goodwill - ces reporting unit description of the matter as discussed in note 1 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. the company’s goodwill is assigned to its reporting units as of the initial acquisition date. in 2019, the company performed a quantitative goodwill impairment test on its ces reporting unit, which had goodwill of $46 million as of december 31, 2019. the company’s quantitative goodwill impairment test compares the fair value of the reporting unit to the reporting unit’s carrying value.auditing management’s goodwill impairment test is highly judgmental due to the subjectivity in determining the fair value of the reporting unit. significant assumptions include future cash flow projections and the discount rate applied to those cash flows, the long-term terminal growth rate, and market proxies. these assumptions are highly subjective and involved significant judgment. how we addressed the matter in our audit we tested the controls over the company’s goodwill impairment process, including management’s review of significant assumptions used in the fair value analysis.our audit procedures included, among others, assessing the suitability and application of the valuation methodologies and evaluating the significant assumptions and underlying data used by the company in its analysis. for example, we compared the significant assumptions used by management to current industry and economic trends, the company’s business model and other relevant factors. we tested the projected financial information used in the analysis and evaluated the consistency and appropriateness of the discount rates and long-term terminal growth rates used in the assessment. we also tested the market approach by evaluating the market multiple proxies in management’s analysis. we involved a valuation specialist to assist us in assessing the valuation methodologies and testing the significant assumptions used in the fair value models. we also performed sensitivity analyses of significant assumptions to evaluate the changes in fair value of the reporting unit resulting from changes in these assumptions./s/ ernst & young llp we have served as the company’s auditor since 2002. | 2 |
critical audit matter the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the 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 relates. as described in note 4 to the consolidated financial statements, the company’s consolidated allowance for loan and lease losses (alll) was $15.5 million at december 31, 2021. the company also describes in note 1 of the consolidated financial statements the “allowance for loan losses” accounting policy around this estimate. the allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. the allowance consists of specific, and general components. the specific component relates to loans that are classified as impaired and an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying 58 table of contents report of independent registered public accounting firm value of that loan. the general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. the primary reason for our determination that the allowance for loan losses is a critical audit matter is that it involved significant judgement and complex review as there is a high degree of subjectivity in evaluating management’s estimate, such as evaluating management’s assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades. our audit procedures related to the estimated allowance for loan losses included: testing the design and operating effectiveness of internal controls, including those related to technology, over the alll including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of a loss rate, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans.testing clerical and computational accuracy of the formulas within the company’s alll calculation. testing of completeness and accuracy of the underlying data utilized in the alll. testing of the loan review function and the reasonableness of loan grades determined. specifically, utilizing internal loan review professionals to assist us in evaluating the appropriateness of loan grades and to assess the reasonableness of specific impairments on loans.evaluating the overall reasonableness of qualitative factor adjustments including economic conditions and other environmental factors to historical loss and the appropriateness of their direction and magnitude and the company’s support for the direction and magnitude compared to previous years. /s/ bkd, llpbkd, 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 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.sale of xermelo product and related assets description of the matter as described in note 4 to the consolidated financial statements, in september 2020, the company completed the sale of its xermelo (telotristat ethyl) product and related assets (the “xermelo sale”) to ter sera therapeutics llc. the company recognized a gain on sale of $132.6 million in loss from operations in the consolidated statements of comprehensive loss for the year ended december 31, 2020. the xermelo sale did not meet the criteria for reporting as discontinued operations as there was not a strategic shift that has (or will have) a major effect on the company’s operations.auditing the xermelo sale was especially challenging given the nature of the transaction and significant judgment required to determine whether discontinued operations presentation was appropriate, to estimate the variable consideration and to identify the specific assets and liabilities and related financial effects included within the scope of the divestiture given the degree of integration of the xermelo product and related assets with the company’s remaining operations.f-1how 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 the xermelo sale. for example, we tested controls over management’s review of the accounting treatment of the xermelo sale and for calculating the gain on sale.our audit procedures included, among others, inspecting the transaction agreement, assessing the reasonableness of judgments, testing the accuracy of the gain on sale calculation and evaluating the adequacy of the company’s disclosures related to the xermelo sale. for example, we evaluated the appropriateness of the company’s application of the criteria for reporting of discontinued operations by inspecting management’s supporting documentation, reading of board of director meeting minutes and other entity information, and evaluating for contrary evidence based on our understanding of the business. in addition, we tested the company’s separation of xermelo’s assets, liabilities and related financial information by inspecting the company’s accounting records and agreeing it to the terms of the transaction agreement. we also evaluated the appropriateness of the company’s treatment of variable consideration included in the transaction agreement by inspecting management’s supporting documentation regarding the likelihood of occurrence of the underlying development, regulatory and commercial milestones and evaluating for contrary evidence based on our reading of board of director meeting minutes and other entity information, inquiries with management, and our understanding of the business.accrued research and development expenses description of the matter as described in note 2 to the consolidated financial statements, the company records accruals for estimated costs of research and development activities that include contract services for clinical trials. clinical trial activities performed by third parties are accrued and expensed based upon estimates of the proportion of work completed over the life of the individual clinical trial in accordance with agreements established with contract research organizations (“cr os”), clinical trial sites and other third parties. estimates are determined by reviewing contracts, vendor agreements, purchase orders, change orders and trial budgets, as well as through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. auditing management’s accounting for accrued third-party clinical trial research and development expenses is especially challenging because of the judgment applied by management to determine the progress or stage of completion of the activities under the company’s research and development agreements and the cost and extent of work performed during the reporting period for services not yet billed by contracted third-party vendors. the testing of the company’s accrued clinical trial expense models also involves a significant level of effort to test the high volume of data from third parties, which is tracked in spreadsheets.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 accrued research and development expenses process, including controls over management’s review of clinical trial activity progress in comparison to budgets and invoices received from third parties.our audit procedures included, among others, testing the accuracy and completeness of the underlying inputs used in management’s analysis to determine costs incurred. we compared expenses incurred to budgeted amounts per executed vendor contracts and to expenses incurred in prior periods and obtained an understanding of the reasons for changes. we inspected the terms and conditions of vendor contracts, change orders and trial budgets, assessed direct fees, pass-through costs and clinical site costs, and clerically tested the cost models to track progress against trial budgets. we evaluated estimated services incurred by third parties by understanding the terms and timeline of significant projects, evaluating management’s estimate of work performed and costs incurred by meeting with members of the company’s clinical operations team, and obtaining external confirmation of key terms and conditions and other key inputs to the accrual calculation, such as costs incurred and key dates. further, we inspected invoices received from third parties after the balance sheet date and performed a lookback analysis to evaluate the completeness of accrued research and development expenses./s/ ernst & young llp we have served as the company’s auditor since 2002. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.regulatory matters - impact of rate regulation on the financial statements-refer to notes 2, 3, and 4 to the financial statements critical audit matter description the company is subject to rate regulation by federal and state utility regulatory agencies (collectively, the “commissions”), which have jurisdiction over the company’s electric and natural gas distribution rates in montana, south dakota and nebraska. management has determined regulated accounting is appropriate provided that (i) rates are established by or subject to approval by independent, third-party regulators, (ii) rates are designed to recover the specific enterprise's cost of service, and (iii) in view of demand for service, it is reasonable to assume that rates are set at levels that will recover costs and can be charged to and collected from customers. accounting for the economics of rate regulation affects multiple financial statement line items and disclosures, including property, plant, and equipment; regulatory assets and liabilities; operating revenues and expenses; depreciation expense; income taxes; and multiple disclosures in the notes to the financial statements.f-2rates are determined and approved in regulatory proceedings based on an analysis of the company’s costs to provide utility service and a return on, and recovery of, the company’s capital investment in its utility operations. the economic effects of regulation can result in regulated companies recording costs that have been, or are deemed probable to be, allowed in the ratemaking process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. when this occurs, costs are deferred as regulatory assets and recorded as expenses in the periods when those same amounts are reflected in rates. additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for amounts that are expected to be refunded to customers (regulatory liabilities). the commissions’ regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. while the company has indicated it expects to recover costs from customers through regulated rates, there is a risk that the commissions will not approve: (1) full recovery of the costs of providing utility service or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of capital expenditures or operating costs that management believes were prudently incurred, and (3) refunds to be provided to customers. given that management’s accounting judgments are based on assumptions about the outcome of future decisions by the commissions, auditing these judgments requires specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.how the critical audit matter was addressed in the audit our audit procedures related to the uncertainty of future decisions by the commissions included the following, among others:• we tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. we also tested the effectiveness of management’s controls over the recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.• we evaluated the company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.• we read relevant regulatory orders issued by the commissions, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, filings made by the company, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the commissions’ treatment of similar costs under similar circumstances. we evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.• we evaluated regulatory filings and testimony for any evidence that intervenors are challenging full recovery of the cost of any capital projects or operating costs. if full recovery of project costs is being challenged by intervenors, we evaluated management’s assessment of the probability of a disallowance.• we assessed management’s conclusion regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery or a future reduction in rates./s/ deloitte & touche llp minneapolis, minnesota february 11, 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 financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. wholesale revenue variable consideration description of the matter as described in note 1 and note 2 to the consolidated financial statements, revenue is adjusted by variable consideration arising from implicit or explicit obligations. the reserves for variable consideration are recorded as customer refund liabilities and totaled $86.8 million as of january 31, 2022. auditing the company's measurement of variable consideration related to non-contractual markdowns and returns from wholesale customers is especially challenging because the method of calculation involves subjective management assumptions about estimates of the expected markdowns and returns. for example, in addition to historical experience, estimates of future markdown allowances and returns from wholesale customers are adjusted to reflect management’s assumptions about performance of the f-1table of contents company’s merchandise, specific known events and industry trends. changes in the assumptions can have a material effect on the amount of variable consideration recognized. 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 estimating variable consideration. for example, we tested controls over management’s review of the significant assumptions underlying the estimates of the refund liabilities for markdown allowances and returns from wholesale customers. to test the company’s measurement of variable consideration related to non-contractual markdowns and returns from wholesale customers, our audit procedures included, among others, evaluating the company’s methodologies, evaluating the significant assumptions described above and testing the completeness and accuracy of the underlying data used in management's analyses. we compared the significant assumptions used by management to current market and economic trends, historical results and other relevant factors. further, we performed sensitivity analyses to evaluate the changes in variable consideration that would result from changes in the significant assumptions. in addition, we performed a retrospective review of actual customer chargebacks for markdowns and returns to evaluate the historical accuracy of the company’s estimates. /s/ ernst & young llp we have served as the company’s auditor since 2000. | 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.loss contingencies as described in note 7 to the consolidated financial statements, the company is from time to time engaged in routine litigation. as disclosed by management, an estimated loss from a loss contingency is recorded when information available prior to issuance of the company’s financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. management also discloses material contingencies when they believe a loss is not probable but reasonably possible. management regularly reviews all pending litigation matters in which it is involved and establishes reserves for these litigation matters when a probable loss estimate can be made. accounting for contingencies such as legal and non-income tax matters requires management to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss.the principal considerations for our determination that performing procedures relating to loss contingencies is a critical audit matter are there was significant judgment by management when assessing the likelihood of a loss being incurred and when determining whether a reasonable estimate of the loss or range of loss for each matter can be made, which in turn led to a high degree of auditor judgment and effort in evaluating management’s assessment of loss contingencies associated with legal and non-income tax matters. in addition, the audit effort involved the use 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 management’s evaluation of loss contingencies associated with legal and non-income tax matters, including controls over determining whether a loss is probable and whether the amount of loss can be reasonably estimated, as well as financial statement disclosures. these procedures also included, among others, obtaining and evaluating the letters of audit inquiry from the company’s external legal counsel, evaluating the reasonableness of management’s assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable, and evaluating the sufficiency of the company’s contingency disclosures. professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of certain contingencies, evaluation of whether the positions taken by management are reasonable and assessing the audit evidence obtained./s/ pricewaterhouse coopers llp los angeles, california february 18, 2020we have served as the company’s auditor since 2013. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.realizability of the deferred tax assets as described in notes 1 and 9 to the consolidated financial statements, the company’s consolidated deferred tax asset balance was $225 million net of valuation allowances as of december 31, 2020. the ultimate realization of deferred tax assets depends upon generating sufficient future taxable income during the periods in which the temporary differences become deductible or before net operating loss and tax credit carryforwards expire. the company records a valuation allowance to reduce deferred tax assets to an amount that is "more likely than not" to be realized. evaluating the need for and quantifying the valuation allowance often requires significant judgment and extensive analysis of all the weighted positive and negative evidence available to the company in order to determine whether all or some portion of the deferred tax assets will not be realized. in performing this analysis, the company’s forecasted u.s. and foreign taxable income, and the existence of potential prudent and feasible tax planning strategies that would enable the company to utilize some or all of its deferred tax assets, are taken into consideration. the principal considerations for our determination that performing procedures relating to the realizability of the deferred tax assets is a critical audit matter is the significant judgment by management when assessing the realizability of the deferred tax assets through the existence of feasible tax planning strategies. this led to a high degree of auditor judgment, subjectivity and effort in performing procedures on management’s assessment of the tax planning strategies to enable utilization of deferred tax assets in u.s. and foreign jurisdictions. the evaluation of audit evidence available to support the realizability of u.s. and f-2foreign tax loss and tax credit carryforwards was complex and subjective, and therefore required significant auditor judgment. 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 the recognition of u.s. and foreign tax loss and tax credit carryforwards and the review of tax planning strategies. these procedures also included, among others, (i) evaluating the reasonableness of management’s assessment of tax planning strategies and the amount that is "more likely than not" to be realized, (ii) testing the completeness and accuracy of tax loss and tax credit carryforwards, (iii) evaluating the appropriateness of the realizability of net operating loss and credit carryforwards relevant to the deferred tax assets recognized, and (iv) evaluating the completeness, accuracy and sufficiency of disclosures. /s/ pricewaterhouse coopers llp london, united kingdom march 5, 2021we have served as the company’s auditor since 2017. | 3 |
critical audit matters the critical audit matter communicatedbelow is a matter arising from the current period audit of the consolidated financial statements that was communicated or requiredto be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidatedfinancial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of criticalaudit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accountsor disclosures to which it relates. evaluation of general reserve portionof the allowance for loan losses - evaluation of the qualitative adjustments as described in notes 1 and 3 to theconsolidated financial statements, management determines the general reserve portion of the allowance for loan losses using actualhistorical loss experience for each individual loan category, as well as evaluating whether qualitative adjustments are necessary.as of december 31, 2020, the allowance for loan losses was $1.9 million which consists of two components: the allowance for loansindividually evaluated for impairment (“special reserves”), none at december 31, 2020, and the allowance for loanscollectively evaluated for impairment (“general reserve”), representing $1.9 million. the general reserve covers loansthat are not individually classified as impaired. in evaluating whether qualitative adjustments are necessary, management considers(1) changes in national, regional and local economic conditions that affect the collectability of the loan portfolio (2) changesin collateral value of loans (3) changes in lending policies and procedures, risk selection and underwriting standards (4) changesin the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss(5) the existence and effect of any concentrations of credit and changes in the level of such concentrations (6) changes in thenature and volume of the loan portfolio and terms of loans, (7) changes in the experience, ability and depth of lending managementand other relevant staff, (8) quality of loan review and board of directors oversight, (9) the effect of other external factors,trends or uncertainties that could affect management’s estimate of probable losses, such as competition and industry conditions. the principal considerations for ourdetermination that performing procedures relating to the evaluation of qualitative adjustments used in the calculation of thegeneral reserve portion of the allowance for loan losses is a critical audit matter are as follows: significant judgment usedby management when evaluating the qualitative adjustments, which in turn led to a high degree of auditor judgment, subjectivity,and effort in performing audit procedures and evaluating audit evidence relating to the qualitative adjustments. addressing the matter involved performingprocedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.these procedures included among others, testing management’s process for evaluating qualitative adjustments by (i) evaluatingthe appropriateness of the methodology management used in evaluating the qualitative adjustments, (ii) testing the inputs usedin the estimate of qualitative adjustments, including the completeness and accuracy of underlying historical loss data, and (iii)evaluating the reasonableness of the qualitative adjustments given current microeconomic trends and portfolio characteristics. /s/ hacker, johnson & smith pa we have served as the company’s auditor since 2000. | 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. f-2table of contents impairment assessment of investments in hotel properties as described in notes 2 and 4 to the consolidated financial statements, management assesses the carrying value of its investments in hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. as of december 31, 2019, investments in hotel properties totaled $4.6 billion and during the year ended december 31, 2019, the company recorded an impairment loss of $13.5 million. the recoverability is measured by comparing the carrying amount to management’s estimated undiscounted future cash flows expected to be generated from the operations and the eventual disposition of the hotel properties over the estimated hold period, which take into account current market conditions and management’s intent with respect to holding or disposing of the hotel properties. if management’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. the fair value is determined by management through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions, third-party appraisals, the net sales proceeds from pending offers, or the net sales proceeds from transactions that closed subsequent to the end of the reporting period. management estimated the fair value of the hotels using a weighted valuation approach considering room revenue multiples and comparable sales adjusted for capital expenditures. the principal considerations for our determination that performing procedures relating to the impairment assessment of investments in hotel properties is a critical audit matter are (i) there was significant judgment by management to identify events or changes in circumstances indicating that the carrying amounts may not be recoverable, develop the projected future cash flows and, if impairment was determined to exist, the fair value estimate of investments in hotel properties, which led to a high degree of auditor judgment and subjectivity in applying procedures relating to the determination of those events or changes in circumstances, projected future cash flows and the fair value estimate of investments in hotel properties, and (ii) significant auditor judgment and significant audit effort was necessary to evaluate the audit evidence for the significant assumptions, including management’s intent with respect to holding or disposing of the underlying hotel properties used in management’s projected future cash flows, and comparable sales and capital expenditures used in management’s fair value estimate of investments in hotel properties. 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 identification of events or changes in circumstances indicating that the carrying amounts may not be recoverable and the impairment assessment of investments in hotel properties, including controls over determining significant assumptions and calculations of projected future cash flows and the fair value estimate of investments in hotel properties. these procedures also included, among others, testing management’s process for (i) identifying investments in hotel properties to be evaluated for impairment; (ii) developing the projected future cash flows; and (iii) estimating the fair value of those investments in hotel properties. testing management’s process included evaluating the appropriateness of the valuation methods and models used to estimate fair value and the reasonableness of significant assumptions, including management’s intent with respect to holding or disposing of the underlying hotel properties used in management’s projected future cash flows, and comparable sales and capital expenditures used in management’s fair value estimate of investments in hotel properties, as well as testing the completeness and accuracy of the data utilized by management. /s/ pricewaterhouse coopers llp mc lean, virginia february 26, 2020 we have served as the company’s auditor since 2001. | 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 42financial 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 — refer to note 7 to the financial statements critical audit matter description the company's income tax expense is recognized and measured based on management's interpretation of the tax regulations and rulings in numerous taxing jurisdictions, which requires significant judgment. when calculating income tax expense management makes estimates and assumptions, including determination of the completeness of book income in each jurisdiction, calculation of taxable income through identification and classification of book to tax differences (either temporary or permanent items), consideration of applicable tax deductions or credits, and the identification of uncertain tax positions.the evaluation of each uncertain tax position requires management to apply specialized skill and knowledge related to the identified position. management evaluates uncertain tax positions identified and a liability is established for unrecognized tax benefits when there is a more than 50% likelihood that its tax position will not be sustained upon examination by taxing authorities. there is additional judgment to determine the amount of the liability for the underlying tax position. the company's income tax expense for 2021 was $632 million and the liability recorded for unrecognized tax benefits as of december 31, 2021, was $360 million.given the number of taxing jurisdictions and the complex and subjective nature of the associated tax regulations and rulings, certain audit matters required a high degree of auditor judgment and increased extent of effort, including the need to involve our income tax specialists. these matters included the auditing of income tax expense, identification of uncertain tax positions, measurement of unrecognized tax benefits, and certain planning transactions with income tax expense implications.how the critical audit matter was addressed in the audit with the assistance of our income tax specialists, our principal audit procedures related to income tax expense included the following, among others:•we tested the effectiveness of management's controls over income taxes, including those over income tax expense, unrecognized tax benefits, and certain planning transactions with income tax expense implications.•we evaluated management's significant estimates and judgments incorporated into the calculation of income tax expense by:◦selecting a sample of book to tax differences (temporary and permanent) and testing the accuracy, completeness, and classification of the selections, including evaluating that all impacts of significant transactions with income tax expense implications are considered.◦developing an expectation over the foreign income tax expense by jurisdiction and comparing it to the recorded balance.◦testing the accuracy of the income tax expense calculation.•we evaluated management's significant judgments regarding the identification of uncertain tax positions by:◦evaluating the reasonableness of a selection of certain planning transactions with income tax expense implications, including the completeness and accuracy of the underlying data supporting the transactions.◦assessing management's methods and assumptions used in identifying uncertain tax positions.◦comparing results of prior tax audits to ongoing and anticipated tax audits by tax authorities.◦evaluating external information including applicable tax law, new interpretations, and related changes to assess the completeness and reasonableness of management's considerations.◦determining if there was additional information not considered in management's assessment.•we evaluated a sample of the liabilities recorded for unrecognized tax benefits to assess the establishment and amount of the liability for the specific underlying tax position./s/ deloitte & touche llp chicago, illinois february 11, 2022we have served as the company's auditor since 2002. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of first-lien primary case reserves for mortgage insurance policies as described in notes 2 and 11 to the consolidated financial statements, the company establishes case reserves for losses on mortgage insurance policies for loans that are considered to be in default, as well as reserves for loss adjustment expenses, losses incurred but not reported (“ibnr”) and other reserves. as of december 31, 2021, first-lien primary case reserves were $790.4 million of the total $823.1 million of mortgage insurance loss reserves. management’s estimate of the case reserves for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. management uses an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate default to claim rates based on the stage of default and time in default as well as the date that a loan goes into default. after estimating the default to claim rate, management estimates claim severity based on the average of recently observed severity rates within product type, type of insurance, and time in default cohorts.the principal considerations for our determination that performing procedures relating to the valuation of first-lien primary case reserves for mortgage insurance policies is a critical audit matter are (i) the significant judgment by management when developing their estimates of the default to claim rates and claim severity, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures relating to such estimates; (ii) the significant audit effort and subjectivity in evaluating the audit evidence related to the default to claim rates and claim severity; 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 valuation of first-lien primary case reserves for mortgage insurance policies, including controls over the development of the default to claim rates and claim severity. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the case reserves for first-lien primary mortgage insurance policies using actual historical data, comparing this independent estimate to management’s determined case reserves, and evaluating the reasonableness of management’s assumptions related to the default to claim rates and claim severity. performing these procedures involved testing the completeness and accuracy of data provided by management and independently developing default to claim rates and claim severity assumptions based on data provided by management./s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 25, 2022we 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 the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.income taxes - uncertain tax positions description of the matter as described in note 11 to the consolidated financial statements, the company operates in a multinational tax environment and is subject to taxation in various jurisdictions. the company recognizes tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. the tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. as of december 31, 2020, the company has accrued liabilities of $310.5 million for uncertain tax positions. auditing management’s estimate of the amount of tax benefits that qualify for recognition required significant judgment given the complexity and varying interpretations of international tax laws, regulations 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 accounting process for uncertain tax positions. for example, this included controls over the company’s assessment of the technical merits of tax positions, including controls relating to management’s process to measure the benefit of those tax positions. in testing the recognition and measurement of uncertain tax positions, we made inquiries of management and involved our income 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 evaluated the appropriateness of the company’s accounting for its tax positions taking into consideration our knowledge of and experience with the application of international and local income tax laws by the relevant income tax authorities. we analyzed the company’s assumptions and data used to determine the amount of tax benefits to recognize and tested the accuracy of the calculations. we have also evaluated the adequacy of the company’s financial statement disclosures related to tax matters. goodwill impairment of the business solutions reporting unit description of the matter as described in note 5 to the consolidated financial statements, the company’s goodwill is tested for impairment at least annually at the reporting unit level. as of october 1, 2020, the company performed a quantitative assessment of the $532.0 million in goodwill of the business solutions reporting unit. auditing management’s goodwill impairment assessment for the business solutions reporting unit was complex due to the subjective nature of the assumptions used in the model to determine the fair value of the business solutions reporting unit. in particular, the estimated fair value of the business solutions reporting unit was sensitive to significant assumptions such as projected revenue growth rates, ebitda margins, and the effects of market and economic conditions and how such conditions may impact subsequent periods’ 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 goodwill impairment review process. for example, we evaluated the design and tested controls over the company’s budgetary process and management’s review of the significant assumptions described above.77table of contents to test the estimated fair value of the business solutions reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and underlying data used by the company in its analysis. we compared the significant assumptions used by management to current industry and economic trends, recent historical performance, and other relevant factors. we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in assumptions. /s/ ernst & young llp we have served as the company’s auditor since 2006. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.acquisition of llog gulf of mexico assets - valuation of acquired oil and gas properties as discussed in note d to the consolidated financial statements, the company completed the acquisition of certain oil and gas properties from llog exploration offshore, l.l.c. and llog bluewater holdings, l.l.c. (“llog”) for consideration of approximately $1.3 billion. the company accounted for this transaction under the acquisition method of accounting for business combinations, which resulted in approximately $1.3 billion of assets being recorded at their estimated fair value. the company estimated the fair value of the acquired oil and gas properties using the income approach, which required the company to make significant estimates and assumptions related to future cash flows, the selection of the discount rates by property type and the volume of oil and gas reserves acquired. these estimates depend upon a number of factors and assumptions, and consequently, different petroleum reserve engineers could arrive at different estimates of oil and gas reserves and future net cash flows based on the same available data and using industry accepted engineering practices and scientific methods. 49table of contents we identified the evaluation of the estimated fair value of the oil and gas properties acquired in the llog transaction as a critical audit matter. there is a high degree of subjectivity in performing procedures due to the uncertainty associated with future commodity prices, estimated future production, the expertise of professional petroleum reserve engineers required to estimate oil and gas reserves, the applied discount rates, and the judgment inherent in forecasting capital and operating costs utilized by the company in their assessment. 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 estimate the fair value of the acquired oil and gas properties, including controls over the estimation of oil and gas reserves, forecasts of future cash flows, selection of the discount rates, and the assessment of the competence, capabilities and objectivity of the internal petroleum reserve engineers. we compared the forecasted prices of oil and gas to publicly available prices. we compared the forecasted production quantities from proved oil and gas reserves to current year production results. we compared the forecasted operating costs to historical results. we assessed the forecasted nature and timing of future development costs by obtaining an understanding of the development projects and comparing the development projects with the available development plans. we evaluated the competence, capabilities, and objectivity of the internal petroleum reserve engineers. in addition, we read and considered the report of the company’s third-party petroleum reserve specialists in connection with our evaluation of the company’s estimated oil and gas reserves. we involved a valuation professional with specialized skills and knowledge, who assisted in:•evaluating the income approach that was used by the company to estimate the fair value of the oil and gas assets; and•evaluating the company’s discount rates by comparing them against discount rate ranges that were independently developed using publicly available market data for comparable entities. assessment of estimated oil and gas reserves on the depletion expense for proved oil and gas properties as discussed in note a to the consolidated financial statements, the company calculates depletion expense related to producing oil and gas properties using the units-of-production method based on estimated proved oil and gas reserves. under this method, costs to acquire interests in oil and gas properties and costs for the drilling and completion efforts for exploratory wells that find proved reserves and for development wells are capitalized. capitalized costs of producing oil and gas properties, along with equipment and facilities that support production, are amortized to expense based on the units-of-production method. the company’s internal petroleum reserve engineers estimate proved oil and gas reserves and the company engages third-party petroleum reserve specialists to perform an independent assessment in accordance with industry and regulatory standards. for the year ended december 31, 2019, the company recorded depreciation, depletion, and amortization expense of $1.1 billion. we identified the assessment of the estimated proved oil and gas reserves on depletion expense for producing oil and gas properties as a critical audit matter. complex auditor judgment was required in evaluating the company’s process to estimate proved oil and gas reserves, which is an input to the calculation of depletion expense. estimating proved oil and gas reserves required the expertise of professional petroleum reserve engineers. their estimates were based on their forecasted oil and gas production, which were based on forecasted operating costs, future development costs and oil and gas prices. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s depletion calculation process, including controls over the estimation of proved oil and gas reserves. we evaluated the competence and objectivity of the internal petroleum reserve engineers and the third-party petroleum reserve specialists engaged by the company. we analyzed and assessed the calculation of depletion expense for compliance with industry and regulatory standards. we compared the forecasted production assumptions used by the company to historical production rates. we compared the forecasted operating costs to historical results. we also evaluated the forecasted nature and timing of future development costs by obtaining an understanding of the development projects and comparing the development projects with the available development plans. we assessed the oil and gas prices utilized by the internal petroleum reserve engineers by comparing them to publicly available prices and recalculated the relevant market differentials. in addition, we read and considered the report of the company’s third-party petroleum reserve specialists in connection with our evaluation of the company’s proved oil and gas reserve estimates. 50table of contents assessment of recoverability of property, plant, and equipment related to oil and gas properties as described in note a to the consolidated financial statements the company reviews their oil and gas properties for triggering events that would indicate potential impairment. the company analyzes indicators for possible triggers of impairment such as a significant reduction in sales prices for oil or natural gas, unfavorable revisions of oil or natural gas reserves, changes to contracts, environmental regulations, tax law or other regulatory changes. if a triggering event is identified in relation to one or more properties, an undiscounted cash flow analysis is required to quantitatively evaluate recoverability. the company compares estimated future net cash flows expected in connection with the property to the carrying amount of the property to determine if the carrying amount is recoverable or if further quantitative analysis is required. we identified the assessment of recoverability of property, plant, and equipment related to oil and gas properties as a critical audit matter. there is a high degree of subjectivity in performing procedures due to (1) the uncertainty associated with future commodity prices and estimated future production, (2) risk adjustment factors associated with reserve volumes, and (3) the judgment inherent in forecasting capital and operating costs used in the company’s assessment. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s property, plant, and equipment process for oil and gas properties including controls over the company’s impairment assessment process and oil and gas reserve estimation process. we compared future commodity price assumptions to publicly available market information. we assessed the competence, capabilities, and objectivity of the company’s internal petroleum reserve engineers, who estimated the oil and gas reserves, and the third-party petroleum reserve specialists engaged by the company to evaluate the estimated proved oil and gas reserves. we evaluated the company’s cash flow analysis related to forecasted production, capital, and operating costs by comparing to historical results. we evaluated risk adjustment factors associated with reserve volumes by comparing to guideline ranges by reserve class in published industry surveys./s/ kpmg llp we have served as the company’s auditor since 1952. | 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 board of directors and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. regulatory assets and liabilities – impact of rate regulation on the consolidated financial statements —refer to notes 2 and 3 to the consolidated financial statements critical audit matter description desc, through its regulated electric and gas operations, is subject to rate regulation by the public service commission of south carolina (the “south carolina commission”) and ferc, which has jurisdiction with respect to the rates of utility companies in the territory desc serves. management has determined desc meets the requirements under accounting principles generally accepted in the united states of america to apply the specialized rules to account for the effects of cost-based rate regulation. accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures such as utility plant, net; regulatory assets; regulatory liabilities; operating revenue and operating expenses, collectively, the “financial statement impacts of rate regulation”. the accounting for desc’s regulated gas and regulated electric operations differs from the accounting for nonregulated operations in that desc is required to reflect the effect of rate regulation in its consolidated financial statements. for regulated businesses subject to federal or state cost-of-service rate regulation, regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by nonregulated companies. when it is probable that regulators will permit the recovery of current costs through future rates charged to customers, these costs that otherwise would be expensed by nonregulated companies are deferred as regulatory assets. likewise, regulatory liabilities are recognized when it is probable that regulators will require customer refunds or other benefits through future rates or when revenue is collected from customers for expenditures that have yet to be incurred. we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about the financial statement impacts of rate regulation. management judgments include assessing the likelihood of (1) recovery of its regulatory assets through future rates and (2) whether a regulatory liability is due to customers. given that 21management’s accounting judgments are based on assumptions about the outcome of future decisions by the south carolina commission, auditing these judgments required specialized knowledge of the accounting for rate regulation and the rate setting process due its inherent complexities. how the critical audit matter was addressed in the audit our audit procedures related to the assessment of whether recovery of regulatory assets through future rates or a regulatory liability due to customers is probable included the following, among others: •we tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) recovery of regulatory assets through future rates, and (2) whether a regulatory liability is due to customers. we also tested the effectiveness of management’s controls over the initial recognition of amounts as regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may impact the assessment of whether recovery of regulatory assets through future rates or a regulatory liability due to customers is probable. •we evaluated desc’s disclosures related to the consolidated financial statement impact of rate regulation. •we read and evaluated orders issued by the south carolina commission, as well as relevant regulatory statutes, interpretations, procedural memorandums, filings made by interveners, existing laws and other publicly available information to assess whether this external information was properly considered by management in concluding upon the financial statement impacts of rate regulation. •we considered the likelihood of (1) recovery of regulatory assets through future rates and (2) whether a regulatory liability is due to customers based on precedents established by the south carolina commission’s previous orders and the desc’s past experience with the south carolina commission. •for regulatory matters in process, we inspected associated documents and testimony filed with the south carolina commission for any evidence that might contradict management’s assertions. •we read and analyzed the minutes of the board of directors of dominion energy, inc. and the board of directors of desc, for discussions of changes in legal, regulatory, or business factors which could impact management’s conclusions with respect to the financial statement impacts of rate regulation./s/ deloitte & touche llp richmond, virginia february 24, 2022we have served as desc’s auditor since 1945. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. acquisition of aleris corporation - valuation of customer relationships and acquired technology intangible assets as described in notes 1 and 2 to the consolidated financial statements, the company completed its acquisition of aleris corporation for net consideration of $2,775 million during fiscal year 2021, which resulted in recording $455 million of customer relationships and acquired technology intangible assets. management makes significant estimates and assumptions regarding the fair values of the elements of the business combination as of the date of acquisition, including the fair values of customer relationships and acquired technology intangible assets, which were valued using the multi-period excess earnings or the relief from royalty methods. significant estimates and assumptions used in estimating the fair values include subjective and/or complex judgments regarding items such as discount rate, revenue growth rates, projected ebitda margins, customer attrition rates, economic lives, and other factors, which are used to derive the estimated future cash flows that management expects to generate from the acquired assets. the principal considerations for our determination that performing procedures relating to the acquisition of aleris corporation is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of the customer relationships and acquired technology intangible assets due to the significant judgment by management when developing the estimates; (ii) the significant audit effort in evaluating management’s significant assumptions related to the discount rate and revenue growth rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the intangible assets and controls over development of the discount rate and revenue growth rates assumptions utilized in the valuation of the intangible assets. these procedures also included, among others (i) reading the purchase agreement; (ii) evaluating management’s accounting related to the business combination; and (iii) testing management’s process for estimating the fair value of customer relationships and acquired technology intangible assets. testing management’s process included evaluating the appropriateness of the multi-period excess earnings and relief from royalty methods, testing the completeness and accuracy of the underlying data provided by management, and evaluating the reasonableness of significant assumptions related to the discount rate and revenue growth rates. evaluating the reasonableness of the revenue growth rates involved considering the past performance of the acquired business, as well as economic and industry forecasts. evaluating the reasonableness of the discount rate involved considering the cost of capital of comparable businesses and other industry factors. professionals with specialized skill and knowledge were used to assist in the evaluation of management’s multi-period excess earnings and relief from royalty methods and management’s significant assumption related to the discount rate.52report of independent registered public accounting firm goodwill impairment assessment as described in notes 1 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $1,083 million as of march 31, 2021. management conducts an impairment test as of the last day of march of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. as disclosed by management, potential impairment is identified by comparing the estimated fair value of each reporting unit to its carrying amount. if the carrying value exceeds the fair value, management records an impairment charge in an amount equal to that excess. management estimates fair value based on a weighted average of the value indication from the market and income approaches. the determination of fair value using the market and income approaches requires the use of management’s significant assumptions related to selection of market multiples and control premium for the market approach and sales volumes, conversion premium, capital spending, working capital changes and the discount rate for the income approach. 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 developing the fair value measurement of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to market multiples and control premium for the market approach and sales volumes, conversion premium capital spending, and the discount rate for the income approach; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the company’s reporting units. these procedures also included, among others (i) testing management’s process for developing the fair value estimate of the reporting units; (ii) evaluating the appropriateness of the income and market approaches and the weighting of the approaches; (iii) testing the completeness and accuracy of underlying data used in the approaches; and (iv) evaluating the reasonableness of the significant assumptions used by management in the income and market approaches. evaluating management’s assumptions related to sales volumes and prices, costs to produce, and capital spending involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the income and market approaches, the weighting of the approaches, and evaluating the reasonableness of the discount rate, control premium and market multiples assumptions. /s/ pricewaterhouse coopers llp atlanta, georgia may 12, 2021we have served as the company’s auditor since 2006. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment – off-highway and commercial vehicle reporting units as described in notes 1 and 4 to the consolidated financial statements, the company’s consolidated goodwill balance was $493 million as of december 31, 2019, and the goodwill associated with the off-highway and commercial vehicle reporting units was $262 million and $228 million, respectively. management tests goodwill for impairment annually as of october 31 and more frequently if events occur or circumstances change that would warrant an interim review. management estimates the fair value of these reporting units using discounted cash flow projections. in determining fair value using discounted cash flow projections, management makes significant assumptions and estimates about the extent and timing of future cash flows, including revenue growth rates, projected gross margins, discount rates, terminal growth rates, and exit earnings multiples.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the off-highway and commercial vehicle reporting units is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting units. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating management’s significant assumptions, including the revenue growth rates, projected gross margins, discount rates, terminal growth rates, and exit earnings multiples. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the off-highway and commercial vehicle reporting units. these procedures also included, among others, testing management’s process for developing the fair value estimates of the off-highway and commercial vehicle reporting units, evaluating the appropriateness of management’s discounted cash flow projections, testing the completeness, accuracy, and relevance of underlying data used in the discounted cash flow projections, and evaluating the reasonableness of significant assumptions used by management, including the revenue growth rates, projected gross margins, discount rates, terminal growth rates, and exit earnings multiples. evaluating management’s assumptions related to the revenue growth rates and projected gross margins 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 evaluation45of the company’s discounted cash flow projections and certain significant assumptions, including the discount rates, terminal growth rates, and exit earnings multiples./s/ pricewaterhouse coopers llp toledo, ohio february 14, 2020 we have served as the company’s auditor since 1916. | 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.realizability of deferred tax assets as described in note 20 to the consolidated financial statements, the company has recorded $705 million of deferred tax assets, net of a valuation allowance of $357 million, as of december 31, 2021. management records the estimated future tax effects of temporary differences between the tax bases of assets and amounts reported, as well as net operating loss and tax credit carryforwards. deferred tax assets are assessed for realizability and, where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. management applied judgment in assessing the realizability of these deferred tax assets and the need for any valuation allowances, in particular the realizability of u.s. tax credit carryforwards with a limited life. in determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considered historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.the principal considerations for our determination that performing procedures relating to the realizability of deferred tax assets is a critical audit matter are the significant judgment by management in assessing the realizability of deferred tax assets related to the company's u.s. tax credit carryforwards with a limited life, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s significant assumptions related to projected future taxable income. 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 the realizability of deferred tax assets, including controls over projected future taxable income. these procedures also included, among others, evaluating management’s assessment of the realizability of deferred tax assets related to the company's u.s. tax credit carryforwards with a limited life, including evaluating the reasonableness of the assumptions related to projected future taxable income. evaluating management’s assumptions related to projected future taxable income involved evaluating whether the assumptions were reasonable by considering historical profitability as well as other audit evidence related to management’s forecasts. professionals with specialized skill and knowledge were used to assist in the evaluation of management’s application of income tax law in determining projected future taxable income and the assessment of the realizability of deferred tax assets related to the company's u.s. tax credit carryforwards with a limited life. goodwill impairment assessment as described in notes 1 and 13 to the consolidated financial statements, the company has recorded $3,287 million of goodwill as of december 31, 2021 for its single reporting unit. management assesses goodwill for impairment at least annually, during the fourth quarter based on balances as of october 1st, and more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. if the fair value exceeds the carrying value, goodwill is not considered impaired. if the carrying value exceeds the fair value, goodwill is considered impaired and management would recognize an impairment loss for the excess. management performs an assessment of goodwill, utilizing either a qualitative or quantitative impairment test. the qualitative impairment test assesses several factors to determine whether it is more-likely-than-not that the fair value of the entity is less than its carrying amount. in a quantitative impairment test, management assesses goodwill by comparing the carrying amount of the entity to its fair value, and the fair value of the entity is determined by using a weighted combination of an income approach and a market approach. after completing the annual quantitative test in the fourth quarter 2021, management concluded that the fair value of the company had declined below its carrying value. as a result, the xerox 2021 annual report 66 table of contents company recognized an after-tax non-cash impairment charge of $750 million ($781 million pre-tax) for the year ended december 31, 2021. as disclosed by management, the income approach is based on the discounted cash flow method that uses management's estimates of forecasted future financial performance including revenues, gross margins, operating expenses, taxes, working capital, and capital asset requirements. projected cash flows are then discounted to a present value employing a discount rate that properly accounts for the estimated market weighted-average cost of capital, as well as any risk unique to the subject cash flows.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment by management in determining the fair value estimate of the reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s discounted cash flow method and significant assumptions related to forecasted revenues, gross margins and operating expenses, and the discount rate. 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 valuation of the company’s reporting unit and the controls over the development of the assumptions related to forecasted revenues, gross margins and operating expenses, and the discount rate. these procedures also included, among others (i) testing management’s process for determining the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow method; (iii) testing the completeness and accuracy of underlying data used in the estimate; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the forecasted revenues, gross margins and operating expenses, and the discount rate. evaluating management’s assumptions related to forecasted revenues, gross margins and operating expenses 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 also used to assist in the evaluation of the company’s discounted cash flow method and the discount rate assumption./s/ pricewaterhouse coopers llp stamford, connecticut february 23, 2022we have served as the company’s or its predecessor's auditor since 2001. | 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 recognized for processing and treating equipment contracts as discussed in note 3 to the consolidated financial statements, $56.2 million of the company’s total revenues for the year ended december 31, 2020 was recognized from processing and treating equipment contracts. the company recognizes revenue from the sale of processing and treating equipment over time based on the input method of percentage-of-completion accounting whereby the actual amounts incurred to date as a percentage of the estimated total is used as a basis for determining the extent to which performance obligations are satisfied. the recognition of revenue over time based on the input method of percentage-of-completion accounting depends largely on the ability to make reasonable dependable estimates related to the extent of progress toward completion of the contract, contract revenues and contract costs. to calculate the actual amounts incurred to date as a percentage of the estimated total, management uses significant judgment to estimate the total hours, costs and profit expected for each project.the principal considerations for our determination that performing procedures relating to revenue recognized for processing and treating equipment contracts is a critical audit matter are (i) the significant judgment by management when developing the estimated hours or costs to complete and (ii) the significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to the estimated hours or costs to complete for processing and treating equipment 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 estimated hours or costs to complete for processing and treating equipment contracts. these procedures also included, among others (i) evaluating and testing management’s process for determining the estimated hours or costs to complete for a sample of contracts, which included evaluating the contracts and other documents that support those estimates, testing of underlying hours or costs, and testing the completeness and accuracy of data used in the estimate; (ii) evaluating management’s ability to reasonably estimate hours or costs by performing a comparison of the actual estimated hours or costs to prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the estimated hours or costs, and (iii) evaluating management’s methodologies and the consistency of management’s methodologies over the life of the contracts./s/ pricewaterhouse coopers llp houston, texas march 2, 2021we have served as the company’s auditor since 2019. | 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.net sales - timing of revenue recognition — refer to note 2 to the financial statements critical audit matter description the company sells its products primarily to individual customers and independent distributors (collectively referred to as “customers”). customers obtain and use products either through ship and bill sales or consignment arrangements. under ship and bill arrangements, the company retains possession of the product until the customer submits an order and the product ordered is shipped to the customer. under consignment arrangements, the customer takes possession of the product, but the company retains title until the implantation, or application of the company’s product to the end user. the company recognizes revenue as performance obligations are fulfilled, which generally occurs upon the shipment of product to the customers for ship and bill orders or upon implantation for consignment sales. we identified the timing of revenue recognition for ship and bill and consignment sales at or near year-end as a critical audit matter because of the judgments involved in evaluating that the performance obligations are fulfilled. this required extensive audit effort due to the volume of transactions 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 f-2our audit procedures related to the timing of revenue recognition transactions included the following, among others: •we created data visualizations using a detail of all revenue transactions and evaluated trends in the transactional revenue data with emphasis on activity at or near period end.•we evaluated and tested corollary relationships between revenue and related accounts. •we evaluated the appropriateness and consistency of the methods and assumptions utilized by management to estimate consignment revenue. •we tested a sample of consignment revenue transactions manually accrued as of year-end and evaluated whether the transactions were recorded in the correct period. •we tested a sample of ship and bill revenue transactions close to period end by agreeing the amounts recognized to source documents and evaluating whether the transaction was recorded in the correct period.•we tested a sample of credits issued after year-end by agreeing to documents supporting the authorization for the issuance of the credit and to evaluate if the credit was issued in the correct period. /s/ deloitte & touche llp atlanta, georgia february 28, 2022 we have served as the company's auditor since 2021. | 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.34workers' compensation claims liabilities workers’ compensation claims liabilities represent management’s estimate of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred as of a given reporting date. the estimated liability for open workers’ compensation claims is based on an evaluation of information provided by the company’s third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, ibnr). workers’ compensation claims liabilities included case reserve estimates for reported losses, plus additional amounts for estimated ibnr claims, medical cost containment, legal costs, and unallocated loss adjustment expenses. the process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes. the company’s estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. the company considers significant facts and circumstances known both at the time that loss reserves are initially established, and as new facts and circumstances become known. workers’ compensation claims liabilities as of december 31, 2020 were $358 million.given the high degree of judgment required to estimate the value of the workers’ compensation claims liabilities, performing audit procedures to evaluate the workers’ compensation claims liabilities recorded for the year ended december 31, 2020, 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 workers’ compensation claims liabilities included the following, among others: •we tested the effectiveness of controls related to workers’ compensation claims liabilities, including those over estimating the value of reported and ibnr losses for workers’ compensation. •we tested the underlying data that served as inputs into the actuarial analysis, including historical claims, to evaluate whether inputs were reasonable. in addition, we assessed whether any changes in the business or environment, including legislative changes, interest rates, and claims handling practices, were appropriately considered in the reserve setting process. •with the assistance of our actuarial specialists, we evaluated the methods and assumptions used by management to estimate the workers’ compensation claims liabilities by performing the following: •compared management’s prior-year assumptions of expected claims development and ultimate loss to actuals incurred during the current year to identify and evaluate potential bias in the determination of the workers’ compensation claims liabilities. •developed a range of independent estimates of the workers’ compensation claims liabilities, utilizing claim payment patterns, loss development factors, and future cost trends for workers’ compensation claims liabilities. we compared our estimated ranges to management’s estimates./s/ deloitte & touche llp portland, oregon march 8, 2021 we have served as the company's auditor since 2016. | 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: (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 matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. product warranty and recall reserves description of the matter the company's reserves for product warranty and recall totaled $9.8 million at december 31, 2021. as described in note 2 to the consolidated financial statements, the company's reserve for product warranty and recall is based on several factors, including the historical trends of units sold and payment amounts, combined with the company’s current understanding of existing warranty and recall claims. the warranty liability requires a forecast of the resolution of existing claims as well as expected future claims on products previously sold. auditing the company’s reserve for product warranty and recall is complex due to the measurement uncertainty associated with the estimate, management’s judgment in determining the cost and volume estimates used in the computation as well as volume and costing assumptions in determining the expected future claims on products previously sold. how we addressed the matter in our audit we evaluated the design and tested the operating effectiveness of the company’s controls over the product warranty and recall process. for example, we tested management review controls over the appropriateness of assumptions management used in the calculation and the completeness of warranty claims. to evaluate the reserve for product warranty and recall, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims data and costs used in the computation of management’s estimate, performing inquiries of the company’s quality control team, and obtaining a legal confirmation letter to evaluate the status and assessment of certain reserves. we assessed the historical accuracy of management’s product warranty and recall reserves and performed sensitivity analyses of significant assumptions to evaluate the impact to the reserve that would result from changes in the assumptions. /s/ernst & young llp we have served as the company’s auditor since 2002. | 5 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.58table of contents accounting for loyalty program - breakage description of the matter as discussed in note 3 to the consolidated financial statements, under the customer loyalty program, the company issues points to customers based upon the fare paid for a ticket purchase or through sales to business partners, including jet blue’s co-branded credit card partners. the company defers a portion of the transaction price allocable to points issued and recognizes revenue when the points are utilized for travel. the company estimates breakage for issued points using historical redemption patterns and records revenue for points that are not expected to be redeemed. estimates of breakage are evaluated annually, and changes to breakage estimates prospectively impact passenger revenue and air traffic liability. the balance of the company’s air traffic liability associated with the loyalty program was $733 million at december 31, 2020.auditing management’s estimates and calculations used in its accounting for the loyalty program is significant to our audit as the related impact to passenger revenue and air traffic liability is material and sensitive to changes in the breakage rate. the estimate of breakage by management requires the company to forecast redemption patterns, which involves the application of judgment and estimation. as a result, auditing the company’s accounting for the loyalty program required complex auditor judgement.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 loyalty program, including controls over management's estimation of breakage rates and review of the significant assumptions underlying the determination of estimated redemption patterns. our audit procedures included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in management's calculation including the total number of points issued to and redeemed by customers. we involved our valuation professionals to assist us in our evaluation of the methodology used by the company to estimate expected redemption patterns. we performed a sensitivity analysis of management’s estimate of points expected to be redeemed to evaluate the impact on passenger revenue and air traffic liability. we also tested the calculation used to determine the amount recognized as revenue for the period.e190 fleet impairment description of the matter as discussed in note 2 and note 18 to the consolidated financial statements, the company recorded impairment charges of $273 million for the year ended december 31, 2020 related to its embraer e190 aircraft, as well as the related engines, operating lease assets, aircraft 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 future undiscounted cash flows forecasted to be generated by those assets are less than their associated carrying value, and the net book value of the asset group exceeds its estimated fair value.auditing the company’s impairment assessments was highly subjective due to the significant estimation required in determining the fair values of long-lived assets. as a result of the covid-19 pandemic, there is currently a very limited market for aircraft and limited data on how the covid-19 pandemic has affected the fair value of aircraft. in estimating the fair value of the owned assets in the e190 fleet asset group, management considered the current market environment, aircraft age, and maintenance condition. management determined the fair value of operating lease right-of-use assets based on the present value of current market lease rates utilizing a market discount rate for the remaining term of each lease. 59table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls relating to the company’s process to measure impairments of long-lived assets, including controls over the review of the significant assumptions underlying the fair value estimates.our audit procedures included, among others, evaluating the significant assumptions used by the company in its estimate of the fair value of the e190 fleet asset group described above and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. we involved our valuation specialists to assist in our assessment of the valuation approach and certain significant inputs and assumptions, including the consideration of market transactions, current market lease rates, and the reasonableness of adjustments made to reflect maintenance conditions./s/ ernst & young llp we have served as the company's auditor since 2001. | 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 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 – identification of contractual terms in certain customer arrangements critical audit matter description we identified a critical audit matter in the ingredients reportable segment associated with a contract that includes determining the performance obligations and an allocation of consideration as further described in note 10 to the consolidated financial statements. the principal considerations for our determination in performing procedures relating to revenue recognition, specifically the identification and evaluation of terms and conditions in the contract, is a critical audit matter as there was significant judgment by management in identifying and evaluating terms and conditions in the contract that impacted revenue recognition. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing such procedures and in evaluating the audit evidence to determine whether the terms and conditions in the contract were appropriately identified and evaluated by management. how the critical audit matter was addressed in the audit addressing the matter involved performing procedures and evaluation of audit evidence that included, among others (i) evaluating contract terms and conditions, (ii) reviewing and assessing the methodology applied and testing the reliability and mathematical accuracy of the underlying data and calculations, (iii) testing management’s identification of performance obligations by evaluating whether the promises were both capable of being distinct and distinct within the context of the contract, including reading the selected contracts and inquiring of certain of the company’s accounting and operations personnel to understand the nature of the promises and how they are delivered to the customer, (iv) evaluating and concluding on the reasonableness of managements judgments and estimates. /s/ marcum llp marcum llp we have served as the company’s auditor since 2013. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. acquisition related contingent consideration liability as described in notes 1, 3, and 16 to the consolidated financial statements, the fair value of the acquisition related contingent consideration was $446.7 million as of december 29, 2019, which consists of the estimated amounts due to the coca‑cola company under the comprehensive beverage agreement (“cba”) over the remaining useful life of the related distribution rights. under the cba, the company makes quarterly sub-bottling payments to the coca‑cola company, specifically coca‑cola refreshments usa, inc. (“ccr”), on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell certain beverages and beverage products in the distribution territories acquired in the system transformation, but excluding territories the company acquired in an exchange transaction. each reporting period, management adjusts the acquisition related contingent consideration liability to fair value by using a probability weighted discounted cash flow model and discounting future expected sub-bottling payments required under the cba using the company’s estimated weighted-average cost of capital (“wacc”). these future expected sub-bottling payments extend through the life of the related distribution assets acquired in each distribution territory, which is generally forty years. as a result, the fair value of the acquisition-related contingent consideration liability is impacted by the company’s wacc, management’s estimate of the amounts that will be paid in the future under the cba, and current sub-bottling payments. the principal considerations for our determination that performing procedures relating to the acquisition related contingent consideration is a critical audit matter was the significant judgment used by management when estimating the fair value of the acquisition related contingent consideration. this in turn led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions, including the wacc and current and future sub-bottling payments under the cba, used by management to estimate the fair value. 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 the acquisition related contingent consideration liability, including controls over the key judgments, underlying data, and assumptions used. these procedures also included, among others, testing management’s process for developing the fair value estimate, including evaluating the significant assumptions used by management, such as the wacc and current and future sub-bottling payments, and testing the completeness, accuracy, and relevance of underlying data used in the discounted cash flow model. evaluating management’s assumptions related to the current and future sub-bottling payments involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the sub-bottling territories, (ii) the consistency with available external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow model and certain significant assumptions, including the wacc. /s/ pricewaterhouse coopers llp pricewaterhouse coopers llp charlotte, north carolina february 25, 2020 we have served as the company’s auditor since at least 1972. | 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.fair value of contingent consideration liabilities as described in notes 2 and 4 to the consolidated financial statements, contingent consideration resulting from a business combination is recorded at fair value on the acquisition date and is revalued on a quarterly basis, with increases or decreases in their fair value as an adjustment to operating earnings. as of and for the year ended december 31, 2021, management recorded total contingent consideration liabilities of $6.9 million and a gain on fair value remeasurement of contingent consideration of $1.4 million. the valuation technique used to measure fair value of the company’s contingent consideration liabilities was primarily an income approach. the significant unobservable inputs used in the fair value measurement of the contingent consideration are estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met. changes to contingent consideration obligations can result from adjustments to discount rates, accretion of the discount rates due to the passage of time, changes in the company’s estimates of the likelihood or timing of achieving development or commercial milestones, changes in the probability of certain clinical events or changes in the assumed probability associated with regulatory approval.the principal considerations for our determination that performing procedures relating to the fair value of contingent consideration liabilities is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty when estimating the fair value of these contingent obligations, as the fair value is based on the probability of success associated with achieving clinical events or regulatory approval. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence relating to the fair value of contingent consideration liabilities.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to contingent consideration, including controls over the development of assumptions used to estimate the contingent consideration liabilities. these procedures also included, among others, developing independent estimates of the fair value of contingent consideration liabilities by estimating the probability of achieving certain clinical events or the probability associated with achieving regulatory approval and comparing the independent estimates to management’s estimates to evaluate the reasonableness of management’s estimates. developing the independent estimates involved evaluating the agreements associated with the transaction, the consistency with industry studies, historical data, and the stage of product development./s/ pricewaterhouse coopers llp boston, massachusetts february 28, 2022we have served as the company’s auditor since 2008. | 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 and finance 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. tax free printing papers spin-off — refer to note 1 to the financial statements critical audit matter description on october 1, 2021, the company completed the spin-off of its printing papers segment along with certain mixed-use coated paperboard and pulp businesses in north america, france, and russia into a standalone, publicly traded company, sylvamo corporation (“sylvamo”). the transaction was executed by distributing shares of sylvamo to the company’s shareholders (the “distribution”). the company concluded the distribution to be a tax-free transaction for u.s. federal income tax purposes. we identified the company’s conclusion that the distribution was a tax-free transaction to be a critical audit matter because of the complexity of the interpretation and application of the u.s. internal revenue code (“code”), the materiality of the potential tax consequences, and the need to involve our income tax specialists when performing audit procedures to evaluate the qualification of the distribution as a tax-free transaction. how the critical audit matter was addressed in the audit with the assistance of our income tax specialists, the audit procedures we performed related to the company’s conclusion that the distribution was a tax-free transaction included the following, among others: 43table of contents•we tested the effectiveness of controls over the company’s conclusion that the distribution was a tax-free transaction. •we inspected the private letter ruling (“plr”) received by the company from the u.s. internal revenue service and the external opinions received by the company from third-party advisors, which were relied upon in the company’s evaluation of whether the distribution qualified as a tax-free transaction.•we evaluated the key factors addressed in the plr and external opinions regarding the qualification of the distribution as a tax-free transaction in comparison to the corresponding criteria prescribed by the code, including interpretations of the code and related statutes. •we tested the key inputs to a mathematical model prepared by the company and used in its evaluation of whether the distribution qualified as a tax-free transaction. •we performed a sensitivity analysis on the key inputs used in the mathematical model, including the key inputs used in the determination of the fair market value and tax basis of the legal entities included in the distribution. •we searched for contradictory evidence regarding the qualification of the distribution as a tax-free transaction by reading minutes of the company’s board of directors meetings and its committees, and reading other relevant documentation, such as income tax returns and historical financial information, of the company and the legal entities included in the distribution, as applicable.•we obtained written representations from management regarding the company’s intent not to execute transactions in the future that could affect the qualification of the distribution as a tax-free transaction. retirement plans — plan assets — refer to note 19 to the financial statements critical audit matter description as of december 31, 2021, the company’s pension plans held approximately $3.0 billion in investments whose reported value is determined based on net asset value (“nav”). the strategic asset allocation policy prescribed by the company’s pension plan includes permissible investments in certain hedge funds, private equity funds, and real estate funds whose reported values are determined based on the estimated nav of each investment. these na vs are generally determined by the pension plan’s third-party administrators or fund managers and are subject to review and oversight by management of the company and its third-party investment advisors. given a lack of a readily determinable value of these investments and the subjective nature of the valuation methodologies and unobservable inputs used in these methodologies, auditing the nav associated with these investments requires a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having expertise in alternative investments.how the critical audit matter was addressed in the audit our audit procedures related to the determination of nav associated with the company’s pension plan’s investments in hedge funds, private equity funds, and real estate funds included the following, among others:•we tested the effectiveness of controls over the company’s determination and evaluation of nav, including those related to the reliability of na vs reported by third-party administrators and fund managers. •we inquired of management and the investment advisors regarding changes to the investment portfolio and investment strategies. •we obtained a confirmation from the third-party custodian as of december 31, 2021 of all individual investments held in trust for the pension plan to confirm the existence of each individual asset held in trust. •for each selected investment fund with a fiscal year end of december 31, we performed a retrospective review in which we compared the estimated fair value recorded by the company in the december 31, 2020 financial statements, to the actual fair value of the fund (using the per-share nav disclosed in the fund’s subsequently issued audited financial statements), to evaluate the appropriateness of management’s estimation process.44table of contents•with the assistance of professionals in our firm having expertise in alternative investments, we rolled forward the valuation from the selected funds’ most recently audited financial statements to december 31, 2021. this roll forward procedure included consideration of the company’s transactions in the fund during the period, as well as an estimate of the funds’ returns based on an appropriate, independently obtained benchmark or index. we then compared our independent fund valuation estimate to the december 31, 2021, balance recorded by the company. for certain selected funds, our roll forward procedures included alternative procedures, such as inspecting trust statements for observable transactions near year-end to compare to the estimated fair value./s/ deloitte & touche llp memphis, tennessee february 18, 2022 we have served as the company's auditor since 2002. | 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. 1exhibit 99.01goodwill - anadarko basin reporting unit - refer to notes 1 and 10 to the consolidated financial statements critical audit matter description the partnership’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. the partnership used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to the weighted average cost of capital and forecasts of future revenues, including the revenue growth rate. changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. the goodwill balance allocated to the anadarko basin reporting unit (“anadarko”) was $86 million as of october 1, 2019. the carrying value of anadarko exceeded its fair value as of the measurement date and the goodwill associated with anadarko was completely impaired in the amount of $86 million.given the significant judgments made by management to estimate the fair value of anadarko, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the weighted average cost of capital and forecasts of future revenues, including the revenue growth rate, of anadarko 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 weighted average cost of capital and forecasts of future revenues, including the revenue growth rate, used by management to estimate the fair value of anadarko included the following, among others: •we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of anadarko, such as controls related to management’s selection of the weighted average cost of capital and forecasts of future revenues, including the revenue growth rate. •we evaluated management’s ability to accurately forecast future revenues by comparing actual results to management’s historical forecasts.•we evaluated the reasonableness of management’s revenue forecasts by comparing the forecasts to:▪historical revenues.▪internal communications to management and the board of directors. ▪forecasted information included in partnership press releases as well as in analyst and industry reports for the partnership and certain of its peer companies. •with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) weighted average cost of capital and revenue growth rate by:–testing the source information underlying the determination of the weighted average cost of capital and revenue growth rate and the mathematical accuracy of the calculation.–developing a range of independent estimates and comparing those to the weighted average cost of capital and revenue growth rate selected by management./s/ deloitte & touche oklahoma city, oklahoma february 19, 2020we have served as the partnership’s auditor since 2013. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. stock-based compensation - assessment of probability related to stock-based compensation subject to performance based vesting requirements as described further in note 12 to the financial statements, the company granted restricted stock awards and stock options. certain of the restricted stock awards and stock options have performance based vesting periods, which vest based on when performance targets are met. performance based awards are recognized as -52-an expense based on the probability of achieving the underlying performance targets. we identified the probability assessment of achieving the performance targets as a critical audit matter.the principal consideration for our determination that the probability of achieving the performance targets is a critical audit matter is that the probability is based on a subjective assessment of the company’s prospective financial information. the probability assessment requires management to estimate the successful development and market acceptance of future product introductions, future sales targets, operating performance, and ebitda. changes in the subjective probability assessment can materially affect the amount and timing of the recognition of stock-based compensation expense and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.our audit procedures related to the probability of achieving the performance targets included the following, among others. –we tested the design and operating effectiveness of internal controls relating to management’s determination of stock-based compensation expense, including testing management’s review controls over the identification of the terms of the performance conditions and the key inputs used in determining the probability of achieving the performance targets.–we evaluated the reasonableness of management’s prospective financial information by comparing management’s previous forecasts to actual results to assess management’s ability to accurately forecast actual results. we also evaluated the reasonableness of forecasted revenue by comparing sales growth to current market and industry trends; operating performance and ebitda by comparing to current market and industry trends, historical information, and inquiring of individuals outside of the finance department; and future product introductions by evaluating the status of development, recent placement history, and inquiring of individuals outside of the finance department. we also evaluated the consistency of forecasts used in the probability assessment with other elements of the financial statements that use the forecast as an input.business combination of scil animal care company gmb has described further in note 3 to the financial statements, the company completed the acquisition of scil animal care company gmb h (“scil”) on april 1, 2020. the company paid approximately $110.3 million in cash to acquire 100% of the capital stock of scil, which resulted in the identification and recognition of $44.5 million of other intangible assets. we identified the company’s determination of the fair value of customer relationships and the trademarks and trade names not subject to amortization (“trade name”) intangible assets acquired as a critical audit matter.the principal considerations for our determination that the company’s valuation of the customer relationships and the trade name intangible assets acquired is a critical audit matter due to the high degree of management subjectivity in the related fair value estimates. this requires management to evaluate historical results and expectations of future operating performance based on relevant information available to them regarding expectations of industry performance, as well as, expectations for company-specific performance. significant assumptions (assumed revenue growth rates, discount rates, and operating margin) utilized to determine the fair value are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.our audit procedures related to the business combination of scil included the following, among others. –we tested the design and operating effectiveness of internal controls relating to management’s valuation of the customer relationships and trade name intangible assets, which includes management’s review of the preliminary valuation report for reasonableness of significant assumptions used in the fair value calculations.–we evaluated the reasonableness of management’s forecasted revenue growth rate and operating margin by comparing to current market and industry trends, historical data, and strategic business plans. we performed a sensitivity analysis on the assumed revenue growth rate and operating margin assumptions. we utilized a valuation specialist to assist in evaluating the appropriateness of the company’s selection of valuation methodology and evaluating the reasonableness of the discount rate. -53-/s/ grant thornton llp we have served as the company’s auditor since 2020. | 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.impairment of indefinite-lived intangible assets — refer to notes 2 and 12 to the financial statements critical audit matter description the company’s indefinite-lived intangible assets are comprised of management contracts and trade names/trademarks acquired in business acquisitions. the company performs its impairment assessment of its indefinite-lived intangible assets at least annually, as of july 31st. in evaluating whether it is more likely than not that the fair value of indefinite-lived intangibles is less than carrying value, the company performs certain quantitative assessments and assesses various significant qualitative factors. if an indefinite-lived intangible asset is determined to be more likely than not impaired, the fair value of the asset is then compared with its carrying value and any excess of the carrying value over the fair value would be recognized as an expense in the period in which the impairment occurs. the determination of fair value requires management to make estimates and assumptions related to projected assets under management (“aum”) growth rates, revenue basis points, operating margins, tax rates, and discount rates.given the significant judgments made by management to estimate the fair value of its indefinite-lived intangible assets, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to projected aum growth rates, revenue basis points, operating margins, tax rates, and 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 determination of fair value of indefinite-lived intangible assets included the following, among others: •we tested the design, implementation and operating effectiveness of controls over the company’s indefinite-lived intangible asset impairment analysis, including those related to management’s determination of fair value for the indefinite-lived intangible asset. this includes controls related to management’s projected aum growth rates, operating margins, tax rates, and the selection of the discount rates. •we evaluated the reasonableness of management’s projected aum growth rates, revenue basis points, operating margins, and tax rates by comparing management’s projections to: -historical amounts,f-2 -internal communications to management and the board of directors, and -forecasted information included in analyst and industry reports for the company and certain of its peer companies. •we evaluated management’s ability to accurately project aum growth rates, operating margins, and tax rates by comparing actual results to management’s historical forecasts. •with the assistance of our fair value specialists, we evaluated the reasonableness of the company’s valuation methodology and assumptions, including the selection of the discount rate by: (1) tested the source information underlying the determination of the discount rate and the mathematical accuracy of the evaluation and (2) developed a range of independent estimates and compared those to the discount rate selected by management. •we evaluated the impact of changes in management’s forecasts from july 31, 2019, the annual impairment assessment date, to december 31, 2019./s/ deloitte & touche, llp new york, new york february 28, 2020 we have served as the company's auditor since 2002. | 1 |
critical audit matters the critical audit matters to be communicated, are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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 business acquisition and impairment of goodwill. description of the matter in june 2021, the company (“buyer”) entered into a stock purchase agreement (“the acquisition”) and acquired 100% of kindcard, inc., a massachusetts corporation (“kind card”) and the tendercard division of croesus holdings corp, a massachusetts corporation, which was considered a combined business acquisition. consideration for the acquisition consisted of 8 million shares valued at $24,000 and assumed liabilities of approximately $157,000. the company recorded goodwill of approximately $110,000 and intangible assets of approximately $21,000 as a result of this acquisition. the fair values recorded were based on an independent valuation obtained by the company. subsequent to the acquisition, kind card failed to deliver its registered trademark and failed to deliver the software that conforms to industry standards and as a result the company recorded impairment of the goodwill. auditing the company’s (i) valuation of identifiable intangible assets and goodwill and (ii) annual impairment test related to these intangible assets was complex due to the (i) the subjective factors used in the valuation and (ii) the estimation uncertainty in determining their fair values. the significant assumptions used to estimate the intangible assets and goodwill on acquisition in addition to the potential impairment included forecasted sales and discount rates. these assumptions are forward-looking which can vary significantly and depend on market forces and events outside of the company’s control. how we addressed the matter in our audit to test the estimated fair value of these intangible assets, our audit procedures included, among others, evaluating the valuation methodology used, the significant assumptions discussed above, and the underlying data used by the company. such data includes historical sales and projections. we reviewed the assumptions and data provided by management and concluded that the intangible assets and goodwill and subsequent impairment recorded was reasonable. we have served as the company’s auditor since 2022. | 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. product warranty liabilities as described in notes 2 and 10 to the consolidated financial statements, the company’s consolidated product warranty liability balance was $53 million as of december 31, 2021. management makes provisions for the estimated product warranty liabilities at the time the products are sold. these estimates are established using historical information including the nature, frequency, and average cost of warranty claims and are adjusted as actual information becomes available. the principal considerations for our determination that performing procedures relating to the product warranty liabilities is a critical audit matter are (i) the significant judgment by management when determining the product warranty liability estimate; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the significant assumptions related to the frequency and average cost of warranty claims; 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 process for developing the estimate, significant assumptions, and inputs used to estimate product warranty liabilities. these procedures also included, among others, (i) testing the completeness and accuracy of historical warranty claims data used in the estimate and (ii) professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the frequency and average cost of warranty claims assumptions. /s/ pricewaterhouse coopers llp indianapolis, indiana february 17, 2022 we have served as the company’s auditor since 2008. | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.csx 2019 form 10-k p. 45csx corporationpart ii item 8. financial statements and supplementary data report of independent registered public accounting firm, continued depreciation policies for assets utilizing the group-life method description of the matter at december 31, 2019, assets depreciated under the group-life method comprised 87% of total gross fixed assets of $45 billion. as discussed in note 6 of the consolidated financial statements, the group-life method aggregates assets with similar lives and characteristics into groups and depreciates each of these groups as a whole. when using the group-life 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. the company utilizes different depreciable asset categories to account for depreciation expense for the railroad assets that are depreciated under the group-life method.under the group-life method, depreciation studies are completed to review asset service lives, salvage values, accumulated depreciation and other factors related to group assets. depreciation studies are performed every three years for equipment assets and every six years for road and track assets. a depreciation study was performed in 2019 for equipment assets and 2014 for road and track assets. the most recent depreciation studies are reviewed by management each year to determine if there have been significant factors that result in changes to the group-life method key assumptions. auditing depreciation expense for assets subject to the group-life method was complex and required the involvement of specialists due to the nature of the methods used in the depreciation studies to determine the useful service lives and salvage values of the company’s assets. these methods have a significant effect on depreciation expense.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 assessment of periodic depreciation studies of its group-life assets. for example, we tested controls over management’s review of the depreciation study for equipment assets and review of depreciation expense and useful lives. we also tested controls over management’s review of asset activity and assumptions that could impact the most recent depreciation study of road and track assets.to test the estimated useful lives and salvage values of the company’s group-life assets, we performed audit procedures that included, among others: obtaining the periodic depreciation studies provided by the company’s third-party specialist and subsequent updates by management; assessing the completeness and accuracy of the data provided to the third-party specialist and used by management; and including a specialist on our team to evaluate the methods used by the third-party specialist and management in determining the average service lives and salvage values of assets to perform the depreciation studies. we compared the significant methods used by management to those used throughout the industry and within other useful life studies. we also assessed the historical accuracy of management’s estimates via retrospective review and independently calculated a sample of the annual depreciation rates./s/ ernst & young llp we have served as the company’s auditor since 1981. | 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.revenue recognition - issuer solutions - refer to notes 1 and 3 to the financial statements.critical audit matter description the company enters into long-term revenue contracts with its issuer solutions customers. issuer solutions customer contracts may include multiple promises, including processing services, loyalty redemption services and professional services to financial institutions and other financial services providers. the company has determined that the processing services and loyalty redemption services represent stand-ready performance obligations comprising a series of distinct days of services that are substantially the same and have the same pattern of transfer to the customer. professional services representing performance obligations are satisfied over time.47table of contents we identified the determination of performance obligations for issuer solutions revenue contracts as a critical audit matter, given the judgment required to determine whether promised services are capable of being distinct and are distinct within the context of the contract. a high degree of auditor judgment was required to evaluate the company's identification of the performance obligations in the contract.how the critical audit matter was addressed in the audit our audit procedures related to the company's issuer solutions revenue transactions, specifically its identification of the performance obligations in contracts with its customers, included the following, among others:•we evaluated the effectiveness of controls over issuer solutions contract revenue, including controls over the identification of performance obligations.•we selected a sample of issuer solutions contracts and evaluated whether the performance obligations were appropriately identified in each of the selected contracts including whether the promised services are capable of being distinct and are distinct in the context of the contract.revenues - payment processing solutions and services - refer to note 1 to the financial statements.critical audit matter description the company's revenues from its payment processing solutions and services consist of activity-based fees made up of a significant volume of low-dollar transactions, sourced from multiple systems and applications. the processing of transactions and recording of revenue is highly automated and is based on contractual terms with merchants, financial institutions, financial service providers, payment networks, and other parties.accordingly, we identified payment processing solutions and services revenues as a critical audit matter. this required an increased extent of effort, including the need for us to involve professionals with expertise in information technology (it), to identify, test, and evaluate the company's systems, software applications, and automated controls.how the critical audit matter was addressed in the audit our audit procedures related to the company's systems to process payment services revenues included the following, among others:•with the assistance of our it specialists, we:◦identified the significant systems used to process revenue transactions and tested the general it controls over each of these systems, including testing of user access controls, change management controls, and it operations controls.◦tested system interface controls and automated controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue. •we tested internal controls within the relevant revenue business processes, including those in place to reconcile the various reports extracted from the it systems to the company’s general ledger. •we evaluated trends in recorded revenues, including interchange fees and payment network fees. •for a sample of revenue transactions, we tested selected transactions by agreeing the amounts of revenue recognized to source documents and testing the mathematical accuracy of the recorded revenue. /s/ deloitte & touche llp atlanta, georgia february 19, 2021 we have served as the company's auditors 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.goodwill and indefinite-lived intangible assets impairment evaluation - boots reporting unit and boots indefinite-lived intangible assets - refer to notes 1 and 6 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 uses the income and the market approaches to estimate the fair value of its reporting units in its goodwill impairment analysis. the income approach requires management to make a number of assumptions for each reporting unit including annual assumptions on future revenue growth, earnings before interest, taxes, depreciation and amortization (ebitda) margins and discount rates. the market approach requires management to estimate fair value using comparable marketplace fair value data from within a comparable industry group. the company primarily uses the multi-period excess earnings model and the relief from royalty model to estimate the fair value of the indefinite-lived intangible assets. changes in assumptions or the selection of companies in the comparable industry group could have a significant impact on the valuation of the reporting units and the amount of a goodwill or indefinite-lived intangible asset impairment charge, if any.- 103 -table of contents the company’s goodwill balance was $16.6 billion as of august 31, 2019, of which $2.6 billion was allocated to the boots reporting unit. management’s estimate of the fair value of the boots reporting unit is in excess of its carrying value by approximately 9% and, therefore, no impairment was recognized for the year ended august 31, 2019.the company’s indefinite-lived intangible assets balance was $7.1 billion as of august 31, 2019, of which $6.9 billion represented boots indefinite-lived intangible assets. the fair value of the boots indefinite-lived intangible assets is in excess of their carrying value by approximately 3% to approximately 29%, except for the pharmacy license intangible, for which the company recorded a $73 million impairment for the year ended august 31, 2019.management has made significant judgments to estimate the fair value of the boots reporting unit and the boots indefinite-lived intangible assets. given the small difference between their fair values and carrying values, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions of future revenue growth, ebitda margins, the selection of the discount rate, the selection of the royalty rates for the boots trade name indefinite-lived intangible assets, and the market multiple selected for the boots reporting unit, specifically due to the sensitivity of the boots reporting unit and boots indefinite-lived intangible assets to changes in the british economy, 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 fair value of goodwill for the boots reporting unit and the boots indefinite-lived intangible assets included the following, among others: •we tested the effectiveness of controls over the goodwill and intangible asset impairment analyses, including those over the development of forecasts of future revenues, ebitda margins, and the selection of royalty rates, market multiples, and discount rates. •we evaluated management’s ability to accurately forecast future revenues and ebitda margins by comparing actual results to management’s historical forecasts. •we evaluated the reasonableness of management’s forecasts of future revenues and ebitda margins by performing certain procedures, including:–comparing the forecasts to internal communications to management and the board of directors.–comparing the forecasts to third-party economic research, including discussions with our economic and industry specialists.•we performed sensitivity analyses to evaluate the risk of impairment if key assumptions are changed.•we evaluated, with the assistance of our fair value specialists, the (1) valuation methodology used for the boots reporting unit goodwill and the boots indefinite-lived intangible assets and (2) the reasonableness of the related discount rates, by performing certain procedures, including:–comparing the valuation methodologies used to generally accepted valuation practices for each asset type.–evaluating the appropriateness of the company’s selection of companies in its industry comparable group for comparability to the boots reporting unit.–testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.–developing an independent discount rate and comparing it to the discount rate selected by management.income taxes - uncertain tax positions - refer to notes 1 and 11 to the financial statements critical audit matter description the company has a complex legal structure involving numerous domestic and foreign locations with constantly changing tax laws and regulations. the company’s management is required to interpret and apply these tax laws and regulations in determining the amount of its income tax liability and provision. when an uncertain tax position is identified by management, the company must evaluate whether it is more likely to be sustained than not on the basis of its technical merits. the company recognizes a benefit for tax positions using the highest cumulative tax benefit that is more likely than not to be realized. the company establishes a liability for unrecognized tax benefits that do not meet this threshold. the evaluation of each uncertain tax position requires management to apply specialized skill, knowledge, and significant judgment related to the identified position. the company’s liability for unrecognized tax benefits as of august 31, 2019 was $455 million.- 104 -table of contents because of the numerous taxing jurisdictions in which the company files its tax returns and the complexity of tax laws and regulations, auditing uncertain tax positions and the determination of whether the more likely than not threshold was met requires a high degree of auditor judgment and increased extent of effort, including the involvement of our income tax specialists.how the critical audit matter was addressed in the audit our audit procedures related to unrecognized tax benefits included the following, among others: •we tested the effectiveness of controls over income taxes, including those over identifying uncertain tax positions and measuring liabilities.•we evaluated, with the assistance of our tax specialists, a selection of underlying tax positions to evaluate the more likely than not principle as it applied to the specific underlying tax position. •we evaluated, with the assistance of our tax specialists, the company’s unrecognized tax positions by performing the following: –obtaining management and third-party opinions or memoranda regarding the analysis of uncertain tax positions and identifying the key judgments and evaluating whether the analysis was consistent with our interpretation of the relevant laws and regulations. –evaluating the basis for certain intercompany transactions, such as transfer pricing, by comparison to economic studies performed by management and third-party data.–evaluating the matters raised by tax authorities in former and ongoing tax audits and considering the implications of these matters on open tax years.–assessing changes and interpretation of applicable tax law./s/ deloitte & touche llp chicago, illinois october 28, 2019 we have served as the company's auditor since 2002. | 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.62stockholders, board of directors and audit committee glacier bancorp, inc.page 2we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 include 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 financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for credit losses as described in notes 1 and 3 to the consolidated financial statements, the company adopted the financial accounting standards board (fab) accounting standards update (asu) no. 2016-13, topic 326, financial instruments – credit losses, on january 1, 2020, which significantly changed the loan and allowance for credit losses (acl) accounting and related financial statement disclosures. the company’s consolidated acl was approximately $158 million at december 31, 2020. the acl is an estimate of probable credit losses related to specifically identified loans and for losses inherent in the portfolio that the company is unlikely to recover. the determination of the acl includes a quantitative portion that calculates historical average loss rates and uses forecast assumptions and other inputs to project credit losses over the life of the loan portfolio. additionally, the acl requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust the acl for projected credit losses that the quantitative allocations portion does not factor into its consideration. as disclosed by management, different assumptions and conditions could result in a materially different amount for the acl.we identified the valuation of the acl as a critical audit matter. auditing the allowance for credit loss involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s identification of credit quality indicators, assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades and non-accrual, collateral dependent, and individually evaluated designations.63stockholders, board of directors and audit committee glacier bancorp, inc.page 3the primary procedures we performed to address this critical audit matter included: •testing the effectiveness of controls, including those related to technology over the acl including data completeness and accuracy, classifications of loan segments, historical data, the calculation of baseline loss rates, the establishment of qualitative adjustments, identification of individually evaluated loans and risk classification of individual loans and/or loan relationships, establishment of specific reserves on individually evaluated loans and management’s review controls over the acl balance as a whole;•testing of completeness and accuracy of the information utilized in the acl through testing of year-end loan balances, non-accrual and individually evaluated loan designations, gross charge-offs and recoveries;•testing of the company’s acl narrative supporting the overall acl process in place and adjusted loss factors applied to various loan segments;•testing of the economic inputs utilized to generate the economic forecast multipliers utilized within the quantitative portion of the acl;•testing the company’s acl model for computational accuracy; •evaluating the qualitative adjustments to the loan segments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions, including; management’s covid-19 qualitative factor adjustments;•testing the loan review functions and evaluating the accuracy of loan grades, specific reserve calculations, and non-accrual and collateral-dependent identifications;•utilizing internal subject matter experts in the area of loan review to assist us in evaluating the appropriateness of loan grades, non-accrual and collateral dependent loan identifications and to assess the reasonableness of specific impairments allocated to impaired loans;•evaluating the overall reasonableness of assumptions used by considering the past performance of the company and evaluating to trends identified within the banking industry, including, but not limited to the following:◦timing and frequency of improvements noted in key lending ratios that are indicative of potential credit risk in the overall loan portfolio and banking industry ◦observation of trends in the company’s overall qualitative factors to ensure directional consistency, the overall economic climate and risk trends identified in the loan portfolio◦evaluating the relevance and reliability of the data and data sources merger and acquisition as described in note 23 to the consolidated financial statements, the company consummated the acquisition of a bank holding company during the year ended december 31, 2020, resulting in the expansion of the company’s operating footprint and additional goodwill of approximately $58 million being recognized on the company’s consolidated statement of financial condition. as part of the acquisition consummated during the year, management determined that the acquisition qualified as a business and accordingly all identifiable assets and liabilities acquired were valued at fair value as part of the purchase price allocation as of the acquisition date. the identification and valuation of such acquired assets and assumed liabilities requires management to exercise significant judgment and consider the use of outside vendors to estimate the fair value allocations.64stockholders, board of directors and audit committee glacier bancorp, inc.page 4we identified the acquisition and the valuation of acquired assets and assumed liabilities as a critical audit matter. auditing the acquired net assets and acquisition related considerations involved a high degree of subjectivity in evaluating management’s operational assumptions of the newly acquired division, fair value estimates, purchase price allocations and assessing the appropriateness of outside vendor valuation models.the primary procedures we performed to address this critical audit matter included:•obtaining and reviewing executed plan and agreement of merger document to gain an understanding of the underlying terms of the consummated acquisition;•obtaining and reviewing management’s purchase accounting checklist to gain an understanding of procedures performed to identify and value the acquired assets and liabilities;•testing management’s purchase accounting analysis, focusing on the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to the identified assets acquired and liabilities assumed;•obtaining valuation estimates prepared by the company’s valuation specialist and challenging management’s analysis of the appropriateness of the valuations allocated to assets acquired and liabilities assumed; including but not limited to, testing of critical inputs, assumptions applied and valuation models utilized by the company’s valuation specialist;•utilization of bkd’s internal valuation specialists to assist with evaluating the related fair value purchase price allocations made to the identified assets acquired and liabilities assumed;•testing the goodwill calculation resulting from the acquisition consummated, which is the difference between the total net consideration paid and the fair value of the net assets acquired;•reviewing and evaluating the adequacy of the disclosures made in the footnotes of the company’s sec filings.emphasis of a matter as discussed in note 1 to the financial statements, on january 1, 2020, the company adopted new accounting guidance for accounting for credit losses. our opinion is not modified with respect to this matter.we have served as the company’s auditor since 2005. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. share-based compensation as discussed in note 11 to the consolidated financial statements, on january 29, 2020, the company repriced certain previously granted and still outstanding vested and unvested stock option awards. auditing management’s recording of compensation under the modification involved significant judgment given the requirements of the applicable accounting literature. to evaluate the appropriateness and accuracy of the recording of compensation by management, we examined the closing price on the date of repricing and the closing price of the company’s common stock for the preceding period, as determined by the company’s board of directors and approved by shareholders. we also reviewed the underlying accounting codifications for this accounting treatment applied by management. in addition, we evaluated the company’s disclosure inrelation to this matter included in note 11 to the financial statements. accrued research and development expenses – clinical costs the company recorded research and development expenses of $9.8 million for the year ended december 31, 2020. as described in note 2, research and development costs are expensed as incurred. research and development costs include fees paid to contract research organizations that conduct certain research and development activities on the company’s behalf and contract manufacturing organizations in connection with the production of materials for clinical trials. 62 auditing the company’s research and development expenses for contract research organizations and contract manufacturing organizations and related accruals was challenging due to the complex nature of evaluating the completeness and accuracy of the expenses and accruals. research and development expenses are recognized as the services are being performed by the vendors, which requires management to accurately monitor the activity at the vendors to determine the extent of unbilled services performed during the reporting period. we obtained an understanding and evaluated the design over the company's process used to determine the completeness and accuracy of the research and development expenses and related accruals for contract research organizations and contract manufacturing organizations, including management’s controls to accurately monitor the activity at the vendors. to test the completeness and accuracy of the contract research organization and contract manufacturing organization expenses and related accruals, our audit procedures included, among others, testing a sample of research and development expenses recorded during the period and evaluating the timing, amount and project coding of the expense recognition, and testing a sample of cash disbursements after period end to assess the completeness of the expense recognition. /s/ pkf san diego, llppkf san diego, llp(formerly pkf, llp) we have served as the company’s auditor since 2020. | 5 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.merchandise inventories — refer to note 2 to the financial statements critical audit matter description merchandise inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“fifo”) method. factors considered in determining if inventory is properly stated at the lower of cost or net realizable value include, among others, recent sale prices, the length of time merchandise has been held in inventory, quantities of various styles held in inventory, seasonality of merchandise, expected consideration to be received from vendors and current and expected future sales trends. the company reduces the value of inventory to its estimated net realizable value where cost exceeds the estimated future selling price. given the significant judgments made by management to estimate the net realizable value of inventory, such as expected consideration to be received from vendors and current and expected future sales trends, performing audit 40 procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment. how the critical audit matter was addressed in the audit our audit procedures related to the significant judgments made by management to determine net realizable value of inventory included the following procedures, among others: •we tested the effectiveness of the company’s internal control over the valuation of inventory, including the review and determination of the anticipated net realizable value of merchandise inventories compared to the cost value of inventory on-hand.•we tested the recorded inventory reserve by developing an expectation based on the prior year inventory reserve balance relative to the merchandise inventory balance at the prior year balance sheet date and compared it to the actual reserve recorded in the current year. •we evaluated the reasonableness of management’s determination of the net realizable value of inventory by:•testing the accuracy of source data used in the calculation, including inventory on hand, aging of inventory, historical losses by product category, sales prices and consideration received from vendors.•evaluating terms and supporting documentation for consideration expected to be received from vendors.•recalculating the projected loss for inventory on hand based on the source data used in the calculation.•making inquiries of management, including merchandise buyers, regarding current and expected future sales trends, and evaluating external communications by analysts.•evaluating management’s ability to accurately forecast future sales trends by comparing actual results to management’s historical forecasts. •we evaluated management’s ability to accurately project inventory losses by comparing actual results to management’s historical estimates. /s/ deloitte & touche llp indianapolis, indiana march 25, 2022 we have served as the company's auditor since 1988. | 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 80complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. valuation of the reserves for long term care policies as described in note 2 and note 11 to the consolidated financial statements, the total reserves for long term care policies was $5,722 million as of december 31, 2020, which is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet. liabilities for estimates of benefits that will become payable on future claims on long term care policies are based on a gross premium valuation reflecting management’s current best estimate assumptions. management utilizes best estimate assumptions as of the date the policy is issued with provisions for the risk of adverse deviation, as appropriate. after the liabilities are initially established, management performs premium deficiency tests, using current best estimate assumptions. if a premium deficiency is recognized, the assumptions as of the date of the loss recognition are locked in and used in subsequent periods. in 2020, the company recognized a premium deficiency and losses of $141 million that were recorded through benefits, claims, losses and settlement expenses, which were based on management’s best estimate assumptions including expected premium rate increases, benefit reductions, morbidity rates, policy persistency and interest rates earned on assets supporting the liability. the principal considerations for our determination that performing procedures relating to the valuation of the reserves for long term care policies is a critical audit matter are the significant judgment by management when developing the estimate of the long term care reserves, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the current best estimate assumptions related to expected premium rate increases, benefit reductions, morbidity rates and interest rates earned on assets supporting the liability. also, the audit effort included the involvement of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the company’s valuation of reserves for long term care policies, including controls over management’s development of the current best estimate assumptions. these procedures also included, among others, evaluating and testing management’s process for developing the estimate of the long term care reserves, testing the completeness and accuracy of underlying data used by management and testing that assumptions are accurately reflected in the models. evaluating and testing management’s process also included the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating the reasonableness of the current best estimate assumptions related to expected premium rate increases, benefit reductions, morbidity rates and interest rates earned on assets supporting the liability, and (ii) evaluating the appropriateness of management’s models.valuation of the embedded derivatives in certain variable annuity riders as described in note 2, note 11, note 12, and note 15 to the consolidated financial statements, management values the embedded derivatives attributable to the provisions of certain variable annuity riders using internal valuation models. as there is no active market for the transfer of these embedded derivatives, such internal valuation models estimate fair value by discounting expected cash flows. as of december 31, 2020, the net embedded derivative liability in certain variable annuity riders was $2,316 million, and is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet. management’s discounted cash flow model for estimating fair value includes observable capital market assumptions and incorporates significant unobservable inputs related to implied volatility, nonperformance risk and contractholder behavior assumptions that include margins for risk, all of which management believes a market participant would expect. the principal considerations for our determination that performing procedures relating to the valuation of the embedded derivatives in certain variable annuity riders is a critical audit matter are the significant judgment by management to estimate the fair value of the embedded derivatives in certain variable annuity riders; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to the significant unobservable inputs related to implied volatility, non-performance risk and contractholder behavior assumptions that include margins for risk 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 related to the company’s estimate of the fair value of embedded derivatives in certain variable annuity riders, including controls over the significant unobservable inputs. these procedures also included, among others, evaluating and testing management’s process for developing the fair value estimate. testing management’s process included evaluating the reasonableness of the significant unobservable inputs related to implied volatility, non-performance risk and contractholder behavior assumptions that include margins for risk, and testing the completeness and accuracy of underlying data used by management in the development of the significant unobservable inputs. professionals with specialized skill and knowledge were used to assist in (i) evaluating the reasonableness of certain significant unobservable inputs related to implied volatility, non-performance risk and contractholder behavior assumptions that include margins for risk, and (ii) evaluating the appropriateness of management’s models. 81valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities as described in note 2, note 11 and note 12 to the consolidated financial statements, the company issues universal life, variable universal life and variable annuity policies that have product features that are accounted for as insurance liabilities. as disclosed by management, the liability for these policies, which is included in policyholder account balances, future policy benefits and claims on the consolidated balance sheet, is determined using actuarial models to estimate the present value of the projected benefits in excess of account value and recognizing the excess over the estimated life based on expected assessments. significant assumptions used by management in projecting the present value of future benefits and assessments include customer asset value growth rates, mortality, persistency, and investment margins, and additionally for variable annuity policies, benefit utilization. the principal considerations for our determination that performing procedures relating to the valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities is a critical audit matter are the significant judgment by management when developing the estimate of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the significant assumptions related to customer asset value growth rates, persistency, investment margins, and , for variable annuity policies, benefit utilization. also, the audit effort included the involvement of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the company’s valuation of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, including controls over management’s development of the significant assumptions. these procedures also included, among others, evaluating and testing management’s process for developing the estimate of certain guarantees on variable annuity and certain life insurance policies accounted for as insurance liabilities, testing the completeness and accuracy of underlying data used by management and testing that assumptions are accurately reflected in the models. evaluating and testing management’s process also included the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating the reasonableness of the significant assumptions related to customer asset value growth rates, persistency, benefit utilization and investment margins, and (ii) evaluating the appropriateness of management’s models. /s/ pricewaterhouse coopers llp minneapolis, minnesota february 24, 2021we have served as the company’s auditor since 2010. | 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. impact of rate-regulation on various account balances and disclosures—refer to notes 1 and 7 to the financial statements critical audit matter description the company’s principal business is the distribution of electricity and natural gas and is subject to regulation by the massachusetts, new hampshire and maine public service commissions as well as the federal energy regulatory commission (collectively, the “commissions”). accordingly, the company accounts for their regulated operations in accordance with financial accounting standards board accounting standards codification topic 980, regulated operations, and has recorded regulatory assets and regulatory liabilities which will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable commission. the company believes it is probable that its regulated distribution and transmission utilities will recover their investments in long-lived assets, including regulatory assets. if the company, or a portion of its assets or operations, were to cease meeting the criteria for application of these accounting rules, immediate recognition of any previously deferred costs, or a portion of deferred costs, would be required in the year in which the criteria are no longer met. in the company’s opinion, its regulated operations will be subject to the fasb codification provisions for regulated operations for the foreseeable future. accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; operating revenues; and depreciation expense, and affects multiple disclosures in the company’s financial statements. while the company has indicated that it expects to recover costs and a return on its investments, there is a risk that the commissions’ will not approve full recovery of the costs of providing utility service or recovery of all amounts invested in the utility business and a reasonable return on that investment. as a result, we identified the impact of rate regulation as a critical audit matter due to the high degree of subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred as of december 31, 2021, and the judgments made by management to support its assertions about impacted account balances and disclosures. management judgments included assessing the likelihood of (1) recovery in future rates of incurred costs or (2) refunds to customers or future reduction in rates. given that management’s accounting judgments are based on assumptions about the outcome of future decisions by the commissions, auditing these judgments requires specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities. 37 table of contents how the critical audit matter was addressed in the audit our audit procedures related to the uncertainty of future decisions by the commissions focused on the ongoing base rate proceedings for northern new hampshire and unitil energy systems as well as the ongoing prudency evaluation of the cis project for northern maine and included the following, among others: • we tested the effectiveness of controls over the relevant regulatory account balances and disclosures, including management’s controls over the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates. • we evaluated the company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. • we made inquiries of management and read relevant regulatory orders and settlements issued by the commissions in massachusetts, new hampshire and maine, regulatory statutes, interpretations, procedural memorandums, filings made by interveners or the company, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the commissions’ treatment of similar costs under similar circumstances. we evaluated this external information and compared to management’s recorded regulatory asset and liability balances and searched for any evidence that might contradict management’s assertions. • we obtained an analysis from management describing the orders and filings that support management’s assertions regarding the probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities to assess management’s assertion that amounts are probable of recovery or a future reduction in rates. /s/ deloitte & touche llp boston, ma february 1, 2022 we have served as the company’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. workers’ compensation as described in note 1 to the consolidated financial statements, in the u.s., the company has a combination of insurance and self-insurance contracts under which they effectively bear the first $1.0 million of risk per single accident. management establishes the accrual for workers’ compensation claims utilizing actuarial methods to estimate the undiscounted future cash payments that will be made to satisfy the claims, including an allowance for incurred-but-not-reported claims. as of december 29, 2019, the accrual for workers’ compensation, net of related receivables, is $59.5 million. management retains an independent consulting actuary to establish loss development factors, based on historical claims experience as well as industry experience, and applies those factors to current claims information to derive an estimate of the ultimate claims liability. in preparing the estimates, the consulting actuary considers a number of assumptions and multiple generally accepted actuarial methods in the course of preparing the loss forecast for claims. when claims exceed the applicable loss limit or self-insured retention and realization of recovery of the claim from existing insurance policies is deemed probable, management records a receivable from the insurance company for the excess amount. management evaluates the accrual quarterly throughout the year and makes adjustments as needed.the principal considerations for our determination that performing procedures relating to workers’ compensation is a critical audit matter are (i) there was significant judgment by management when determining the actuarial methods and the significant assumptions to use in establishing the accrual for workers’ compensation claims, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing our procedures and evaluating management’s actuarial methods and significant assumptions, including the loss development factors and (ii) the audit effort included the involvement 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 accrual for workers’ compensation, including controls over the actuarial methods and development of significant assumptions. these procedures also included, among others, obtaining and evaluating the company’s workers’ compensation plan documents and testing the completeness and accuracy of data used in management’s accrual, including incurred and paid claims. testing management’s process included evaluating the actuarial methods and significant assumptions, including the loss development factors used by management to estimate the workers’ compensation accrual, and using professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.acquisitions of next gen global resources and global technology associates –valuation of intangible assets as described in notes 1 and 4 to the consolidated financial statements, in 2019, the company completed acquisitions of next gen global resources llc (next gen) for $54.3 million and global technology associates, llc (gta) for $35.7 million, for which approximately $21.5 million and $17.3 million of intangible assets were recorded, respectively. the fair value of trade name intangibles is determined using the relief-from-royalty method, which relies on the use of estimates and assumptions about projected revenue growth and discount rates. the fair value of customer relationship intangibles is determined using the multi-period excess earnings method, which relies on the use of estimates and assumptions about projected revenue growth, customer attrition, and discount rates.the principal considerations for our determination that performing procedures relating to the acquisitions of next gen and gta and the related valuation of intangible assets is a critical audit matter are (i) there was a high degree of auditor subjectivity in applying our procedures relating to the fair value measurement of the intangible assets due to the significant judgment by management when developing these estimates, (ii) significant audit effort and auditor judgment was required in assessing the 47significant assumptions used in the valuation of the intangible assets, including the revenue growth rates, the customer attrition rates, and the discount rates, and (iii) the audit effort included the involvement 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 acquisition accounting, including controls over management’s valuation of the intangible assets and controls over development of the significant assumptions related to the valuation of the intangible assets, including the revenue growth rates, the customer attrition rates, and the discount rates. these procedures also included, among others, reading the purchase agreements and testing management’s process for estimating the fair value of the intangible assets. testing management’s process included evaluating the appropriateness of the valuation methods, testing the completeness, accuracy, and relevance of underlying data used in calculating the estimates, and the reasonableness of significant assumptions, including the revenue growth rates, the customer attrition rates, and the discount rates, including using professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. evaluating the reasonableness of the revenue growth rates and customer attrition rates involved considering the past performance of the acquired businesses, as well as economic and industry forecasts. the discount rates were evaluated by considering the cost of capital of comparable businesses and other industry factors./s/ pricewaterhouse coopers llp detroit, michigan february 13, 2020 we have served as the company’s auditor since 1960. | 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.electric utility segment - regulatory assets and liabilities - refer to notes 1 and 3 to the financial statements critical audit matter description hawaiian electric company, inc. (“hawaiian electric” or the “utility”) is subject to rate regulation by the hawaii public utility commission (the “puc”) and accounts for the effects of regulation under financial accounting standards board (“fasb”) accounting standards codification (“asc”) topic 980, “regulated operations,” as management believes that the operations of the utility currently satisfy the criteria for regulatory accounting. accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment; regulatory assets and liabilities; operating revenues; operation and maintenance expense; and depreciation expense. as of december 31, 2021, regulatory assets and liabilities amounted to approximately $565,543,000 and $996,768,000, respectively. the company’s continued accounting under asc topic 980 generally requires that rates are established by an independent, third-party regulator; rates are designed to recover the costs of providing service; and it is reasonable to assume that rates can be charged to, and collected from, customers. on december 23, 2020, the puc issued a decision and order approving a new performance-based regulation (“pbr”) framework. the framework became fully effective on june 1, 2021.hawaiian electric’s rates are subject to regulatory rate-setting processes and earnings oversight. rates are determined and approved in regulatory proceedings based on an analysis of the utility’s costs to provide utility service and a return on, and recovery of, hawaiian electric’s investment in the utility business. any decision by the puc could (1) impact the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets and (2) necessitate a refund in rates that should be reported as regulatory liabilities.we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about the applicability of applying the specialized rules and the impacted account balances, including disclosures and the high degree of subjectivity involved in assessing the impact of regulatory orders on the financial statements. management judgments include assessing the applicability of the specialized rules and the likelihood of (1) recovery in future rates of incurred costs and (2) a refund to customers. given that management’s accounting judgments are based on assumptions about the outcome of future decisions by the puc, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate-setting process due to its inherent complexities.how the critical audit matter was addressed in the audit our audit procedures related to the application of specialized rules to account for the effects of cost-based rate regulation and the uncertainty of future decisions by the rate regulators included the following, among others: •we tested the effectiveness of management’s controls over (1) the evaluation of the application of specialized rules to account for the effects of cost-based rate regulation and (2) the evaluation of the likelihood of (a) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets and (b) a refund that should be reported as regulatory liabilities. such controls include the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or refunding amounts in rates.•we evaluated the company’s conclusion that it should apply the specialized rules to account for the effects of cost-based rate regulation including considerations as a result of the pbr decision and order.•we evaluated the company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.•we read relevant regulatory orders issued by the puc for the utility, regulatory statutes, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the puc’s treatment of similar costs under similar circumstances. we evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.•for regulatory matters in process, we inspected the utility’s filings with the puc and the filings with the puc by intervenors that may impact the utility’s future rates, for any evidence that might contradict management’s assertions.•we obtained analyses from management as appropriate regarding probability of recovery for regulatory assets or refund in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery, or refundable in rates.82allowance for credit losses - refer to notes 1 and 4 to the financial statements critical audit matter description the allowance for credit losses is a material estimate of the company and as of december 31, 2021, the total balance was $71,130,000. the allowance for credit losses is based on the composition, characteristics, and quality of the loans, as well as the prevailing economic conditions and reasonable and supportable forecasts. the credit loss models use a probability-of-default, loss given default, and exposure at default methodology to estimate expected credit losses.the company also incorporates qualitative factors to adjust the historical loss rates or other static sources as these rates may not be an accurate indicator of expected losses in the current portfolio. these qualitative factors include, but are not limited to, adjustments for changes in policies and procedures in underwriting, monitoring or collections, current and expected economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values, and any concentrations of credit.the selection of relevant and appropriate qualitative factors in calculating the allowance for credit losses requires significant management judgment. given the magnitude of the qualitative factors and significant amount of judgment required by management in developing the qualitative component of the overall allowance, performing audit procedures to evaluate the reasonableness of the allowance for credit losses required a high degree of auditor judgment, an increased level of effort, and the need to involve more experienced audit professionals.how the critical audit matter was addressed in the audit our audit procedures related to the allowance for credit losses included the following, among others: •we tested the effectiveness of controls over the allowance for credit losses, including management’s controls over the respective qualitative factors.•we evaluated the reasonableness and conceptual soundness of the allowance for credit losses modeling framework, including the use of qualitative factors.•we tested the mathematical accuracy of the calculation of the qualitative allowance for credit losses as well as the accuracy and completeness of data used as inputs to the determination of qualitative factors.•we evaluated the qualitative factors applied to the historical loss rates, including assessing the basis for the factors and the reasonableness of the qualitative factors used in the allowance for credit losses.•we evaluated the directional consistency and magnitude of the qualitative adjustments, as well as the absolute value of the allowance for credit losses attributable to the qualitative adjustments.•in order to identify potential bias in the determination of the allowance for credit losses, we performed analytical analysis, including retrospective review, where we compared the estimate of losses to actual losses, analyzed ratios of the allowance for credit losses to loans and other relevant metrics, such as losses and nonperforming loans, and performed peer analysis where we compared relevant metrics to comparable financial institutions, and evaluated the relevance of the underlying data used to determine qualitative factors, to identify potential bias in the determination of the allowance for credit losses./s/ deloitte & touche llp honolulu, hawaii february 25, 2022 we have served as the company’s auditor since 2017. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the 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.lease classification - lease term - see note 14 to the financial statements critical audit matter description the company performs a lease classification test upon the entry into any new tenant lease or lease modification to determine if the company will account for the lease as an operating, sales-type lease, or direct financing lease. the accounting guidance under asc 842 is complex and requires the use of judgments and assumptions by management to determine the proper accounting treatment of a lease. the lease classification tests and the resulting calculations require subjective judgments, such as determining the likelihood a tenant will exercise all renewal options, in order to determine the lease term. a slight change in estimate or judgment can result in a material difference in the financial statement presentation.59table of contents given the significant judgments made by management to determine the expected lease term, we performed audit procedures to assess the reasonableness of such judgments, which required a high degree of auditor judgment. how the critical audit matter was addressed in the audit our audit procedures related to the judgments surrounding the determination of lease term for any new or modified lease included the following, among others: •we tested the effectiveness of the controls over management’s assessment of the likelihood a tenant would exercise all renewal options.•we evaluated the significant judgments made by management to determine the expected lease term by:◦evaluating the significance of the leased assets to the tenant’s operations by examining available information including tenant’s financial statements if available. ◦evaluating the company’s historical pattern of tenant lease modifications by examining both confirming and contradictory evidence.◦obtaining lease agreements to examine material lease provisions considered by management in their analysis.current expected credit loss (“expected loss”) – refer to notes 2 and 8 to the financial statements critical audit matter description the company follows asc 326 “credit losses” (“asc 326”), which requires that the company measures and record current expected credit losses (“cecl”), the scope of which includes investments in leases - financing receivables. the company elected to use an econometric default and loss rate model to estimate the cecl allowance. this model requires the company to calculate and input lease and property specific credit and performance metrics which in conjunction with forward looking economic forecasts, project estimated credit losses over the life of the lease. a cecl allowance is recorded based on the expected loss rate multiplied by the outstanding investment in lease balance. expected losses within the company’s cash flows are determined by estimating the probability of default (“pd”) and loss given default (“lgd”) of the company’s investment in lease, financing receivable. the pd and lgd are estimated during the initial term of the lease. the pd and lgd estimates for the lease term were developed using current financial condition forecasts. the pd and lgd predictive model uses the average historical default rates and historical loss rates, respectively, dating back to 1998 that have similar credit profiles or characteristics to the real estate underlying the company's financing receivable. the company will monitor the credit risk related to its financing receivable by obtaining the rent coverage ratios on a periodic basis. the company also monitors legislative changes to assess whether it would have an impact on the underlying performance of its tenant.the determination of the company’s cecl allowance, including the forward looking economic forecasts, represents a critical audit matter due to the level of subjectivity and judgement involved. auditing management’s allowance for credit losses requires a high degree of auditor judgment and increased extent of effort including the need to involve our credit specialist.how the critical audit matter was addressed in the audit our audit procedures related to the allowance for credit losses for the company’s investments in financing leases included the following, among others: •we tested the effectiveness of controls implemented by the company related to the estimation of the allowance for credit losses, including the judgements involved in the determination of the macroeconomic factors applied to expected loss rate.•we tested the inputs used in the calculation to determine the pd and lgd of the tenant by agreeing lease and property specific credit and performance metrics to independent data.•with the assistance of our credit specialist, we evaluated the reasonableness of the methodology, appropriateness of the model and significant assumptions used by management to estimate the pd and lgd.60table of contents•we evaluated management’s expected loss rate by performing a peer benchmarking analysis. /s/ deloitte & touche new york, new york february 24, 2022 we have served as the company's auditor since 2016. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.61valuation of goodwill-jefferson terminal reporting unit description of the matter at december 31, 2020, the company’s goodwill was $122.7 million for the jefferson terminal reporting unit. as discussed in note 2 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level.auditing the fair value of the jefferson terminal reporting unit used in the annual goodwill impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value of the jefferson terminal reporting unit. in particular, the fair value estimate was sensitive to significant assumptions such as the extent and timing of future cash flows (including forecasted revenue growth rates and ebitda margins), capital expenditures and discount rate, which are affected by expectations about the company’s ability to secure additional contracts and increase volumes from existing contracts as well as expectations about the overall industry, market and 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, including tests of controls over management’s review of valuation methodology and significant assumptions described above.to test the estimated fair value of the company’s jefferson terminal reporting unit for use in the goodwill impairment assessment, we performed audit procedures that included, among others, assessing the valuation methodology used and testing the significant assumptions described above and the completeness and accuracy of the underlying data used by the company in its impairment test. for example, we compared the significant assumptions used by management to current industry, market and economic trends; to the historical results of the reporting unit and other guideline companies within the same industry; and evaluated whether changes to the company’s business model, customer base or product mix and other relevant factors would affect the significant assumptions. we also assessed the historical accuracy of management’s estimates and performed sensitivity analyses over significant assumptions to evaluate the changes in the fair value of the jefferson terminal reporting unit that would result from changes in the significant assumptions. we also involved our valuation specialists to assist in our evaluation of the company's valuation methodology and certain significant assumptions.recognition of maintenance revenue for aircraft leases description of the matter as described in note 2 to the consolidated financial statements, the company recognizes maintenance revenue for aircraft leases related to the portion of maintenance payments received from lessees that are not expected to be reimbursed for maintenance events. revenue related to maintenance on leased aircraft is recorded as a component of maintenance revenue which totaled $101.5 million for the year ended december 31, 2020, as disclosed in note 12.auditing maintenance revenue related to aircraft leases was complex and highly judgmental due to the significant estimation involved in projecting the timing of future major maintenance events. in particular, such estimates are sensitive to significant assumptions such as the mean time between removal (mtbr) and forecasted utilization of the aircraft which are affected by historical usage patterns and overall industry, market and economic conditions. changes to these significant assumptions could have a material effect on the amount of revenue recognized in the period.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 maintenance revenue recognition process, including controls over management’s review of the significant assumptions used in determining the estimated timing of major maintenance events as described above.to test maintenance revenue for aircraft leases, we performed audit procedures that included, among others, assessing the company’s revenue recognition methodology and testing the significant assumptions described above and the completeness and accuracy of the underlying data used by the company in its analyses. for example, we compared the significant assumptions used by management to the underlying customer lease agreements, historical utilization and third- party estimates for mtbr, when available. we tested management’s retrospective review of timing of estimated maintenance events to actual results to assess the historical accuracy of significant assumptions and contrary evidence, if any. we also performed a sensitivity analysis on utilization of the aircraft to evaluate the changes in the timing of the maintenance events from changes in utilization assumptions and the impact, if any, on maintenance revenue recognized in the period./s/ ernst & young llp we have served as the company’s auditor since 2016. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the 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 from contracts with customers as described in note c to the consolidated financial statements, the company recorded $176.9 million in revenue for the year ended december 31, 2020, which consists of several different revenue streams. the nature of the services offered by each revenue stream is different, and the company’s process for revenue recognition differs between each of the discrete revenue streams. additionally, a portion of the company’s revenue is recognized through large volumes of low-dollar transactions. the company’s revenue recognition processes are reliant upon a combination of automated and manual controls which rely on several distinct information technology (it) systems. we identified revenue from contracts with customers as a critical audit matter. obtaining an understanding of the complex processes and systems used in the company’s revenue recognition, and evaluating the processes and related internal controls for multiple revenue streams required significant auditor effort, including specialized skills and knowledge related to several distinct it systems. additionally, determining the nature and extent of our audit procedures and evaluating the overall sufficiency of the audit evidence required subjective auditor judgment. addressing the critical audit matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others: ●testing the design and operating effectiveness of key process-level controls related to revenue, including both manual and automated controls. ●involving it professionals with specialized skills and knowledge who assisted in the identification of key systems used for the processing and recording of revenue transactions and testing the general it controls over each of these systems. ●for a selection of transactions, comparing the amount of revenue recorded for consistency with underlying supporting documentation. ●evaluating the overall sufficiency of the audit evidence obtained over revenue. /s/ moody, famiglietti, & andronico, llp we have served as the company’s auditor since 2019. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. revenue recognition – determination of estimated costs to complete for contracts recognized over time description of the matter the company’s construction and engineering contracts generally recognize revenue over time as there is a continuous transfer of control to the customer. approximately 54% of the company’s revenue during the year ended december 31, 2020 was for construction and engineering contracts whereby revenue was recorded over time. f-1the company uses the amount of cost incurred under the contract as a measure of progress towards completion, and revenue recognized is measured principally by the costs incurred and accrued to date for each contract as a percentage of the estimated total cost for each contract at completion. contract costs include all direct material, labor, and indirect costs related to contract performance. changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income, and the effects of these revisions are recognized prospectively in the period in which the revisions are determined. this measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates include subjective assessments and judgments. we identified the company’s estimation of the costs to complete each contract as a critical audit matter due to the high degree of auditor judgment and the increased extent of effort that was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the estimate of costs to complete contracts recognized over time. how we addressed the matter in our audit our audit procedures related to forecasts of estimated costs to complete contracts recognized over time included the following, among others: • we selected a sample of contracts and obtained and inspected the executed contract and change orders to validate existence and understand the scope of each contract. • we performed a site visit near the end of the reporting period. we observed and inspected the projects in process and inquired of project managers to gain an understanding of the progress on significant projects in process. • we evaluated and tested management’s process to estimate future costs to complete contracts recognized over time. this evaluation included the consistency of management’s process and policies regarding change orders and timely costs revisions. • we evaluated management’s ability to accurately estimate future costs to complete contracts recognized over time by performing a retrospective review of prior estimates to actual results. acquisition of echo dcl, llc – fair value of net assets acquired and contingent consideration description of the matter as discussed in note 9 to the financial statements, the company acquired substantially all of the assets of echo dcl, llc (echo) for a purchase price cash and contingent consideration, which resulted in the acquisition of property, plant and equipment and a tradename intangible asset. management estimated the fair value of the tradename using the relief from royalty method which required management to estimate discounted cash flows with subjective assumptions of the appropriate discount rate, an appropriate royalty rate, and future revenues. the property, plant and equipment is largely comprised of equipment and buildings held for lease. the equipment was valued using a market approach, which estimates value using third-party transactions. the buildings held for lease were valued using the cost to replicate adjusted for the condition of each building. the contingent consideration was valued using a monte carlo simulation, which required management to estimate future revenues, expenses, and net income. f-2we identified the fair value of net assets acquired and contingent consideration in the echo business combination to be a critical audit matter due to the significant judgments made by management to estimate the fair value of intangible assets, property, plant and equipment, and contingent consideration. 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 the selection of discount and royalty rates, forecasts of future revenues and cash flows, as well as estimates of the cost to replicate buildings acquired. how we addressed the matter in our audit our audit procedures related to the assumptions and forecasts used by management to estimate the fair value of intangible assets, property, plant and equipment, and contingent consideration acquired in the echo business combination included the following, among others:• we read the executed purchase agreement and reviewed historical financial data of echo to verify that management had identified all acquired assets and liabilities, as well as any contingent consideration. • with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) discount rates, (3) the royalty rate, and (4) future revenue, expenses, and growth rates, including testing the source information underlying the determination of the discount rates and the royalty rate and testing the mathematical accuracy of the calculations. • we evaluated management’s ability to accurately forecast future revenues and cash flows by considering the past financial performance of echo and current economic factors. • we visited the echo plant and inspected the property, plant and equipment acquired to validate existence and working condition. we reviewed online sales and auction prices to independently validate the reasonableness of the fair values assigned to acquired equipment. we performed an independent calculation to estimate the cost to replicate the buildings held for lease and compared our calculation to management’s fair value. we have served as the company’s auditor since 2016. | 2 |
critical audit matters” section of our report.basis for opinions the company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management’s annual report on internal control over financial reporting appearing under item 9a. our responsibility is to express opinions on the company’s consolidated financial statements and on the company’s internal control over financial reporting based on our audits. we are a public accounting firm registered with the public company accounting oversight board (united states) (pcaob) and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. our audits also included performing such other procedures as we considered necessary in the circumstances. we believe that our audits provide a reasonable basis for our opinions.emphasis of matter as discussed in note q subsequent event, effective march 19, 2020, the company closed all of its stores for at least two weeks and has temporarily closed its online businesses, its distribution centers and its offices in response to covid-19. at this point, the company cannot reasonably estimate the duration and severity of this pandemic, which could have a material adverse impact on the company’s business, results of operations, financial position and cash flows in the year ending january 30, 2021. management’s evaluation of the events and conditions and management’s plans to mitigate these matters are also described in note q.f-2definition and limitations of internal control over financial reporting a company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. a company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (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.adoption of the leases accounting standard as described above and in note a to the consolidated financial statements, the company adopted the new leases accounting standard as of february 3, 2019. this resulted in the company recording right of use (rou) assets and lease liabilities of $9 billion. management made an accounting policy election to keep leases with a term of twelve months or less off the consolidated balance sheets and recognizes the lease payments on a straight-line basis over the lease term. at the inception of an arrangement, management determines if the arrangement is a lease based on assessment of the terms and conditions of the contract. operating lease rou assets and lease liabilities are recognized at possession date based on the present value of lease payments over the lease term. as the company’s leases do not provide an implicit rate, nor is one readily available, management uses the company’s incremental borrowing rate based on the information available at possession date in determining the present value of future lease payments. the incremental borrowing rate is calculated based on the us consumer discretionary yield curve and adjusted for collateralization and foreign currency impact for tjx international and canada leases. the principal considerations for our determination that performing procedures relating to the adoption of the leases accounting standard is a critical audit matter are there was a high degree of subjectivity and effort in performing procedures and in evaluating audit evidence with respect to management’s conclusions relating to identifying the population of contracts within the scope of the standard and in evaluating the lease term and incremental borrowing rate used to calculate the right of use asset and lease liability for each lease. also, there was significant audit effort in performing our procedures due to the large volume of contracts that management evaluated under the new accounting standard and the significance of the rou asset and lease liability balances recorded at the adoption date. 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 adoption of the new leases accounting standard. these procedures also included, among others, (i) evaluating the appropriateness of accounting policies established by management in connection with the adoption of the new standard, (ii) evaluating management’s process and conclusions for determining whether contracts contain a lease, on a sample basis by independently evaluating the contract terms, (iii) evaluating the reasonableness of the incremental borrowing rate involved comparing the interest rates to observable yield curves that are similar to the lease terms and have a similar credit rating as the company, and (iv) testing the inputs to management’s calculation of the rou asset and lease liability, on a sample basis, for completeness and accuracy by comparing them to the underlying contract./s/pricewaterhouse coopers llp boston, massachusetts march 27, 2020 we have served as the company’s auditor since 1962. | 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.allowance for loan losses - consumer automotive portfolio - refer to notes 1 and 9 to the financial statements critical audit matter description the allowance for loan losses (“allowance”) is management’s estimate of expected credit losses in the lending portfolio. the consumer automotive portfolio represents 62% of the total finance receivables and loans balance and the amount of the allowance required for the consumer automotive loan portfolio is based on its relevant risk characteristics and represents 88% of the total allowance of the company. the determination of the appropriate level of the allowance for the consumer automotive portfolio inherently involves a high degree of subjectivity and requires significant estimates of current credit risks using both quantitative and qualitative analyses.the allowance is maintained at a level that management considers to be adequate based upon ongoing quarterly assessments and evaluations using relevant available information, which includes both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. the company uses a proprietary statistical model to estimate the quantitative component of the consumer automotive allowance. in addition, management takes into consideration relevant qualitative factors that have occurred but are not yet reflected in the model estimate.auditing certain aspects of the allowance, including the (1) model methodology, (2) model accuracy, (3) model assumptions, (4) selection of relevant risk characteristics (including consideration of covid-19 extensions), (5) interpretation of the results, and (6) use of qualitative adjustments, involves especially subjective and complex judgment. given the calculation of the allowance requires significant judgment in determining the estimate, performing audit procedures to evaluate the reasonableness of management’s estimate of the allowance requires a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists.112table of contents report of independent registered public accounting firm how the critical audit matter was addressed in the audit our audit procedures related to the specific aspects of the consumer automotive allowance described above included the following, among others:•we tested the effectiveness of controls over the company’s (1) model methodology, (2) model accuracy, (3) model assumptions, (4) selection of relevant risk characteristics (including consideration of covid-19 extensions), (5) interpretation of the results, and (6) use of qualitative adjustments.•with the assistance of our credit specialists we evaluated the reasonableness of the (1) model methodology, (2) model accuracy, (3) model assumptions, (4) selection of relevant risk characteristics (including consideration of covid-19 extensions), (5) interpretation of the results, and (6) use of qualitative adjustments.•we tested the company’s model performance evaluation methods and computational accuracy of the model with the assistance of our credit specialists.•we tested the accuracy and completeness of key risk characteristics input into the model by agreeing to source information.•we evaluated the company’s method for determining qualitative adjustments to the model estimate by testing on a sample basis (and, where applicable, recalculating) the (1) key assumptions, (2) input data, and (3) the reasonableness of any changes in assumptions compared to prior periods made by management./s/ deloitte & touche llp deloitte & touche llp detroit, michigan february 24, 2021we have served as the company’s auditor since at least 1936; | 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 and combined 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 goodwill30 description of the matter at december 31, 2019, the company’s goodwill was $505.8 million. as discussed in note 2 and note 6 of the consolidated and combined financial statements, goodwill is tested for impairment at least annually at the reporting unit level on november 1. due to an interim triggering event, the company performed a quantitative impairment analysis as of september 1, 2019, estimating the fair value of the reporting unit by utilizing an income approach which uses the discounted cash flow (“dcf”) analysis and the company also considered a market-based valuation methodology using comparable public company trading values. the company recorded an impairment charge of $379.2 million in the third quarter of 2019. in the fourth quarter of 2019, the company performed an updated quantitative impairment analysis of its goodwill and the results of this test indicated that the estimated fair value exceeded the carrying value as of december 31, 2019. auditing the company’s goodwill impairment test was complex due to the significant judgment required in determining the fair value of the reporting unit. in particular, the fair value estimate was sensitive to significant assumptions that require judgment, including the amount and timing of future cash flows (e.g., revenue growth rates and free cash flow), long-term growth rates, and the weighted average cost of capital (“discount rate”), which are affected by factors such as general market conditions and recent operating performance. 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 valuation model and the significant assumptions, as discussed above, used to develop the prospective financial information. we also tested management's controls to validate that the data used in the valuation was complete and accurate.to test the estimated fair value of the company’s goodwill, we performed audit procedures that included, among others, assessing the reasonableness of the methodologies used. we compared the significant assumptions used by management to current industry and economic trends, analyst expectations, changes to the company’s business model, 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 assess the changes in the fair values that would result from changes in the assumptions. further, we evaluated the reasonableness of the company’s assumptions by analyzing comparable public company trading values. we also 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. valuation of indefinite-lived intangible asset description of the matter at december 31, 2019, the company’s indefinite-lived intangible asset (cars.com trade name) was $790 million. as discussed in note 2 and note 6 of the consolidated and combined financial statements, indefinite-lived intangible assets are tested for impairment at least annually. due to a triggering event, the company performed a quantitative impairment analysis as of september 1, 2019, estimating the fair value using the “relief from royalty” methodology, which is a variation of the income approach. the company recorded an impairment charge of $82.3 million in the third quarter of 2019. in the fourth quarter of 2019, the company performed an updated quantitative impairment analysis of its indefinite-lived intangible asset and the results of this test indicated that the estimated fair value exceeded the carrying value as of december 31, 2019. auditing the company’s trade name impairment test was complex due to the significant judgement required in determining the fair value of trade name assets. in particular, the fair value estimate was sensitive to significant judgments, including amount and timing of future cash flows (e.g. revenue growth rates), long-term growth rates, royalty rate and weighted average cost of capital (“discount rate”), which are affected by factors such as general market conditions and recent operating performance. 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 indefinite-lived intangible asset impairment review process. for example, we tested controls over management's review of the valuation model and the significant assumptions (e.g., revenue growth rates, long-term growth rates, royalty rate and discount rate) used to develop the prospective financial information. we also tested management's controls to validate that the data used in the valuation was complete and accurate.to test the estimated fair value of the company’s trade name asset, we performed audit procedures that included, among others, assessing the reasonableness of the methodology used. we compared the significant assumptions used by management to current industry and economic trends, analyst expectations, changes to the company’s business model, 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 values that would result from changes in the assumptions. we also involved our valuation specialists to assist with our evaluation of the methodology used by the company and significant assumptions included in the fair value estimates. we have served as the company’s auditor since 2016. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment - evernorth and u.s. medical reporting units as described in note 17 to the consolidated financial statements, as of december 31, 2020, goodwill is primarily reported in the evernorth segment ($33.8 billion), the u.s. medical segment ($10.4 billion) and, to a lesser extent, the international markets segment ($0.4 billion). management conducts its annual quantitative evaluation for goodwill impairment during the third quarter at the reporting unit level and writes it down through shareholders’ net income if impaired. on a quarterly basis, management performs a qualitative impairment assessment to determine if events or changes in circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value. fair value of a reporting unit is generally estimated based on either a market approach or a discounted cash flow analysis using assumptions that management believes a hypothetical market participant would use to determine a current transaction price. the significant assumptions and estimates used in determining fair value include the discount rate and future cash flows. a discount rate is selected to correspond with each reporting unit's weighted average cost of capital, consistent with that used for investment decisions considering the specific and detailed operating plans and strategies within that reporting unit. projections of future cash flows for each reporting unit are consistent with management’s annual planning process for revenues, pharmacy costs, benefits expenses, operating expenses, taxes, capital levels and long-term growth rates.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the evernorth and u.s. medical reporting units is a critical audit matter are the significant judgment by management when determining the fair value measurement of the reporting units. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimate of the reporting units’ fair value related to the assumptions for the discount rate and projection of future cash flows. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over management’s methodology, inputs and assumptions used in its goodwill impairment assessment of the evernorth and u.s. medical reporting units. these procedures also included, among others, testing management’s process for determining the fair value estimate of the reporting units; evaluating the appropriateness of the discounted cash flow analysis; testing the completeness and accuracy of underlying data used in the discounted cash flow analysis; and evaluating the key inputs and significant assumptions related to the discount rate and the projections of future cash flows. the underlying inputs and assumptions used in the development of the discount rate and the projections of future cash flows that were evaluated related to the weighted average cost of capital, revenues, pharmacy costs, benefits expenses, operating expenses, capital levels and long-term growth rates. evaluating the reasonableness of management’s inputs and assumptions involved considering (i) the current and past performance of the reporting unit, (ii) the consistency of the discount rate and long-term growth rates with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions related to the discount rate./s/ pricewaterhouse coopers llp hartford, connecticut february 25, 2021we have served as the company’s auditor since 1983. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.fair value of mortgage servicing rights as discussed in notes 1, 2 and 7 to the consolidated financial statements, the fair value of the company’s mortgage servicing rights (ms rs) as of december 31, 2021 is $675.3m. the company recognizes ms rs when loans are sold, and the associated servicing rights are retained. the company maintains one class of msr asset and has elected the fair value option with the changes in fair value being recorded in current period income. to determine the fair value of the msr when created, the company uses a third-party valuation firm and its valuation model that calculates the present value of future cash flows. the valuation model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of contractual service fees, ancillary income and late fees, the cost of servicing, float value, the inflation rate, estimated prepayment speeds, and default rates. these estimated cash flows are present valued using a discount rate which is reflective of 54table of contentsthe servicer’s required return on capital in addition to a premium for market liquidity, funding cost, and operational risk.we identified the assessment of the fair value of the ms rs as a critical audit matter. a high degree of subjective and complex audit judgment was required, including the use of professionals with specialized skills and knowledge, to assess the estimated fair value of the ms rs. specifically, the assessment encompassed the evaluation of the msr valuation methodology, including the methods and models used to estimate the following key assumptions because they are unobservable and the sensitivity of changes to those assumptions have a significant effect on the valuation: (1) estimated prepayment speeds, (2) the cost of servicing, and (3) the discount rate. there was also a high degree of subjectivity and potential for management bias related to updates made to key assumptions due to changes in market conditions, mortgage interest rates, and servicing standards. to address this critical audit matter, we evaluated the company’s process to develop the fair value of the ms rs by testing certain sources of data and assumptions. in addition, we involved valuation professionals with specialized skills and knowledge who assisted in:•assessing the design of the valuation model used to estimate the fair value of the ms rs in accordance with relevant u.s. generally accepted accounting principles•evaluating the company’s fair value of the ms rs by benchmarking the value against industry surveys and by performing trend analyses with market data•assessing the key assumptions by benchmarking against ranges obtained from comparable entities and industry surveys•determining an independent fair value range and evaluating the company’s msr value against that range initial fair value measurement of the contingent consideration liability and the acquired referral network intangible as discussed in note 3 to the consolidated financial statements, the company applies certain methodologies that include estimates and assumptions to accurately measure initial fair value to the tangible and intangible assets acquired and liabilities assumed in a business combination. the company completed its acquisition of residential mortgage services holdings, inc. (the acquiree) on july 1, 2021 for total purchase consideration of $265.0 million. this acquisition resulted in the recognition of a contingent consideration liability of $64.0 million and a referral network intangible of $42.3 million.we identified the evaluation of the initial fair value measurement of the contingent consideration liability and the referral network intangible as a critical audit matter. evaluating the methodology used to measure the fair value of the contingent consideration liability and the referral network intangible, including the key assumptions and the inputs used to develop those key assumptions required a high degree of subjective auditor judgment, and the involvement of valuation professionals with specialized skills and knowledge. specifically, key assumptions included estimated future revenues, volatility factors and discount rate for the contingent consideration liability and estimated future revenues, long-term growth rate, retention rate, contributory asset charges and discount rate for the referral network intangible. in addition, subjective auditor judgment was required to evaluate the sufficiency of the audit evidence obtained.the following are the primary procedures we performed to address this critical audit matter. we evaluated the reasonableness of certain data and assumptions used to determine the valuation of the contingent consideration liability and the referral network intangible by evaluating the relevance and reliability of such data and assumptions and comparing to independent sources. we assessed estimated future revenues by evaluating the accuracy of projections made in previous periods. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:•evaluating the overall fair value methodologies used by the company to estimate the fair value of the contingent consideration liability and the referral network intangible•assessing the estimate of fair value for the contingent consideration liability by developing independent assumptions for the volatility factors and discount rate, utilizing market data•re-creating management’s valuation of the referral network intangible and assessing whether the model includes all key elements of the model’s methodology•assessing the estimate of fair value for the referral network intangible by 1) comparing the long-term growth rate to publicly available data, 2) recalculating the retention rate used in 55table of contentsdetermining the expected economic life, and 3) developing independent assumptions for the contributory asset charges and discount rate, utilizing market data.we also assessed the sufficiency of the audit evidence obtained related to the valuation of the contingent consideration liability and the referral network intangible by evaluating the:•cumulative results of the audit procedures•qualitative aspects of the company’s accounting practice•potential bias in the accounting estimates./s/ kpmg 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 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.equity method investment – refer to note 1 to the consolidated financial statements critical audit matter description in june 2019, kforce entered into a joint venture whereby kforce has a 50% noncontrolling ownership in work llama, llc ("work llama"). the noncontrolling interest in work llama, a variable interest entity, is accounted for as an equity method investment. under the equity method, the investment carrying value is recorded at cost and adjusted for the proportionate share of earnings or losses. management reviews the equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. an impairment loss would be recognized in the event that an other-than-temporary decline in fair value of an investment occurs. management’s estimate of fair value of an investment is based on the income approach and/or market approach, which requires management to make significant estimates and assumptions related to the discount rate and forecasted operating results for 26table of contents work llama. changes in these assumptions could have a significant impact on either the fair value, the amount of any impairment charge, or both. the balance of the investment in work llama of $10.5 million was included in other assets, net in the consolidated balance sheet at december 31, 2020. we identified management’s quantitative impairment analysis for the equity method investment in work llama as a critical audit matter because of the significant amount of judgment required by management to estimate the fair value of work llama. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and forecasted operating results.how the critical audit matter was addressed in the audit our audit procedures related to the discount rate and forecasted operating results used by management to estimate the fair value of work llama included the following, among others:•we tested the effectiveness of controls over management’s impairment evaluation, including those over the discount rate and forecasted operating results. •due to the lack of operating history available for the equity method investment, we evaluated the reasonableness of management’s forecasts as follows:◦obtained an understanding of and performed audit procedures over management’s forecasting process, including the sources of information used, the underlying significant assumptions, and sensitivity to changes in these significant assumptions. ◦compared the forecast to (1) internal communications to management and board of directors, (2) current year operating results, and (3) forecasted information included in analyst and industry reports for the company.•with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and assumptions used to determine the fair value of work llama, such as the discount rate, by:◦testing the underlying source information and mathematical accuracy of the calculations.◦developing a range of independent estimates and comparing those to the assumptions used by management. ◦for the discount rate, we compared the amount used by management to the amounts associated with other companies with a similar risk profile, and◦evaluating the interaction between the discount rate and the forecasts to understand and sensitize management’s assumptions regarding risk inherent in the forecast./s/ deloitte & touche llp tampa, florida february 26, 2021we have served as kforce’s auditor since 2000. | 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 — identification of contractual terms in certain customer arrangements as described in note 2 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the company expects to receive in exchange for those products or services. management applies judgment in determining the transaction price which is dependent on the contractual terms. in order to determine the transaction price, management may be required to estimate variable consideration when determining the amount and timing of revenue recognition. the principal considerations for our determination that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized nature of the company’s customer arrangements. this in turn led to significant effort in performing our audit procedures which were designed to evaluate whether the contractual terms used in the determination of the transaction price and the timing of revenue recognition were appropriately identified and determined by management and to evaluate the reasonableness of management’s estimates.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 those related to the identification of contractual terms in customer arrangements that impact the determination of the transaction price and revenue recognition. these procedures also included, among others, (i) testing the completeness and accuracy of management’s identification of the contractual terms by examining customer arrangements on a test basis, and (ii) testing management’s process for determining the appropriate amount and timing of revenue recognition based on the contractual terms identified in the customer arrangements./s/ pricewaterhouse coopers llp san jose, california september 3, 2020 we have served as the company’s auditor since 1988. | 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.income taxes — completeness of uncertain tax positions — refer to notes 1 and 10 to the financial statements critical audit matter description the company assesses uncertain tax positions (“ut ps”) based upon an evaluation of available information and records a liability when a position taken or expected to be taken in a tax return does not meet certain measurement or recognition criteria. a tax benefit is recognized only if management believes it is more likely than not that the tax position will be sustained upon examination by the relevant tax authority. determining the completeness of ut ps is complex and significant judgment is involved in identifying which positions may not meet the required measurement or recognition criteria. as of december 31, 2021, the company’s recorded utp balance was $37.3 million.the utp analysis is complex as it includes numerous tax jurisdictions and varying applications of tax laws. given the multiple jurisdictions in which the company operates and the complexity of tax regulations, auditing the completeness of ut ps involved a high degree of auditor judgment, and an increased extent of audit effort, including the need to involve our tax specialists. 40how the critical audit matter was addressed in the audit our audit procedures to evaluate the completeness of ut ps in material jurisdictions included the following, among others:•we tested the effectiveness of controls over management’s determination of the existence of ut ps.•with the assistance of our income tax specialists, we assessed the company’s determination of the existence of ut ps. in particular, our procedures included:◦evaluating the company’s significant judgments related to completeness of ut ps in material jurisdictions:▪we performed inquiries of management to assess whether they are aware of any new items or significant changes to the business that would impact the utp assessment or give rise to new ut ps. ▪we evaluated the following: technical merits of existing ut ps, technical merits of potential ut ps, and significant transactions and their tax implications, including the completeness and accuracy of the underlying data supporting the transactions. ▪we assessed the appropriateness and consistency of management’s methods and assumptions used in identifying ut ps. ▪we evaluated former and ongoing tax audits by tax authorities.▪we considered changes in and assessed the company’s interpretation of applicable tax laws. ▪we inspected the company’s summary of differences between the filed tax returns and the tax provision to obtain an understanding of significant differences. we assessed whether the appropriate ut ps were recorded as well as whether any additional ut ps needed to be considered. ▪we evaluated the appropriateness and consistency of the financial statement disclosures, including judgments associated with unrecognized tax benefits that could increase or decrease within 12 months of the reporting date. /s/ deloitte & touche llp minneapolis, minnesota february 22, 2022we have served as the company’s auditor since 1977. | 3 |
Subsets and Splits