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critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee 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.retail inventory method—impact of markdowns—refer to note 1 to the financial statements critical audit matter description the company values merchandise inventories at the lower of cost or market using the retail inventory method. under this method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. the retail inventory method is an averaging method that results in valuing inventory at the lower of cost or 50 market provided markdowns are taken timely to reduce the retail value of inventory. merchandise inventories as of january 30, 2021, were $740.8 million.the judgments involved in determining when to record markdowns can significantly impact the ending inventory valuation and the resulting gross profit. given the significant judgments necessary to identify and record markdowns timely, performing audit procedures to evaluate the timeliness of markdowns involved a high degree of auditor judgment.how the critical audit matter was addressed in the audit our audit procedures related to the timing of markdowns taken included the following, among others:•we tested the effectiveness of controls over inventory valuation, specifically those over the determination and execution of markdowns.•we made a selection of markdowns recorded throughout the year to test the accuracy and timeliness of markdowns taken. •we made a selection of markdowns recorded after year-end to determine if the selected markdowns should have been taken as of the year-end balance sheet date.•we made a selection of purchases made throughout the year; determined if those purchases were subsequently marked down; and, if marked down, that the markdown was recorded timely.•we analyzed trends in the aging of inventory to determine if there were any significant fluctuations in aged inventory that would indicate markdowns were not taken timely. •we developed an expectation of markdowns in ending inventory based on historical relationships between markdowns and inventory balances on hand and compared to recorded markdowns. /s/ deloitte & touche llp parsippany, new jersey march 15, 2021we have served as the company’s auditor since 1983. | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.store asset impairment assessments as described in notes 2 and 3 to the consolidated financial statements, the company has long-lived assets which include consolidated property and equipment, net of $148 million and consolidated right of use assets, net of $615 million as of january 29, 2022, of which a significant portion of such balances relate to store level long-lived assets. as disclosed by management, store related property and equipment and right of use assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of these assets might not be recoverable. management reviews for indicators of impairment at the individual store level, the lowest level for which cash flows are identifiable. stores that display an indicator of impairment are subjected to an impairment assessment. the impairment assessment requires management to make assumptions and judgments related, but not limited, to management’s expectations for future operations and projected cash flows. the key assumption used in undiscounted future store cash flow models is the sales growth rate. an impairment loss may be recognized when these undiscounted future cash flows are less than the carrying amount of the asset group. in the circumstance of impairment, any loss would be measured as the excess of the carrying amount of the asset group over its fair value. fair value of the store-related assets is determined at the individual store level based on the highest and best use of the asset group. the key assumptions used in the fair value analysis may include discounted estimates of future store cash flows from operating the store and/or comparable market rents.the principal considerations for our determination that performing procedures relating to the store asset impairment assessments is a critical audit matter are the high degree of auditor subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the sales growth rate when developing the undiscounted future cash flows, and comparable market rents when estimating the fair value. 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 store asset impairment assessments, including controls over the assumptions used when developing the undiscounted future cash flows expected to be generated by the assets to test for recoverability and when estimating the fair value of the asset groups to measure for impairment. these procedures also included, among others, (i) testing management’s process for developing the undiscounted future cash flows expected to be generated by the assets and estimating the fair value of the asset groups; (ii) evaluating the appropriateness of the models used by management; (iii) testing the completeness, accuracy and relevance of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions related to the sales growth rate when developing the undiscounted future cash flows, and comparable market rents when estimating the fair value. evaluating management’s assumptions related to the sales growth rate and comparable market rents involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the asset groups and the consistency with evidence obtained in other areas of the audit as it relates to the sales growth rate and consistency with external market data as it relates to the sales growth rate and express, inc. | 2021 form 10-k | 45table of contentscomparable market rents. professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness of the comparable market rents significant assumption./s/ pricewaterhouse coopers llp columbus, ohio march 24, 2022we have served as the company’s auditor since 2008. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the 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 – over time accounting using the cost-to-cost measure for specific identified material contracts — refer to note 1 to the financial statements.critical audit matter description the company’s determination of revenue recognition for specific identified material contracts accounted for over time involves estimating the total costs needed to complete the specific identified contracts and updating those estimates throughout the life of those specific identified contracts. this requires management to make significant estimates related to forecasts of future costs for the identified specific contracts. changes in these estimates for the identified specific contracts could have a significant impact on the company's results of operations.given the significant judgment and estimates used in management’s projections, auditing the company’s estimates at completion and estimates to completion involved especially subjective judgment. f - 2how the critical audit matter was addressed in the audit our audit procedures related to the company’s determination of revenue recognition for specific identified material contracts accounted for over time included the following, among others: •we tested the design and operating effectiveness of the controls over the development of the initial contract cost to complete estimate and monitoring of estimates at completion and estimates to completion. •for each specific identified material contract selected, we performed the following: ◦evaluated whether the contract was properly included in management’s calculation of overtime revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation.◦compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers. ◦tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated. ◦evaluated the estimates of total cost and profit for the performance obligation by:▪performing a retrospective review by comparing the estimated margins at contract inception to the actual margins as of year-end in order to assess management’s ability to accurately estimate costs. ▪inquiring and corroborating the estimates to complete and the estimates at completion with the project manager (i.e., someone outside of finance/accounting) to understand significant variances in costs and completeness of the estimates at completion and estimates to completion. ▪testing the estimates to complete through a combination of tests of details, in which we selected individual costs within the estimate to complete and obtained supporting documentation, and where we developed an expectation of the estimate to complete and compared it to the recorded balance. ◦tested the accuracy and completeness of costs incurred during the current fiscal year. this testing included agreeing labor costs to employee timesheets and agreeing the labor rate to either rates agreed upon with the customer in the contract or rates from the company's payroll records.◦tested the mathematical accuracy of management’s calculation of revenue for the performance obligation./s/ deloitte & touche llp jericho, new york october 4, 2021we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.loans held for investment, net – identification of impairment indicators – refer to notes 3 and 6 to the financial statements critical audit matter description the company evaluates loans on a loan by loan basis for possible indicators of impairment on at least a quarterly basis in order to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of loans held for investment, net are no longer recoverable. the loans are typically collateralized by commercial real estate, and as a result, the company regularly evaluates the extent and impact of any deterioration associated with the financial health and/or sale value of the underlying property, as well as the financial and operating capability of the borrower/sponsor for each individual loan investment. factors considered in the impairment evaluation include, but are not limited to, property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, risk of loss, current loan to value ratio, or ltv, f-1table of contentsdebt yield, collateral performance, structure, exit plan and sponsorship. the company’s evaluation involves a certain level of judgment and/or estimation related to whether the financial performance of the collateral or the existing market conditions results in an impairment indicator. the determination of whether loans are impaired involves judgments and assumptions based on objective and subjective factors. changes in these judgements and/or estimates could have a significant impact on the loans identified for further analysis. for the year ended december 31, 2021, no impairment loss has been recognized on the company’s loans held for investment, net balance. we identified the determination of impairment indicators for loans held for investment, net as a critical audit matter because of the level of judgment and significant assumptions involved in management’s assessment of whether events or changes in circumstances have occurred indicating that the carrying amounts of mortgage loans held for investment may not be recoverable. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators.how the critical audit matter was addressed in the audit our audit procedures related to the determination of impairment indicators included the following, among others: •we evaluated a sample of loans for potential impairment by:◦evaluating the accuracy and determining the relevance of the factors utilized during the company’s evaluation.◦analyzing period over period changes on items such as physical conditions of the underlying property, net operating income, debt service coverage ratio, debt yield ratio, occupancy, loan structure and modifications, leasing and tenant profiles, remaining loan term and exit plan, progress of redevelopment plans, and risk ratings to determine impact on loan performance.◦◦reviewing any updates (or lack thereof) to each loan’s risk rating period over period.◦evaluating the financial performance of the collateral associated with each loan.◦reviewing the changes in budgets/timelines and the summaries of third-party reports, where applicable, for loans on projects involving construction.◦evaluating the impact of macroeconomic and microeconomic events on the borrower, sponsor, or asset type.•we reviewed the payment history for all loans in the company’s portfolio to ensure that the borrowers are making contractual payments in accordance with the loan agreements./s/ deloitte & touche llp boston, massachusetts february 17, 2022we 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 consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate audit opinion on the critical audit matter or on the accounts or disclosures to which it relates.recoverability of the specialty waxes segment long-lived assets the company’s specialty waxes segment has total assets of $79.9 million, including net plant, pipeline, and equipment of $58.1 million and net intangibles assets of $11.1 million. the company considers the specialty waxes segment to be a single long lived asset group. a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that it’s carrying amount may not be recoverable. for the year ended december 31, 2021, the specialty waxes segment had a net loss of $0.8 million.we identified the recoverability of the specialty waxes segment long-lived assets as a critical audit matter because of the significant estimates and assumptions management used in the undiscounted cash flow analysis. performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.how the critical audit matter was addressed in the audit our audit procedures related to the following:•we obtained an understanding and evaluated the design of internal controls over management’s evaluation of the recoverability of long-lived assets based on the company’s undiscounted cash flows analysis. •we evaluated management’s ability to forecast future sales, gross profit and future capital needs by comparing actual results to management’s historical forecasts.f-2table of contents•we evaluated the reasonableness of significant assumptions in the undiscounted cash flow analysis, including future sales, operating costs, gross profit, and capitalization rates. in addition, we tested the mathematical accuracy of the undiscounted cash flows analysis. •we evaluated whether the assumptions were consistent with evidence obtained in other areas of the audit./s/ bkm sowan horan, llp we have served as the company’s auditor since 2010. | 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.liability related to sale of future revenue as described in notes 3 and 10 to the consolidated financial statements, on june 11, 2020 the company sold its tiered, sales-based royalty rights on worldwide net sales of idhifa®, as well as rights to receive up to $55 million in regulatory milestone payments from bristol myers squibb to royalty pharma (“rpi”) for $255 million. management accounted for the sale of future revenue to rpi as a debt financing, as the company continues to have significant continuing involvement in the generation of the cash flows. management applied significant judgment in determining the appropriate accounting treatment for the transaction. the liability related to sale of future revenue and the related interest expense are based on management’s current estimates of future royalties expected to be paid over the life of the arrangement. management periodically assesses the expected royalty payments using forecasts from external sources. the company recognized non-cash interest expense for the sale of future revenue of $17.8 million for the year ended december 31, 2020, and the liability related to the sale of future revenue was $261.3 million as of december 31, 2020.the principal considerations for our determination that performing procedures relating to the liability related to the sale of future revenue is a critical audit matter are the significant judgment by management in determining the appropriate accounting for the transaction and the valuation of the liability related to sale of future revenue. this in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures and evaluating management’s determination of the accounting for the transaction and the assumption related to the current estimates of future royalties expected to be paid over the life of the arrangement.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 determination of the accounting treatment for the transaction, as well as controls over the development of the assumption related to the current estimates of future royalties expected to be paid over the life of the arrangement. these procedures also included, among others, evaluating whether the transaction has been properly accounted for in accordance with the relevant accounting standards, testing management’s process for determining the valuation of the liability related to the sale of future revenue, testing the completeness and accuracy of underlying data used in determining the valuation of the liability, and evaluating the significant assumption used by management related to the current estimate of future royalties expected to be paid over the life of the arrangement. evaluating management’s assumption related to the current estimate of future royalties expected to be paid over the life of the arrangement involved evaluating whether the assumption used by management was reasonable considering the terms of the agreement, consistency with external market and industry data, and consistency with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp boston, massachusetts february 25, 2021we have served as the company’s auditor since 2017. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. revenue recognition for fixed price contracts as described further in note 1 to the consolidated financial statements, the company performs technology research under fixed price contracts with the associated revenue recognized over time. the company has revenue from fixed price contracts in both revenue from continuing operations as well as in net loss from discontinued operations. for fixed price revenue contracts recognized over time, management utilizes the input method to measure progress toward the complete satisfaction of the performance obligations based upon the cost incurred to date as a percentage of the total estimated cost. we identified revenue recognition for fixed price contracts as a critical audit matter.the principal consideration for our determination that revenue recognition for fixed price contracts was a critical audit matter is that the measure of progress towards completion utilizes assumptions for future costs to complete the performance obligations, and those assumptions have significant estimation uncertainty. a significant change in the assumptions could affect the profitability of the contract. auditing such assumptions required extensive audit effort due to the volume and complexity of these contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.our audit procedures related to testing revenue recognition of fixed-price contracts included the following, among others. 40table of contents•we evaluated the design effectiveness of controls over the company’s process for recognizing revenue over time. this included the design of controls over the initial budgeting process and proportional performance determination. •for a sample of contracts, we inquired regarding the status of the project and obtained an understanding for significant changes in budgeted to actual costs. •for a sample of contracts, we tested the completeness and accuracy of costs incurred to date./s/ grant thornton 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 estimated rate of future use assumption used to determine deferred amusement revenue as discussed in notes 1 and 4 to the consolidated financial statements, the company defers a portion of amusement revenues for the estimated unfulfilled performance obligations related to unused game play credits which they believe their customers will utilize in the future. the company recorded deferred amusement revenue of $75.1 million as of february 2, 2020, which is included in accrued liabilities on the consolidated balance sheet and disclosed as deferred amusement revenue. the deferral is based on an estimated rate of future use by customers. the company applies judgment to determine the estimated rate of future use by customers using information about game play credits outstanding and historical customer utilization patterns. we identified the evaluation of the estimated rate of future use assumption used to determine deferred amusement revenue as a critical audit matter. subjective auditor judgment was required to evaluate the effect of historical customer usage patterns on the estimated rate of future use assumption. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s deferred amusement revenue process, including controls related to the development of the estimated rate of future use assumption. we evaluated historical periods’ game play credit activity for indication of significant changes in customer behavior and to determine whether changes in the historical activity were consistent with changes in the company’s business that impact the estimated rate of future usage assumption. we compared trends of customers’ historical use patterns to the company’s estimated rate of future use assumption. we assessed the outstanding game play credit data utilized by the company to derive the estimated rate of future use assumption by comparing it to relevant underlying documentation. evaluation of the estimated redemption rate used to determine deferred amusement revenue related to tickets as discussed in notes 1 and 4 to the consolidated financial statements, the company defers a portion of amusement revenue for the estimated unfulfilled performance obligations related to unredeemed tickets which they believe their customers will utilize in the future. the company recorded deferred amusement revenue of $75.1 million as of february 2, 2020, which is included in accrued liabilities on the consolidated balance sheet and disclosed as deferred amusement revenue. the deferral is based on an estimated redemption rate of outstanding tickets that will be redeemed in subsequent periods. the company applies judgment to determine the redemption rate assumption using information about tickets outstanding and customers’ historic redemption patterns. we identified the evaluation of the estimated redemption rate used to determine deferred amusement revenue related to tickets as a critical audit matter. subjective auditor judgment was required to evaluate the effect of historical customer redemption patterns on the estimated rate of future use assumption. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s deferred amusement revenue process, including controls related to the development of the redemption rate assumption. we evaluated previous periods’ ticket redemption activity for indication of significant changes in customer behavior and to determine whether changes in the historical activity were consistent with changes in the company’s business that impact the estimated redemption rate. we compared trends of customers’ historical redemption patterns to the company’s estimated redemption rate. we assessed the outstanding ticket data utilized by the company to derive the redemption rate assumption by comparing it to relevant underlying documentation. /s/ kpmg llp we 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.readily marketable inventories and physically settled forward purchase and sale contracts - refer to notes 1 and 15 to the financial statements critical audit matter description the company records agricultural commodity inventories, referred to as readily marketable inventories "rmi", and physically settled forward purchase and sale contracts at fair value with changes in fair value recorded in earnings as a component of cost of goods sold. the company values rmi and physically settled forward purchase and sale contracts primarily using level 1 inputs, such as public exchange quotes of commodity futures, broker or dealer quotations. a portion of the value, however, is derived using significant unobservable inputs referred to as level 3 inputs, such as management estimates regarding costs of transportation and other location-related adjustments, that involve significant judgment by management. f-2table of contents auditing the significant unobservable inputs used by management to estimate the fair value of rmi and physically settled forward purchase and sale contracts involved judgment. how the critical audit matter was addressed in the audit our audit procedures related the significant unobservable inputs used by management to estimate the fair value of rmi and physically settled forward purchase and sale contracts included the following, among others:•we evaluated the appropriateness and consistency of the company’s methods and assumptions used to estimate the fair value of rmi and physically settled forward purchase and sale contracts. •we evaluated the competence, capabilities, and objectivity of in-house experts used to estimate the fair value of rmi and physically settled forward purchase and sale contracts. •we tested the effectiveness of internal controls over management’s review of the underlying assumptions used in the company’s process of estimating the fair value of rmi and physically settled forward purchase and sale contracts, including those over level 3 inputs.•we evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to subsequent transactions, taking into account changes in market conditions subsequent to year-end.•we made selections of rmi and physically settled forward purchase and sale contracts to test level 3 inputs and performed the following:◦we evaluated the reasonableness of the level 3 inputs by reference to third-party data, information produced by the entity, and inquires of management.◦we searched for contradictory evidence to level 3 inputs based on our knowledge of the commodities market and inquiries of management./s/ deloitte & touche llp st. louis, missouri february 24, 2022we have served as the company's auditor since 2002. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved 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 – chargeback reserve — refer to notes 1 and 4 to the financial statements critical audit matter description the company recognizes revenue for product sales net of a reserve for estimated chargebacks. chargebacks are the difference between prices the company charges distribution customers and contracted prices the company has with the end-customer which are processed as credits to the distribution customers. chargebacks are accounted for as variable consideration when determining the transaction price for purposes of recognizing revenue. the company estimates and reserves for chargebacks as a reduction of revenue at the time of sale to its distribution customers using information available at that time, including historical experience. accounts receivable as of december 31, 2021 of $106 million and total revenues for the year ended december 31, 2021 of $1,316 million are recorded net of estimated chargebacks. given the subjectivity and complexity of evaluating management’s assumptions used in the determination of the chargeback reserve, including the chargeback amount related to monthly sales to distribution customers and the time to settle chargeback obligations, auditing the chargeback reserve requires a high degree of auditor judgment and an increased extent of effort. how the critical audit matter was addressed in the audit our audit procedures related to the chargeback reserve included the following, among others: •we tested the effectiveness of controls related to management’s assessment of assumptions related to estimating the provision for chargeback reserves, the provisioning, processing, and monitoring of chargeback transactions, and the reconciliation of chargeback reserves. •we tested chargeback estimates for purposes of determining whether revenues recognized at the time of sale were recorded in the proper period. •we evaluated the methods and assumptions used by management to estimate the chargeback reserve by:58–analyzing trends in the chargeback provision as a percent of revenues and the chargeback reserve as a percent of revenues.–testing the underlying data, including historical sales to distribution customers and chargeback settlements with distribution customers, that are utilized as the basis for the chargeback reserve, to test whether the inputs to the estimate were reasonable.–developing an expectation of the chargeback reserve based on monthly sales to distribution customers, historical experience, and the time to settle chargeback obligations, and comparing our expectation to the amount recorded by management.–performing retrospective reviews comparing management’s estimates of expected chargeback reserves to actual amounts incurred subsequent to the dates of estimation, to assess management’s ability to reasonably estimate these obligations and to identify potential bias in management’s assessment of the reserve. /s/ deloitte & touche llp costa mesa, california february 25, 2022 we have served as the company's auditor since 20085 | 4 |
critical audit matters critical audit matters arising from the currentperiod of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate toaccounts or disclosure that are material to the financial statements and (2) involve especially challenging, subjective, or complex judgements.the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and weare not, by communicating the critical audit below, providing separate opinions on the critical audit matters or the accounts or disclosuresto which they relate. 15 related party transactions. as of december 31, 2021, the president and director of the company is the managing member of each project where the company owns membership interest value as of $18,471,239through the red hills capital advisors, which is a wholly-owned subsidiary. the procedure performed to address the matterincluded: obtaining land appraiser valuation and internal development cost confirmation from the president of the company who is alsothe managing member of each property.we have served as the company’s auditorsince 2020. | 0 |
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 requiredto 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 ofcritical 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 theaccounts or disclosures to which they relate. allowance for loan losses (all) qualitative factors description of the matter the companys loan portfolio totaled $81.2 million as of june 30, 2021, and the associated all was $564 thousand. as discussed in notes 8 and 9 to the consolidated financial statements, determining the amount of the all requires significantjudgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. management appliesadditional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. qualitative adjustments are made based upon changes in lendingpolicies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios. we identified these qualitative adjustments within the all as critical audit matters because they involve a high degree of subjectivity. in turn, auditingmanagements judgments regarding the qualitative factors applied in the all calculation involved a high degree of subjectivity. furthermore, concernabout the spread of covid-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial propertyvacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause borrowers to be unable to make scheduled loan payments. if the effects of covid-19 result in widespread and sustained loan repayment shortfalls, significant loan delinquencies, foreclosures, declines in collateral values, and credit losses could result in, and significantly impact, the overall adequacy of the all. theextent of covid-19s effects on business, operations, or the global economy as a whole is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, which increases the degree of subjectivity involved inestimating the related qualitative factors within the all. how we addressed the matter in our audit we gained an understanding of the companys process for establishing the all, including the qualitative adjustments made to the all. we evaluated thedesign and tested the operating effectiveness of controls over the companys all process, which included, among others, managements review and approval controls designed to assess the need and level of qualitative adjustments to the all ,as well as the reliability of the data utilized to support managements assessment. 22 to test the qualitative adjustments, we evaluated the appropriateness of managements methodology andassessed whether all relevant risks were reflected in the all and the need to consider qualitative adjustments, including the potential effect of covid-19 on the adjustments. regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized inmanagements estimate. for example, we compared the inputs and data to the companys system reports, third-party macroeconomic data, and other internal and external sources and considered the existence of new or contrary information.furthermore, we analyzed the changes in the components of the qualitative reserves relative to change in external market factors, the companys loan portfolio, and asset quality trends, which included the evaluation of managements abilityto capture and assess relevant data from both external sources and internal reports on loan customers affected by the covid-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors to ensure that movement inthe factors was directionally consistent with the underlying data. we have served as the companys auditor since 1993. | 3 |
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 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.81 core marketplace revenue description of the matter as described in note 2 to the consolidated financial statements, the company generates its core marketplace revenue by providing a mix of marketplace services to merchants. core marketplace revenue primarily consists of commission fees collected in connection with user purchases. these fees vary depending on user location, demand, product type and dynamic pricing. for the year ended december 31, 2021, the company’s core marketplace revenue was $1.2 billion. auditing the company’s core marketplace revenue, funds receivable and merchants payable balances was challenging because the core marketplace revenue recognition process utilizes multiple, complex, proprietary systems and tools as well as manual procedures for the initiation, processing and recording of transactions which includes a high volume of individually low monetary value transactions. how we addressed the matter in our audit to test the core marketplace revenue, our audit procedures included, among others, reconciling the core marketplace revenue recognized to cash receipts as well as testing the accuracy and completeness of the core marketplace revenue transaction data by initiating purchases on the marketplace and reconciling the details of the purchases to the company’s system records. additionally, we recalculated the core marketplace revenue and merchants payable balances using source data, compared our independent calculations to the company’s recorded amounts, evaluated any material differences, and performed data and other analytical procedures to assess trends in the core marketplace revenue over time and evaluated any significant deviations from expectations. material weaknesses in internal control over financial reporting description of the matter as discussed in management’s report on internal control over financial reporting, the company identified material weaknesses across multiple components of the internal control – integrated framework (2013) issued by coso. these material weaknesses impact the company’s controls over it systems and business processes and affect substantially all financial statement account balances and disclosures; and result in a critical audit matter that required us to increase the extent of our audit effort, including the need to modify the nature and extent of audit evidence obtained. how we addressed the matter in our audit as a result of the material weaknesses, in performing our audit procedures we lowered the threshold for investigating differences between recorded amounts and independent expectations developed by us that we would have otherwise used, and increased the number of selections we would have otherwise made if the company’s controls were designed and operating effectively. in addition, we utilized original source documents for audit evidence, rather than relying on system reports or other information generated by the company’s it systems. /s/ ernst & young llp we have served as the company’s auditor since 2015. | 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.goodwill — refer to notes 1 and 9 to the financial statements critical audit matter description the company’s consolidated goodwill balance was $609 million at december 26, 2020. goodwill is tested for impairment by management at least annually at the reporting unit level, or more often if an indicator of impairment is present, by comparing allocated carrying value of goodwill to the estimated fair value of the respective reporting unit or through a qualitative assessment to determine whether it is not more likely than not that the fair value of the reporting units are less than their respective carrying amounts. the determination of fair value of the reporting units, or events and conditions affecting fair value in the case of a qualitative analysis, require management to make significant estimates and assumptions related to forecasts of future revenues, cost of sales, expenses and 57table of contents the weighted-average cost of capital for each reporting unit. an adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on the financial statements.during the second quarter of 2020, the company determined that, due to the sustained impacts of the covid-19 pandemic, an indicator of potential impairment existed and performed an interim quantitative goodwill impairment test for its compu com and contract reporting units. the company used the market and discounted cash flow approaches to determine the fair value of its compu com and contract reporting units and recognized an impairment charge of $237 million for the compu com reporting unit and $115 million for the contract reporting unit.during the fourth quarter of 2020, the company performed its annual impairment assessment, which was as of the first day of fiscal month december. the annual impairment assessment was performed using a quantitative assessment for all reporting units. the quantitative assessment combined the income approach and the market approach valuation methodologies and concluded that the fair value of all reporting units exceed their respective carrying amounts. as the carrying value of the goodwill for compu com and contract reporting units were written down to fair value during the second quarter of 2020, their margin of passage during the annual impairment assessment were approximately 12%.given the significant judgments made by management to estimate the fair value of the compu com and contract reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenues, cost of sales, expenses and the weighted-average cost of capital, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to management’s judgments related to forecasts of future revenues, cost of sales, expenses, and weighted-average cost of capital for the compu com and contract reporting units included the following, among others: •we tested the effectiveness of controls relating to management’s goodwill impairment tests, including those over the forecasts and the weighted-average cost of capital. •we assessed the reasonableness of the various scenarios considered by management, which included multiple scenarios for the compu com and contract reporting units in which each scenario contained independent assumptions of economic recovery and future cash flow estimates. we then assessed the reasonableness of the weighting applied by management to the various scenarios. once the scenarios had the weighting applied, we then assessed the reasonableness of the forecast selected to be used in the quantitative test. •we evaluated the reasonableness of management’s revenue, cost of sales and expenses forecasts by comparing forecasts to (1) the actual historical results of the compu com and contract reporting units, (2) internal communications amongst management and the board of directors, (3) external communications made by management to analysts and investors, (4) evidence obtained throughout the audit, and (5) industry reports discussing the operating forecasts for the office supplies and technology services industries. •we evaluated the reasonableness of the determined company-specific risk premium (csrp) added to the weighted-average cost of capital through assessing the de-risked cash flow assumptions. •we developed a range of independent estimates based on the key inputs into the discounted cash flow model and compared those to the assumptions used by management.58table of contents •with the assistance of our fair value specialists, we evaluated the valuation methodology and assumptions used to determine the fair value of the compu com and contract reporting units, such as the weighted average cost of capital, by o testing the underlying source information and mathematical accuracy of the calculations; o for the weighted-average cost of capital, comparing the amount used by management to the amounts associated with other office supplies and technology services companies with similar risk profiles; and o evaluating the interaction between the weighted-average cost of capital and the forecasts to understand and sensitize management’s assumptions regarding risk inherent in the forecast. /s/ deloitte & touche llp certified public accountants boca raton, florida february 24, 2021 we have served as the company's auditor since 1990. | 2 |
critical audit matters the critical auditmatters communicated below are matters arising from the current period audit of the financial statements that were communicated or requiredto be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statementsand (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alterin 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 – commission the company operatesan artwork trading platform which processes significant volumes of trading transactions. as described in note 2, the company generatescommission fee revenues from these transactions. the revenue recognition of these commissions relies on the information technology (“it”)systems processing those transactions and data. addressing the matter involved performing procedures and evaluating audit evidence inconnection with forming our overall opinion on the consolidated financial statements. the audit engagement team performed extended procedures,which includes, among others, obtaining an understanding of the it systems and environment, performing walkthroughs procedures,and recalculating commission fees recognized. /s/ wwc, p.c.wwc, p.c.certified public accountants we have served as the company’s auditorsince 2021. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. capitalized software – estimate of time and related costs eligible for capitalization as described in note 2 to the consolidated financial statements, the company’s consolidated capitalized software development costs, net balance was $16.8 million as of december 31, 2019, and the company capitalized software development costs, exclusive of costs recorded within property and equipment, of $15.5 million for the year ended december 31,2019. management capitalizes certain software development costs for new offerings as well as upgrades to existing software platforms. management determines the amount of internal software costs to be capitalized based on the amount of time spent by developers on projects in the application stage of development. as disclosed by management, there is judgment involved in estimating time allocated to a particular project in the application stage. the principal considerations for our determination that performing procedures relating to the estimate of time and related costs eligible for capitalization as software development costs is a critical audit matter are there was significant judgment by management when determining the amount of time to capitalize for projects. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s determination of capitalized costs, including the assessment of management’s judgment related to the amount of time incurred by developers on projects in the application stage. 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 capitalized software development costs, including controls over management’s estimate of time and related costs eligible for capitalization. these procedures also included, among others, testing management’s process for determining the time eligible for capitalization in the current year; evaluating whether the time and related costs were eligible for capitalization; testing the completeness, accuracy, and relevance of underlying data used in management’s estimate of eligible time and related costs; and evaluating the reasonableness of significant assumptions used by management in estimating eligible time and related costs. evaluating management’s assumptions related to eligible software development time for capitalization involved evaluating whether the assumptions used by management were reasonable considering (i) inquiries with management and it product development managers in evaluating the software development costs capitalized for a sample of capitalized projects, and (ii) evaluating management’s estimate of hours through inquiry with a sample of individual software developers regarding the nature, timing and extent of time worked on development activities. acquisition of pie sync n.v. ltd (“pie sync”) – valuation of developed technology intangible asset as described in note 5 to the consolidated financial statements, on october 31, 2019, the company acquired 100% of the equity interests of pie sync for a total cash purchase price of $23.3 million, net of cash acquired, which included a working capital settlement of $0.3 million. as part of the purchase price allocation, management recorded $9.8 million for the acquired developed technology intangible asset using an excess earnings method for which management applied significant estimates and assumptions with respect to forecasted revenue growth rates, the revenue attributable to the acquired technology intangible asset over its estimated economic life and the discount rate. the principal considerations for our determination that performing procedures relating to the valuation of the developed technology intangible asset is a critical audit matter are there was significant judgment by management when estimating the fair value of the acquired developed technology intangible asset. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s estimates and assumptions with respect to forecasted revenue growth rates, the revenue attributable to the acquired technology intangible asset over its estimated economic life and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures over the discount rate. 53addressing 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 acquired developed technology intangible asset and assumptions related to forecasted revenue growth rates, the revenue attributable to the acquired technology intangible asset over its estimated economic life, and the discount rate. these procedures also included, among others, testing management’s process for determining the fair value of the acquired developed technology intangible asset. this included evaluating the appropriateness of the valuation method, testing the completeness, accuracy, and relevance of underlying data used in the valuation method, and evaluating the reasonableness of significant assumptions used by management, including forecasted revenue growth rates, the revenue attributable to the acquired technology intangible asset over its estimated economic life and the discount rate. evaluating the assumptions related to the forecast forecasted revenue growth rates and the revenue attributable to the acquired technology intangible asset over its estimated economic life involved whether the assumptions used were reasonable considering the past performance of the acquired entity and industry data. professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the discount rate. /s/ pricewaterhouse coopers llp boston, massachusetts february 12, 2020 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 consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.goodwill impairment test - american girl reporting unit as described in notes 1 and 3 to the consolidated financial statements, the company’s consolidated goodwill balance was $1.4 billion as of december 31, 2020, and the goodwill associated with the american girl reporting unit was $207.6 million. management tests goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. as disclosed by management, the fair value of the american girl reporting unit is estimated based upon the discounted cash flows that the reporting unit is expected to generate in the future (the "income approach"). the income approach includes various projections such as expected sales growth, gross margin, operating costs, working capital investment, and discount rate for the american girl reporting unit. the principal considerations for our determination that performing procedures relating to the goodwill impairment test of the american girl reporting unit is a critical audit matter are the significant judgment by management when developing the fair value measurement of the american girl reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence relating to management’s fair value estimate and significant assumptions, related to projections of expected sales growth rate, gross margin and operating costs, and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the valuation of the company’s reporting units. these procedures also included, among others (i) testing management’s process for developing the fair value estimate of the american girl reporting unit, (ii) evaluating the appropriateness of the discounted cash flow model, (iii) testing the completeness, accuracy, and relevance of underlying data used in the model, and (iv) evaluating the reasonableness of significant assumptions related to the projections of expected sales growth rate, gross margin and operating costs, and the discount rate. evaluating management’s assumptions related to projections of expected sales growth rate, gross margin and operating costs involved evaluating whether the assumptions were reasonable considering the current and past performance of the american girl reporting unit and 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 discounted cash flow model and evaluating the reasonableness of the discount rate assumption. sales adjustments accrual - discretionary component as described in note 1 to the consolidated financial statements, the company routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns or defective merchandise. accruals for these programs are recorded as sales adjustments that reduce gross billings in the period the related sale is recognized. as disclosed by management, sales adjustments for such programs totaled $554.2 million for the year ended december 31, 2020. the accrual for such programs, which can either be contractual or discretionary in nature, is based on an assessment of customer purchases, customer performance of specified promotional activities, and other specified factors such as customer sales volume. while the majority of sales adjustment amounts are readily determinable at period end and do not require estimates, certain of the sales adjustments (i.e., discretionary sales adjustments) require management to make estimates. in making these estimates, management considers all available information, including the overall business environment, historical trends, and information from customers. the principal considerations for our determination that performing procedures relating to the discretionary component of the sales adjustments accrual is a critical audit matter are the significant judgment by management in estimating the discretionary component, which in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence relating to management’s estimate of the discretionary component of the sales adjustments accrual. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the completeness and accuracy of the discretionary component of the sales adjustments accrual. these procedures also included, among others (i) testing management’s process for developing the discretionary component of the sales adjustments accrual, (ii) 50evaluating the reasonableness of the assumptions used by management to develop the discretionary component of the sales adjustments accrual, (iii) testing the completeness, accuracy, and relevance of underlying data used in developing the discretionary component of the sales adjustments accrual, (iv) considering the results of a retrospective comparison of sales adjustments accrued in the prior year to settlements in the current year, and (v) testing settlements subsequent to year-end./s/ pricewaterhouse coopers llp los angeles, california february 25, 2021we have served as the company’s auditor since 1974. | 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 whole, and we are not, by communicating the critical matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. valuation of equity transactions as described in the equity note to the financial statements, the company has complex equity transactions including the use of stock options and warrants. the estimates that management used in calculating the price value depend on assumptions specific to the nature of the management service activities with regard to the amount of the price model. the principal consideration for our determination surrounding equity transactions as a critical audit matter is the significant judgment by management when developing the valuation of options and warrants. this, in turn, led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the price model used to calculate equity transactions. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included evaluating the use of the fair value-based method of accounting for stock-based compensation for options granted to employees, independent consultants and contractors. the company measures options granted at fair value determined as of the grant date, and recognizes the expense over the periods in which the related services are rendered based on the terms and conditions of the awards. evaluation of management’s assumptions related to the price model and evaluating whether assumptions used by management were reasonable considering the current and past performance of equity, the consistency, and whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ daszkal bolton llp we have served as the company’s auditor since 2014. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.fair value of assets acquired and liabilities assumed in significant non-routine acquisitions as described further in note 4 to the consolidated financial statements, the partnership acquired all of the assets of mesquite disposals unlimited, llc (“mesquite”) and all of the equity interests of hillstone environmental partners, llc (“hillstone”), two water disposal companies, during the year ended march 31, 2020 and the assets acquired and liabilities assumed were required to be recorded at fair value as of the respective transaction dates, for which the partnership utilized a third party valuation firm. we identified the estimation of the fair value of the assets acquired and liabilities assumed in these significant non-routine acquisitions as a critical audit matter.the principal considerations for our determination that the estimation of the fair value of the assets acquired and liabilities assumed in these significant non-routine acquisitions is a critical audit matter are that there was a high estimation uncertainty due to significant judgments with respect to assumptions used to estimate the future revenues and cash flows, including revenue growth rates, operating margins, weighted average costs of capital and future market conditions, the valuation methodologies applied by the third party valuation firm for the fair value of the intangible customer commitments, customer relationships, and f-2right-of ways as well as the real property and the estimated replacement costs of the personal property acquired and the valuation methodologies applied by the third party valuation firm. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s forecasted future revenues and 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.our audit procedures related to the estimation of the fair value of the assets acquired and liabilities assumed in the significant non-routine acquisitions included the following, among others. we tested the effectiveness of controls relating to management’s review of the assumptions used to develop the future revenues and cash flows, the reconciliation of future revenues and cash flows prepared by management to the data used in the third party valuation report, the estimated replacement cost of property, plant and equipment, and the valuation methodologies applied by the third party valuation firm. in addition to testing the effectiveness of controls, we also performed the following:•utilized a valuation specialist to evaluate:◦the methodologies used and whether they were acceptable for the underlying assets or operations and being applied correctly by performing an independent calculation,◦the methodologies and assumptions used in the valuation of the real property,◦the appropriateness of the replacement cost of the personal property, by performing an independent calculation and inspecting the estimated remaining years of service for the underlying assets based on the original acquisition dates and condition of assets,◦the appropriateness of the discount rate by recalculating the weighted average costs of capital and evaluating future market conditions, and◦the qualifications of the third party valuation firm engaged by the partnership based on their credentials and experience.•tested the revenue growth rate and operating margins by comparing such items to the industry projections and conditions found in industry reports as well as historical operating results of the entity acquired.goodwill impairment assessment as described further in note 6 to the consolidated financial statements, the partnership’s consolidated goodwill balance was $993.6 million as of march 31, 2020. management evaluates goodwill for impairment on january 1 of each year, or more frequently to the extent events or conditions indicate a risk of possible impairment. based on events occurring during the three months ended march 31, 2020, management performed a quantitative impairment assessment for each reporting unit to test goodwill for impairment. as a result of the assessment performed for the reporting units, and as described further in note 6 to the consolidated financial statements, the partnership recognized a goodwill impairment charge of $250.0 million related to its water solutions reporting unit within the partnership’s water solutions reportable segment primarily due to changes in assumptions related to the projected future revenues and cash flows from the dates the goodwill was originally recorded. we identified the goodwill impairment assessment as a critical audit matter.the principal considerations for our determination that the goodwill impairment assessment was a critical audit matter are that there was a high estimation uncertainty due to significant judgments with respect to assumptions used to estimate the future revenues and cash flows, including revenue growth rates, operating expenses and cash outflows necessary to support the cash flows, weighted average costs of capital and future market conditions as well as the valuation methodologies applied by the partnership. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s forecasted future revenues and 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.our audit procedures related to the goodwill impairment assessment included the following, among others. we tested the effectiveness of controls relating to management’s goodwill impairment tests, including controls over the determination of the fair value of the reporting units. in addition to testing the effectiveness of controls, we also performed the following:•utilized a valuation specialist to evaluate:◦the methodologies used and whether they were acceptable for the underlying assets or operations and being applied correctly by performing an independent calculation,◦the appropriateness of the discount rate by recalculating the weighted average costs of capital and evaluating future market conditions, and◦other significant assumptions, including the terminal growth rate.•tested the reasonableness of management’s process for determining the fair value of the reporting units, including the revenue growth rate, forecasted costs and operating margins by comparing such items to the industry projections and f-3conditions found in industry reports as well as historical operating results of the reporting units and by assessing the likelihood or capability of the reporting unit to undertake activities or initiatives underpinning significant drivers of growth in the forecasted period./s/ grant thornton llp we have served as the partnership’s auditor since 2010. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.accounting for income taxes the company is a u.s. based multinational entity subject to taxes in the u.s. and multiple foreign jurisdictions which affect the company’s provision for income taxes. the tax provision is an estimate based on management’s understanding of current enacted tax laws and tax rates of each tax jurisdiction. we identified the accounting for income taxes as a critical audit matter. the company’s tax provision included the following areas of complexity: (i) the calculation methods and the global legal structure and (ii) evaluation of current tax laws and regulations. auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skillsets and knowledge needed. 55table of contents the primary procedures we performed to address this critical audit matter included:·tested the completeness and accuracy of the underlying data used to prepare the income tax provision.·with the assistance of u.s. and international income tax experts, we evaluated management’s application of relevant tax laws to its legal entity structure and the effect on the company’s income tax provision, including the company’s calculations of current period income tax expense and deductions associated with current tax laws and regulations by reviewing and evaluating management’s income tax calculations and assessing the company’s compliance with tax laws.·with the assistance of u.s. and international income tax experts, we evaluated management’s income reporting to the various tax jurisdictions in which the company operates based on its global corporate structure./s/ bdo usa, llp we have served as the company's auditor since 2019. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.goodwill valuation – global industrial motors reporting unit – refer to notes 3 and 5 to the financial statements critical audit matter description the company performed an impairment evaluation of the goodwill for the global industrial motors reporting unit by comparing the estimated fair value of the reporting unit to its carrying value. in order to estimate the fair value of the reporting unit, management is required to make significant estimates and assumptions related to the discount rate and forecasts of future earnings before interest, taxes, depreciation, and amortization (“ebitda”) margins. changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. the consolidated goodwill balance was $4,039 million as of january 1, 2022, of which $80.1 million related to the global industrial motors reporting unit. as of october 30, 2021, the company’s measurement date, the company determined that the carrying value for the global industrial motors reporting unit was in excess of fair value and recorded a $33.0 million goodwill impairment charge. we identified the impairment evaluation of goodwill for the global industrial motors reporting unit as a critical audit matter because of the inherent subjectivity involved in management’s estimates and assumptions related to the discount rate and forecasts of future ebitda margins. the audit procedures to evaluate the reasonableness of management’s estimates and 49assumptions related to the selection of the discount rate and forecast of future ebitda margins required a high degree of auditor judgement and an increased extent of effort, including the need to involve our fair value specialists.how the critical audit matter was addressed in the audit our audit procedures related to the selection of the discount rate and forecasts of future ebitda margins for the global industrial motors reporting unit included the following, among others:•we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the selection of the discount rate and management’s development of forecasts of future ebitda margins.•we evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the board of directors, and (3) forecasted information included in analyst and industry reports for the company and certain of its peer companies. •we evaluated the impact of changes in management’s forecasts from the october 30, 2021, annual measurement date to january 1, 2022.•with the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by:◦testing the source information underlying management’s determination of the discount rate.◦testing the mathematical accuracy of management’s calculations.◦developing a range of independent estimates and compared those to the discount rate selected by management. fair value of acquired customer relationship, tradename and technology intangible assets – refer to note 3 to the financial statements critical audit matter description during 2021, the company acquired the rexnord process & motion control business from rexnord corporation (now known as zurn water solutions corporation) for an aggregate purchase price of $3,977 million. the company accounted for the acquisition under the acquisition method of accounting for business combinations. accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. related to the acquisition, the company recorded intangible assets related to customer relationships, tradenames and technology assets of $1,519 million, $225 million and $87 million, respectively, based on a discounted cash flow model. in order to estimate the acquisition date fair value of the customer relationship, tradenames and technology intangible assets, management made significant estimates and assumptions related to discount rates, royalty rates, and forecasts of future revenues and ebitda margins.given the fair value determination of the acquired customer relationships, tradenames and technology assets required management to make significant estimates and assumptions related to the forecasts of future cash flows and the selection of the discount rates and royalty rates, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.how the critical audit matter was addressed in the audit our audit procedures related to the selection of discount rates, royalty rates and forecasts of future revenues and ebitda margins for the intangible assets included the following, among others: •we tested the effectiveness of controls over management’s evaluation of the fair value of acquired intangibles, including those over the selection of the discount rates, royalty rates, and management’s development of forecasts of future revenues and ebitda margins.•we evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the board of directors, and (3) forecasted information included in analyst and industry reports for the company and certain of its peer companies. 50•with the assistance of our fair value specialists, we evaluated the discount rates and royalty rates, and tested the underlying market-based source information and the mathematical accuracy of the calculations, and developed a range of independent valuation assumptions and compared those to the respective discount rates and royalty rates selected by management./s/ deloitte & touche llp milwaukee, wisconsin march 2, 2022 we have served as the company's auditor since 2002. | 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. goodwill– refer to notes 2 and 7 to the financial statements critical audit matter description the company operates as a single reportable segment, operating segment and reporting unit. the company’s evaluation of goodwill forimpairment involves comparing the book value of the reporting unit to its estimated fair value. the company’s determination ofestimated fair value of the reporting unit is based primarily on a discounted cash flow model utilizing the income approach. the companyused the discounted cash flow model to estimate fair value which requires management to make significant estimates and assumptions relatedto the valuation of the reporting unit, including assumptions regarding discount rates and forecasts of future revenue and operatingmargins. changes in these assumptions could have a significant impact on either the fair value of the reporting unit, the amount of anygoodwill impairment charge, or both. the company’s annual impairment assessment date is september 30. accordingly, management performedan impairment assessment as of september 30, 2021. the estimated fair value of the reporting unit exceeded the carrying value as of september30, 2021 and, therefore, no impairment was recognized. weidentified the valuation of goodwill as a critical audit matter because of the significant estimates and assumptions management madeto estimate the fair value of the reporting unit and the highly sensitive nature of company’s operations to changes in demand.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. f-2 howthe critical audit matter was addressed in the audit ouraudit procedures related to the forecasts of future revenues, gross profit, operating income/ebitda, and capital expenditures, and theselection of the long-term growth rate and discount rate for the reporting unit included the following, among others: ●we evaluated the reasonableness of management’s forecasts of revenue, gross profit, operating income/ebitda, and capital expenditures by comparing the forecasts to: (1)historical revenue, gross profit, operating income/ebitda, and capital expenditures, (2)internal communications to management and the board of directors, and (3)forecasted information included in industry reports for the company. ●with the assistance of our fair value specialists: o we evaluated the reasonableness of the discounted cash flow valuation methodology and performed underlying procedures on the mathematical accuracy of the calculations. o we evaluated the reasonableness of the discount rate used in the discounted cash flow model by testing the underlying source information, developing an independent range of estimated discount rates and comparing that range to the discount rate selected by the company. o we evaluated the reasonableness of the long-term growth rate used in the discounted cash flow model by comparing the information used by the company to third party economic and industry related information. /s/deloitte & touche llp louisville,kentucky march22, 2022 wehave served as the company’s auditor since 2020. | 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. accounting for acquisitions of real estate as described in notes 2 and 4 to the consolidated financial statements, the acquisition of property for investment purposes is typically accounted for as an asset acquisition in which the company allocates the purchase price to land, buildings and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. the company acquired approximately $702.9 million of real estate during the year ended december 31, 2019. we identified the accounting for acquisitions of real estate as a critical audit matter.the principal consideration for our determination that the accounting for acquisitions of real estate was a critical audit matter was the higher risk of estimation uncertainty due to the sensitivity of management’s judgments in determining estimates of fair value, particularly with respect to the market rent assumption, a significant component in the fair value estimation of above- and below-market lease intangible assets and liabilities recognized in connection with the f-3table of contentsacquisitions. as described in note 2 to the consolidated financial statements, these amounts are amortized over the remaining terms of the related leases as adjustments to the “rental income” line item in the consolidated statement of operations.our audit procedures related to the accounting for acquisitions of real estate included the following, among others. we tested the design and operating effectiveness of relevant controls relating to the accounting for acquisitions of real estate, such as controls over the measurement and recognition of assets acquired, liabilities assumed, and consideration paid. for each of the acquisitions during the audit period, we inspected the purchase agreements to assess whether amounts reported and disclosed in the consolidated financial statements were consistent with the underlying transaction agreements. in testing the estimates of fair value of assets acquired and liabilities assumed recognized in connection with the acquisitions, we evaluated the appropriateness of the valuation methodology used by management, and compared management’s significant assumptions, particularly the market rent assumption, with comparable observable market data. these procedures involved the use of our valuation specialists. our overall assessment of these assumptions and the amounts reported and disclosed in the consolidated financial statements in connection with the acquisitions included consideration of whether such information was consistent with evidence obtained in other areas of the audit. impairments as described in notes 2 and 4 to the consolidated financial statements, the company reviews its real estate investments for potential impairment when certain events or changes in circumstances indicate that the carrying amount may not be recoverable. those events and circumstances include, but are not limited to, significant changes in real estate market conditions, estimated residual values, and an expectation to sell assets before the end of the previously estimated life. for real estate investments that show an indication of impairment, management determines whether an impairment has occurred by comparing the estimated undiscounted future cash flows, including the residual value of the real estate, with the carrying amount of the individual asset. forecasting the estimated future cash flows requires management to make estimates and assumptions about significant variables, such as the probabilities of outcomes, estimated holding periods, capitalization rates, and potential disposal proceeds to be received upon a sale. we identified the evaluation of impairment of real estate investments as a critical audit matter.the principal consideration for our determination that the evaluation of impairment was a critical audit matter was a higher risk of estimation uncertainty due to sensitivity of management judgments not only regarding indicators of impairment but also regarding estimates and assumptions utilized in forecasting cash flows for cost recoverability and making fair value measurements. our audit procedures related to the evaluation of impairment included the following, among others. we tested the design and operating effectiveness of relevant controls over the evaluation of potential real estate investment impairments, such as controls over the company’s monitoring of the real estate investment portfolio, controls over the company’s analysis of undiscounted future cash flows, and controls over the company’s estimates of fair value. in consideration of impairment indicator criteria established in management’s accounting policies over impairment, we evaluated the completeness of the population of properties requiring further analysis. we examined and evaluated the company’s undiscounted cash flow analyses and estimates of fair value over properties identified for potential impairment. we evaluated the reasonableness of the methods and significant assumptions used, including probabilities of outcomes, holding periods, capitalization rates, and disposal proceeds. we evaluated these items in comparison with historical performance of the impacted properties and with comparable observable market data, which involved the use of our valuation specialists. our assessment included sensitivity analyses over these assumptions, and we considered whether such assumptions 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. | 3 |
critical audit matters the critical audit matters communicated below are a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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 combination as disclosed in note 3 to the company’s consolidated financial statements on october 28, 2021, the company acquired substantially all of the assets of videology, a global designer, developer and manufacturer of oem digital streaming and image capturing solutions for consideration of $12.1 million. on december 21, 2021, the company acquired all of the outstanding capital stock of acculogic, a global manufacturer of robotics-based electronic production test equipment and application support services for $9.3 million. the transactions were accounted for as business combinations. the purchase consideration was allocated among the acquired assets and liabilities, including several acquired intangible assets. we identified the accounting for the business combinations as a critical audit matter because of the significant, subjective assumptions used and judgments made by management in developing the discounted cash flow models used to estimate the fair value of the intangible assets acquired in the business combinations. as a result, we performed audit procedures to test the company’s discounted cash flow models, including significant assumptions related to revenue growth rates, royalty rates, discount rates, and contingent consideration that are affected by expected future market or economic conditions. in addition, we used professionals with specialized skill and knowledge in valuation methods to assist us in performing these procedures. addressing the accounting for business combinations involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others: ● obtaining an understanding of management’s process for developing the fair value estimates; ● testing management’s process for developing the fair value estimates; ● testing the completeness, accuracy, and relevance of certain underlying data used in the discounted cash flow models; f-1 ● assessing management’s methodologies, evaluating the appropriateness of the discounted cash flow models, and performing tests on the significant assumptions used by management. this included evaluating the company’s financial forecasts by comparing the significant assumptions used to current industry and economic trends, changes in the company’s business model, the current customer base and the company’s product mix; ● assessing the reasonableness of management’s forecasted revenue streams to identify, understand, and evaluate the reasonableness of the forecasts as compared to historical results and market data; ● performing a sensitivity analysis of the significant assumptions used to evaluate changes in the fair value estimates resulting from changes in the assumptions; and ● utilizing a valuation specialist to assist us in evaluating certain key inputs including, but not limited to, the discount rates and royalty rates. valuation of goodwill as disclosed in notes 2 and 6 to the company’s consolidated financial statements, the company has two operating segments which are also its reporting units - thermal and ems. as of december 31, 2021, the company’s goodwill balance of approximately $21.4 million was allocated to the company’s thermal reporting unit. the company evaluates its goodwill for impairment annually at the beginning of the fourth quarter, or more frequently whenever events or changes in circumstances indicate that it is more likely than not that the carrying value of goodwill may not be recoverable. the company performed its annual goodwill impairment test as of october 1, 2021 using a quantitative approach. we identified goodwill impairment as a critical audit matter because of the significant, subjective assumptions used and judgments made by management in developing the discounted cash flow model used to estimate the fair value of the thermal reporting unit. as a result, we performed audit procedures to test the company’s discounted cash flow model, including significant assumptions related to the revenue growth rate, operating margins, and the discount rate that are affected by expected future market or economic conditions. in addition, we used professionals with specialized skill and knowledge in valuation methods to assist us in performing these procedures. addressing the potential impairment of goodwill involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others: ● obtaining an understanding of management’s process for developing the fair value estimate; ● testing management’s process for developing the fair value estimate; ● testing the completeness, accuracy, and relevance of certain underlying data used in the discounted cash flow model; ● assessing management’s methodologies, evaluating the appropriateness of the discounted cash flow model, and performing tests on the significant assumptions used by management. this included evaluating the company’s financial forecast by comparing the significant assumptions used to current industry and economic trends, changes in the company’s business model, the current customer base and the company’s product mix; ● comparing and assessing the historical accuracy of management’s estimates, including forecasted revenue streams, to identify, understand, and evaluate the reasonableness of forecasts as compared to the company’s historical results; ● performing a sensitivity analysis of the significant assumptions used to evaluate changes in the fair value estimate resulting from changes in the assumptions; and ● utilizing a valuation specialist to assist us in evaluating certain key inputs including, but not limited to, the discount rate, risk premiums, and control premiums used in determining the fair value of the thermal reporting unit and its reconciliation to the company’s market capitalization. /s/ rsm us llp we have served as the company's auditor since 2008. | 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.acquisitions — refer to note 3 to the financial statements critical audit matter description as discussed in note 3 to the financial statements, in august, october and december 2021 indirect subsidiaries of nep completed acquisitions of ownership interests in wind and solar generation facilities, some of which included storage, for consideration of $815 million, $585 million and $858 million. the august acquisition was from a third party and the october and december acquisitions were from next era energy resources, llc. nep accounted for the august and october acquisitions as business combinations, and the december acquisition as an asset acquisition. nep’s allocation of the purchase price among acquired assets required management to make estimates and assumptions, including level 3 (unobservable) inputs, related to the future cash flows and the discount rate in determining and assigning fair value.the accounting and reporting for these transactions required an increased extent of audit effort and specialized skill and knowledge. auditing the unobservable inputs used by management to estimate the fair value of the acquired assets involved subjective judgments and an increased extent of effort, including the need to involve our firm specialists. how the critical audit matter was addressed in the audit our audit procedures included the following, among others: •we tested the effectiveness of controls over purchase accounting, including management’s review of the third-party specialist’s valuation reports. •we evaluated the competency of the third-party specialist engaged by management to perform the valuations. we read the third-party valuation reports.•we assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results of the acquired generation facilities and/ or similar generation facilities acquired in previous years. •we evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the 40audit.•we used personnel in our firm who specialize in energy transacting to assist in testing certain inputs in management's fair value models.•with the assistance of our fair value specialists, we (1) evaluated the reasonableness of the valuation methodology, (2) evaluated the reasonableness of the discount rates, including testing the source information underlying the determination of the discount rates, assessing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates selected by management, and (3) assessed the mathematical accuracy of significant calculations in the valuation schedules.deloitte & touche llp boca raton, florida february 22, 2022 we have served as nep's auditor since 2014. | 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 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.allowance for loan losses (all)management describes their accounting policies and provides additional disclosure regarding the all in notes 1 and 3 to the consolidated financial statements. as described in note 3, the all totaled $19.4 million as of december 31, 2020. the all consists of a general and specific component. the general component is based upon historical loss experience adjusted for qualitative risk factors. the specific allowance relates to estimated losses on individually evaluated impaired loans. management determines the qualitative factor allowance based on evaluation of various internal and external environmental conditions, including charge-offs, delinquencies, classified loans, loan concentrations and the rate of portfolio segment growth as well as an assessment of the current regulatory environment, the quality of credit administration and loan portfolio management and national and local economic trends.estimating an appropriate allowance for loss losses requires management to make certain assumptions about losses that have been incurred but not yet realized in the loan portfolio as of the balance sheet date. significant judgments in estimating the allowance for loan losses include the determination of the impact of qualitative factors and the identification and valuation of impaired loans. we identified the allowance for loan losses as a critical audit matter. the principal considerations for our determination include management’s judgement applied in determining the impact of qualitative factors and the identification and valuation of impaired loans. auditing these judgments required a high degree of subjectivity in evaluating the reasonableness of management’s judgments and a significant level of audit effort.74table of contents the primary audit procedures we performed to address this critical audit matter included:•we evaluated the design and tested the operating effectiveness of key controls relating to the company’s allowance for loan losses, including, management’s determination of internal and external qualitative factors and their weightings used in the allowance calculation, the identification of impaired loans, the review of impaired loan valuations, and the review and approval of the allowance reserves based upon trends and comparison of supporting information.•we tested management’s determination of qualitative factors by comparing information utilized by management to internal or external evidence as appropriate. we assessed the appropriateness, completeness and accuracy of data utilized by management in developing the assumptions underlying the qualitative factors including the consideration of potentially new or contradictory information. we evaluated the consistency and reasonableness of changes to management’s weightings applied to each of the qualitative factors.•we tested the accuracy of the application of qualitative factors by loan classification. •we tested the completeness of the impaired loans by comparing the list to internal loan data including past due, non-accrual and classified asset listings. •we verified data used in management’s impairment calculations to underlying support. we evaluated the reasonableness of assumptions used in appraisals and management’s discounts applied in valuing impaired loans. •we performed analytical procedures on the overall level of the all and various components of the allowance, including the historical reserve, qualitative reserves and specific reserves, to evaluate whether they were directionally consistent relative to credit quality indicators and changes in the company’s loan portfolio. goodwill impairment evaluation as described in notes 1 and 4 to the consolidated financial statements, the company’s consolidated goodwill balance was $10.8 million at december 31, 2020. goodwill is tested for impairment at the reporting unit level at least annually, or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. the company had an independent consultant perform a quantitative assessment of goodwill for the company’s single reporting unit during the third quarter due to a triggering event that required an interim impairment test for goodwill. the impairment analysis used both a market and income approach. the calculation of the goodwill impairment involves significant estimates and subjective assumptions which require a high degree of management judgment. this judgment includes, but is not limited to, projected profitability ratios, the selection of appropriate discount rates, cash flow projections, control premium and selection of peer groups. we identified the goodwill impairment assessment of the company as a critical audit matter. the principal consideration for this determination was the degree of auditor judgment in performing procedures over the key assumptions, specifically the selection of the control premium and of an appropriate peer group.the primary audit procedures we performed to address this critical audit matter included:•testing key financial data used in the valuation to supporting evidence.•evaluating, with the assistance of our internal valuation specialists, appropriateness of valuation methodologies, the selection of a control premium and of a peer group, and the overall reasonableness of the estimated fair value of the reporting unit. •evaluating, with the assistance of our internal valuation specialists, appropriateness of valuation methodologies, the selection of a control premium and of a peer group, and the overall reasonableness of the estimated fair value of the reporting unit. /s/ dixon hughes goodman 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 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.accrued clinical trial expenses as disclosed in note 2 to the financial statements, the company expenses research and development expenditures as incurred, which include costs relating to clinical trial activities. the company accrues costs for clinical trial activities based upon estimates of the services performed and costs incurred that have not been invoiced by the service providers. the company’s clinical trial accrual balance at december 31, 2021 is $1.6 million, and the company’s related 2021 clinical trial expenses are included in research and development expense of $17.4 million for the year ended december 31, 2021.we identified accrued clinical trial expenses as a critical audit matter. when estimating clinical trial expenses, the company considers several factors including clinical trial budgets, contract amendments and the progress toward completion. auditing these elements involves especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.f-2the primary procedures we performed to address the critical audit matter included:•testing management’s estimation of accrued clinical trial expenses by (i) obtaining and inspecting significant agreements, clinical trial budgets, and contract amendments, (ii) evaluating the company’s documentation of trial progress and status (including consideration of patient enrollment and milestones achieved), (iii) confirming clinical trial billings with third party service providers, and (iv) testing a sample of transactions by comparing the costs against the related invoices and agreements. •testing the completeness of the company’s clinical trial accruals by (i) evaluating publicly available information (such as press releases, investor presentations and public databases that track clinical trials) and board of directors’ minutes which discuss the status of clinical trials, (ii) inquiring of clinical staff outside of finance to gain an understanding of the status of significant on-going clinical trials, and (iii) testing a sample of payments subsequent to year end to evaluate the completeness of clinical trial accruals. /s/ bdo usa, llp we have served as the company’s auditor since 2007. | 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.fair value — level 3 investments — refer to note 2 and note 3 to the financial statements critical audit matter description as of december 31, 2020, the fund has nonmarketable investments in loans of $264.6 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.34how 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 15, 2021san 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 matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for loan losses as described in notes 1 and 5 – loans and allowance for loan losses to the consolidated financial statements, the company’s allowance for loan losses (“allowance”) balance was $18.3 million on gross loans of $2.4 billion as of december 31, 2020, and consisted of general reserves on loans collectively evaluated for impairment and specific reserves on loans individually evaluated for impairment. the allowance is based upon management’s evaluation of the uncollectability of the loan portfolio in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower’s ability to pay, estimated value of any underlying collateral and prevailing economic conditions. the general component covers non-impaired loans and is based on the company’s historical loss experience adjusted 57table of contentsfor other qualitative factors. other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. the specific component relates to loans that are classified as impaired. for impaired loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. we identified the allowance as a critical audit matter. the principal consideration for that determination was the subjectivity of the assumptions that management utilized in determining and applying the qualitative factors in the allowance model. this required a higher degree of auditor judgment and subjectivity due to the nature and extent of audit evidence and effort required to address this matter.the primary audit procedures we performed to address this critical audit matter included, among others:●we evaluated the design and tested the operating effectiveness of key controls relating to the company’s allowance, including controls over the completeness and accuracy of the data used within the model, identification of impaired loans, the determination of qualitative factors, and the precision of management’s review and approval of the allowance model and resulting estimate.●we evaluated the reasonableness of management’s application of qualitative factor adjustments to the allowance, including the comparison of factors considered by management to historical trends, as well as evaluated the appropriateness and level of the qualitative factor adjustments.●we assessed the reasonableness of the qualitative factors by comparing information utilized by management to internal and external evidence and assessing the appropriateness of data utilized by management in developing the assumptions.●we assessed the overall trends in credit quality by comparing the company’s year-over-year and quarterly changes in qualitative factors and the allowance.●we performed analytical procedures on the overall level and various components of the allowance, including general reserves and specific reserves, as well as credit quality to ensure movement of the allowance in a directionally consistent manner relative to credit quality indicators and changes in the company’s loan portfolio and the economy.business combinations – fair value of acquired loans as described in note 2 – business combinations to the consolidated financial statements, on march 1, 2020 the company completed its acquisition of progressive financial group, inc. (“pfg”) for total consideration of $34.4 million. determination of the acquisition date fair values of the assets acquired and liabilities assumed in a business combination requires management to make significant estimates and assumptions, especially for the fair value of the loan portfolio acquired. in determining the fair value of acquired loans, management must determine whether or not acquired loans have evidence of credit deterioration at acquisition, the amount and timing of cash flows expected to be collected, and market discount rates, among other assumptions. changes in these assumptions could have a significant impact on the fair value of the acquired loans and ultimately the amount of goodwill recorded.we identified the acquisition date fair value of acquired loans as a critical audit matter. the principal considerations for that determination were the subjectivity of the auditor judgement involved in evaluating management’s identification of loans with evidence of credit deterioration, the need for specialized skills in evaluating the development and application of subjective assumptions in estimated cash flows, and the complexity of the acquired loan portfolio.the primary audit procedures we performed to address this critical audit matter included, among others:●we evaluated the design and tested the operating effectiveness of controls over the company’s assumptions regarding credit losses of the acquired portfolio provided to the third party specialist and the company’s review and approval of the results of valuations provided by the third party.●we evaluated the significant assumptions and methods utilized in developing the fair value of the loan portfolio, including assessment of significant assumptions, and evaluated whether the assumptions used were reasonable considering past acquisitions and current market participant views and other factors.●we utilized an internal valuation specialist to assist in testing the company’s calculation of fair value of the loan portfolio acquired and the reasonableness of certain significant assumptions including, among others, prepayment speeds and discount rates.58table of contents●we tested the completeness and accuracy of loans determined to have credit deterioration at acquisition and evaluated the reasonableness of the criteria utilized by management in the determination.●we tested the completeness and accuracy of the data utilized in the fair value determination by the third party specialist, including reconciling the loan portfolio to the loan trial balance and confirming a sample of loans with the borrowers./s/ dixon hughes goodman llp we have served as the company's auditor since 2018. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of developed technology and customer contracts and related relationships intangible assets acquired - symantec corporation enterprise security business as described in notes 2 and 4 to the consolidated financial statements, the company completed the purchase of certain assets and assumption of certain liabilities of the symantec corporation enterprise security business on november 4, 2019 for $10.7 billion in cash, of which $2.9 billion of finite-lived developed technology and $2.4 billion of finite-lived customer contracts and related relationships intangible assets were recorded. management valued the developed technology using the multi-period excess earnings method under the income approach. this method reflects the present value of the projected cash flows that are expected to be generated by the developed technology less charges representing the contribution of other assets to those cash flows. management valued the customer contracts and related relationships using the with-and-without-method under the income approach. in this method, the fair value was measured by the difference between the present values of the cash flows with and without the existing customers in place over the period of time necessary to reacquire the customers. significant estimates and assumptions in estimating the fair value of the developed technology and the customer contracts and related relationships include future expected cash flows from product sales, customer contracts and acquired technologies, revenue growth rate, customer ramp-up period, technology obsolescence rates, and discount rates.the principal considerations for our determination that performing procedures relating to the valuation of the developed technology and the customer contracts and related relationships intangible assets acquired in the symantec corporation enterprise security business acquisition is a critical audit matter are (i) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of the developed technology and the customer contracts and related relationships due to the significant judgment by management when developing these estimates, (ii) the significant audit effort in evaluating the significant assumptions relating to the valuation of the developed technology and the customer contracts and related relationships related to the revenue growth rate, the customer ramp-up period, the technology obsolescence rates, and the discount rates, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the developed technology and the customer contracts and related relationships and controls over development of the assumptions related to the revenue growth rate, the customer ramp-up period, the technology obsolescence rates, and the discount rates. these procedures also included, among others, reading the purchase agreement and testing management’s process for determining the fair value of these intangible assets, including evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of data used in the methods, and evaluating the reasonableness of the significant assumptions related to the revenue growth rate, the customer ramp-up period, the technology obsolescence rates, and the discount rates. evaluating the reasonableness of the revenue growth rate and the customer ramp-up period involved considering the past performance of the acquired business and industry data. evaluating the reasonableness of the technology obsolescence rates involved considering the past performance of the acquired business and benchmarking of peer companies. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of valuation methods and the reasonableness of the customer ramp-up period, the technology obsolescence rates, and the discount rates./s/ pricewaterhouse coopers llp san jose, california december 18, 2020we have served as the company’s auditor since 2006. | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.tax receivable agreement as described in notes 2 and 10 to the consolidated financial statements, the company has recorded a liability under the tax receivable agreement (“tra”) of $278.9 million as of december 31, 2020. in connection with its initial public offering, the company entered into a tra with switch, ltd. and the members (the “members” as defined by management). switch, ltd. operates as a partnership for federal, state, and local tax reporting. in the event that such parties exchange any or all of their common units for class a common stock, the tra requires the company to make payments to such holders for 85% of the tax benefits realized, or in some cases deemed to be realized, by the company by such exchange as a result of (i) increases in the company’s tax basis of its ownership interest in the net assets of switch, ltd. resulting from any redemptions or exchanges of noncontrolling interest, (ii) tax basis increases attributable to payments made under the tra, and (iii) deductions attributable to imputed interest pursuant to the tra. as disclosed by management, management recognizes obligations under the tra after concluding that it is probable that it would have sufficient future taxable income to utilize the related tax benefits. the projection of future taxable income involves judgment and actual taxable income may differ from estimates, which could impact the timing of payments under the tra. management calculates the liability under the tra using a complex tra model, which includes a significant assumption related to the fair market value of property and equipment.the principal considerations for our determination that performing procedures relating to the tax receivable agreement is a critical audit matter are (i) the significant judgment by management when determining the tra liability; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the tra liability and the significant assumption related to the fair market value of property and equipment; 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 over the calculation of the tra liability, including the significant assumption related to the fair market value of property and equipment. these procedures also included, among others (i) the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the tra liability and (ii) comparing the independent estimate to management’s estimate to evaluate the reasonableness of management’s estimate. developing the independent estimate involved testing the completeness and accuracy of the underlying data used in the tra model and the use of professionals with specialized skill and knowledge to assist in evaluating the significant assumption used by management related to the fair market value of property and equipment. evaluating the reasonableness of the significant assumption related to the fair market value of property and equipment involved (i) testing the completeness and accuracy of changes to the cost basis of property and equipment throughout the year; (ii) assessing the appropriateness of the method used to estimate the fair market value of property and equipment; and (iii) testing management’s calculation of the fair market value of property and equipment on a test basis./s/ pricewaterhouse coopers llp las vegas, nevada march 1, 2021we have served as the company’s auditor since 2013. | 2 |
critical audit matter below.emphasis of a matter as discussed within note 1 to the financial statements, subsequent events, effective march 17, 2020, the company announced the temporary closure of its stores in the u.s. and canada for two weeks in response to the novel coronavirus (covid-19) and that the impacts of covid-19 may have a material adverse impact on its results of operations, financial position and cash flows in 2020. additionally, the company drew $800 million on its revolver in march 2020.basis for opinion these financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’s financial statements based on our audits. we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audits provide a reasonable basis for our opinion.critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit 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.merchandise inventories — refer to note 1 to the financial statements critical audit matter description36table of contents the company’s merchandise inventories are generally stated at the lower of cost or market using the retail inventory method (“rim”). under the rim, the valuation of inventories is determined by applying a calculated cost-to-retail ratio to the retail value of ending inventory. the value of the company’s inventory on the balance sheet is then reduced by a charge to cost of sales for retail inventory markdowns taken on the selling price. markdowns are recorded to reduce the price of merchandise from its originally marked and recorded retail price to a retail price at which it is expected to be marked and finally sold. to determine if the retail value of its inventory should be marked down, the company considers many factors, including current and anticipated demand, customer preferences, age of the merchandise and fashion trends. recorded markdowns represent one of the most significant inputs into the rim calculation due to their impact on inventory valuation. accordingly, the company’s process of recording markdowns is subjective, particularly as it relates to timing of markdowns. if markdowns are not recorded timely, ending inventory will not be accurately stated in the financial statements.given the management judgments necessary to identify and record markdowns in a timely manner, performing audit procedures to evaluate the timeliness of markdowns required a high degree of auditor judgment.how the critical audit matter was addressed in the audit our audit procedures related to the timing of markdowns taken, included the following, among others:•we tested the effectiveness of controls designed to ensure that markdowns are recorded timely.•we evaluated the reasonableness of the timing of markdowns recorded by performing analytical procedures to compare current period trends to historical trends at varying levels of disaggregation (i.e. total company, operating segment, and business unit level) across multiple fiscal periods, including, but not limited to, metrics such as markdowns relative to sales trends, inventory turnover, and inventory aging. •we evaluated management’s ability to identify triggering events and accurately forecast markdown activity by:▪comparing actual markdowns recorded to management’s historical forecasts▪reading forecast information included in company press releases, as well as in analyst and industry reports of the company and selected companies in its peer group.▪reading internal communications to management and the board of directors.•we performed a retrospective review of markdowns recorded in periods subsequent to fiscal year-end to assess whether any unusual trends occurred that would indicate untimely markdowns. lease liability — refer to notes 1 and 2 to the financial statements (also see change in accounting principle explanatory paragraph related to the new leasing standard above)critical audit matter description the company adopted the provisions of asc 842, leases, as of february 3, 2019. in doing so, the company recorded a lease liability for the present value of its leases of $1.8 billion and a corresponding right-of-use (“rou”) asset. the company has disclosed the impact of adoption in note 2 to its 2019 financial statements. in determining the lease liability and rou asset, the company derived an incremental borrowing rate (“ibr”) to calculate the present value of its lease payments. the determination of an ibr requires management to use significant estimates and assumptions as to its credit rating, credit spread, and an estimate for the impact of collateral.given the company-specific factors and judgments in the model used by management to develop the ib rs for its leases, the auditing of the ibr’s involved a high degree of auditor judgment, 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 ib rs used in the adoption of asc 842, which thereby determined the impact of adoption disclosed in the february 1, 2020 financial statements, included the following, among others:•we tested the effectiveness of controls over the determination and calculation of the ib rs.•with the assistance of our fair value specialists, we evaluated the methods and assumptions used by management to estimate the ib rs and tested the inputs used by management to develop the ib rs./s/ deloitte & touche llp seattle, washington march 20, 2020 we have served as the company’s auditor since 1970n | 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 board of directors and that: (1) relate 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, taken asa whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit mattersor on the accounts or disclosures to which they relate. f-2 accountingfor debt conversions and warrant modifications descriptionof the matter asdescribed in note 7 of the consolidated financial statements, the company entered into various settlement agreements with lenders toexchange convertible note payables and outstanding warrants for shares of the company’s common and preferred stock and warrants(“settlements”). in connection with the settlements, the company recognized a loss on extinguishment of debt of approximately$16,000,000. we have identified the assessment of the accounting of the settlements to be a critical audit matter because of the judgementsnecessary for management to determine if the settlements resulted in debt extinguishment. the interpretation and application of the relevantaccounting literature required significant auditor judgment due to the complexity of the agreement and required auditor judgment whenperforming audit procedures to audit management’s assessment of the accounting treatment for the amendment. how we addressed the matter in our audit weobtained an understanding over managements process for assessing the accounting considerations of the settlements, specifically, management’sassessment of the accounting treatment of the arrangement supporting the conclusion that the settlements were accounted for as a debtextinguishment. to evaluate management’s accounting conclusion, we performed audit procedures that included, among others, assessingthe company’s accounting memorandum and other documentation, including the application of the relevant accounting guidance. weread the relevant documents and agreements and compared the terms to the company’s accounting documentation. we also evaluatedthe presentation of the transactions in the consolidated financial statements and the related footnote disclosure. stock based compensation – equity transactions descriptionof the matter asdescribed in note 8 of the consolidated financial statements, the company entered into equity agreements which include stock based compensation.these agreements include transactions, including the issuance of stock options and restricted stock awards, that are required to be recordedat their estimated fair values. the company’s determination of the estimated fair values involves the identification of relatedfinancial instruments and a clear understanding of the terms of the agreements. auditing management’s estimates of fair value requiresa high degree of auditor judgment and an increased extent of effort, including the need to carefully examine to understand the true natureof the related agreements. how we addressed the matter in our audit ouraudit procedures related to determination of the estimated fair values of these equity transactions included the following, among others; ●we obtained an understanding of management’s process and methodology to develop the estimates.●we examined signed contracts and amendments.●we evaluated the reasonableness of the inputs and assumptions used by management in developing the estimates.●we evaluated the adequacy of the disclosures related to these fair value measurements. /s/ friedman llp we have served as the company’s auditor since 2020. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. impairment of long-lived assets - store location asset groupings as described in notes 1 and 6 to the consolidated financial statements, the company’s consolidated property and equipment, net balance was $72.6 million, of which the store locations were a portion, and consolidated operating lease right-of-use assets, net balance was $199.8 million as of january 30, 2021. the company invests in leaseholds, right-of-use assets and equipment, primarily in connection with the opening and remodeling of stores, and in computer software and hardware. the company periodically reviews its store locations and estimates the recoverability of its long-lived assets, which primarily relate to fixtures and equipment, leasehold improvements, right-of-use assets net of lease liabilities, and information technology equipment and software. an impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair value when management determines that projected cash flows associated with those long-lived assets will not be sufficient to recover the carrying value. this determination is based on a number of factors, including the store’s historical operating results and projected cash flows, which include future sales growth rates, margin rates, and expense projections. the company assesses the fair value of each lease by considering market rents and any lease terms that may adjust market rents under certain conditions such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain criteria. an impairment charge for store assets of $11.4 million was recorded during the year ended january 30, 2021. the principal considerations for our determination that performing procedures relating to the impairment of long-lived assets – store location asset groupings is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the store location asset groupings, which led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s projected cash flow assumptions related to future sales growth rates, margin rates, and expense projections. 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 – store location recoverability test and determination of the fair value of the asset group. these procedures also included, among others (i) testing the completeness and accuracy of underlying data used in the projected cash flows and store location asset groupings, (ii) evaluating the reasonableness of management’s assumptions related to future sales growth rates, margin rates, and expense projections by considering current and historical performance of the store location asset groupings and whether the assumptions were consistent with evidence obtained in other areas of the audit, (iii) evaluating the appropriateness of the projected cash flow model, and (iv) evaluating management’s assessment of the fair value of the leased assets included in the store location asset groupings. /s/ pricewaterhouse coopers llp charlotte, north carolina march 29, 2021 we have served as the company’s auditor since 2003. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. goodwill impairment assessment– foodservice reporting unit as described in note 7 to the consolidated financial statements, the company’s goodwill balance was $4,438.6 million and the goodwill associated with the foodservice reporting unit was $1,335.6 million as of september 30, 2020. management conducts a goodwill impairment assessment during the fourth quarter of each fiscal year following the annual forecasting process, or more frequently if facts and circumstances indicate that goodwill may be impaired. as disclosed by management, the goodwill impairment assessment requires an entity to compare the fair value of each reporting unit with its carrying amount. an impairment charge should be recognized for the amount by which the carrying amount of goodwill exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. the estimated fair value of the reporting unit was determined using a combined income and market approach with a greater weighting on the income approach. the income approach is based on discounted future cash flows and requires significant assumptions, including estimates regarding future revenue, profitability, capital requirements and the discount rate. the market approach is based on a market multiple (revenue and earnings before interest, income taxes, depreciation and amortization, “ebitda”) and requires an estimate of multiples based on market data.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the foodservice reporting unit is a critical audit matter are (i) the significant judgment by management when determining 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 future revenue, future profitability, the discount rate, the revenue market multiple and the ebitda 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 foodservice reporting unit. these procedures also included, among others, (i) testing management’s process for determining the fair value estimate of the reporting unit, (ii) evaluating the appropriateness of the approaches used for estimating fair value, (iii) testing the completeness and accuracy of underlying data used in the approaches, and (iv) evaluating the significant assumptions used by management related to future revenue, future profitability, the discount rate, the revenue market multiple and the ebitda market multiple. evaluating management’s assumptions related to future revenue and future profitability involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s income approach and market approach, the discount rate, the revenue market multiple and the ebitda market multiple./s/pricewaterhouse coopers llp st. louis, missouri november 20, 2020 we have served as the company’s auditor since 2011. | 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.valuation of goodwill and indefinite-lived intangible assets description of the matter as reflected in the company’s consolidated financial statements, at june 30, 2021, the company’s goodwill was $4,653 million and indefinite-lived intangible assets were $1,057 million. as disclosed in note 8 to the consolidated financial statements, goodwill and indefinite-lived intangible assets are tested for impairment at least annually or more frequently if indicators of impairment require the performance of an interim impairment assessment.auditing management’s impairment tests of goodwill and indefinite-lived intangible assets was complex and highly judgmental due to the significant measurement uncertainty in determining the fair values of the reporting units and indefinite-lived intangible assets. in particular, the fair value estimates of the reporting units were sensitive to changes in significant assumptions such as discount rates, revenue growth rates, operating margins, estimated spend on capital expenditures, terminal growth rates and market multiples. the fair value estimates for indefinite-lived intangible assets were sensitive to significant assumptions such as discount rates, revenue growth rates, royalty rates, and terminal growth rates. these assumptions are affected by expected future market or economic conditions, including the impact of covid-19. 62table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill and indefinite-lived intangible asset impairment assessment process. for example, we tested controls over the company’s long range planning process as well as controls over the review of the significant assumptions in estimating the fair values of the reporting units and indefinite-lived intangible assets.to test the fair values of the reporting units and indefinite-lived intangible assets, our audit procedures included assessing methodologies and testing the significant assumptions and underlying data used by the company. this included forecasted revenue including subscriber and advertising growth, customer churn, and new product launches. we compared the significant assumptions used in the company’s long range plan, including forecasted revenue and operating margins, to current industry and economic trends, including the impact of covid-19, while also considering changes in the company’s business model, customer base and product mix. we assessed the historical accuracy of management’s estimates by comparing past projections to actual performance and assessed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units and indefinite-lived intangible assets resulting from changes in the assumptions. we also involved a valuation specialist to assist in evaluating the company’s models, valuation methodology, and significant assumptions used in the fair value estimates. we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the company.assessment of realizability of deferred tax assets description of the matter as discussed in note 19 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. for the year-ended june 30, 2021, the company had deferred tax assets before valuation allowances of $2.4 billion.auditing management’s assessment of recoverability of deferred tax assets in the u.s. and non-u.s. jurisdictions involved subjective estimation and complex auditor judgment in determining whether sufficient future taxable income, including projected pre-tax income, will be generated to support the realization of the existing deferred tax assets before expiration.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the risks of material misstatement relating to the realizability of deferred tax assets, including controls over management’s projections of pre-tax income.among other audit procedures performed, we evaluated the assumptions used by the company to develop projections of future taxable income, including the pre-tax income, by income tax jurisdiction and tested the completeness and accuracy of the underlying data used in the projections. for example, we compared the projections of pre-tax income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends, including the impact of covid-19. we also compared the projections of future pre-tax income with other forecasted financial information prepared by the company./s/ ernst & young llp we have served as the company’s auditor since 2012. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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.f-2 |financial statements and schedules goodwill impairment assessment description of the matter at december 31, 2019, the company’s goodwill was $855.7 million and represented approximately 12% of total assets, of which $801.3 million was associated with the refining segment. as discussed in notes 2 and 18 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level, or more frequently if events or changes in circumstances indicate the goodwill might be impaired. the company performs its annual goodwill impairment testing in the fourth quarter of each year. auditing management’s annual goodwill impairment test for the reporting units within the refining segment requires significant judgment, as the valuation includes subjective estimates and assumptions in estimating the fair value. in particular, the fair value estimates are sensitive to significant assumptions, such as forecasted gross margins and the weighted average cost of capital. 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 valuation of the company’s goodwill. for example, we tested controls over management’s review of the discounted cash flow calculation, the prospective financial data, and the valuation assumptions. to test the estimated fair value of the company’s reporting units within the refining segment, our audit procedures included, among others, assessing the valuation methodology applied, performing recalculations, and testing the significant assumptions discussed above and the underlying data used by the company. we compared the significant assumptions in the prospective financial data used by management to current industry and economic trends and historical performance. we performed sensitivity analyses of certain significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions, as well as a hindsight analysis. in addition, we involved our valuation specialists to assist in evaluating the fair value methodology and testing the related assumptions that are most significant to the fair value estimates, as well as the market capitalization reconciliation. environmental liabilities description of the matter as described in notes 2 and 14 of the consolidated financial statements, the company accrues environmental remediation costs when it is both probable that a liability has been incurred and the amount can be reasonably estimated. at december 31, 2019, the company accrued a liability of $146.1 million, representing management’s best estimate of the expected costs related to environmental liabilities. auditing the company’s environmental liabilities requires significant judgment due to the inherent complexity in estimating the likelihood, timing and amount of future costs. this required us to make highly subjective auditor judgments as estimates are based on management’s assessment of the extent of contamination, the selected remediation methodology and applicable environmental regulations. such estimates require management to adjust its accruals as further information develops or circumstances change and includes significant judgment with respect to costs, time frame of remediation and monitoring activities, and extent of required remedial and clean-up activities.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 environmental liability cost estimation and review process, including controls over management’s review of the significant assumptions relating to costs, time frame and extent of required remedial and clean-up activities. to test the environmental liabilities, our audit procedures included, among others, evaluating the nature of contamination and the status of remediation including reviewing publicly available remediation data and through inquiries of the company’s management. we utilized our environmental specialists to evaluate the reasonableness of management’s assessment of the extent of contamination, the selected remediation methodology and applicable environmental regulations. our specialists also reviewed key assumptions used in the valuation of the environmental liabilities, including costs, time frame and extent of required remedial, clean-up and on-going monitoring activities in management’s analysis, including adjustments or lack thereof in the related cost 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 especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.allowance for loan losses as described in notes 1 and 5 to the consolidated financial statements, the company’s consolidated allowance for loan losses balance was $28,596,000 at june 30, 2019, which consists of two components: specific and general allocations. the allowance for loan losses is the estimated amount considered necessary to cover probable and reasonably estimable incurred credit losses inherent in the loan portfolio at the balance sheet date. the calculation of the allowance for loan losses involves significant estimates and subjective assumptions, which require a high degree of judgment relating to the company’s loan portfolio, operations, and operating environment and how those items impact probable incurred losses inherent within the loan portfolio. changes in these assumptions could have a material effect on the company’s financial results.56index the company’s general allocation for “pass” classification loans includes reserve factors for historical charge-offs and qualitative general reserve factors. the component for qualitative general reserve factors involves an evaluation of items including: lending policy and procedures, economic and business conditions, nature and volume of portfolio, lending staff, volume and severity of delinquent loans, loan review system, collateral values, and concentrations of credit. the evaluation of these items results in qualitative general reserve factors, which contribute significantly to the general allocation component of the estimate of the allowance for loan losses. we identified the estimate of the aggregate effect of the qualitative general reserve factors on the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment. auditing management’s determination of qualitative general reserve factors involved especially subjective auditor judgment because management’s estimate relies on a qualitative analysis to determine the quantitative impact the items have on the allowance. management’s analysis of these items requires significant judgment.the primary procedures we performed to address this critical audit matter included:testing the effectiveness of controls over the evaluation of the items used to estimate the qualitative general reserve factors, including controls addressingo the data used as the basis for the adjustments relating to qualitative general reserve factorso management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative general reserve factors and the resulting allocation to the allowance substantively testing management’s process, including evaluating their judgments and assumptions, for developing the qualitative general reserve factors which included:o evaluation of the data used as a basis for the adjustments relating to qualitative general reserve factorso evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative general reserve factors and the resulting allocation to the allowance.o analytically evaluating the general allocation component year over year and testing for reasonableness crowe llp 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.excess and obsolete inventory reserves as described in note 2 and schedule ii to the financial statements, the company’s inventory reserves balance was $42.3 million as of december 31, 2021. the company’s inventories are valued at the lower of cost, the value determined by the first-in, first-out method, or net realizable value. the company reviews the components of its inventories on a periodic basis for excess and obsolescence and adjusts inventories to its net realizable value as necessary. the valuation of inventories requires management to make significant assumptions, including assumptions about product life cycle and projections of future demand as well as specific product considerations such as timing of the introduction and development of new or enhanced products. we identified valuation of excess and obsolete inventory reserves, which is included in the inventory reserves balance, as a critical audit matter because of the significant assumptions and judgements used by management in estimating adequate reserves. auditing management’s assumptions was complex and required a high degree of auditor judgment and subjectivity when performing audit procedures and evaluating the audit evidence obtained. our audit procedures related to the company’s excess and obsolete inventory reserves included the following, among others: a.we obtained an understanding of the relevant controls over the company’s excess and obsolete inventory reserves, including the completeness and accuracy of data used in the process, and tested such controls for design and operating effectiveness. b.we evaluated the reasonableness of the methodology, assumptions and data used in the company’s estimate by: a.comparing the on-hand inventory quantities to projections of future demand and historical sales and evaluating adjustments to projections of future demand for specific product considerations, such as timing of the introduction and development of new or enhanced product; and 1b.assessing the historical accuracy of management’s estimate and performing sensitivity analyses over the significant assumptions to evaluate the impact of changes in the obsolete and excess inventory reserve that would result from changes in the underlying assumptions. valuation of acquired intangible assets as described in note 3 to the consolidated financial statements, the company completed the acquisition of 7d surgical, inc. (“7d surgical”) for $120.6 million on may 20, 2021. the company accounted for this transaction under the acquisition method of accounting for business combinations. accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $32.3 million and resulting goodwill of $84.6 million. in order to determine the fair value of the identified intangible assets, which consist of trademarks & tradenames and patents & technology, the company used an income approach valuation model. the model requires management to make significant assumptions, which include, where applicable, forecast of future cash flows, forecasted revenue growth rates, royalty rates and discount rates.we identified the valuation of acquired intangible assets as a critical audit matter as there was a high degree of auditor judgment, subjectivity and increased audit effort, including the use of valuation specialists, when performing audit procedures and evaluating audit evidence related to the reasonableness of significant estimates and assumptions utilized in management’s calculation of intangible asset valuations.we obtained an understanding of the relevant controls related to the valuation of the intangible assets acquired and tested such controls for design and operating effectiveness, including management review controls related to the development of the significant assumptions including revenue, gross margins, growth rates, royalty rates and discount rates. we utilized historical data and compared management’s revenue and gross margin forecasts to the most recent actual data available to determine reasonableness of assumptions for revenue, gross margins, and growth rates. with the assistance of our valuation specialists, we evaluated the reasonableness of the royalty rates and discount rates and, tested the relevance and reliability of source information underlying the determination of the royalty rates, discount rates and testing the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the royalty rates and discount rates selected by management. /s/ rsm us llp we have served as the company's auditor since 2017. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.f-2table of contents embedded conversion features description of the matter as more fully described in note 3 and note 6 of the consolidated financial statements, the company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the statement of operations. certain redemption features within the convertible debt do not qualify for any of the exceptions from derivative accounting in asc 815 and requires bifurcation from the host debt instrument with subsequent changes in fair value recorded in earnings each period. for redemption features within convertible debt instruments that require bifurcation from the host instrument the company used a third party valuation specialist to assist them in determining the fair value of the derivative liability at inception and at the end of each subsequent reporting period. if the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature (“bcf”) requiring separate recognition. when the company records a bcf, the intrinsic value of the bcf is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.how we addressed the matter in our audit 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 the following, among others:·we obtained and evaluated management’s accounting memo and management’s valuation.·we evaluated the authoritative guidance used by management for determining whether embedded conversion features were present within the convertible notes and required bifurcation.·with the assistance of our fair value specialists, (1) we developed independent estimates of the conversion liability component of the convertible debt and compared them to the management’s estimates; (2) we reviewed the valuation methods and assumptions utilized by the appraiser, which included the historical volatility; (3) we reviewed and evaluated the relevant metrics prepared by management; and (4) we tested the mathematical accuracy of the valuation model. /s/ marcum llp marcum llp we have served as the company’s auditor since 2015. | 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) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. accrued warranty claims as described further in note 1 to the consolidated financial statements, the company provides a lifetime limited structural hull warranty, a five-year structural deck warranty, and a one-year limited warranty to the original owner for all boats sold to dealers. the cost of these warranty claims is recorded by the company at the time of the boat sale based on historical claims experience and may subsequently be adjusted based on items such as production quality. we identified accrued warranty claims ("warranty") as a critical audit matter.the principal consideration for our determination that warranty is a critical audit matter is that the accrual for warranty claims has a higher degree of estimation uncertainty related to the estimation of anticipated future warranty claims. the estimation 30 uncertainty and subjectivity in determining the accrual resulted in the need for significant auditor judgement when assessing the reasonableness of the inputs and assumptions utilized by the company.our audit procedures related to this matter included the following, among others.●we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s warranty accrual estimation process. for example, we tested controls over the development of the assumptions and the verification of the completeness and accuracy of the information used in developing the warranty accrual. ●we tested the process used to develop the estimate using information related to recent production trends and the historical experience of the company. ●we compared the company’s prior year warranty liability related to anticipated claims in the current year to actual claims paid in the current year to evaluate the historical accuracy of the company’s estimate. /s/ grant thornton llp we have served as the company’s auditor since 2004. | 5 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment as described in notes 2 and 8 to the consolidated financial statements, the company’s consolidated goodwill balance was $21.5 billion as of december 31, 2019. management evaluates goodwill for impairment on may 31 of each year, or more frequently to the extent events or conditions indicate a risk of possible impairment during the interim periods subsequent to the annual impairment test. management estimates fair value based primarily on a market approach utilizing forecasted earnings before interest, taxes, depreciation and amortization (ebitda) and the enterprise value to estimated ebitda multiples of comparable companies for each reporting unit.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when developing the fair value estimate of the reporting units. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s forecasted ebitda and estimates of enterprise value to ebitda multiples of comparable companies for each reporting unit. 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 related to the development of the fair value estimate of the company’s reporting units. these procedures also included, among others, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the market approach model; and evaluating the significant assumptions used by management, including management’s forecasted ebitda and estimates of enterprise value to ebitda multiples of comparable companies for each reporting unit. evaluating management’s significant assumptions related to forecasted ebitda and estimated enterprise value to ebitda multiples of comparable companies for each reporting unit involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s market approach model and certain significant assumptions, including the estimated enterprise value to ebitda multiples of comparable companies for each reporting unit./s/pricewaterhouse coopers llp houston, texas february 11, 2020we have served as the company’s auditor since 1997. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the 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 — realizability of deferred tax assets — refer to notes 2 and 6 to the financial statements critical audit matter description as discussed in note 6 to the consolidated financial statements, at december 31, 2021 the company had deferred tax assets on deductible temporary differences, tax credits, and tax loss carryforwards of $25.1 million (net of a $12.5 million valuation allowance). deferred tax assets are reduced by a valuation allowance if, based upon the weight of all available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. auditing management’s determination that all or some portion of certain deferred income tax assets will not be realized, and that it is more likely than not that sufficient taxable income will be generated in the future to realize the remaining deferred tax assets, is a critical audit matter because of the significant judgments management makes related to taxable income. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of taxable income and the application and interpretations of accounting principles generally accepted in the united states of america.f-3how the critical audit matter was addressed in the audit our audit procedures related to the determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets included the following, among others: •we tested the effectiveness of internal controls over deferred tax assets, including management’s controls over the estimates of taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized.•we evaluated the reasonableness of the methods, assumptions, and judgments used by management to determine whether a valuation allowance was necessary.•with the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law.•we tested the reasonableness of management’s estimates of taxable income by comparing the estimates to: –internal budgets.–historical taxable income, as adjusted for nonrecurring items.–internal communications to management and the board of directors.–forecasted information included in company press releases as well as in analyst and industry reports for the company and certain of its peer companies.•we evaluated whether the estimates of future taxable income were consistent with evidence obtained in other areas of the audit.•we evaluated whether the taxable income in prior carryback years was of the appropriate character and available under the tax law./s/ deloitte & touche llp atlanta, georgia february 18, 2022we 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.contingent liabilities - litigation and claims involving distribution of controlled substances - refer to note 21 to the financial statements critical audit matter description the company and its affiliates are defendants in many cases asserting claims related to distribution of controlled substances, including opioids. the company is named as a defendant along with other pharmaceutical wholesale distributors, pharmaceutical manufacturers and retail pharmacy chains. the plaintiffs in these actions include state attorneys general, county and municipal governments, hospitals, indian tribes, pension funds, third-party payors and individuals. when a loss is considered probable and reasonably estimable, the company records a liability in the amount of its estimate for the ultimate loss. the company reviews all loss contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. the company also performs an assessment of loss contingencies where a loss is reasonably possible. if it is reasonably possible that a loss may have been incurred and the effect on the financial statements could be material, the company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the financial statements. as of march 31, 2020, the company has determined that a liability associated with these claims, whether through settlement or litigation, is not probable and a loss or range of loss is not reasonably estimable. we identified litigation and claims involving the distribution of controlled substances as a critical audit matter because of the challenges auditing management’s judgments applied in determining the likelihood of loss related to the resolution of such claims. specifically, auditing management’s determination of whether any contingent loss arising from the related litigation and claims is probable, reasonably possible, or remote, and the related disclosures, is subjective and requires significant judgment due to the large number of parties involved, together with the novelty and complexity of the issues. 53table of contents mc kesson corporation how the critical audit matter was addressed in the audit our audit procedures related to litigation and claims involving distribution of controlled substances included the following, among others:•we tested the effectiveness of internal controls related to management’s review of litigation and claims involving the distribution of controlled substances, and approval of the accounting treatment and related disclosures based on the most recent facts and circumstances. •we inquired of the company’s internal and external legal counsel to understand the basis for the company’s conclusion that any potential loss from the litigation and claims involving the distribution of controlled substances, including through broad resolution via settlement, is neither probable nor reasonably estimable as of march 31, 2020. in addition, we requested and received a written response from internal and external legal counsel as it relates to litigation and claims involving the distribution of controlled substances. •we evaluated management’s analysis of litigation and claims involving the distribution of controlled substances, read board of directors meeting minutes, including relevant sub-committee meeting minutes, and compared to responses from internal and external counsel. as part of our procedures, we also performed public domain searches for evidence contrary to management’s analysis.•we compared the company's assessment of this matter to relevant history of similar legal contingencies that have been settled or otherwise resolved to evaluate the consistency of the company's assessment of litigation and claims involving the distribution of controlled substances at march 31, 2020.•we consulted with our auditing and accounting experts to assist in our evaluation of the case facts and the company’s related accounting treatment for the litigation and claims involving the distribution of controlled substances. •we evaluated any events subsequent to march 31, 2020 that might impact our evaluation of litigation and claims involving the distribution of controlled substances, including any related accrual or disclosure.•we obtained written representations from executives and internal counsel of the company. •we read the company’s related disclosures and evaluated them for consistency with our testing.goodwill - refer to note 14 to the financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves comparing the carrying amount of each reporting unit to its fair value on the first day of the third fiscal quarter or whenever the company believes a potential indicator of impairment requiring a more frequent assessment has occurred. the company uses a combination of the income and market approaches to estimate reporting unit fair value. under the market approach, fair value is estimated by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. under the income approach, the company uses a discounted cash flow (“dcf”) model where cash flows anticipated over future periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate that is commensurate with the risk inherent within the reporting unit. the rate used to discount to present value includes an unsystematic risk premium, which is intended to address uncertainty related to the reporting unit’s future cash flow projections. the goodwill balance was $9.4 billion as of march 31, 2020, of which $1.4 billion was allocated to the mc kesson canada reporting unit. the fair value of all reporting units exceeded their respective carrying amounts as of the measurement date and, therefore, no impairment was recognized. we identified the estimation of the fair value of the mc kesson canada reporting unit used to evaluate the recoverability of goodwill as a critical audit matter because of the challenges auditing significant judgments used in the selection of a discount rate, including the unsystematic risk premium. in particular, the fair value estimate is sensitive to the unsystematic risk premium assumption, which is affected by expected risk of changes in the canadian business and regulatory environments. auditing management’s selected discount rate required a high degree of auditor judgment and an increased extent of effort, including the need to involve more senior members of the team and our fair value specialists. 54table of contents mc kesson corporation how the critical audit matter was addressed in the audit our audit procedures related to the company’s selection of a discount rate, including consideration of the unsystematic risk premium, for the mc kesson canada reporting unit included the following, among others:•we tested the effectiveness of internal controls related to management’s goodwill impairment evaluation, including those related to the selection of a discount rate and consideration of an unsystematic risk premium.•we evaluated management’s ability to accurately forecast operating results for the mc kesson canada reporting unit by comparing actual results to management’s historical forecasts, in order to consider the reasonableness and adequacy of management’s selected unsystematic risk premium.•as part of our assessment of the unsystematic risk premium, we evaluated the reasonableness of strategic plans expected to be implemented during the forecast period by comparing the forecasts to:◦actual results of historical strategic plans◦internal communications to management and the board of directors•with the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate, including the unsystematic risk premium, by developing a range of independent estimates, testing the mathematical accuracy of the calculation and comparing to the discount rate selected by management.investment in change healthcare joint venture - tax-free separation of change healthcare jv - refer to note 2 to the financial statements critical audit matter description on march 10, 2020, the company completed the previously announced separation of its interest in the change healthcare joint venture (“joint venture”). the separation was effected through the split-off of a wholly owned subsidiary of the company (“spin co”) that held all of the company’s interest in the joint venture, to certain of the company’s stockholders through an exchange offer (“split-off”), followed by the merger of spin co with and into change healthcare inc. (“change”), with change surviving the merger (“merger”).in connection with the split-off, on march 9, 2020, the company distributed all outstanding shares of common stock of spin co to participating stockholders in exchange for shares of the company common stock. following consummation of the split-off, on march 10, 2020 the merger was consummated. the split-off and merger are intended to be generally tax-free transactions for u.s. federal income tax purposes. following the split-off, the company does not beneficially own any of change’s outstanding securities. we identified the classification of the split-off and merger as a tax-free transaction for us federal income tax purposes to be a critical audit matter because of the complexity of the interpretation and application of the 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 u.s. federal taxability of the split-off and merger.how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of the u.s federal taxability of the split-off and merger included the following, among others:•we tested the effectiveness of controls over management’s evaluation of the split-off and merger as tax free for u.s. federal income tax.•we inspected the opinion from the company’s outside legal counsel and external tax advisor that management utilized in forming their conclusions on u.s. federal taxability of the split-off and merger, including certain interpretations of the code and related statutes. •we inspected meeting minutes of the board of directors and its committees, income tax filings, support from external advisors, historical financial results of the company and the joint venture, and contracts associated with the split-off and merger for corroborating or contradictory evidence.55table of contents mc kesson corporation•we obtained written representations from management concerning management’s intent associated with future transactions that could affect u.s. federal taxability and we obtained representations made by change management that it does not intend to cause any transactions that could affect the company’s u.s. federal taxability.•we assessed the key facts in the opinion from the company’s outside legal counsel and tax advisor detailing the requirements under the code and specifying how such requirements were met. •with the assistance of our income tax specialists, we evaluated management’s conclusion that the requirements were met to qualify the split-off and merger as tax free for u.s. federal income tax purposes. /s/ deloitte & touche llp dallas, texas may 22nd, 2020we have served as the company’s auditor since 1968. | 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. oil and gas properties, depletion and amortization and impairment of long-lived assets - refer to note 1 to the financial statements critical audit matter description as described in note 1 to the financial statements, oil and gas properties are accounted for using the successful efforts method. depletion and amortization of the cost of proved oil and gas properties are calculated using the units-of-production method. proved developed reserves are used as the base for depleting capitalized costs associated with successful exploratory well costs, development costs and related facilities, other than offshore platforms. the sum of proved developed and proved undeveloped reserves is used as the base for depleting or amortizing leasehold acquisition costs and costs to construct offshore platforms and associated asset retirement costs. also, the fund reviews the carrying value of its oil and gas properties for impairment whenever events and circumstances indicate that the recorded carrying value of its oil and gas properties may not be recoverable. recoverability is evaluated by comparing estimated future net undiscounted cash flows to the carrying value of the oil and gas properties at the time of the review. if the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the oil and gas properties is impaired, and written down to fair value. f-2 table of contents estimates of proved reserves are key components of the fund’s most significant estimates involving its rate for recording depletion and amortization and estimated future cash flows of oil and gas properties used to test for impairment. annually, the fund engages an independent petroleum engineering firm to perform a comprehensive study of the fund’s proved properties to determine the quantities of reserves and the period over which such reserves will be recoverable. the fund’s estimates of proved reserves are based on the quantities of oil and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions.the fund’s oil and gas properties, net balance was $5.8 million as of december 31, 2021 and depletion and amortization expense recognized was $2.5 million for the period ended december 31, 2021. no impairment was recognized during 2021.we identified the impact of the oil and natural gas reserve quantities on the oil and gas properties and depletion and amortization financial statement line items and the evaluation of impairment of long-lived assets as a critical audit matter due to the significant judgments made by the fund. the significant judgments made by the fund include the use of specialists to develop and evaluate the fund’s oil and natural gas reserve quantities, future cash flows, reserve risk weightings, future development costs, and future oil and natural gas commodity prices. auditing these significant judgments 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 fund’s estimates and assumptions related to oil and natural gas reserve quantities included the following, among others:•we evaluated the reasonableness of the fund’s oil and natural gas reserve quantities by performing the following procedures: o comparing the fund’s oil and natural gas reserve quantities to historical production volumes. o evaluating the reasonableness of the methodology used and the production volume decline curve. o understanding the experience, qualifications and objectivity of management’s expert, an independent petroleum engineering firm. o comparing forecasts of proved undeveloped oil and natural gas reserves to historical conversions of proved undeveloped oil and natural gas reserves and communication from third-party well operators. •we evaluated management’s assessed reserve risk weighting associated with the development of proved, probable and possible oil and natural gas reserve quantities by comparing the assessed risk to industry surveys. •we evaluated the reasonableness of future development costs by comparing such costs to the approval for expenditures, historical well cost data and communication from third-party well operators. f-3 table of contents •we evaluated, with the assistance of our fair value specialists, the reasonableness of future oil and natural gas commodity prices by performing the following procedures: o understanding the methodology utilized by management for development of the future oil and natural gas commodity prices. o comparing the future oil and natural gas commodity prices to an independently determined range of prices. o comparing management’s future oil and natural gas commodity prices to published forward pricing indices and third-party industry sources. •we evaluated the future oil and natural gas commodity prices by comparing future oil and natural gas commodity price differentials to historical realized price differentials. /s/ deloitte & touche llp parsippany, new jersey february 28, 2022 we have served as the fund's auditor since 2006. | 5 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.recoverability of real estate and real estate related assets - refer to notes 2 and 4 to the financial statements critical audit matter description the company’s real estate investments are evaluated for potential impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. impairment losses are recorded when indicators of impairment are present and the carrying amount of the asset is greater than the sum of future undiscounted cash flows expected to be generated by that asset over the remaining expected holding period. the company’s undiscounted future cash flows analysis and the assessment of expected remaining holding period requires management to make significant estimates and assumptions related to future occupancy levels, rental rates, lease-up periods and capitalization rates. changes in these assumptions could have a significant impact on the real estate assets identified for further analysis. for the year ended december 31, 2021, the company recorded impairment charges of $22.9 million on its real estate investments.given the company’s evaluation of the sum of future undiscounted cash flows expected to be generated by an asset over the remaining expected holding period when indicators of impairment are present requires management to make significant estimates and assumptions related to future occupancy levels, rental rates, and capitalization rates, performing audit procedures to evaluate the reasonableness of management’s undiscounted future cash flows analysis and assessment of expected remaining holding period required a high degree of auditor judgment and an increased extent of effort, including the need to involve our 70table of contentsfair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of real estate assets for possible indicators of impairment included the following, among others:•we tested the effectiveness of controls over management’s analysis for impairment indicators, including the identification of impairment indicator properties and significant estimates and assumptions used by management in preparing undiscounted future cash flows analysis for properties with impairment indicators.•we audited management’s impairment indicator analysis by: ◦evaluating management's process for identifying impairment indicators and whether management appropriately considered the examples of impairment indicators provided within the financial accounting standards board’s (fasb) accounting standard codification (asc) 360, property, plant, and equipment.◦conducting independent market analysis to determine if there were additional indicators of impairment not identified by management.◦conducting inquiries of property management, leasing, asset management, and other departments outside of the accounting department to determine if there might be additional indicators of impairment not identified by management. •with the assistance of our fair value specialists, we evaluated management’s undiscounted cash flow analysis for various properties that exhibited indicators of impairment by:◦evaluating whether the valuation method used was in accordance with asc 820, fair value measurement.◦evaluating the undiscounted future cash flows analysis, including estimates of future occupancy levels, rental rates, lease-up periods and capitalization rates, in addition to the assessment of expected remaining holding period for each real estate asset with possible impairment indicators by (1) evaluating the source information and assumptions used by management and (2) testing the mathematical accuracy of the undiscounted future cash flows analysis.investments in real estate - refer to notes 2 and 3 to the financial statements critical audit matter description for the year ended december 31, 2021, the company had acquired investments in real estate with an aggregate purchase price of $308.8 million. the company accounted for these acquisitions as asset acquisitions. accordingly, the purchase price for assets acquired and liabilities assumed was allocated, based on relative fair value, to land, buildings and improvements, in-place leases, above or below market leases, and other intangible assets. the method for determining relative fair value varied depending on the type of asset or liability and involved management making significant estimates related to assumptions such as future cash flows, discount rates, and costs during the expected lease-up periods. given the relative fair value determination of assets acquired and liabilities assumed requires management to make significant estimates related to assumptions such as future cash flows, discount rates, and costs during hypothetical lease-up periods, 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.how the critical audit matter was addressed in the audit our audit procedures related to the relative fair value of assets acquired and liabilities assumed for investments in real estate included the following, among others:•we tested the effectiveness of controls over the purchase price allocation, including management’s controls over the review of purchase price allocations prepared by third party specialists. •for properties selected for further evaluation by our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) current market data, (3) cost to replace certain assets, and (4) assumptions used in the discounted cash flows, including testing the mathematical accuracy of the calculation, 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 rental revenue by comparing the assumptions used in the projections to external market sources, in-place lease agreements, historical data, and results from other areas of the audit./s/ deloitte & touche llp phoenix, arizona march 1, 2022 we have served as the company’s auditor since 2006. | 2 |
critical audit matters the critical audit matterscommunicated below are matters arising from the current period audit of thefinancial statements that were communicated or required to be communicated tothe audit committee and that: (1) relate to accounts or disclosures that arematerial to the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. the communication of criticalaudit 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 matterbelow, providing separate opinions on the critical audit matter or on theaccounts or disclosures to which it relates.evaluation of intangibleasset and goodwill impairment analysis as described in notes 7 and 8 tothe consolidated financial statements, the carrying amount of the company's solereporting unit, consisting of intangible assets and the associated goodwill, was$5,552,428 as at december 31, 2020 and is a significant portion (51%) of the company's total assets. as discussed in notes 2(m) and 2(n) to the consolidatedfinancial statements, the company performs impairment testing on an annual basisor whenever events or changes in circumstances indicate that the carrying valueof a reporting unit may exceed its recoverable amount. during the year ended december 31, 2020, the company determined that no impairment was necessary. we identified the evaluation ofthe goodwill impairment analysis as a critical audit matter. the estimatedrecoverable amount of the reporting unit uses forward-looking estimates thatinvolved a high degree of subjective auditor judgment, in addition tospecialized skills and knowledge to evaluate. the sensitivity of reasonably possible changes to those assumptions couldhave a significant impact on the determination of the recoverable amount of thereporting unit and the company's assessment of impairment. addressing thematter involved performing procedures and evaluating audit evidence inconnection with forming our overall opinion on the consolidated financialstatements. these procedures include, among others: evaluating projected earnings before interest,taxes, depreciation, and amortization ("ebitda") by comparing historical ebitd aforecasts to actual results and by examining the historical trend analysis ofboth increases and decreases in actual revenues and costs as compared toforecasted amounts; involving our valuation specialists to assist intesting certain significant assumptions described above, such as discount ratesand long-term growth rates; performing sensitivity analyses on significant assumptions to evaluate the changes in fair value that would result from changes in these assumptions; and assessing the adequacy of theassociated disclosures in the financial statements.reliability ofinternally-generated reports supporting revenues the company uses an underlyingoperating system to track ad tech advertising revenue and report thisinformation to customers and suppliers. as disclosed in note 2(c) of theconsolidated financial statements, the company records revenues when a customerobtains control of promised services, which in certain instances, is determinedby the company's underlying operating and ad tech systems.we identified relying oninternally-generated reports as a critical audit matter. assessing thereliability of information produced by the company as audit evidence requiressignificant judgment with respect to testing and evaluating the information todetermine if it is sufficient and appropriate for purposes of the audit. auditing the company's accounting for revenue from contracts with customers waschallenging and complex due to the dependency on these internally-generatedreports.addressing thematter involved performing procedures and evaluating audit evidence inconnection with forming our overall opinion on the consolidated financialstatements. these procedures include, among others: page 24 testing, on a sample basis,the completeness and accuracy of the underlying data within the company'sbilling system; testing, on a sample basis,credit notes issued to customers to determine if there is a history ofmodification; comparing the company'sinternally-generated reports to similar reports as provided by key customers todetermine if any difference were within an acceptable range of variance; and confirming, on a samplebasis, revenues directly with customers. we 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 consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. allowance for loan losses as described in notes 1 and 3 to the consolidated financial statements, the company’s consolidated allowance for loan losses balance was $25.6 million at december 31, 2021. the allowance for loan losses is maintained to provide for probable losses on existing loans based on evaluating risks in the loan portfolio and is based upon the company’s analysis of the factors underlying the quality of the loan portfolio. these factors include, among others, changes in the size and composition of the loan portfolio, the estimated value of any underlying collateral, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectability may not be assured. this evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information is available. we identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the allowance for loan losses calculation, as a critical audit matter. the company uses internally determined risk ratings to classify loans into pools and to estimate loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses. determination of the risk grades involves significant management judgement. the qualitative factors are used to estimate probable losses incurred related to factors that are not captured in the past loss experience, are based on management’s evaluation of available internal and external data, and involve significant management judgement. auditing management’s judgments regarding the determination of risk grades and qualitative factors applied to the allowance for loan losses involved a high degree of subjectivity. the primary procedures we performed to address this critical audit matter included:●testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of risk ratings of loans and the determination of the reasonableness of the qualitative factors used. ●testing a risk-based, targeted selection of loans to gain substantive evidence that the company is appropriately rating these loans in accordance with its policies, and that the risk grades for the loans are reasonable based on current information available. ●obtaining management’s analysis and supporting documentation related to the qualitative factors, and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the analysis provided by management. 81table of contents●testing the completeness and accuracy of the data used in the calculation, application of the loan risk grades determined by management and used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.●analytically reviewing historical asset quality trends and the overall characteristics of the loan portfolio including times past due, charge-off activity, and concentration of loan types for areas of directional consistency or bias. /s/ moss adams llp everett, washington march 16, 2022 we have served as the company’s auditor since 2006. | 3 |
critical audit matter.basis for opinion these financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’s financial statements based on our audits.we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the 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 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.allowance for loan and lease losses as described in note 5 to the consolidated financial statements, the company’s consolidated allowance for loan and lease losses (alll) was $140.65 million at december 31, 2020. the company also describes in note 1 of the consolidated financial statements the “allowance for loan and lease losses” accounting policy around this estimate. the alll is an estimate of current expected credit losses in the loan and lease portfolio. the determination of the allowance for loan and lease losses requires significant judgment reflecting the company’s best estimate of expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate.this assessment is made on a loan pool basis in most instances, with the expected credit losses estimates by using a combination of models that measures the probability of default, probability of attrition, loss given defaults and exposure at default. the assessments of probability of default and probability of attrition are based on internal data that relates to the historical performance of each loan pool over a complete economic cycle. adjustments were then applied, if needed, to reflect the current impact of macroeconomic variables and to account for other expected changes that could occur in the future. these assumptions are analyzed for a reasonable and supportable forecast period, after which, the forecasted macroeconomic assumptions reverted to their historical average, using a rational and systematic basis. the loss given default is based on an analysis of historical recoveries for each loan pool, with adjustments to reflect the current impact of macroeconomic variables and to account for other expected changes that could occur in the future, if considered necessary. the exposure at default was estimated by using a transitional matrix that estimates the average percentage of the loan balance that remains at the time of default. additional qualitative adjustments were applied in certain circumstances, to account for other factors not evaluated in the initial model. in certain instances, loans were evaluated on an individual basis due to the management’s conclusion that they exhibited unique risk characteristics which prevented them from being similar to the identified loan pools.the primary reason for our determination that the allowance for loan losses is a critical audit matter is that auditing the estimated allowance for loan losses involved significant judgment and high degree of subjectivity, due to the number of relevant assumptions and the nature of the qualitative factor adjustments. additionally, there was high level of complexity involved in the implementation of asu no. 2016-13, financial instruments – credit losses (topic 326): measurement of credit losses on financial instruments. areas that contained subjectivity in evaluating management’s estimate, included evaluating management's assessment of current and expected economic conditions and other environmental factors, evaluating assumptions utilized in determining cohort loss rates, probability of default and loss given default, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades.our audit procedures related to the estimated allowance for loan losses, both at initial adoption of asu no. 2016-13 and at december 31, 2020, included:•testing the design and operating effectiveness of internal controls, including those related to technology, over the alll, the establishment of qualitative adjustments for current and expected conditions, grading and risk classification of loans and establishment of specific reserves on individually evaluated loans and management’s review controls over the alll balance as a whole including attending internal company credit policy committee meetings and audit committee discussions and analysis.•testing clerical and computational accuracy of the formulas within the calculation. •testing of completeness and accuracy of the information and reports utilized in the alll, including reports used in management review controls over the alll. •evaluating the precision of management review of the adequacy of the alll.•evaluating the current and expected qualitative adjustments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions including growth in gross domestic product, unemployment rates, housing market trends, commodity prices, and inflation rates.•evaluating the forecast adjustment, including assessing that it is reasonable and supportable.•evaluating significant assumptions utilized in the probability of default/loss given default model including probability of default run-out frequency, length, and look-back period and loss given default months of delay, look-back period and loss horizon.•evaluating significant assumptions utilized in the cohort model including look-back period, months of delay, and loss horizon.•evaluating the relevance and reliability of data and assumptions.•testing of the loan review function and the accuracy of loan grades determined. specifically, utilizing internal 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 factors and the appropriateness of their direction and magnitude and the company’s support for the direction and magnitude compared to previous years.•evaluating credit quality indicators such as trends in delinquencies, nonaccruals, charge-offs, and loan grades.•identifying fields in the various loan systems that defined the loan pools and tested the design and operating effectiveness of internal controls surrounding the input and maintenance of those fields./s/ bkd, llp we have served as the company’s auditor since 2015f | 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.revenue recognition – software license arrangements - refer to note 2 to the financial statements the company generates revenue from multiple sources, including software license revenue primarily derived from license sales of the company’s pega platform and other software applications, maintenance revenue from client support, and services revenue primarily derived from cloud sales of the company’s hosted pega platform and other software applications and consulting services. the company’s license and cloud arrangements often contain multiple performance obligations. these performance obligations may be included in the same contract or negotiated separately. additionally, the company enters into amendments to previously executed contracts which constitute contract modifications. certain new complex arrangements require a detailed analysis of the contractual terms and application of more complex accounting guidance, specifically for contracts with higher contract values. factors with potentially significant judgements include:•identification of the complete customer arrangement•accounting treatment of contract modifications•valuation and allocation of identified material rights•allocation of arrangement consideration to bundled fixed price work orders 33given the accounting complexity and the management judgment necessary to properly identify, classify, and account for performance obligations, auditing such estimates involved especially complex and subjective auditor judgment in relation to license and cloud arrangements.how the critical audit matter was addressed in the audit our audit procedures related to license and cloud revenue arrangements included the following, among others:•we tested the effectiveness of controls over revenue recognition, including those over the identification of performance obligations included in the transaction, accounting treatment of contract modifications, identification of material rights, and allocation of arrangement consideration. •we selected a sample of customer contracts and performed the following: ◦evaluated whether the company properly identified the terms of the arrangements and considered all arrangement terms that may have an impact on revenue recognition.◦evaluated whether the company appropriately identified all performance obligations in the arrangement and whether the methodology to allocate the transaction price to the individual performance obligations was appropriately applied.◦tested the accuracy of management’s calculation of revenue for each performance obligation by developing an expectation for the revenue to be recorded in the current period and comparing it to the company’s recorded balances.◦evaluated management’s assessment of any ongoing negotiations with customers and bundling with statements of work.◦analyzed the proper accounting treatment for any contract modifications based on 1) whether the additional products and services are distinct from the products and services in the original arrangement, and 2) whether the amount of consideration expected for the added products and services reflects the stand-alone selling price of those products and services.◦evaluated management’s determination of whether certain renewal clauses, additional product offers, or additional usage offers represented material rights included in the contract and whether they were properly valued based on the incremental discount provided and the probability of the right being exercised.◦for contracts with a performance obligation of bundled fixed price services, evaluated whether management reasonably estimated the number of hours that each project will require and independently recalculated the stand-alone selling price for each bundled fixed price service.◦obtained evidence of delivery of the elements of the arrangement to the customer. /s/ deloitte & touche llp boston, massachusetts february 12, 2020 we have served as the company's auditor since 2000. | 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. valuation of long-lived assets as described further in note b to the consolidated financial statements, the company evaluates long-lived assets for impairment when events or changes in circumstances exist that may indicate that the carrying amount of the asset group is no longer recoverable. the company identified triggering events for impairment in each of the three months ended march 31, 2020, june 30, 2020, september 30, 2020, and december 31, 2020. accordingly, we identified the valuation of long-lived assets as a critical audit matter.79the principal considerations for our determination of the valuation of long-lived assets as a critical audit matter is due to significant judgments and estimates made by management when determining whether an asset group may be impaired. significant judgments and estimates included forecasted cash flows and terminal value. this required a high degree of auditor judgment and an increased extent of effort when evaluating the reasonableness of management’s judgments and estimates. our audit procedures related to the company’s test for impairment of long-lived assets included the following, among others:•we tested management’s ability to forecast by comparing actual results to prior forecasts.•we tested the reasonableness of management’s forecasted cash flows by considering both positive and negative evidence impacting the forecasts in comparison to market and industry factors and trends, and historical trends. additionally, we performed analysis to test the sensitivity of management’s forecasts. •we evaluated management’s determination of the asset group and identification of the primary asset. •with the assistance of our valuation specialists, we evaluated the appropriateness of management’s valuation methodologies and the reasonableness of key assumptions by developing a range of independent estimates for a terminal value using market participant revenue multiples and comparing to the terminal value selected by management./s/ grant thornton llp we have served as the company’s auditor since 2008. | 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) relate 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. impairmentof goodwill descriptionof matter the company’s consolidated goodwill balance was approximately $4,183,000 at december 31, 2020. the company’s evaluationof goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. the fair valueof each reporting unit is estimated using the income approach, which requires the use of estimates and assumptions related tocash flow forecasts, discount rates, and terminal values. management’s cash flow forecasts included significant judgmentsand assumptions relating to revenue growth rates. thefair value of a reporting unit did not exceed its carrying value as of the annual evaluation date; therefore, impairment expenseof approximately $1,036,000 was recognized during the year ended december 31, 2020. managementmade significant judgments when developing the fair value estimate of the reporting units. as a result, a high degree of auditorjudgment and effort was required in performing audit procedures to evaluate the reasonableness of management’s cash flowforecasts and the significant assumptions identified above. significant uncertainty exists with these assumptions because theyare sensitive to future market or economic conditions. how we addressed the matter in our audit ouraudit procedures included the following: ●obtained an understanding of the internal controls and processes in place over the company’s annual goodwill impairment review process, including management’s review of the significant assumptions described above. ●evaluated management’s determination of reporting units and segments. ●evaluated the significant assumptions and inputs used in the income model based and reviewed corroborating documentation to support the assumptions and inputs. ●evaluated the reasonableness of management’s current revenue forecasts by comparing the forecasts to actual results subsequent to year-end. ●performed a sensitivity analysis over the company’s annual goodwill impairment analysis. f-3 revenuefrom contracts with customers – identity solutions software descriptionof matter the company had approximately $2,141,000 in revenues for the year ended december 31, 2020. as disclosed in note 1 to the consolidatedfinancial statements, the company recognizes revenue from identity solutions software based on the identified performance obligationsover the performance period for fixed consideration and for variable fees generated that are earned on a usage fee based overtime, which represented approximately $852,000 of the company’s revenue for the year ended december 31, 2020. dueto the nature of the company's contracts including multiple performance obligations, management exercises significant judgmentin the following areas in determining appropriate revenue recognition: ●determinationof which products and services are considered distinct performance obligations that should be accounted for separately or combined,such as software licenses and related implementation or support services. ●determinationof stand-alone selling prices for each distinct performance obligation. ●estimationof contract transaction price and allocation of the transaction price to the performance obligations. ●thepattern of delivery (i.e. timing of when revenue is recognized) for each distinct performance obligation. asa result, a high degree of auditor judgment was required in performing audit procedures to evaluate the reasonableness of management’sjudgments. changes in these judgments can have a material effect on the amount of revenue recognized on these contracts how we addressed the matter in our audit basedon our knowledge of the company, we determined the nature and extent of procedures to be performed over revenue, including thedetermination of the revenue streams over which those procedures were performed. our audit procedures included the following foreach revenue stream where procedures were performed: ●obtained an understanding of the internal controls and processes in place over the company’s revenue recognition processes. ●analyzed the significant assumptions and estimates made by management as discussed above. ●assessed the recorded revenue by selecting a sample of transactions, analyzing the related contract, testing management’s identification of distinct performance obligations, and comparing the amounts recognized for consistency with underlying documentation. ●assessed the completeness of contract liabilities by selecting a sample of transactions, analyzing the related contract, and recalculating contract liability based on remaining subscription period. wehave served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.goodwill – telematics products reporting unit – refer to notes 1 and 9 to the financial statements critical audit matter description55table of contents goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. the impairment test involves comparing the estimated fair value of a reporting unit with its carrying value, including goodwill. the estimates of fair value of the reporting units are computed using either an income approach, a market approach, or a combination of both. under the income approach, the company utilizes the discounted cash flow method to estimate the fair value of the reporting units. significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including future gross margin rates, expense rates, capital expenditures and other estimates), and a rate used to discount estimated future cash flow projections to their present value (or estimated fair value) based on estimated weighted average cost of capital (i.e., the selected discount rate). the company selected assumptions used in the financial forecasts by using historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses (i.e. guideline companies). the selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. the goodwill balance was $94.6 million as of february 28, 2021, of which $39.2 million is allocated to the telematics products reporting unit. the fair value of the telematics products reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.we identified goodwill impairment for the telematics products reporting unit as a critical audit matter because of the significant estimates and assumptions made by management to estimate the fair value of the telematics products reporting unit. this required a high degree of auditor judgment and an increased extent of effort, including the involvement of our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s cash flow projections, specifically revenues, gross margin rates, and the selected discount rate for the telematics products reporting unit. how the critical audit matter was addressed in the audit our audit procedures related to the assumptions of future revenues, gross margin rates, and the selected discount rate included the following, among others:we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over management’s cash flow projections of future revenues and gross margin rates and the selection of the discount rate.we evaluated management’s ability to accurately project future revenues and gross margin rates by comparing actual results to management’s historical projections, obtaining evidence for changes in future gross margin rates and revenue projections, and inquiring with management to understand the overall basis for their cash flow projections.we evaluated the reasonableness of management’s cash flow projections of future revenues and gross margin rates by comparing the projections to (1) historical growth of revenues and historical gross margin rates, (2) management’s long-range strategic plan which was communicated to the board of directors, and (3) projected information included in the company’s press releases, as well as, in analyst and industry reports for the company.with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology including guideline companies and (2) discount rate by: –evaluating the valuation methodology utilized by the company including the market and income approaches –evaluating and determining the appropriateness of the multiples, recently completed transactions and guideline public companies utilized in the analysis –testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.56table of contents –developing a range of independent estimates and comparing those to the discount rate selected by management.revenue recognition — refer to note 1 to the financial statements critical audit matter description the company’s fleet management vertical includes sales of hardware (“customized devices”), accessories, installation and application subscriptions. the company defers the recognition of revenue, and related costs, for the customized devices that only function with their applications and are sold on an integrated basis with applicable subscriptions. such customized devices and the application services are not sold separately. the promises to deliver hardware and service are not separate performance obligations. these service arrangements do not provide the customer with the right to take possession of the software supporting the subscription service at any time. the determination as to whether the promises associated with hardware and applications subscription is a single performance obligation involves significant judgment. this judgment can have a significant impact on the timing of revenue recognition. given the complexity of determining whether the contract promises represent a single performance obligation, the related audit effort required a higher degree of auditor judgment, and an increased extent of effort. how the critical audit matter was addressed in the audit our principal audit procedures related to the customized devices and related application subscriptions for fleet management included the following, among others: –we tested the effectiveness of controls related to management’s identification and assessment of a single performance obligation in contracts with customers. –we performed an analysis of how each step within the accounting guidance is addressed for each fleet management revenue transaction selected in our substantive test of details. –we tested management’s identification of a single performance obligation by evaluating whether the underlying goods and services were highly interdependent and interrelated. –we obtained and tested individual customer contracts to determine if the terms of the contract support that the arrangement represents a single performance obligation. –we verified that the revenue was not recorded upfront if there was a deferral element associated with the transaction (i.e. bundled arrangement or monthly billing fees) by validating the terms of the arrangement against invoices, po, and contracts. /s/ deloitte & touche llp costa mesa, ca april 22, 2021 we have served as the company’s auditor since fiscal 2018. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. 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 auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. going concern asdescribed further in note #3 to the financial statements, the company has incurred losses each year from inception through february 28,2021 and expects to incur additional losses in the future. wedetermined the company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertaintyregarding the company’s future cash flows and the risk of bias in management’s judgments and assumptions in estimating thesecash flows. ouraudit procedures related to the company’s assertion on its ability to continue as a going concern included the following,among others: wereviewed the company’s working capital and liquidity ratios and forecasted revenue, operating expenses, and uses and sources ofcash used in management’s assessment of whether the company has sufficient liquidity to fund operations for at least one year fromthe financial statement issuance date. this testing included inquiries with management, comparison of prior period forecasts to actualresults, consideration of positive and negative evidence impacting management’s forecasts, the company’s financing arrangementsin place as of the report date, market and industry factors and consideration of the company’s relationships with its financingpartners. going concern theaccompanying financial statements have been prepared assuming the company will continue as a going concern. as discussed in note #3 tothe financial statements, although the company has limited operations it has yet to attain profitability. this raises substantial doubtabout its ability to continue as a going concern. management’s plan in regard to these matters is also described in note #3. thefinancial statements do not include any adjustments that might result from the outcome of this uncertainty. basisfor opinion thesefinancial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’sfinancial statements based on our audit. 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 securitieslaws and the applicable rules and regulations of the securities and exchange commission and the pcaob. weconducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. the companyis not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. as part of our audit,we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinionon the effectiveness of the company’s internal control over financial reporting. accordingly, we express no such opinion. ouraudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to erroror fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regardingthe amounts and disclosures in the financial statements. our audit also included evaluating the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audit providesa reasonable basis for our opinion. /s/michael gillespie & associates, pllc wehave served as the company’s auditor since 2017. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the 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.inventory valuation description of the matter at january 29, 2022, the company’s inventories, net balance was $221.2 million. as discussed in note 1 of the consolidated financial statements, the company values inventories using the lower of weighted average cost or net realizable value method. adjustments to reduce inventories to their net realizable value are determined by management based on historical trends, specific identification, and anticipated demand. auditing management’s assessment of net realizable value for inventories was challenging due to the estimation uncertainty in determining the forecasted sales of the company’s inventory, which are impacted by a number of factors that are affected by market and economic conditions outside the company’s control, such as customer forecasts and industry supply and demand.-42-index how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s inventory valuation process, including controls related to the determination of the net realizable value of inventories. to test the net realizable value of inventories, our audit procedures included, among others, evaluating the reasonableness of management’s key assumptions and judgments by testing the accuracy and completeness of the underlying data used to determine the amounts of inventory carrying value adjustments. we also assessed the historical accuracy of management's estimates and performed sensitivity analyses over the significant assumptions to evaluate the changes in the net realizable value inventory estimates that would result from changes in the underlying assumptions./s/ ernst & young llp we have served as the company’s auditor since 2020. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.page 59allowance for loan losses as more fully described in notes 1 and 3 to the company’s consolidated financial statements, the allowance for loan losses represents losses that are estimated to have occurred. the allowance for loan losses is based on collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. the allowance consists of allocated and general components. the allocated component relates to specific allowances on loans that are classified as impaired. the general component relates to loans that are not classified as impaired and is based on historical charge-off experience and the expected loss, given default, derived from the company’s internal risk rating process. other adjustments have been made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. management discloses that this evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.we identified the valuation of the allowance for loan losses as a critical audit matter. auditing the allowance for loan losses involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other qualitative or environmental factors, evaluating the adequacy of specific allowances associated with impaired loans, and assessing the appropriateness of loan grades.the primary procedures we performed to address this critical audit matter included: •testing the design and operating effectiveness of controls, including those related to technology, over the allowance for loan losses, including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of loss rates, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans, and management’s review and disclosure controls over the allowance for loan losses;•testing of completeness and accuracy of the information utilized in the calculation of the allowance for loan losses; •testing the allowance model for computational accuracy;•evaluating the qualitative adjustments to historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;•testing the internal loan review functions and evaluating the accuracy of loan grades, including utilizing our internal loan review professionals to assist us;•assessing the reasonableness of specific allowances on certain impaired loans;•evaluating the overall reasonableness of significant assumptions used by management, considering the past performance of the company and evaluating trends identified within peer groups;•evaluating the accuracy and completeness of disclosures in the consolidated financial statements.bkd, llp we have served as the company’s auditor since 2012. | 2 |
critical audit matter.basis for opinion these consolidated financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’s consolidated financial statements based on our audits. we are a public accounting firm registered with the public company accounting oversight board (united states) (pcaob) and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob. we conducted our audits of these consolidated financial statements in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. the company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. as part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. accordingly, we express no such opinion.our audits 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. we believe that our audits provide a reasonable basis for our opinion.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.liquidation basis of accounting as described above and in notes 2 and 3 to the consolidated financial statements, as a result of the august 19, 2020 approval by the company’s stockholders to file for dissolution pursuant to a plan of dissolution, it was determined that liquidation was imminent and the company’s basis of accounting transitioned from the going concern basis of accounting to the liquidation basis of accounting on september 1, 2020, in accordance with generally accepted accounting principles. under the liquidation basis, 37the remeasurement of the company's assets and liabilities include management's estimates and assumptions of: (i) income to be generated from the remaining assets until the anticipated date of sale, (ii) sales proceeds to be received for these assets at the time of sale, (iii) operating expenses to be incurred; and, (iv) amounts required to settle liabilities. the estimated liquidation values for assets derived from future revenue streams and asset sales and the settlement of liabilities are reflected on the consolidated statement of net assets in liquidation. under the liquidation basis, the accounting estimates that require management’s most significant, difficult and subjective judgments include the determination that the liquidation was imminent, the estimated sales proceeds of assets, estimated settlement amounts of liabilities, the estimated revenue and operating expenses that are projected during dissolution, and discount rates. additional significant estimates under the liquidation basis include the recognition and measurement of amounts recoverable under the coronavirus aid, relief, and economic security (“cares”) act. the total effect of adoption of the liquidation basis of accounting was a $21,339 thousand increase from consolidated net equity as of august 31, 2020 to net assets in liquidation as of september 1, 2020. the changes in net assets and liabilities in liquidation from september 1, 2020 to december 31, 2020 was a reduction of $59,634 thousand.the principal considerations for our determination that performing procedures relating to the company’s adoption of the liquidation basis of accounting is a critical audit matter are the significant judgment by management when determining (i) the point at which liquidation was imminent, and (ii) remeasuring the values of assets and liabilities, which included significant assumptions related to sales proceeds of assets, settlement amounts of liabilities, revenue and operating expenses, discount rates and amounts recoverable under the cares act. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to (i) management’s judgments around applying the liquidation basis to the consolidated financial statements and determining the point at which liquidation was imminent, and (ii) the remeasurement of certain assets and liabilities. also, 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, among others, (i) testing management’s process for and evaluating management’s judgments around applying the adoption of the liquidation basis of accounting and the point at which liquidation was imminent; (ii) testing management’s process for developing the estimates and assumptions used in the remeasurement of certain assets and liabilities as of september 1, 2020 and december 31, 2020; (iii) testing the completeness and accuracy of the data used by management in the developing the estimates, and (iv) evaluating the reasonableness of the significant assumptions used by management for certain assets related to (1) the estimated sales proceeds, (2) amounts estimated to be recoverable under the cares act, (3) the estimated revenue and operating expenses that are projected during dissolution and (4) the discount rates; for certain liabilities related to (1) the amounts estimated to be paid in settlement, (2) the estimated revenue and operating expenses that are projected during dissolution, and (3) the discount rates; and (v) evaluating the adequacy of the company’s disclosures. the work of management’s specialist was used in performing the procedures to evaluate the reasonableness of enterprise values. evaluating management’s assumptions related to the estimated revenue and operating expenses that are projected during dissolution, estimated proceeds from sales of certain assets, and the estimated amounts to be paid in settlement of certain liabilities involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the company; (ii) the consistency with external 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 valuation methods and evaluating the reasonableness of the discount rates and amounts recoverable under the cares act./s/ pricewaterhouse coopers llp san francisco, california march 26, 2021we have served as the company’s auditor since 2014. | 2 |
critical audit matters the critical auditmatters communicated below are matters arising from the current period audit of the financial statements that were communicated or requiredto be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statementsand (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alterin any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. f-2 convertible notes –description of the matter as discussed in notes 8 to the consolidated financial statements, the company had various debt instruments which included conversion features requiringbifurcation and separate accounting. management evaluated the required accounting, significant estimates, and judgments around the valuationfor these embedded derivatives. these embedded derivatives were initially measured at fair value and have subsequently been remeasuredto fair value at each reporting period and at settlement.there is no currentobservable market for these types of features and, as such, the company determined the fair value of the embedded derivatives using a black-scholes model to measure the fair value of the bifurcated derivative. as a result, a high degree of auditor judgment and effortwas required in performing audit procedures to evaluate the conclusions reached by management, as well as the inputs to the company’s black-scholes model.how we addressed the matter in our audit our principalaudit procedures performed to address this critical audit matter included the following: ·we obtained an understanding of the controls and processes surrounding the evaluation, initial measurement, and revaluation of the bifurcated derivatives. ·we verified note amount, interest rate and maturity date to the supporting documentation and debt agreement, and examined terms and conditions of the note and confirmed the ending balance to the note holder. ·we evaluated management’s assessment and the conclusions reached to ensure these instruments were recorded in accordance with the relevant accounting guidance. ·we evaluated the fair value of the bifurcated derivatives that included testing the valuation models and assumptions utilized by management. we reviewed and tested the fair value model used, significant assumptions, and underlying data used in the model. ·we considered the adequacy of the disclosures in the financial statements in relation to convertible debt. /s/ taad llp we have served as the company’s auditor since 2022. | 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 especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. estimated costs to complete on fixed price contracts as discussed in note 1 to the consolidated financial statements, revenues from fixed price contracts are recognized over time since control of the services is transferred continuously to the client. generally, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the company’s performance obligations, which typically occurs over time periods ranging from six months to one year. we identified auditing management’s estimates of costs to complete on select fixed price contracts to be a critical audit matter. the critical audit matter relates to select long-term fixed price construction contracts, based on magnitude of estimated costs to complete and the stage of completion of the contract. these estimates require management to make assumptions about future events and, as a result, a high degree of auditor judgment is involved in auditing these estimates. due to the factors above, auditing management’s estimates of costs to complete required extensive audit procedures. our audit procedures related to the evaluation of estimated costs at completion for fixed price contracts included the following: ●tested the design, implementation, and operating effectiveness of controls that are designed to address the reasonableness of estimates of costs to complete fixed price contracts.●evaluated the reasonableness of management’s estimates related to the cost to complete for fixed price contracts through testing of the key components of the estimated costs to complete, including, labor, materials, and subcontractor costs. ●agreed a sample of contract costs incurred to supporting documentation. ●performed inquiries of management and project personnel regarding facts and circumstances relevant to the accounting for a sample of such contracts.●recalculated revenue recognition based on the percentage of completion.●performed a retrospective review procedures to assess management’s historical ability to accurately estimate the transaction price and cost to complete of fixed price contracts. estimated realization of deferred income tax assets for net operating losses as described in notes 1 and 11 to the consolidated financial statements, the company’s consolidated net deferred tax assets includes the value of net operating losses that management expects to realize before the net operating losses expire. in assessing the need for a valuation allowance, management estimates future taxable income by jurisdiction. significant estimates are required in estimating future taxable income, the reversal of income tax liabilities, leading to significant judgment from management.57table of contents the principal considerations for our determination that performing procedures relating to the income tax valuation allowances on deferred tax assets is a critical audit matter are there was significant judgment by management when estimating future taxable income and reversal of income tax liabilities. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence relating to the realization of deferred income tax assets. 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. our audit procedures related to the evaluation of management's estimates over the realization of deferred income tax assets included the following: ●tested the design, implementation, and operating effectiveness of controls relating to the valuation allowances on deferred tax assets. ●tested underlying historical data used in calculating the cumulative book income (loss) subject to tax. ●assessed the reasonableness of management’s estimate of future book income, as adjusted for permanent income tax items, which included evaluating historical book income (loss) subject to tax, and the company's sources of future taxable income, including verifiable signed contracts. ●used professionals with specialized skill and knowledge to assist in evaluating management’s analysis, including cumulative book income (loss) subject to tax. /s/crowe llp we have served as the company's auditor since 2018. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the 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 opinion on the critical audit matter or on the accounts or disclosures to which it relates.55kost forer gabbay & kasierer144 menachem begin road, building a tel-aviv 6492102, israel tel: +972-3-6232525fax: +972-3-5622555ey.com revenue recognition description of the matter as described in note 2.h to the consolidated financial statements, the company generates revenues in the form of software license fees and related maintenance and services fees. software license revenues are recognized at the point of time when the software license has been delivered and the benefit of the asset has transferred. the company recognizes revenues from maintenance ratably over the term of the underlying maintenance contract term. the term of the maintenance contract is usually one year. renewals of maintenance contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the period.revenues from professional services consist mostly of time and material services. the performance obligations are satisfied, and revenues are recognized, when the services are provided or once the service term has expired. the company enters into contracts that can include combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.to account for promised goods and services, the company allocates the transaction price to the distinct performance obligations on a relative standalone selling price basis and recognizes revenue when control of the distinct performance obligation is transferred. auditing the company’s recognition of revenue was challenging and complex due to the effort required to evaluate 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, the determination of stand-alone selling prices for each distinct performance obligation and the timing of when revenue is recognized.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 we addressed the matter in our audit we obtained an understanding, evaluated design and tested the operating effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the stand-alone selling prices and of the timing of revenue recognition.among the procedures we performed to test the identification and determination of distinct performance obligations, for a sample of contracts, we read the executed contract to understand and evaluated management’s identification of significant terms for completeness, including the identification of distinct performance obligations.to test management’s determination of stand-alone selling price for each performance obligation, we performed procedures to evaluate the methodology applied, tested the accuracy of the underlying data and calculations and the application of that methodology to the sample of contracts. we also tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. finally, we assessed the appropriateness of the related disclosures in the consolidated financial statements./s/ kost forer gabbay & kasierera member of ernst & young global we have served as the company’s auditor since 2007. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved 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.58 valuation of goodwill description of the matter as discussed in note 6 to the consolidated financial statements, at december 31, 2021, the company had goodwill of $725 million in reporting units that did not have a fair value substantially in excess of their carrying value. 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 year. goodwill is tested for impairment at the reporting unit. auditing management’s impairment test for goodwill is complex and involved subjective auditor judgment and 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 projected cash flows and weighted average cost of capital. these assumptions are sensitive to and affected by expected future market or economic conditions, and industry and company-specific qualitative factors. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill impairment assessment process, including management’s review controls over the significant assumptions described above as well as the underlying data used in the company’s valuation models. to test the estimated fair value of the company’s reporting units, we performed audit procedures that included, among others, evaluating the company’s valuation methodologies, testing the significant assumptions described above and testing the underlying data used by the company in its analysis. we compared the projected cash flows to the company’s historical cash flows and other available industry forecast information. we involved our valuation specialists to assist in reviewing the valuation methodology and testing certain significant assumptions. 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. revenue recognition under long-term construction contracts description of the matter as discussed in note 2 to the consolidated financial statements, the company recognizes revenue over time for certain long-term construction contracts using an input method described as the cost-to-cost approach to determine the extent of progress towards completion of performance obligations. under the cost-to-cost approach, the determination of the progress towards completion requires management to prepare estimates of the costs to complete. for material fixed price contracts, estimates are subject to considerable judgment and could be impacted by such items as changes to the project schedule and the cost of labor and material. auditing management’s estimate of the progress towards completion of its projects involved subjectivity as the costs to complete forecasts of fixed price contracts are subject to considerable judgment. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s process to recognize long-term contract revenue, including key controls related to monitoring projected project costs. to test the revenue recognized under long-term construction contracts, we performed audit procedures that included, among others, evaluating the appropriate application of the cost-to-cost method to ensure it accurately depicts the company’s performance in transferring control of the performance obligation; testing the significant assumptions discussed above to develop the estimated cost to complete; and testing the completeness and accuracy of the underlying data. to assess management’s estimated costs, we performed audit procedures that included, among others, agreeing the estimates to supporting documentation; conducting interviews with project personnel; attending selected project review meetings; performing observations of select projects to observe progress; and performing lookback analyses to historical actual costs to assess management’s ability to estimate.59 /s/ ernst & young llp we have served as the company’s auditor since at least 1995, | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. revenue recognition – allocation of transaction price to performance obligations description of the matter as described in note 2 to the consolidated financial statements, the company’s contracts for instrument sales commonly include a combination of the instrument, consumables and services. for those arrangements with multiple distinct performance obligations, the company allocates the total contract price to each distinct performance obligation based on relative stand-alone selling price. the company uses its best estimate of relative stand-alone selling price for its products and services based on historical sales data. auditing the company’s revenue recognition was complex, specifically related to the effort required to test the accounting for contracts with multiple performance obligations. this included the identification of the distinct performance obligations, determination of the stand-alone selling price and allocation of the transaction price to the distinct performance obligations based on the company’s best estimate of the stand-alone selling price.-68-table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls to determine the distinct performance obligations, stand-alone selling price of each distinct performance obligation and the allocation of the transaction price to the distinct performance obligations.to test the revenues recognized for contracts with multiple performance obligations, our audit procedures included, among others, reading a sample of executed contracts to understand the terms and conditions, evaluating the company’s identification of the distinct performance obligations, and testing the company’s allocation to the distinct performance obligations based on relative stand-alone selling price. to test management’s determination of relative stand-alone selling price for each distinct performance obligation, our audit procedures included, among others, assessing the appropriateness of the methodology applied and testing the reliability and mathematical accuracy of the underlying data and calculations and performing a sensitivity analysis of the impact to recorded revenues for varying stand-alone selling prices.issuance of convertible debt description of the matter in march 2020, the company issued $230 million of 2.625% convertible senior notes due 2025 (the “convertible notes”). as discussed in note 10 of the consolidated financial statements, the convertible notes include conversion terms that require the company to account for the debt and equity components of the convertible notes separately. this required allocating value to the debt component based on the effective yield that the company would have received on the debt issuance had it not included the conversion feature, with the residual value ascribed to the equity component and reflected as a debt discount to be amortized to interest expense over the terms of the notes.auditing management’s evaluation of the convertible notes was especially challenging due to the complexity in assessing the components of the convertible notes for separability and assessing the valuation of the debt instrument absent any conversion feature. the valuation of the debt instrument absent any conversion feature is used to record the debt component on the company’s balance sheet and required the use of a valuation methodology and certain key assumptions. while the company used available data from which to derive key assumptions to the fair value of stand-alone debt, such as expected volatility, synthetic credit rating, and effective yield, the fair value is sensitive to changes in the key assumptions and therefore required judgement in evaluating their reasonableness.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 initial convertible notes accounting process and the company’s procedures evaluate the applicable accounting guidance and components of the convertible notes for separability, to review the valuation methodology and the key assumptions used to determine the fair value of the debt component.to test the initial accounting for the convertible notes, our audit procedures included, among others, inspection of the debt agreement and testing management’s application of the relevant accounting guidance. to test the value assigned to the debt and equity components, we performed audit procedures involving our valuation specialists to evaluate the company’s determination of the fair value of the debt absent of any conversion feature. this included testing the appropriateness of the methodology and underlying assumptions used, performing an independent credit analysis including comparison to market rates for similarly rated instruments, and evaluating the sensitivity of management’s key assumptions./s/ ernst & young llp we have served as the company’s auditor since 2020. | 3 |
critical audit matters the critical audit matters communicated beloware matters arising from the current period audit of the financial statements that were communicated or required to be communicated tothe audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved ourespecially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinionon the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinionson the critical audit matters or on the accounts or disclosures to which they relate. the accompanying notes are an integral part of these consolidated financial statements. f-2 description of the matter as described in notes 3 and 10 to the consolidatedfinancial statements, the company has made investments in avalanche international corp. (“avlp”), a related party controlledby philou ventures, llc, which is an entity affiliated with the company by common ownership through milton c. ault, iii who is the company’s executive chairman of the board. these investments include convertible notes with a net carrying amount of approximately $9.9 million,warrants to purchase up to 22.5 million shares of common stock with a carrying amount of approximately $4.9 million and 999,175 sharesof common stock with a carrying amount of approximately $500,000. the aggregate carrying amount of these investments amounted to approximately$15.3 million at december 31, 2020 and required management to make subjective and complex judgments relating to the fair value of thesesecurities and credit risk with respect to the convertible notes. changes in these estimates, including conditions that affect creditrisk, could have a significant impact on the company’s consolidated financial statements. we identified the company’s investmentsin avlp as a critical audit matter because that entity has undertaken a plan to commercialize a new textile manufacturing technology.the company also has entered into an agreement with avlp to provide contract manufacturing services relating the production of this machinery.management exercised significant judgment in determining the carrying amounts of the avlp notes and warrants including the applicationof fair value measurements and evaluating credit risk. the company exercised these judgments within the context of avlp being a relatedparty that is both a debtor to the company and customer with a trade relationship. management used both a market and income approachto quantify the carrying amount of the convertible notes, including credit risk. significant assumptions used by management in applyingthe market approach include the fair value of avlp’s common stock adjusted for a lack of marketability discount and the time valueof money based on management’s expectation as to when there may be a liquidity event which could affect the timing of a settlementof the convertible notes. the income approach included the use of a discounted cash flow analysis with assumptions regarding forecastedrevenues, operating margins and a risk-adjusted discount rate to compute the net present value of such cash flows. the avlp common stockpurchase warrants were valued using the black-scholes option pricing model with subjective inputs including the fair value of avlp’scommon stock adjusted for lack of marketability discount as described herein, risk free interest rates and expected volatility. how we addressed the matter in our audit the primary procedures we performed to addressthis critical audit matter included the following: (i)gaining an understating of the company’s internal control and processes used to develop fair valueestimates,(ii)reading relevant agreements,(iii)confirming balances due to the company with avlp’s management,(iv)reviewing information provided to us about avlp’s historical sources and uses of cash as a meansof evaluating its revenue and expense forecast and the attainability of its business plan,(v)interviewing avlp’s management regarding the status and expectations regardingits business plan,(vi)comparing the fair value of avlp’s common stock to public quotes, and(vii)utilizing a valuation specialist to assist the engagement team with the following: ·evaluating the reasonableness of the lack of marketability discount used by management to quantify thecarrying amount of the convertible notes using the market approach and as input to the black-scholes option pricing model,·evaluating the reasonableness of the risk free interest and volatility rates used by management as inputto the black-scholes option pricing model,·testing the mathematical accuracy of the discounted cash flow analysis,·assessing the reasonableness of the revenue and expense assumptions and their consistency with other audit evidence, and·evaluating the appropriateness of the discount rate used in the cash flow forecast discounted cash flowanalysis. /s/ marcum llp marcum llp 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 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.assessment of the carrying value of goodwill in the amc networks international (amcni) reporting unit as discussed in note 10 to the consolidated financial statements, the company’s goodwill balance for its international and other segment was $464.9 million at december 31, 2019, which includes the amcni reporting unit. the company performs goodwill impairment testing on an annual basis during the fourth quarter of each fiscal year as of december 1, and whenever events and changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value. in connection with its 2019 annual impairment test, the company recognized a charge of $98.0 million to reduce the carrying value of the amcni reporting unit to its fair value.f-2we identified the assessment of the carrying value of goodwill in the amcni reporting unit as a critical audit matter. revenue growth rates and the discount rate used by the company to estimate the fair value of the reporting unit involved challenging auditor judgments, and have a significant effect on the company’s assessment of the carrying value of the reporting unit’s goodwill.the primary procedures we performed to address this critical audit matter included the following. we tested internal controls over the company’s goodwill impairment assessment process, including controls related to the selection of relevant assumptions used to estimate the fair value of the reporting unit, such as revenue growth rates and the discount rate. we performed sensitivity analyses over the revenue growth rates and discount rate assumptions to assess their potential impact on the company’s determination of the fair value of the reporting unit. we evaluated the company’s forecasted reporting unit revenue growth rate assumptions by comparing the assumptions to the reporting unit’s historical revenue growth rates, to projected revenue growth rates for guideline companies, and to projected television broadcasting revenue growth rates published by a third-party. we compared the company’s historical revenue forecasts to actual results to assess the company’s ability to accurately forecast. we involved a valuation professional with specialized skill and knowledge who assisted in:•evaluating the company’s discount rate, by comparing it to a discount rate range that we independently developed using publicly available market data for comparable entities; and •evaluating the company’s estimated fair value of the reporting unit, by comparing it to a range of indicative fair values that we independently developed using the reporting unit’s cash flow forecast, our independently developed discount rate range, and publicly available market multiples for comparable entities.assessment of the amortization of owned original program rights as discussed in note 6 to the consolidated financial statements, the balance of the company’s owned original program rights, net as of december 31, 2019 was $548.7 million. owned original program rights costs are amortized over their estimated useful lives, commencing upon the first airing, based on attributable revenue to-date as a percentage of total projected attributable revenue (ultimate revenues) under the individual-film-forecast-computation method. the company bases its estimates of projected ultimate revenues primarily on distribution and advertising revenues historically generated from similar content in comparable markets, and projected program usage. projected program usage is based on the company’s expectation of future exhibitions. the company reviews ultimate revenue estimates and projected program usage and revises assumptions, if necessary, which could either accelerate or delay the timing of amortization expense or result in a write-down of unamortized costs to fair value.we identified the assessment of ultimate revenues used in the amortization of owned original program rights as a critical audit matter. the assumptions used by the company to determine ultimate revenues involved especially challenging auditor judgment as they involve subjective assessments about future distribution (subscription fee revenues and content licensing revenues) and advertising revenues. changes in those assumptions could have a significant effect on the carrying amount of the company’s owned original program rights and associated current period program rights amortization expense.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s ultimate revenue forecasting process, including controls related to the development of assumptions used in determining projected attributable distribution revenue and attributable advertising revenue. we compared the company’s historical projections of attributable distribution and advertising revenues to actual results to assess the company’s ability to accurately project ultimate revenues. for a selection of owned original programming series, we evaluated (1) projected attributable subscription fee revenue, by comparing the company’s assumptions for projected subscribers and rates to recent actual subscriber and rate trends and terms of existing distribution agreements, (2) projected attributable content licensing revenue, by comparing expected licensing fees to contractual terms of existing agreements and recent historical trends of sales and usage based royalties, (3) projected attributable advertising revenue, by comparing the underlying pricing and ratings assumptions to recent historical trends, and (4) projected program usage by comparing historical projections to actual usage, to assess the company’s ability to accurately project program usage, and compared projected program usage to historical trends./s/ kpmg llp we have served as the company’s auditor since 2011. | 3 |
critical audit matter the critical audit matters communicatedbelow are matters arising from the current period audit of the financial statements that were communicated or required to be communicatedto the board of directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)involved subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion onthe financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separateopinions on the critical audit matters or on the accounts or disclosures to which they relate. long-lived asset impairment consideration at december 31, 2020, the company’smining and mineral rights balance totaled $3.9 million. as more fully described in note 2 to the consolidated financial statements,the company evaluates its mining and mineral rights for impairment whenever events or changes in circumstances indicate that thecarrying amounts of the asset or group of assets may not be recoverable (“triggering events”). management evaluatesvarious qualitative factors in determining whether or not events or changes in circumstances indicate that the carrying amountof an asset or group of assets may not be recoverable. auditing the company’s impairmentassessment involved our subjective judgment because, in determining whether a triggering event occurred, management uses estimatesthat include, among others, assumptions about forecasted gold, silver, copper and other metal prices and total future productionusing reserve or other relevant information reported by the operators. significant uncertainty exists with these assumptions. further,management’s evaluation of any new information indicating that production will not likely occur or may be significantly reducedin the future requires significant judgment. to test the company’s impairmentassessment, our audit procedures included, among others, evaluating the significant assumptions, judgments and operating data usedin the company’s analysis to available market information. furthermore, we considered the professional qualifications andobjectivity of management’s specialists and the reputation of the third-party valuation firm. /s/ turner, stone &company l.l.p. dallas, texas january 26, 2021 we have served as the company’s auditor since 2013. | 2 |
critical audit matters the critical audit matters communicated beloware matters arising from the current period audit of the financial statements that were communicated or required to be communicated tothe audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved ourespecially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinionon the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinionson the critical audit matters or on the accounts or disclosures to which they relate. going concern assessment critical audit matter description as described in note 2 to the consolidated financialstatements, the company had recurring losses from operations. the company has incurred a net loss of $45 million during the year ended december 31, 2021. as of december 31, 2021, the company had a working capital deficit of $90 million and the cash flow used in the operationactivities for the year ended december 31, 2021 was $27 million. these conditions raise substantial doubt about the company's abilityto continue as a going concern. auditing the company’s going concern assessmentis a critical audit matter as the assessment is complex and involves high degree of estimation due to the uncertainty of the company’sability to execute its plans for the next twelve months from the financial statement issuance date, including increasing profitabilityby increasing revenue and reducing expenditures, accessing additional funding through both debt and equity financing and the dispositionof certain long-lived assets. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing proceduresand evaluating the relevant audit evidence. how the critical audit matter was addressedin the audit our principal audit procedures included, amongothers: ·evaluating the company’s goingconcern assessment methodology; ·testing the completeness, accuracy,and relevance of underlying data, and evaluating the reasonableness of the assumptions used in the management’s assessment; ·assessing the level of certaintyin its ability to access funding; ·assessing the adequacy of the company’sgoing concern disclosures included in note 2 to the consolidated financial statements. /s/ marcum bernstein & pinchuk llp marcum bernstein & pinchuk llp we have served as the company’s auditor since 2018. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.estimation of total labor costs to be incurred for the murata contract as discussed in notes 2 and 3 to the consolidated financial statements, in september 2019 the company entered into a collaboration and license agreement with murata manufacturing co., ltd. revenue for the murata contract is recognized over time and represents a substantial majority of total revenues of $3.16 million for the year ended december 31, 2020. the company recognizes revenue for the murata contract over the estimated design development period based on the level of effort expended, as measured by costs incurred relative to total expected costs, as the services are performed.37table of contents we identified the evaluation of the estimation of total labor costs to be incurred for the murata contract as a critical audit matter. subjective auditor judgment was required to evaluate the estimate of remaining labor costs to complete the contract because of the nature and complexity of the work to be performed.the following are the primary procedures we performed to address this critical audit matter: •we inquired of operational and financial personnel of the company to evaluate progress to date, the estimate of remaining labor costs to be incurred, and factors impacting the amount of time and cost to complete the contract, including the assessment of the nature and complexity of the work to be performed. •we inspected correspondence, if any, between the company and the customer as part of our evaluation of contract progress. •we compared the company’s original or prior period estimate of total labor costs to be incurred to the actual labor costs incurred to-date to assess the company’s ability to accurately estimate labor costs. /s/ kpmg llp we have served as the company’s auditor since 2020. | 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.asset management and administration fees and trading revenue – refer to note 3 to the financial statements critical audit matter description revenues from asset management and administrative fees (amaf) are generated through proprietary, third-party mutual fund and exchange-traded funds (et fs) offerings, as well as fee-based advisory solutions. trading revenue is generated through commissions earned for executing trades for clients in individual equities, options, fixed income securities, and certain third-party mutual funds and et fs. both amaf and trading revenue is made up of a significant volume of low-dollar transactions, and uses automated systems to process and record revenue from these transactions based on underlying information sourced from multiple systems. the processing and recording of revenue is highly automated and is based on contractual terms with individual investors, mutual funds and investment advisors. as of december 31, 2019, total net revenue was $10.7 billion, of which $3.8 billion is amaf and trading revenue.given that the company’s process to record revenue is highly automated and involves multiple systems, auditing these revenue streams was complex and challenging due to the extent of audit effort required and involvement of professionals with expertise in information technology (it) which was necessary for us to identify, test, and evaluate the company’s systems.how the critical audit matter was addressed in the audit our audit procedures related to the company’s systems to process the amaf and trading revenue transactions included the following, among others:•with the assistance of our it specialists, we:◦identified the significant systems used to process revenue transactions and, using a risk-based approach, tested the relevant general it controls over each of these systems.◦performed testing of automated business controls and system interface controls (including batch processing) 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 systems to the company’s general ledger.•we performed testing of controls addressing the accuracy and completeness of reports used in the performance of controls.•with the assistance of our data specialists, we created data visualizations to evaluate recorded revenue and evaluate trends in the revenue data.•for a sample of transactions, we performed detail transaction testing by testing the mathematical accuracy of the recorded revenue and agreeing inputs to the calculation to contractual agreements. •we tested the amount of client assets by obtaining quoted market prices and reconciling total positions to third-party statements. /s/ deloitte & touche llp san francisco, california february 26, 2020 we have served as the company's auditor since 1976. | 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.revenue - refer to note 2 and 3 to the financial statements critical audit matter description the company provides center-based early education and child care, back-up child and adult/elder care, tuition assistance and student loan repayment program administration, educational advisory services, and other support services for employers and families. the company generates revenue from services based on the consideration specified in contracts with customers, which primarily consist of employer sponsors and parents. the company recognizes revenue when a performance obligation is satisfied by transferring control of the promised services to a customer, in an amount that reflects the consideration that the company expects to receive in exchange for those services. a performance obligation is a promise in a contract to transfer a distinct service to the customer. revenue is recognized over time as control of the service is transferred to the customer.given the company’s disparate services require recording a significant volume of transactions in multiple systems, performing audit procedures to test revenue required a high degree of auditor judgment and an increased extent of effort.52table of contents how the critical audit matter was addressed in the audit our audit procedures related to revenue included the following, among others:•we evaluated the company’s accounting policies for compliance with the applicable revenue recognition accounting guidance.•we performed analytical procedures to test the reasonableness of recorded balances. •we performed procedures to test the transactions were recorded in the appropriate accounting period.•we selected a sample of transactions within each significant revenue stream and performed the following:◦evaluated whether the transaction was accounted for in accordance with the company’s policies.◦tested the amounts recognized to source documents and tested the mathematical accuracy of the recorded revenue./s/ deloitte & touche llp boston, massachusetts february 25, 2022we 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 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.f-1valuation of syndicated loan and clo equity level 3 investments as described in notes 2 and 3 to the consolidated financial statements, the company’s fair value of syndicated loans (comprised of senior secured notes) and clo equity investments was $172.2 million and $122.5 million, respectively as of december 31, 2020. management applies judgment to the specific facts and circumstances of each level 3 investment when determining fair value, which involves the use of significant unobservable inputs with respect to (i) for syndicated loan investments: non-binding indicative bids received from agent banks, discount rates derived from estimated credit spreads, ebitda multiples, and recent trading activity, and (ii) for clo equity investments: indicative prices provided by a recognized industry pricing service, and the implied yield of such prices, supplemented by actual trades executed in the market at or around period-end, as well as indicative prices provided by brokers who arrange the transactions. for syndicated loan investments, when determining fair value, management also analyzes each syndicated loan by reviewing the portfolio company’s financial statements, covenant compliance and other business developments. additionally, for syndicated loans that have certain attributes as discussed in note 2, management uses a third party valuation firm. for clo equity investments, management considers, among other factors, operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults in determining fair value. the principal considerations for our determination that performing procedures relating to the valuation of syndicated loan and clo equity level 3 investments is a critical audit matter are the significant judgment by management to determine the fair value of syndicated loan and clo equity level 3 investments due to the use of significant unobservable inputs, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the audit evidence obtained relating to the significant unobservable inputs. also, 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 valuation of syndicated loan and clo equity level 3 investments, including controls over management’s methods, significant unobservable inputs, and data. these procedures also included, among others (i) developing an independent fair value estimate by obtaining independent pricing from third party vendors, when available, and comparing management’s estimate to the independent estimate to evaluate the reasonableness of management’s estimate, and/or (ii) for a sample of investments, professionals with specialized skill and knowledge were used to assist in developing an independent range of prices using available market inputs, independently constructed models and independently determined significant unobservable inputs, and comparing management’s estimate to the independent range of prices to evaluate the reasonableness of management’s estimate. developing an independent range of prices involved testing the completeness and accuracy of data provided by management. income from securitization vehicles and investments as described in notes 2 and 8 to the consolidated financial statements, the company recorded income from securitization vehicles and investments of $15.0 million for the year ended december 31, 2020. the company’s income from investments in the equity class securities of clo vehicles (typically income notes or subordinated notes) is recorded using the effective yield method based upon estimated cash flow, amounts and timing, including those clo equity investments that have not made their inaugural distribution for the relevant period end. the principal considerations for our determination that performing procedures relating to the income from securitization vehicles and investments is a critical audit matter are the significant judgment by management to determine the significant assumptions related to estimated cash flow amounts and timing used in the effective yield method, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the audit evidence obtained relating to the significant assumptions used in the effective yield method. also, the audit effort involved the use of professionals with specialized skill and knowledge. f-2addressing 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 income from securitization vehicles and investments, including controls over management’s methods, significant assumptions, and data. these procedures also included, among others (i) developing an independent estimate of income from securitization vehicles and investments for a sample of securities; (ii) comparing the independent estimate to management’s estimate to assess the reasonableness of management’s estimate; and (iii) testing the completeness and accuracy of data provided by management. professionals with specialized skill and knowledge were used to assist in independently developing a range of effective yields using independently developed significant assumptions for cash flow amounts and timing, based on available market inputs, current information, and events. /s/ pricewaterhouse coopers llp new york, new york march 22, 2021we have served as the company’s auditor since 2003. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. inventory valuation as discussed in note 1 to the financial statements, the company assesses the recoverability of its inventory based on judgments and assumptions about future demand and market conditions. future demand is determined based on historical sales and expected future sales. the company reduces its inventory to its lower of cost or net realizable value on a part-by-part basis to account for its obsolescence or lack of marketability. reductions are calculated as the difference between the cost of inventory and its net realizable value based upon the assumptions about future demand, market conditions, and costs.we identified inventory valuation as a critical audit matter. the principal consideration for our determination that inventory valuation is a critical audit matter is that management's estimates of future demand and market conditions are subject to a high level of estimation uncertainty. therefore, subjective and complex auditor judgment is necessary to evaluate the reasonableness of management's judgments and assumptions since historical results may not be indicative of the future due to uncertainties arising from technological advances, industry consolidation and economic factors.17addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. our audit procedures related to the inventory valuation reserve included the following, among others:•we evaluated the appropriateness and consistency of management's methods and assumptions used in developing their estimate of the inventory valuation reserve, which included consideration of recent changes in the company's strategy and technology in the market.•we evaluated the appropriateness of specific inputs supporting management's estimate, including the age of on-hand inventory levels, historic inventory trends, and projected sales and gross margin rates used in the forecasted periods.•we tested the accuracy, completeness, and relevance of the reports and inputs used in the company's analysis.•we evaluated management's calculation of the inventory valuation reserve by testing the mathematical accuracy of the company's reserve calculation.revenue recognition for the year ended september 30, 2021, contract revenues recognized by the company were $20.7 million. as described in note 1 of the financial statements, the company generally recognizes revenues for these contracts over time as performance obligations are satisfied. the company generally measures its progress towards completion using an input measure of total costs incurred divided by total costs expected to be incurred. in addition, the company's estimate of transaction price includes variable consideration associated with claims only to the extent that a significant reversal would not be probable.recognition of revenue over time as performance obligations are satisfied for fixed price contracts is highly judgmental as it requires the company to prepare estimates of total contract revenue and total contract costs, including costs to complete in-process contracts. these estimates are dependent upon a number of factors, including the accuracy of estimates made at the balance sheet date, such as progress, material quantities, labor productivity and cost estimates.we identified revenue recognition as a critical audit matter. the principal consideration for our determination is contract revenue recognition is complex and highly judgmental due to the variability and uncertainty associated with estimating the costs to complete and amounts expected to be recovered from variable consideration. changes in these estimates would have a significant effect on the amount of contract revenue recognized. our audit procedures related to contract revenue recognition included the following, among others:•we obtained an understanding, evaluated the design and operating effectiveness of controls that address the risk of material misstatement of contract revenue including those associated with cost to complete estimates for fixed price contracts and estimates of amounts expected to be recovered from variable consideration. •to evaluate the company's determination of estimated costs to complete, we selected a sample of contracts and, among other things, inspected the executed contracts including any significant amendments; tested key components of the cost to complete estimates, including materials, labor, and subcontractors costs; compared actual project margins to historical and expected results; and recalculated revenues recognized.•we tested management's estimation process by performing a lookback analysis to evaluate projects completed in the current year compared to management's prior year estimates. we also performed a look forward analysis to evaluate projects completed subsequent to year end and compared to management's current year estimates./s/ hogan taylor 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 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.government and commercial rebates description of the matter as more fully described in note 1, the company estimates reductions to its revenues for amounts payable to payers and healthcare providers in the united states under various government and commercial rebate programs in the period that the related sales occur. rebates may vary by product, payer and individual payer plans, which may not be known at the point of sale. estimated reductions to revenue are based on product sales, historical and expected payer mix, discount rates, and various other estimated and actual data, adjusted for current period expectations.auditing the company’s estimated reductions to revenue for rebates was complex and involved significant judgment, particularly in assessing the reasonableness of estimated payer mix applied to sales during the period. this estimate relies heavily on historical data that is adjusted for changes in payer mix expectations over time.52how we addressed the matter in our audit we evaluated and tested the design and operating effectiveness of the company’s internal controls over management’s estimation and review of reductions from revenue for rebate programs, including controls to assess the payer mix assumption. we also tested the completeness and accuracy of data utilized in the controls, and the accuracy of calculations supporting management’s estimates.to test management’s estimation methodology for determining the payer mix, our audit procedures included, among others, evaluating evidence contrary to the estimated amounts, performing a sensitivity analysis on the rates used in the estimates and performing a comparison of actual payments related to amounts accrued during the current and prior years.valuation of in-process research and development intangible assets description of the matter at december 31, 2020, the company’s in-process research and development (“ipr&d”) intangible assets from acquisitions prior to 2020 were $1.1 billion. as discussed in note 1, intangible assets with indefinite useful lives related to purchased ipr&d projects are measured at their respective fair values as of the acquisition date and are considered indefinite-lived until the completion or abandonment of the associated r&d efforts. the company tests indefinite-lived intangible assets for impairment on an annual basis and in between annual tests if they become aware of any events or changes that would indicate the fair values of the assets are below their carrying amounts.auditing the impairment test was complex due to the significant judgment required in estimating the fair values of the ipr&d intangible assets. in particular, the fair value estimates required the use of valuation methodologies that were sensitive to significant assumptions (e.g., discount rate, projected research and development costs, probability of technical success, addressable patient population, projected market share and product profitability), which were affected by expected future market or economic conditions. how we addressed the matter in our audit we evaluated and tested the design and operating effectiveness of the company’s internal controls over the determination of the estimated fair value of the ipr&d intangible assets. for example, we tested controls over management's review of the valuation methodologies and the significant assumptions used to develop the fair value estimates. we also tested management's controls to validate that the data used in the fair value estimates were complete and accurate. to test the estimated fair value of the company’s ipr&d intangible assets, our audit procedures, among others, included evaluating the company’s use of appropriate valuation methodologies with the assistance of a valuation specialist, performing sensitivity analyses to determine which assumptions had the greatest impact on the overall determination of value, and testing the completeness and accuracy of the underlying data. our audit procedures over the most significant assumptions included comparing the assumptions to current industry, market and economic trends, to historical results of the company’s business and other guideline companies within the same industry and to other relevant factors. for example, to evaluate the probability of technical success, we considered the phase of development of the ipr&d projects, and the company's history of obtaining regulatory approval. valuation of intangible assets acquired in a business combination description of the matter as described in note 6, on october 23, 2020, the company completed its acquisition of immunomedics, inc. (“immunomedics”) for $20.6 billion in cash consideration. the transaction was accounted for as a business combination using the acquisition method of accounting. the acquisition date fair values of acquired finite-lived intangible assets, comprised of commercial product rights, and indefinite-lived intangible assets, comprised of ipr&d intangible assets, was estimated to be $4.6 billion and $15.8 billion, respectively, using a probability-weighted income approach that discounts expected future cash flows to present value. auditing the acquisition date fair values of the intangible assets acquired from immunomedics was complex due to the significant judgment required in estimating the fair values of each asset. in particular, the fair value estimates required the use of valuation methodologies that were sensitive to significant assumptions (e.g., discount rate, projected research and development costs, probability of technical success, addressable patient population, treatment duration, projected market share and product profitability), which were affected by expected future market or economic conditions. 53how we addressed the matter in our audit we evaluated and tested the design and operating effectiveness of the company’s internal controls over the determination of the estimated fair value of the intangible assets. for example, we tested controls over management's review of the valuation methodologies and the significant assumptions used to develop the fair value estimates of the intangible assets. we also tested management's controls to validate that the data used in the fair value estimates were complete and accurate. to test the estimated fair value of the company's intangible assets acquired from immunomedics, our audit procedures, among others, included evaluating the company's use of appropriate valuation methodologies with the assistance of a valuation specialist, performing sensitivity analyses to determine which assumptions had the greatest impact on the overall determination of value and testing the completeness and accuracy of the underlying data used to develop the assumptions. our audit procedures over the significant assumptions included comparing the most significant assumptions to current industry, market and economic trends, to historical results of the company's business and other guideline companies within the same industry and to other relevant factors. for example, we evaluated the probability of technical success by considering the phase of development of the clinical projects, and the company's history of obtaining regulatory approval. in addition, we evaluated the expected addressable patient populations by comparing the company’s estimates to external industry forecasts./s/ ernst & young llp we have served as the company’s auditor since 1988. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.allowance for loan losses – qualitative factors as described in notes 1 and 4 to the consolidated financial statements, the company’s allowance for loan losses is a valuation account that reflects the company’s estimation of incurred losses in its loan portfolio to the extent they are both probable and reasonable to estimate. the allowance for loan losses was $50,652,000 at december 31, 2019, which consists of two components: the valuation allowance for loans individually evaluated for impairment (“specific component”), representing $10,384,000, and the valuation allowance for loans collectively evaluated for impairment (“general component”), representing $40,268,000. the general component is based on the company’s historical loss experience over the most recent three years subject to a floor, adjusted for qualitative factors.the qualitative factors include consideration of the following: levels of, and trends in, delinquencies and impaired loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. due to the significant judgment applied by management to determine the effect of the qualitative factors, we identified the effect of the qualitative factors on the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment to audit management’s determination of the qualitative factors.the primary procedures we performed to address this critical audit matter included:●testing the effectiveness of controls over the evaluation of the items used to estimate the qualitative factors, including controls addressing:o management’s review of the completeness and accuracy of data inputs used as the basis for the allowance allocations resulting from the qualitative factors.o management’s review of the reasonableness of the judgments and assumptions used to develop the qualitative factors for the general component of the allowance for loan losses.o management’s review of the mathematical accuracy of the allowance calculation.●substantively testing management’s process, including evaluating their judgments and assumptions, for developing the qualitative factors, which included:o evaluation of the completeness and accuracy of data inputs used as a basis for the qualitative factors.o evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the qualitative factors and the resulting allocation to the 52table of contentsallowance. among other procedures, our evaluation considered, evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently from period to period.o analytically evaluating the qualitative factors year over year for directional consistency, testing for reasonableness, and obtaining evidence for significant changes.o testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors./s/ crowe llp we have served as the company’s auditor since 1983. | 3 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. 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 auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. business combinations – valuation of acquired intangible assets asdescribed in note 2 to the consolidated financial statements, on december 29, 2021, the company acquired t&l creative salads, inc.and olive branch foods, llc for purchase consideration of approximately $14 million. the company accounted for the acquisition in accordancewith asc topic 805, business combinations, which required the company to exercise judgment and make estimates and assumptions based onavailable information regarding the fair values of intangible assets as of the date of the acquisition. weidentified the fair values of certain identifiable intangible assets, primarily goodwill, trademarks, trade names, and a customer list,as critical audit matters. the principal considerations for our determination included the following: (i) changes in the key assumptionscould have a significant impact on the fair value of the intangible assets acquired, (ii) subjectivity and judgment required to determinesignificant unobservable inputs and assumptions utilized by the company in determining the fair value of the intangible assets, specificallyprojected revenue growth rates, expected cash flow, royalty rates and discount rates and (iii) the appropriateness of the use of variousvaluation models to determine the fair value of the intangible assets. auditing these factors involved especially challenging and subjectiveauditor judgment due to the nature and extent of audit effort required to address the matters, including the extent of specialized skillor knowledge needed. theprimary procedures we performed to address this critical audit matter included: ●assessing the reasonableness of projected revenue growth rates and expected cash flow through: (i) evaluating the company’s objectives, strategies, and related business risks, (ii) evaluating consistency with available industry or other third-party reports or data, and (iii) evaluating the company’s relevant evidence and analysis for the significant assumptions. ●utilizing personnel with specialized knowledge and skill with valuations to (i) assess the reasonableness of royalty rates and discount rates utilized in the various valuation models and (ii) assess the appropriateness of the various valuation models utilized by management to determine the fair values of the intangible assets. /s/rosenberg rich baker berman, p.a. wehave served as the company’s auditor since 2011. | 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.revenue recognition on certain agreements for sales of new products manufactured to unique customer specifications as discussed in note 1 to the consolidated financial statements, the company enters into agreements for sales of goods manufactured to unique customer specifications on an over time basis. revenue from these types of contracts is recognized to the extent of progress towards completion measured by actual costs incurred relative to total expected costs. the company provides for potential losses on these types of contracts when it is probable that a loss will be incurred.we identified revenue recognition for certain agreements for sales of new products as a critical audit matter. complex auditor judgment was required in evaluating the company's long-term estimates of the expected direct material costs to be incurred in order to complete these agreements.baker hughes holdings llc 2020 form 10-k | 43the 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 revenue recognition process for sales of new products. this included controls pertaining to the company's estimation of direct material costs expected to be incurred to complete agreements for sales of new products. we evaluated the company's ability to accurately estimate direct material costs expected to be incurred to complete the agreements for sales of new products. we evaluated the estimated direct material costs expected to be incurred to complete the new products for the agreements by:–questioning the company's finance and project managers regarding progress to date based on the latest project reports and the costs expected to still be incurred until completion;–observing project review meetings performed by the company or inspecting relevant minutes of those meetings to identify changes in the estimated costs expected to be incurred to complete the contract and related contract margins;–investigating changes to the contract margin when compared to the prior year's estimated contract margin; and–evaluating the estimated direct material costs to be incurred by obtaining supplier cost estimates and considering changes to those estimates during the year.goodwill impairment in the oilfield services reporting unit as discussed in notes 1 and 6 to the consolidated financial statements, the company has four reporting units which are monitored for impairment on the basis of market conditions. the company performs an impairment test on goodwill on an annual basis for each of its reporting units as of july 1, or more frequently when circumstances indicate that an impairment indicator exists at the reporting unit level. potential impairment indicators include the results of the most recent annual impairment testing, downward revisions to internal forecasts, declines in market capitalization below book value, and the magnitude and duration of those declines, if any. the company identified impairment indicators and therefore performed an interim quantitative impairment test comparing the fair value of each of its reporting units to its carrying value as of march 31, 2020. based on the results of the quantitative impairment test as of march 31, 2020, the company concluded that the carrying value of the oilfield services reporting unit exceeded its estimated fair value and recorded a goodwill impairment charge in the amount of $11,428 million associated with the oilfield services reporting unit. the goodwill balance as of december 31, 2020 was $5,739 million, of which $1,301 million was related to the oilfield services reporting unit. projected revenue, projected operating profit, and the discount rate are elements of the estimated future cash flows used by the company in determining the fair value of each of the reporting units.we identified the evaluation of the goodwill impairment analysis for the oilfield services reporting unit as a critical audit matter. specifically, the evaluation of projected revenue and projected operating profit required the application of subjective auditor judgment because these projections involve assumptions about future events. in addition, changes to the discount rate assumptions may have a significant effect on the company’s assessment of the carrying value of the goodwill of the reporting unit.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 goodwill impairment process. this included controls relating to management’s goodwill impairment test, the development of projected financial information and the discount rate, and management’s review of the projections. we evaluated the projected revenue and projected operating profit assumptions by comparing the projected amounts to (1) the past performance of the reporting unit, including historical actual results, and (2) relevant industry benchmark data related to future events. we also considered evidence obtained in other areas of the audit. we evaluated the company’s ability to accurately prepare projections by comparing the projected revenues and projected operating profit to actual results for the period. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rate used by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities./s/ kpmg llp we have served as the company’s auditor since 2017. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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.31table of contents revenue recognition on contracts description of the matter during the year ended december 31, 2019, the amount of revenue recognized over time was $371.1 million. as discussed in note 1 to the consolidated financial statements, the company’s revenue on contracts is accounted for based on the cost-to-cost input measure of progress, whereby the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. auditing management’s estimates to complete for certain components is especially subjective due to significant judgment required in estimating the remaining costs to complete. factors inherent in the estimation process include direct labor hours, direct material costs, and other direct costs. due to uncertainties attributed to such factors, a significant change in an estimate on one or more contracts could have a material effect on the company’s results of operations.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement and valuation of the company’s review of estimated costs to complete, including the determination of the underlying significant assumptions and the completeness and accuracy of the open contracts reviewed. for example, we tested controls over management’s quarterly review of the cost estimates, monthly review of open contracts and completed contracts, and review over the cost estimates used to develop initial cost estimates on projects.to test the amount of revenue recognized from contracts, our audit procedures included, among others, assessing whether the performance obligations identified were appropriately recognized on an over time basis through inspection of the contract and inquiry from program management regarding the nature and scope of work and testing the completeness and accuracy of the data underlying the determination of the amount of revenue recognized in the current period. to assess the over time revenue recognition, we tested that the actual costs incurred on the project are complete and accurate through agreement to supporting evidence. our testing of the assumptions included a combination of inquiries of the program management and financial personnel, inspection of evidence to support future estimated costs, performance of an analysis of actual gross margin on completed contracts compared to prior estimates, evaluation of subsequent year-end expenses incurred on projects, and assessment of the historical accuracy of management’s estimates by analyzing changes in project gross margins during project lifecycles and determining if those changes were driven by cost factors that should have been known or could have been reasonably estimated at project inception. valuation of goodwill description of the matter at december 31, 2019, the company’s goodwill was $329.7 million. as discussed in notes 1 and 7 of the consolidated financial statements, the company tests goodwill for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. the company may elect to perform a qualitative assessment or a quantitative test for impairment. in its quantitative tests the company used the discounted cash flow method to estimate the fair value of its reporting units. the discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates and the weighted-average cost of capital. if the carrying value of the reporting unit exceeds its fair value, goodwill impairment is measured as the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. auditing management’s annual goodwill impairment test was especially subjective due to the significant estimation required to determine the fair value of certain reporting units tested using the quantitative assessment. the fair value estimates for certain reporting units were sensitive to significant assumptions inherent in the company’s discounted estimated future cash flows, such as changes in the weighted average cost of capital, revenue growth rate, operating margin, working capital and terminal value, which are affected by expectations about future market or economic conditions, particularly those in the u.s. highway and bridge repair and construction markets that impact those reporting units.32table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above.to test the estimated fair value of the company’s reporting units that applied a quantitative assessment, we performed audit procedures with the assistance of our valuation professionals that included, among others, assessing the methodology used and testing the significant assumptions discussed above and the underlying data used in the impairment analysis. we compared the significant assumptions used by management to current industry and economic trends and evaluated whether changes to the company’s business model, customer base or product mix and other factors would affect the significant assumptions. we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the aggregate fair value of the reporting units that would result from changes in the assumptions. we considered the relationship between the fair value of the company’s reporting units to the market capitalization of the company as of the annual impairment testing date./s/ ernst & young llp we have served as the company‘s auditor since 2005. | 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.accounting for the effects of rate regulation as described in notes 2 and 4 to the consolidated financial statements, the company’s consolidated regulatory assets and liabilities balances were $1,127 million and $1,770 million, respectively, as of december 31, 2020. the company’s regulated utilities are subject to regulation by multiple state utility commissions and the company follows authoritative accounting principles required for rate regulated utilities, which requires the effects of rate regulation to be reflected in the company’s consolidated financial statements. as disclosed by management, for each regulatory jurisdiction where the company conducts business, management assesses, at the end of each reporting period, whether the regulatory assets continue to meet the criteria for probable future recovery and regulatory liabilities continue to meet the criteria for probable future settlement. this assessment includes consideration of factors such as changes in regulatory environments, recent rate orders (including recent rate orders on recovery of a specific or similar incurred cost to other regulated entities in the same jurisdiction) and the status of any pending or potential legislation.the principal considerations for our determination that performing procedures relating to accounting for the effects of rate regulation is a critical audit matter are the significant judgment by management in accounting for regulatory assets and liabilities relative to whether regulatory assets continue to meet the criteria for probable future recovery and regulatory liabilities continue to meet the criteria for probable future settlement as a result of changes in regulatory environments, recent rate orders, and the status of any pending or potential legislation. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence obtained relating to management’s judgments.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 regulatory accounting process, including controls over management’s assessment and consideration of factors related to the probability of future recovery or settlement. these procedures also included, among others, evaluating the reasonableness of management’s judgments regarding the probability of recovery and settlement based on the company’s correspondence with regulators, status of regulatory proceedings, past practices, and other relevant information; evaluating the related accounting and disclosure implications; and evaluating regulatory assets and liabilities balances based on provisions and formulas outlined in rate orders and other correspondence with the company’s regulators./s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 24, 2021we have served as the company’s auditor since 1948. | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. goodwill impairment assessment for viya reporting unit as described in notes 2 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $60.7 million as of december 31, 2019, and the goodwill balance associated with the viya reporting unit was $20.6 million. management tests goodwill for impairment at each of the reporting units on an annual basis, which has been determined to be as of october 1st. if the carrying value of the reporting unit, including goodwill, exceeds the fair value of the reporting unit an impairment charge is recorded equal to the excess, but not more than the total amount of goodwill allocated to the reporting unit. management determines the fair value of the viya reporting unit using the income approach. the income approach is based on a discounted cash flow model. the discounted cash flow model requires the exercise of significant judgment, including judgments and assumptions about appropriate discount rates and revenue growth. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the viya reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including revenue growth and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. 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, testing management’s process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness and accuracy of the underlying data used in the model; and evaluating the reasonableness of significant assumptions used by f-3table of contentsmanagement, including revenue growth and the discount rate. evaluating the reasonableness of management’s significant assumptions related to revenue growth involved evaluating whether the assumption used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow model and certain significant assumptions, including the discount rate. /s/ pricewaterhouse coopers llp boston, massachusetts march 2, 2020 we have served as the company’s auditor since 2002. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.f-2 fair value of customer relationships intangible asset as discussed in note 4 to the consolidated financial statements, the company completed the acquisition of innovation specialists llc d/b/a 2nd.md (2nd.md) during the year ended february 28, 2022. the fair value of the consideration transferred for the acquired business was $420,090 thousand, of which $120,000 thousand was allocated to a customer relationships intangible asset. the fair value of the identified customer relationships intangible asset was estimated using an income approach valuation model, which required the company to make assumptions regarding estimated future cash flows and the discount rate.we identified the assessment of the fair value of the customer relationships intangible asset acquired in the 2nd.md business combination as a critical audit matter. a high degree of subjective auditor judgment was required to evaluate the revenue projections in the company’s cash flow forecast and the discount rate assumptions used to determine the fair value of the customer relationships intangible asset, as changes to those assumptions could have had a significant effect on the company’s estimate of fair value.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 acquisition-date valuation process, including a control related to the revenue projections and the discount rate assumptions used to determine the fair value of the customer relationships intangible asset. we evaluated the company’s revenue projections by comparing them to (1) historical results of 2nd.md and the company, (2) forecasted growth rates in an industry report, and (3) historical growth rates of comparable companies. we involved valuation professionals with specialized skill and knowledge, who assisted in evaluating the company’s discount rate by performing a parallel analysis and comparing the results used to the company’s calculation. revenue recognition – variable consideration related to healthcare cost savings as discussed in note 2 to the consolidated financial statements, the company provides advocacy services to its customers and earns revenue from the realization of healthcare cost savings resulting from the members’ utilization of the company’s services. the company prices its services using recurring per-member-per month (pmpm) fees and those fees related to healthcare cost savings are considered to be variable consideration. the company includes the variable consideration related to the realization of healthcare cost savings in its estimate of the transaction price when it is probable that a significant reversal of cumulative revenue will not occur. we identified the evaluation of the variable consideration recognized by the company related to the achievement of healthcare cost savings as a critical audit matter. a high degree of challenging auditor judgment was required to evaluate the achievement of healthcare cost savings. 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 revenue process, including a control related to the variable consideration recognized based on the achievement of healthcare cost savings with its customers. we read a selection of contracts to assess the completeness and existence of any variable consideration associated with the achievement of healthcare cost savings. for a selection of contracts, we confirmed with the company’s customers or inspected other supporting documentation that the relevant healthcare cost savings were achieved as of the fiscal year end. /s/ kpmg llp we have served as the company's auditor since 2008. | 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 — refer to notes 1 and 4 to the financial statements critical audit matter description the company generates revenue from subscription-based arrangements that allow customers to access its products. subscription revenue is recognized on a ratable basis over the contractual subscription period of the arrangement beginning when or as control of the promised goods or services is transferred to the customer. the company determines revenue recognition through the following steps: (i) identification of the contract, or contracts with a customer, (ii) identification of the performance obligations in the contract, (iii) determination of the transaction price, (iv) allocation of the transaction price to the 53table of contentsperformance obligations in the contract, and (v) recognition of revenue, when, or as, the company satisfies a performance obligation. for the fiscal year ended march 31, 2020, the company’s revenue was $599.5 million.in performing the steps above, management applies significant judgment in evaluating the revenue recognition impact of contractual terms in customer agreements specifically, contractual terms that could result in recognizing material rights or different revenue recognition patterns. given, these factors, the related audit effort in evaluating management’s judgment in determining revenue recognition 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 included the following, among others:•we tested the effectiveness of controls related to the revenue recognition process, including controls related to the evaluation of the revenue recognition impact of contractual terms in customer agreements.•we evaluated management’s significant accounting policies related to revenue recognition for reasonableness and compliance with gaap.•we selected a sample of recorded revenue transactions and performed the following procedures:◦obtained and read customer source documents and the 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 each selection 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./s/ deloitte & touche llp san francisco, california may 14, 2020 we have served as the company's auditor since 2012. | 2 |
critical audit matters manuals and handbooks: absence of written manuals and handbooks is the concern for the audit. since the company is involving experienced professionals for the day-to-day operations, the need for specialized training was not felt. so also, the need for the written manuals and handbooks. however, the management is aware of the need for standard operating procedures to educate and train its growing general staff. preparation of manuals and handbooks has begun. 21 table of contents item 9a. changes in and disagreements with accountants on accounting and financial disclosure none. item 9b. controls and procedures evaluation of disclosure controls and procedures. for the current year, the company has few transactions. the book-keeping and the financial statement preparations were handled by qualified professionals and hence this management believes that there are adequate controls and procedures for the current period covered by this report which are effective to ensure that the information required to be disclosed by us in reports filed under the securities exchange act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the sec’s rules and forms and (ii) accumulated and communicated to our management, as appropriate to allow timely decisions regarding disclosure. it has been determined by our management that the company has adequate segregation of duties consistent with control objectives and has also adapted various accounting policies in accounting and financial reporting with respect to the requirements and application of gaap and sec requirements. the company has effective controls over the financial disclosure and reporting processes. management’s annual report on internal control over financial reporting the management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rules 13a-15(f) and 15d-15(f) of the exchange act. the internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. the system of internal control over financial reporting prevents or detect misstatements. all projections such as evaluation of effectiveness to future periods, are provided by well experienced professionals, while the same can be subject to inherent risks such as changing conditions, or that the degree of compliance with the policies or procedures may deteriorate. the management conducts quarterly evaluation of the effectiveness of internal control over financial reporting using the criteria set forth by the committee of sponsoring organizations of the treadway commission (coso) in internal control—integrated framework. based on its evaluation, the company is constantly requiring the experts to improve the system to remove any material weakness in our internal control over financial reporting. a material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. the material weakness is eliminated by segregation of duties in financial reporting, as our financial reporting and all accounting functions are performed by experts with adequate oversight by a professional with accounting expertise. in general, there have been no changes in our system of internal controls over financial reporting during the current period of reporting, while the management has been constantly reviewing and eliminating any area of material weakness. the management assertion is adequate internal control over financial reporting. however, this company being not a fully reporting company is not required to adhere to detailed and exhaustive procedures. item 9c. other information none. 22 table of contents part iii item 10. directors, executive officers and corporate governance the following table sets forth the names of our current directors and executive officers. also, the principal officers and positions with us held by each person and the date such person became our director, executive officer. our executive officers are appointed by our board of directors. our directors serve until the earlier occurrence of the election of his or her successor at the next meeting of stockholders, death, resignation, or removal by the board of directors. timothy barton ceo 1st october, 2019 robert w bueker cfo 1st october, 2019 murugan venkat secretary 22nd january 2019 murugan venkat treasurer 22nd november 2021 section 16(a) beneficial ownership compliance. section 16(a) of the securities exchange act of 1934 requires our executive officers, directors and persons who own more than ten percent of our shares of common stock, to file initial reports of beneficial ownership on form 3, changes in beneficial ownership on form 4 and an annual statement of beneficial ownership on form 5, with the sec. such executive officers, directors and greater than ten percent shareholders are required by sec rules to furnish us with copies of all such forms that they have filed. based solely on our review of the copies of such forms filed with the sec electronically, received by us and representations from certain reporting persons, for the fiscal year ended 31st december 2021, none of the officers, directors and more than 10% beneficial owners have filed form 5 with the sec. broadview holdings llc is the majority shareholder but does not involve in the day-to-day activities of the company and hence is a passive ownership. code of ethics we have adopted a code of ethics for our principal executive officers. director independence our determination of independence of directors is made using the definition of “independent director” contained in rule 4200(a)(15) of the marketplace rules of the nasdaq stock market (“nasdaq”), even though such definitions do not currently apply to us because we are not listed on nasdaq. we have determined that none of the members of our board of directors as of 31st december 2021 were “independent” within the meaning of such rules. item 11. executive compensation there was no executive compensation for the current year. 23 table of contents item 12. security ownership of certain beneficial owners and management and related matters as of the reporting date, the company had 46,203,716 common shares outstanding. the following table sets forth certain information regarding our shares of common stock beneficially owned as of the reporting date, for (i) each stockholder known to be the beneficial owner of five percent (5%) or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. a person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within sixty (60) days through an exercise of stock options or warrants or otherwise. unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children. for purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within sixty (60) days from the reporting date. for purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within sixty (60) days of the closing date is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. the inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. name of officer/director or control person affiliation with company (e.g., officer title /director/ owner of more than 5%) residential address (city / state only) number of shares owned share type/class ownership percentage of class outstanding note timothy barton director dallas, tx 0 common 0 robert w bueker officer dallas, tx 0 common 0 murugan venkat director hollywood, fl 0 common 0 broadview holdings owner of more than 5% dallas, tx 40000000 common 78.48 % broadview holdings owner of more than 5% dallas, tx 1000 series a preferred stock 100 % cynergy development advisers llc owner of more than 5% dallas, tx 4948854 common lynn investments llc owner of more than 5% dallas, tx 4761905 common 9.34 % item 13. certain relationships and related transactions during the current reporting period, $206,679 is owed for the related party transactions. item 14. principal accountant fees and services independent public accountants 2019 financial statements were audited by yusufali & associates llc and this company paid $10,000 as the audit fees for the 2019 audit, in 2020. both 2020 and 2021 financial statements are un-audited. 24 table of contents item 15. exhibits. exhibit no. description 31.1* rule 13a-14(a)/15d-14(a) certifications 31.2* certification of principal financial officer pursuant to 18 u.s.c. 1350, as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 32.1* certification of principal executive officer pursuant to 18 u.s.c. 1350, as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 _____________ *filed herewith 25 table of contents signatures pursuant to the requirements of the securities exchange act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. carnegie development, inc. by: /s/ | 5 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of 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. allowance for credit losses on loans as discussed in notes 1 and 4, the allowance for credit losses (the “acl”) is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures in accordance with accounting standards update (the “asu”) 2016-13, financial instruments —credit losses (topic 326): measurement of credit losses on financial instruments. the standard requires the company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the estimated life of the loans. in order to estimate the expected credit losses, the company utilizes a loss estimation model. the company utilizes the static pool methodology for determining the allowance for credit losses. the static pool methodology tracks loan pool by segment over a period of time to calculate a loss rate. loss rates are then qualitatively adjusted for current conditions and reasonable and supportable forecast. commercial and agricultural loans graded special mention and substandard are also adjusted based on a migration analysis technique.auditing the allowance for credit losses for loans was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management. the principal considerations resulting in our determination included the following:•significant auditor judgment and effort were used in evaluating the qualitative factors used in the calculation. •significant audit effort to test the completeness and accuracy of data used in the migration analysis calculation, including accuracy of loan risk rating, and its application to the commercial and agricultural loan segments.the primary procedures performed to address this critical audit matter included: •testing the effectiveness of controls over the company’s preparation and review of the allowance for credit loss calculation, including relevance and reliability of data used as the basis for adjustments related to the qualitative factors, management’s judgments and significant assumptions in the development and reasonableness of qualitative factors, and mathematical accuracy and appropriateness of the application of qualitative factors;53 report of independent registered public accounting firm•substantively testing management’s process for developing the qualitative factors and assessing relevance and reliability of data used to develop factors, including evaluating their judgments and significant assumptions for reasonableness, and mathematical accuracy and appropriateness of the application of qualitative factors;•testing the effectiveness of controls over the company’s loan risk rating; •substantively testing the accuracy of both the loan risk ratings as well as testing the accuracy of the transition matrix./s/ crowe llp crowe llp we have served as the company's auditor since 1977. | 2 |
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. valuation of long-lived assets as described in note 1of the company’s financial statements, the company performs an annual impairment assessment of its long-lived assets, includingproperty, plant, and equipment, intangible assets, and operating lease right-of-use assets, or more frequently if events or circumstancesindicate that the carrying values may not be recoverable. f-2 auditing the recoverabilityof long-lived assets involved complex judgment due to the significant estimation required in determining the future cash flows ofthe long-lived assets. specifically, the cash flow forecasts were sensitive to significant assumptions about future market and economicconditions. significant assumptions used in the company’s recoverability estimates included sales volume, pricing, cost of rawmaterials and labor, marketing spending, general and administrative expenses, and tax rates, as applicable. we obtained an understandingof the controls over the company’s annual impairment assessments for long-lived assets and tested the estimated future cash flowsof the long-lived assets based on our risk assessments. our audit procedures included, among others, comparing significant inputs toobservable third party and industrial sources, and evaluating the reasonableness of management’s projected financial informationby comparing to observable average industry historical trends and projections, and other internal and external data. we performed sensitivityanalyses of significant assumptions to evaluate the change in the recoverability of the long-lived assets and assessed the historicalaccuracy of management’s estimates. we also assessed the company’s disclosure of its annual impairment assessments includedin note 1. /s/ b f borgers cpa pc 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 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. deferred revenues and liability - wyndham rewards loyalty program - refer to notes 2 and 3 to the financial statements critical audit matter description the company operates the wyndham rewards loyalty program under which members earn points that can be redeemed for free nights or other rewards. wyndham rewards members primarily accumulate points by staying in hotels operated under one of the company's brands or by making purchases with their co-branded credit card. revenues related to the issuance of loyalty points are recognized net of redemptions over time based upon loyalty point redemption patterns, including an estimate of loyalty points that will expire or will never be redeemed. in addition, the company records a liability for estimated future redemption costs of outstanding loyalty points.the company estimates the value of the deferred revenues and related liability (collectively referred to as the “liability”) related to the loyalty program based on an estimated cost per point and an estimated redemption rate of the overall points earned, which is determined with the assistance of a third-party actuarial firm through historical experience, current trends and the use of an actuarial analysis, and includes an estimate of the points that will expire or will never be redeemed. changes in the estimated redemption rate used in the determination of the liability could result in a material change to the amount of liability reported.we identified the estimated redemption rate used in the determination of the liability as a critical audit matter because of the significant judgments made by management to estimate the redemption rate. this required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the redemption rate.how the critical audit matter was addressed in the audit our audit procedures related to the estimated redemption rate used in the determination of the liability included the following, among others: •we tested the effectiveness of the controls related to the liability, including those over the estimate of the redemption rate.•we evaluated the assumptions used by management to estimate the liability by: ◦testing the underlying data that served as the inputs for the actuarial analysis of the estimated redemption rate, including earnings and redemptions. f-3table of contents◦evaluating whether any approved changes to the wyndham rewards loyalty program have been appropriately incorporated in the actuarial analysis of the estimated redemption rate. ◦comparing management’s prior-year estimated redemption rate to actual redemptions during the current year to identify potential bias in the determination of the liability. •with the assistance of our actuarial specialists, we developed a range of independent estimates of the liability, utilizing the same underlying data tested above, and compared our estimates to management’s estimates. /s/ deloitte & touche llp new york, new york february 13, 2020 we have served as the company’s auditor since 2017. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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 indefinite-lived intangible assets description of the matter as reflected in the company’s consolidated financial statements, the company’s indefinite-lived intangible assets were $144.9 million as of march 31, 2022 and included $56.0 million of trademarks recognized in connection with the acquisition of the alpha group. as discussed in note 1 to the consolidated financial statements, indefinite-lived intangible assets are tested for impairment at least annually. auditing management’s annual quantitative indefinite-lived intangible asset impairment tests was complex and involved a high degree of subjectivity due to the significant estimation required in determining the fair value of the indefinite-lived intangible assets. the fair value estimates related to the company’s indefinite-lived intangible assets were sensitive to significant assumptions such as discount rates, revenue growth rates, royalty rates, and terminal growth rates, which are forward-looking and could be affected by future economic and market conditions. 49table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s annual quantitative indefinite-lived intangible asset impairment tests. for example, we tested controls over management’s review of the valuation models, the significant assumptions used to develop the estimate including forecasted revenue growth rates and royalty rates, and the completeness and accuracy of the data used in the valuations. to test the estimated fair value of the company’s indefinite-lived intangible assets, we performed audit procedures that included, among other procedures, assessing fair value methodologies and testing the significant assumptions discussed 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 current industry, market and economic trends, to historical results of the company's business and other guideline companies within the same industry and to 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 indefinite-lived intangible assets that would result from changes in the assumptions. we also involved internal valuation specialists to assist in our evaluation of the significant assumptions and methodologies used by the company.income taxes - uncertain tax positions description of the matter as discussed in note 14 to the company’s consolidated financial statements, the company and its subsidiaries file income tax returns in the u.s. federal jurisdiction, and various states and foreign jurisdictions. also as disclosed in note 14, approximately 87% of the company’s consolidated earnings before taxes are generated in foreign jurisdictions for the year ended march 31, 2022. uncertainty in a tax position taken or to be taken on a tax return may arise as tax laws are subject to interpretation. the company must identify its uncertain tax positions and uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-than-not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. as of march 31, 2022, the company has recognized accrued liabilities of $4.8 million for uncertain tax positions.auditing the completeness of the company’s uncertain tax positions and the evaluation of the technical merits of those uncertain tax positions is complex given the scope of its international operations and the significant judgment required in evaluating the technical merits of the company’s uncertain tax positions.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 identifying uncertain tax positions and evaluating the technical merits of those positions. for example, we tested controls over the review of the company’s foreign operations, including the tax positions taken by those operations, differences between statutory and effective tax rates, permanent differences impacting taxable income, and the monitoring of tax audits. we involved our tax professionals with subject matter expertise in the areas of international taxation and transfer pricing to assess the technical merits of the company’s tax positions. this included assessing the company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the company. we also used our knowledge of, and experience with, the application of international and local income tax laws by the relevant income tax authorities to evaluate the company’s accounting for those tax positions. we analyzed the company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. we also evaluated the company’s income tax disclosures included in note 14 to the consolidated financial statements in relation to these matters./s/ ernst & young llp we have served as the company's auditor since 1998. | 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 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.69table of contents pagerduty, inc.report of independent registered public accounting firm revenue recognition description of the matter the company’s revenue totaled $281.4 million for the year ended january 31, 2022. as described in note 2 to the consolidated financial statements, the company primarily generates revenue from cloud-hosted subscription fees, with the majority of its revenue recognized from such arrangements. in order to recognize revenue, the company evaluates whether promises made to customers represent distinct performance obligations, the appropriate measure of the transfer of control and when the transfer of control has occurred. these assessments can require significant judgment, particularly when contracts include non-standard terms. auditing the company’s accounting for revenue recognition was complex because certain of the company’s revenue agreements contained non-standard contractual terms that required significant auditor judgement to determine if distinct performance obligations were created. the proper identification of performance obligations in the company’s revenue arrangements could have a significant impact on the timing of revenue recognition and the disclosures. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the company's process to identify and evaluate performance obligations including identification and consideration of non-standard contractual terms, the transaction price, and the measure of progress of the transfer of control.our audit procedures included, among others, reading a sample of contracts and evaluating whether management appropriately identified and considered terms within those documents that would affect revenue recognition, and testing the company’s evaluation of standalone selling price for its performance obligations. we also evaluated the completeness and accuracy of the underlying data used in management’s determination of standalone selling price and the recorded deferred revenue and revenue amounts. /s/ernst & young llp we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.valuation of investments – level 3 investments in preferred stock and common stock as described in note 4 to the consolidated financial statements, approximately 41% of the company’s $431 million total investments in securities as of december 31, 2020 represents investments in level 3 common stock and preferred stock issued by private companies whose fair value, as disclosed by management, is determined in good faith by the board of directors. management applied significant judgment in determining the fair value of these level 3 investments, which involved the use of significant unobservable inputs with respect to the revenue and/or other multiples utilized, discounts rates and precedent transactions.72table of contents the principal considerations for our determination that performing procedures relating to the valuation of level 3 investments in preferred stock and common stock is a critical audit matter are the significant judgment involved by management in determining the fair value of these level 3 investments, including the use of various valuation techniques and significant unobservable inputs, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating the audit evidence obtained relating to the valuation techniques and significant unobservable inputs.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements and financial highlights. our principle audit procedures included, among others,(i) testing the completeness and accuracy of management’s valuations, including evaluating the appropriateness of management’s methodologies, evaluating the reasonableness of assumptions and significant unobservable inputs; including revenue and/or other multiples utilized, discounts rates and precedent transactions and;(ii) the involvement of professionals with specialized skills and knowledge to assist in the assessment of the fair values for a sample of investments, including reviewing the valuation methodologies, assessing the assumptions utilized in developing the estimates, and evaluating the reasonableness of management’s conclusions in deriving the valuations./s/ marcum llp san francisco, ca march 12, 2021 we have served as the company’s auditor since 2019. | 2 |
critical audit matter thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures thatare material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communicationof critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, andwe are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or onthe accounts or disclosures to which they relate.accountingfor embedded conversion features on convertible notes – refer to notes 12 and 16 to the financial statements theprincipal considerations for our determination that performing procedures relating to the valuation of derivatives is a criticalaudit matter are the significant judgment by management when developing the fair value of the derivative liabilities. this inturn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’ssignificant assumptions related to the valuation models used and related variable inputs used within those models. addressingthe matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on theconsolidated financial statements. these procedures included testing management’s process for developing the fair valueestimate; evaluating the appropriateness of the valuation techniques; testing the completeness and accuracy of underlying dataused in the model; and evaluating the significant assumptions used by management, including the values of expected volatilityand discount rate. evaluating management’s assumptions related to the volatility amounts and discount rates involved evaluatingwhether the assumptions used by management were reasonable considering the current and historical performance, the consistencywith external market and industry data, and whether these assumptions were consistent with evidence obtained in other areas ofthe audit. /s/ daszkal bolton llp we have served as the company’s auditor since 2018. | 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.impairment - long-lived assets - refer to notes 2 and 17 to the financial statements critical audit matter description the company evaluates long-lived assets, which includes property, plant, and equipment and definite-lived intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. in fiscal year 2019, the company recorded impairment charges of $264.8 million, including $219.9 million related to customer relationships, $37.1 million related to acquired technology and $7.8 million related to property, plant and equipment, primarily as a result of restructuring actions initiated during the year. the determination and valuation of long-lived asset groups, specifically the customer relationship and acquired technology intangible assets, require significant management judgments when assessing for potential impairment. these analyses are based on the creation of forecasts of future operating results that are used in the valuation for each identified asset group which requires management to make significant estimates and assumptions related to (1) forecasted revenue used in the future cash flows and (2) the determination of the discount rate. changes in these assumptions and judgments could have a significant impact on either the fair value, the amount of any impairment charge, or both for the identified asset groups. 47we identified the valuation of the long-lived asset groups as a critical audit matter because of the significant estimates and assumptions management makes to determine the asset groups and to estimate the valuation of the customer relationships and acquired technology. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists with quantitative and modeling expertise when performing audit procedures to evaluate the reasonableness of management’s determination of the asset groups and forecasts of future operating results, including estimation of (1) forecasted revenue, particularly related to those new product lines that do not have historical experience, and (2) the determination of the discount rate.how the critical audit matter was addressed in the audit our audit procedures related to the valuation of the long-lived asset group, including management’s determination of the asset groups and forecasts of future operating results included the following, among others:•we tested the effectiveness of controls over the valuation of long-lived assets, including those controls over the identification of asset groups and the review of (1) the forecasted revenue, particularly related to those new product lines that do not have historical experience, and (2) the determination of the discount rate.•we evaluated the appropriateness of management’s conclusions regarding the identification of asset groups by holding discussions with senior financial and operating management to gain an understanding of the strategic plans for the business, assess the impact of recent changes within the business, and review available discrete financial information.•we evaluated the forecasted revenue, particularly related to those new product lines that do not have historical experience, by performing the following procedures:•we obtained an understanding of the key assumptions used in the revenue forecast and corroborated the reasonableness of those assumptions by comparing it to (1) historical revenues, (2) internal communications with management and the board of directors, and (3) forecasted information included in analyst and industry reports for the company and certain of its peer companies.•due to the lack of historical experience available for certain new product lines, we evaluated the reasonableness of management’s revenue forecasts of the new product lines by comparing the forecasts to (1) internal communications to management and the board of directors, (2) customer produced forecasted demand, and (3) industry reports containing analyses of the company’s and its competitor’s products.•with the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by:•testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.•developing a range of independent estimates and comparing those to the discount rate selected by management.inventories - excess quantities and obsolescence reserve - refer to notes 2 and 8 to the financial statements critical audit matter description the company evaluates inventory each reporting period for excess quantities and obsolescence, establishing reserves when necessary based upon historical experience, assessment of economic conditions, and expected demand. once recorded, these reserves are considered permanent adjustments to the carrying value of inventory. as of september 27, 2019, the company has inventories of $107.9 million, net of excess quantities and obsolescence reserves.we identified the reserve for excess quantities and obsolete inventory as a critical audit matter because of the significant estimates and assumptions management makes to quantify and to record the reserve, including the determination of expected demand especially when considering the cyclical nature of the semiconductor industry. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of assumptions including expected demand. how the critical audit matter was addressed in the audit our audit procedures related to the reserve for excess quantities and obsolete inventory including management’s estimate of expected demand, included the following, among others:•we tested the effectiveness of controls over inventory, including those over the estimation of reserves for excess quantities and obsolescence and the review of any adjustments to the reserve methodology. 48•we selected a sample of inventory parts and performed corroborative inquiry with product line managers associated with the selected part to corroborate our understanding of the expected demand of the part including future sales plans, product life cycle, and utilization in other products.•we held discussions with senior financial and operating management to determine whether any strategic or operational changes in the business were consistent with the reserves as it relates to expected demand. •we performed a retrospective review on the prior year inventory reserve, including the prior year expected demand, and compared it to current year activity.•we compared the company’s inventory reserve assumptions to events and trends discussed in industry and analyst reports, recent press releases from the company’s major customers (including financial information), and other industry data. in addition, we also considered any changes within the business including restructuring events and strategic changes.income taxes - intra-entity transfer of a license for intellectual property - refer to note 19 to the financial statements critical audit matter description during the year ended september 27, 2019, the company completed an intra-entity transfer of a license for intellectual property to a higher tax jurisdiction. the company determined there was an incremental tax basis due to the intra-entity transfer and recognized a deferred tax asset and related income tax benefit of $39.8 million based upon the tax basis step-up to the intellectual property’s current fair value.we identified management’s determination of the tax basis resulting from the intra-entity transfer of a license for intellectual property to be a critical audit matter because of the significant judgments and estimates management made related to the interpretation and application of tax laws in the applicable jurisdiction. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax and fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s determination of the tax basis.how the critical audit matter was addressed in the audit our audit procedures related to the determination of the tax basis resulting from intra-entity transfer of a license for intellectual property, include the following, among others:•we tested the effectiveness of controls over the intra-entity transfer of a license for intellectual property, including management’s review of the underlying agreements, estimation of fair value, and the tax laws applicable to the transfer of a license for intellectual property.•with the assistance of our income tax and fair value specialists, we evaluated the tax basis of the intra-entity transfer based upon applicable tax laws and evaluated the reasonableness of management’s conclusions. /s/ deloitte & touche llp boston, massachusetts november 25, 2019 we have served as the company’s auditor since 2010. | 3 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. 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 auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. valuationof assets and liabilities assumed in the acquisitions of lomotif private limited.(“lomotif”), and asset acquisition of emmersive entertainment, inc.(“emmersive”) descriptionof the matter duringthe year ended december 31, 2021, the company completed the business acquisition of lomotif private limited. for a net aggregate considerationof approximately $109.8 million and completed the asset acquisition of emmersive entertainment, inc. for $7.6 million (based on the netfair values of shares reserved for future issuance and liabilities assumed). lomotif private limited.asdiscussed in note 3 to the consolidated financial statements, the company completed the acquisition of lomotif for $109.8 million on july 24, 2021. the company accounted for this transaction under the acquisition method of accounting for business combinations. accordingly,the purchase price was allocated, to the assets acquired and liabilities assumed based on their respective fair values, including identifiedintangible assets of $27.0 million and a noncontrolling interest of $27.4 million and resulting goodwill of $116.1 million. the company,with the assistance of a third party valuation specialist, estimated the fair values of the identified intangible assets using the incomeapproach. such model requires significant assumptions. the company estimated the fair value of the intangible assets using the incomeapproach method (valuation method), which is a specific discounted cash flow method that required management to make significant estimatesand assumptions related to future cash flows and the selection of implied rate of return and discount rates. 71 emmersive entertainment, inc.asdiscussed in note 3 to the consolidated financial statements, the company completed the asset acquisition of emmersive for $7.6 millionon april 17, 2021. the company accounted for this transaction under the acquisition method of accounting for an asset purchase. as substantiallyall of the fair value of gross assets acquired being concentrated to a group of similar identifiable assets, coupled with limited inputs,processes and outputs, which did not meet the requirements to be considered a business acquisition. accordingly, the purchase price wasallocated, to the preferred shares reserved for future issuance of $7.4 million and assumed notes payable $0.2 million based on theirrespective fair values. the company, with the assistance of a third party valuation specialist, estimated the fair value of the preferredshares reserved for future issuance using the a probability weighted expected return method, which is a form of the income approach thatconsiders management’s estimates of the possible scenarios related to the achievement of the earnout along with the correspondingprobability associated with each scenario. how we addressed the matter in our audit auditingmanagement’s assessment of fair value of the acquired assets and assumed liabilities is highly subjective and judgmental. furtherchanges in either the assumptions or method utilized may have a material impact on the fair value assigned to the acquired assets andliabilities assumed in the acquisitions. this required a high degree of auditor judgment and an increased extent of effort, includingthe need to involve our valuation specialists to evaluate the reasonableness of management’s key assumptions used in developingthe fair value estimates, such as: (i) forecasted revenue growth rates (ii) future cash flows and (iii) weighted-average cost of capital(iv) discount rate and (v) probability weighted expected return method. ouraudit procedures included, amongst others: ●we obtained the purchase price allocation analyses from management and the third-party specialist engaged by management○we assessed the qualifications and competence of management and the third-party specialist; and○we evaluated the methodologies used to determine the fair values of the intangible assets.●we evaluated the reasonableness of management’s forecasts of future revenue growth rates and cash flows by inquiring with management to understand how the forecast was developed and comparing the projections to historical results and certain peer companies.●with the assistance of our valuation specialists, we evaluated the reasonableness of the valuation methodology and discount rates by using sensitivity analysis and ensuring the inputs to the valuations were reasonable for the methodology. valuationof warrant liabilities asdiscussed in note 15 to the consolidated financial statements, the company issued warrants (“2021 warrants”) to purchaseshares of the company’s common stock related to multiple private placements. the 2021 warrants did not meet the criteria to beequity-classified. the company, with the assistance of a third party valuation specialist, estimated the fair values of the 2021 warrants.such valuation models require significant assumptions. the company’s valuation specialist used a geometric brownian motion based monte carlo simulation to project the underlying metric value to ultimately determine the fair value of the warrant liabilities. as of december 31, 2021, the fair value of the warrant liability was $198.6 million. the monte-carlo simulation pricing model fair valued thewarrants utilizing assumptions of dividend yield, expected volatility, risk-free interest rate and fundamental transaction probabilities. ouraudit procedures over the warrant liabilities included, amongst others: ●we agreed warrant grants and exercises to applicable agreements, warrant exercise notices and tested the company prepared schedule for clerical accuracy.●we obtained an understanding of the factors considered and assumptions made by management and the company’s valuation specialist in developing the estimate of the stock price volatility, the sources of data relevant to these factors and assumptions and the procedures used to obtain the data and the methods used to calculate the estimates.○we assessed the qualifications and competence of management and the third-party specialist; and○we evaluated the methodologies used to determine the fair values of the warrant liabilities●with the assistance of our valuation specialists, we evaluated the reasonableness of the valuation methodology by using sensitivity analysis and ensuring the inputs to the valuations were reasonable for the methodology. /s/marcum llp marcumllp wehave served as the company’s auditor since 2017. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts ordisclosures that are material to the financial statements and (2) involved our especially challenging, subjective, orcomplex judgments. the communication of the critical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providingseparate opinions on the critical audit matters or on the accounts or disclosures to which they relate.we did notidentify any critical audit matters during the course of our audit for the year ended december 31, 2020. /s/ rbsm llp we have served as the company’s auditor since 2015. | 0 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. the communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.assessment of the estimation of liability for losses, claims, and settlement expenses as discussed in note 1(h) to the consolidated financial statements, the company estimates the liability for losses, claims, and settlement expenses utilizing a number of considerations to determine its best estimate of the cost of settling claims reported and claims incurred but not reported. the company estimates the liability by applying expected claim ratios by line of business to the related earned premium revenue. the company’s liability for losses, claims, and settlement expenses (reserves) at december 31, 2019 was $9,929.5 million.we identified the assessment of the estimate of the liability for losses, claims, and settlement expense as a critical audit matter. the assessment of the estimate of the reserves involved a high degree of judgment due to the inherent uncertainty in determining the reserves and certain assumptions, including expected claim ratios. the expected claim ratios utilized in the estimate may be affected by various internal and external considerations, including loss trends, premium rate trends and adequacy, interest rates, and social and economic trends. specialized skills and knowledge were required to assess the estimate of reserves. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s reserving process, including controls over development of the expected claim ratios and analysis of the difference between the company’s actuarial indicated reserves and the company’s recorded reserves. we involved actuarial professionals with specialized skills and knowledge, who assisted in:•comparing the company’s reserving methodologies to generally accepted actuarial techniques;•developing independent analyses for certain reserve groups based on actuarial methodologies; •assessing the company’s internally prepared actuarial analyses for other reserve groups by inspecting the assumptions and actuarial methods utilized; •developing an independent consolidated range of reserves and comparing to the company’s recorded reserves; and•assessing year-over-year movements of the company’s recorded reserves within the independently developed actuarial range. /s/ kpmg llp we have served as the company’s auditor since 2010. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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.75table of contents revenue from diagnostic services description of the matter during the year ended december 31, 2019, the company’s revenue from diagnostic services was approximately $107.4 million. as discussed in note 2, the company’s diagnostic services revenue is recognized upon the delivery of test results to the prescribing physician, at which time the company bills for its services. the company recognizes revenue related to billings based on estimates of the amount that will ultimately be realized. auditing the measurement of the company’s diagnostic services revenue was complex due to the judgments used in estimating the amount to be realized per test. in determining the amount to recognize for a delivered test the company considers factors such as payment history, amount collected per test, payer coverage, and whether there is a reimbursement contract between the payer and the company. the company also considers whether historical collections per test are indicative of future collections or if there are any current or expected developments or changes that could affect reimbursement rates, which is an estimate that requires significant judgment by the company.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls used by management in making this estimate. for example, we tested controls over management’s review of changes in collection trends, payer rates, contract terms, and payer behavior and expectations of how those changes are expected to impact future collections and the amount of revenue to be recognized per test.to test management’s estimate of the amount of revenue to be recognized per test delivered our audit procedures included, among others, evaluating the methodology used, understanding and testing the significant assumptions discussed above, and testing the underlying data used by the company (including the completeness and accuracy of historical data). we tested payment history and amount collected per test on a sample basis, including agreeing selections to supporting documentation such as physician requisition, cash collected, write-offs of receivables, and proof of delivery, as applicable. we evaluated and tested management’s assessment of changes in payer trends, behaviors, and contract terms and how those changes will impact future cash collections as well as management’s consideration of any contrary factors. we also assessed and tested management’s review of differences between prior period accrual rates and actual cash collections and how those differences were factored into management’s estimate of current period accrual rates.76table of contents valuation of intangible assets and contingent consideration description of the matter on december 3, 2019, the company entered into an agreement to acquire a license and certain assets for consideration of $60 million, including up to $10 million of contingent consideration upon achievement of certain milestones. as discussed in note 4 to the consolidated financial statements, the company accounted for this transaction as a business combination. auditing the accounting for this business combination was complex due to the significant estimation uncertainty in determining the fair value of identified intangible assets and contingent consideration. the significant estimation uncertainty was primarily due to the sensitivity of the fair value estimates to the significant underlying assumptions about the forecasted results of the acquired business. the significant assumptions used to form the basis of the forecasted results included revenue growth rates, profit margins, timing of cash flows, and the discount rate. 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 the valuation of intangible assets and contingent consideration related to the business combination. this included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets and contingent consideration and management’s judgment and evaluation of underlying assumptions and estimates with regards to these fair values.to test these fair values, our audit procedures included, among others, involvement of a specialist to assist us in the evaluation of the company’s valuation methodology and testing of the discount rate, evaluating prospective financial information, and testing the completeness and accuracy of underlying data. for example, we compared the significant assumptions to current industry and market trends, historical results and other relevant factors./s/ ernst & young llp we have served as the company’s auditor since 2014. | 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.revenue recognition from contracts with customers as described in note 13 to the consolidated financial statements, the company recognized $20.6 billion of consolidated revenue for the year ended december 31, 2021. some of the company’s contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract spans multiple phases of a product life-cycle such as production, installation, maintenance and support. the company recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefit from that good or service. a significant portion of the company's performance obligations are recognized at a point-in-time when control of the product transfers to the customer, which is generally at the time of shipment. the remaining portion of the company's performance obligations are recognized over time as the customer simultaneously obtains control as the company performs work under a contract, or if the product being produced for the customer has no alternative use and the company has a contractual right to payment. for over-time performance obligations requiring the installation of equipment, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. the company includes variable consideration in the estimated transaction price when there is a basis to reasonably estimate the amount and when it is probable that a significant reversal of revenue recognized would not occur when the uncertainty associated with variable consideration is subsequently resolved. in addition, the company customarily offers customers incentives to purchase products to ensure an adequate supply of its products in distribution channels. the principal incentive programs provide reimbursements to distributors for offering promotional pricing for products. the company accounts for estimated incentive payments as a reduction in sales at the time a sale is recognized.the principal considerations for our determination that performing procedures relating to revenue recognition from contracts with customers is a critical audit matter are the high degree of audit effort in performing procedures related to revenue recognized on the company’s point-in-time and over-time contracts with customers and in evaluating evidence related to management’s determination of total estimated costs at completion for revenue recognized on an over-time basis.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 on the company’s point-in-time and over-time contracts with customers, including controls over the determination of total estimated costs at completion for revenue recognized on an over-time basis. these procedures also included, among others (i) evaluating management’s significant accounting policies related to revenue recognition; (ii) testing the appropriateness of the timing and amount of revenue recognized for a sample of point-in-time revenue transactions by obtaining and inspecting source documents, such as contracts with customers, purchase order information, shipping documents, cash receipts, and other documentation; and (iii) evaluating and testing management’s process for determining the total estimated costs at completion for a sample of over-time revenue contracts, which included evaluating the estimated costs at completion used by management by considering factors that can affect the accuracy of those estimates. evaluating the total costs at completion for revenue recognized on an over-time basis involved comparing the originally estimated costs and actual costs incurred, including identifying circumstances that may warrant a modification to the total estimated costs to complete. /s/ pricewaterhouse coopers llp hallandale beach, florida february 8, 2022we 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 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.allowance for loan losses – general component qualitative factorscritical audit matter descriptionas discussed in notes 2 and 6 to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount, which, in management’s judgment, f - 2 will be adequate to absorb losses in the loan portfolio. the company’s allowance for loan losses was $5.9 million at december 31, 2020 and consists of specific and general components of $-0- and $5.9 million, respectively. management develops the general component based on historical loan loss experience adjusted for qualitative factors not reflected in the historical loss experience. historical loss ratios are measured using the average charge-off ratio for the previous three or five-year period, depending of loan type. the qualitative factors used by the company include factors such as national and local economic conditions, levels of and trends in delinquency rates and nonaccrual loans, trends in volumes and terms of loans, changes in lending policies and procedures, lending personnel, and collateral, as well as concentrations in loan types, industry, and geography. the adjustments for qualitative factors require a significant amount of judgment by management and involve a high degree of estimation uncertainty.we identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty. our audit procedures related to the qualitative factor component of the allowance for loan losses included the following, among others: ·obtaining an understanding of the relevant controls related to the allowance for loan losses, including controls related to management’s establishment, review, and approval of the qualitative factors, and the completeness and accuracy of the data used in determining qualitative factors. ·evaluation of the appropriateness of management’s methodology for estimating the allowance for loan losses. ·testing the completeness and accuracy of data used by management in determining qualitative factor adjustments by agreeing them to internal and external source data. ·testing management’s conclusions regarding the appropriateness of the qualitative factor adjustments and agreement of any changes therein to the allowance for loan losses calculation./s/ baker tilly us, llp we have served as the company's auditor since 2005. | 3 |
critical audit matters thecritical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. 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 auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. capitalized software development costs asdescribed in note 2 to the financial statements, the company develops software within the scope of both asc 350-40, internal-use software(“topic 350”) and asc 985-20, software – costs of software to be sold, leased or marketed (“topic 985”). internal-usesoftware development costs are accounted for in accordance with topic 350. costs associated with the preliminary stages of developmentare classified as research and development costs and expensed as incurred. costs associated with the application development stage arecapitalized. maintenance and enhancement costs, including costs in the post-implementation stages, are typically expensed as incurred,unless such costs relate to substantial upgrades and enhancements that result in added functionality, in which case the costs are capitalized.capitalized amounts are amortized on a straight-line basis over the estimated useful life of the software. developmentcosts for software to be sold, leased, or marketed are accounted for in accordance with topic 985. costs associated with the planningand design phase of software development are classified as research and development costs and expensed as incurred. once technologicalfeasibility has been established, a portion of the costs incurred in development, including coding, testing and quality assurance, arecapitalized until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizablevalue. weidentified capitalized software development costs as a critical audit matter. our principal considerations for this determination werethe high degree of auditor judgment and subjectivity required in evaluating management’s determination of the activities and coststhat qualify for capitalization and the relevant software development guidance to be applied under the applicable accounting standards. 36 theprimary procedures we performed to address this critical audit matter included: ●we obtained an understanding of the company’s process for determining the activities and costs that qualify for capitalization and the relevant software development guidance to be applied under the applicable accounting standards. ●we tested the mathematical accuracy of the roll forward of capitalized software and related amortization expense. we also tested the completeness and accuracy of applicable system-generated reports, including reconcilements of details to associated sub-ledgers. ●for a sample of capitalized costs, we evaluated the relevance of the software development guidance applied, by performing the following: ○we inspected underlying documentation and assessed the eligibility of costs for capitalization, to the application of the correct guidance, and whether during the application development stage or after the attainment of technological feasibility, as applicable. ○we recalculated the capitalized amount based on hours incurred and direct payroll related costs or associated vendor contracts and invoices for work performed by third parties. ○we evaluated the software implementation timelines and related underlying documentation supporting the capitalization periods for implementation and development amounts as well as the date the costs were placed in service. ○we inquired of project managers for significant projects to assess the nature of the costs, the time devoted to capitalizable activities and the underlying documentation. ●for eligible costs within the scope of topic 985, we assessed whether amortization was the greater of amortization derived from either a straight-line basis or the ratio of current revenues to total current and anticipated revenues. valuationof contingent consideration and acquired intangible assets asdescribed in note 3 to the financial statements, on august 16, 2021, the company acquired avelead consulting, llc, which included contingentconsideration and acquired intangible assets. the contingent consideration was recorded at fair value on the acquisition date and isrevalued each reporting period until final settlement with changes in the fair value recognized within the consolidated statement ofoperations. the company estimated the fair value of the customer relationship intangible assets using the multi-period excess earnings method, whichrequired management to make significant estimates and assumptions related to forecasted revenue and earnings, attrition rates, and theselection of discount rates. the company estimated the fair value of the trade name and developed software technology intangible assetsusing the relief from royalty method, which required management to make significant estimates and assumptions related to forecasted revenueand earnings, the obsolescence rate, and the selection of discount rates. the company estimated the fair value of the contingent considerationusing a monte carlo simulation. the method required management to make significant estimates and assumptions related to forecasted revenue,discount rates and revenue volatility. weidentified the valuation of contingent consideration and acquired intangible assets as a critical audit matter. our principal considerationfor this determination included the high degree of auditor judgement and subjectivity in evaluating management’s valuation methodologies,particularly as it related to evaluating the inputs and significant assumptions used to develop the fair value measurements. theprimary procedures we performed to address this critical audit matter included: ●we obtained an understanding of management’s process for determining the fair value measurements of the contingent consideration and acquired intangible assets. ●we evaluated forward-looking assumptions, such as forecasted revenue and earnings and attrition rates used by management by performing procedures that included, but not limited to, comparisons to industry and historical performance data, and sensitivity analysis to assess their reasonableness. ●utilizing a valuation specialist, we evaluated the significant assumptions and methods utilized in developing the fair value of the contingent consideration and acquired intangible assets, including: ○we evaluated the reasonableness of the company’s third-party valuation models and methodologies, expected cash flow calculations, and reviewed significant assumptions. ○we developed an independent calculation of the discount rates used and compared our rates to those used by management. ○we prepared an independent calculation of the fair value of the contingent consideration and the intangible assets to test the accuracy of management’s valuation models. /s/dixon hughes goodman llp wehave served as the company’s auditor since 2019. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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.64assessment of the estimate of liability for secondary guarantees for universal life policies as discussed in note 11 to the consolidated financial statements, some of the company’s universal life policies contain secondary guarantees for which additional reserves are recorded. as of december 31, 2019, the balance of the estimated liability for secondary guarantees was included within the life future policy holder benefits balance of $3,088 million in the consolidated statements of financial position. the liabilities for universal life secondary guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. the company regularly evaluates estimates used and adjusts the additional liability balances with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier actuarial assumptions should be revised based on the company’s best estimate. we identified the assessment of the company’s estimate of liability for secondary guarantees for universal life policies as a critical audit matter. a high degree of subjective auditor judgment was required in the evaluation of mortality, surrender and premium persistency assumptions (actuarial assumptions) related to determining the present value of the excess payments. in addition, specialized skills and knowledge were required to evaluate the estimate and actuarial assumptions.the primary procedures we performed to address the critical audit matter included the following. we tested certain internal controls over the company’s process to estimate the liability for secondary guarantees for universal life policies including controls related to assessment of actuarial assumptions through an analysis of actuarial assumptions used relative to the company’s historical experience. we involved actuarial professionals with specialized skills and knowledge, who assisted in:•comparing the company’s reserving methodologies to generally accepted actuarial standards;•evaluating the actuarial assumptions utilized in deriving the estimate based on an analysis of the actuarial assumptions as compared to actual experience and current economic environmental factors affecting policyholder behavior;•evaluating the company’s decisions to change or not to change actuarial assumptions based on the above mentioned analysis; and•developing independent estimates for certain cohorts (group of policies) based on assumptions and data used by the company.assessment of the estimate of embedded derivative liability for equity indexed annuity contracts as discussed in note 9 to the consolidated financial statements, the company issues equity-indexed annuity contracts. the equity-indexed feature is required to be accounted for separately as a derivative instrument (embedded derivative liability). the fair value of the embedded derivative liability is estimated using the discounted cash flow technique utilizing various assumptions. the fair value of the embedded derivatives in equity-indexed annuity contracts is $596 million as of december 31, 2019. we have identified the assessment of the company’s estimate of the embedded derivative liability as a critical audit matter. as assumptions required predictions of policyholder behavior, the evaluation of surrender assumptions utilized in the estimation of the embedded derivative liability required specialized skills and knowledge and a high degree of auditor judgment. the primary procedures we performed to address the critical audit matter included the following. we tested certain internal controls over the company’s process to estimate the embedded derivative liability including controls related to the assessment of surrender assumptions based on analysis of anticipated surrenders as compared to historical experience. we involved actuarial professionals with specialized skills and knowledge, who assisted in: •evaluating the company’s valuation methodology to ascertain whether the methodology is designed to produce a fair value estimate as required by generally accepted accounting principles;•evaluating the surrender assumptions utilized in developing the estimate based on an analysis of anticipated surrenders as compared to actual experience and current economic environmental factors affecting policyholder behavior;•evaluating the company’s decisions to change or not to change surrender assumptions based on the above mentioned analysis;•developing independent estimates for certain equity indexed embedded derivative fair values based on assumptions and data elements used by the company;65•assessing the trend of the percentage change in the s&p 500 index and the percentage change in the fair value of the embedded derivative as a percentage of policyholder account value to assess the relationship throughout the year; and •evaluating the ratio of the fair value of the embedded derivative to policyholder account value of equity indexed annuities to assess the consistency of the ratio throughout the year and in comparison to prior year.assessment of the estimate of property and casualty liability for unpaid claims as discussed in notes 2 and 12 to the consolidated financial statements, the property and casualty liability for unpaid claims (property and casualty reserves) consists of the amount estimated for incurred but not reported claims and claims that have been reported but not settled. as of december 31, 2019, the balance of property and casualty reserves was included within the policy and contract claims balance of $1,490 million in the consolidated statements of financial position. the company estimates property and casualty reserves based upon the company’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. the company periodically evaluates such estimates in light of recent experience and current information and adjusts the reserves accordingly. we identified the assessment of the company’s estimate of property and casualty reserves as a critical audit matter because specialized skills and knowledge of actuarial methodologies were required to evaluate the estimate. evaluation of the following assumptions required subjective auditor judgment: 1) selection and weighting of actuarial methodologies in the actuarial estimates; and 2) selection of loss development factors in the actuarial estimates. the primary procedures we performed to address the critical audit matter included the following. we tested certain internal controls over the company’s process to estimate the property and casualty reserves, including controls over: 1) assessment of actuarial loss development factors and selection and weighting of actuarial methodologies and 2) a comparison of the independent analysis performed by a third party actuary. we involved actuarial professionals with specialized skills and knowledge, who assisted in: •comparing the company’s reserving methodologies to generally accepted actuarial standards; •assessing the company’s selection and weighting of actuarial methodologies, including the selection of loss development factors, by performing an independent estimate of reserves for major lines of business;•examining the company’s internal and independent external actuarial analyses for the remaining lines of business;•developing an independent range of reserves based on actuarial methodologies to evaluate the company’s total recorded reserves; and•assessing the year-over-year movements of the company’s total recorded property and casualty reserves within the independently developed range./s/ kpmg llp we have served as the company’s auditor since 2000. | 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.environmental liabilities description of the matter at december 31, 2019, the company’s environmental liability balance was $78.7 million. as discussed in note 21 of the financial statements, the company is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively “environmental remediation work”) at approximately 130 locations. in determining the appropriate level of environmental reserves, the company considers several factors such as information obtained from investigatory studies; required scope and estimated costs of remediation; the interpretation, application and enforcement of laws and regulations; the development of alternative cleanup technologies and methods; and the level of the company’s responsibility for remediating at various sites.auditing management’s accrual for environmental liabilities was especially challenging because it involves judgmental underlying assumptions, including remediation methods, remediation time horizon and remediation cost estimates. these assumptions have a significant effect on the accrual for environmental liabilities.36table of contents how we addressed the matter in our audit we tested management’s controls that address the risks of material misstatement relating to the measurement and valuation of the environmental liabilities. for example, we tested controls over management’s review of the environmental liability calculations and, the significant assumptions and the data inputs provided to management’s specialists.to test the accrual for environmental liabilities, we involved our specialist to assist us in evaluating the reasonableness of the company’s calculation and underlying assumptions. we performed audit procedures that included, among others, assessing key methodologies and testing the significant assumptions and the underlying data used by the management’s specialists. for example, we tested the site’s current remediation status and remediation strategy, which included an analysis of the site’s remediation timeline, regulatory requirements, remediation actions and related technologies and eligibility for discounting. in addition, we performed a search of various data sources for any unidentified environmental liabilities for which the company may be a potential responsible party.accounting for nexeo solutions acquisition description of the matter during 2019, the company completed its acquisition of nexeo solutions, inc (nexeo) for net consideration of $1,814.8 million, as discussed in note 3 to the consolidated financial statements. the company accounted for the acquisition under the acquisition method of accounting for business combinations. accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. assets acquired included intangible assets representing customer relationships of approximately $138.7 million. auditing the company’s accounting for its acquisition of nexeo was complex due to the highly judgmental nature of the significant assumptions used to estimate the fair value of the intangible assets including the discount rates and certain assumptions that form the basis of the forecasted results such as sales growth rates, percentage of revenue attributable to customer relationships, customer attrition rates, and ebitda margin. these significant assumptions are forward looking and could be affected by future economic and market conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s process for determining the fair value of the acquired intangible assets, including controls over management’s review of the significant assumptions described above.to test the estimated fair value of the acquired intangible assets, we performed audit procedures that included, among others, evaluating the company’s use of the income approach which utilized 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 the assumptions used to value similar assets in other acquisitions, to the historical results of the acquired business and to other guidelines used by companies within the same industry. we compared the prospective financial information for consistency with other prospective financial information prepared by the company. we involved our specialists to assist in our evaluation of the significant assumptions described above. /s/ ernst & young llp we have served as the company’s auditor since 2010. | 3 |
critical audit matter.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 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.96table of contents emphasis of matter as discussed in note 20 to the consolidated financial statements, in response to the public health crisis posed by covid-19, effective from march 17, 2020, the company temporarily closed its retail locations for an indeterminate period of time. as a result of these developments, the company expects an unfavorable impact on its sales, results of operations and cash flows in fiscal 2020. management’s evaluation of the events and conditions and management’s plans to mitigate these matters are also described in note 20.definition and limitations of internal control over financial reporting a company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. a company’s internal control over financial reporting includes those policies and procedures that (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 accounting standard on leases as described above and in note 3 to the consolidated financial statements, the company adopted the new accounting standard on leases using a modified retrospective approach. under this adoption method, the results of prior comparative periods are presented with an adjustment to opening retained earnings of the earliest comparative period presented. as of february 3, 2019, the adoption of the new accounting standard on leases resulted in an increase of $617 million and $633 million to consolidated total assets and liabilities, respectively. in addition, the company recorded an increase to the fiscal 2017 (the earliest comparative period presented) opening retained earnings balance of $4.0 million, inclusive of the tax impact. the adoption of the new accounting standard on leases included the derecognition of non-company owned properties that were capitalized under previously existing build-to-suit accounting policies and are now classified as either an operating or finance lease upon lease commencement. in addition, any capital amounts contributed by the company toward the construction of the leased asset are recorded as landlord assets under construction within other non-current assets. upon lease commencement, the company reclassifies amounts of the construction project determined to be the landlord asset to lease right-of-use assets. 97table of contents the principal considerations for our determination that performing procedures relating to adoption of the new accounting standard on leases is a critical audit matter are that there was significant judgment by management when (i) identifying and evaluating the impact of varying terms and conditions within leasing contracts, highlighted by the treatment of non-company owned properties that were capitalized under previously existing build-to-suit accounting policies, and (ii) applying the transition guidance to all current and comparative periods presented in accordance with the modified retrospective method. this in turn led to significant auditor judgment, subjectivity and effort in performing audit procedures relating to the accounting treatment for each lease arrangement and the application of the transition guidance to all current and comparative periods presented. 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 adoption of the new accounting standard on leases, including the treatment of non-company owned properties and the transition guidance to all current and comparative periods presented. these procedures also included, among others, evaluating management’s lease classification and accounting treatment of all non-company owned properties that were capitalized under previously existing build-to-suit accounting policies and the recognition of right-of-use assets and liabilities to all current and comparative periods presented. professionals with specialized skill and knowledge were used to assist in evaluating the company’s technical application of the accounting standard related to non-company owned properties that were capitalized under previously existing build-to-suit accounting policies, and the application of the transition guidance to all current and comparative periods presented./s/ pricewaterhouse coopers llp san francisco, california march 30, 2020we have served as the company’s auditor since 2008. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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.assessment of effect of international tax realignment as discussed in note 16 to the consolidated financial statements, the company continued the realignment of its international structure in the current year. assets acquired in the acquisition of aerohive networks, inc. were transferred amongst legal entities residing in different tax jurisdictions, resulting in changes to the income tax provision and related disclosures. we identified the assessment of the effect of the international tax realignment as a critical audit matter. due to the significance of the company’s foreign operations subject to the realignment of its international structure, there was complexity in assessing the implications of the realignment on the income tax provision and related disclosures. complex auditor judgment was required to evaluate the company’s interpretation of applicable tax laws, regulations and the relevant topics of the accounting standards codification and their application to specific aspects of the company’s realignment activities.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 income tax process, including controls related to the identification and assessment of the tax and accounting positions taken due to the realignment. due to the complexity of tax law, which is often subject to interpretation, combined with the complexity of applying the accounting requirements, we involved tax professionals with specialized skills and knowledge, who assisted in evaluating: •the company’s interpretation and application of tax laws and regulations, •the company’s application of relevant accounting guidance related to the accounting for income taxes, including the intra-entity transfer of assets, and business combinations, and •the company’s compliance with the intercompany agreements which were executed as part of the realignment. evaluation of the estimated market value of finished goods inventory.as discussed in note 2 to the consolidated financial statements, the company assesses its finished goods inventory to identify excess or obsolete inventory and potential declines in its value. finished goods inventory as of june 30, 2020 was $52.9 million.we identified the evaluation of the estimated market value of finished goods inventory as a critical audit matter. there was a high degree of subjectivity in evaluating management’s assumptions used to evaluate whether they could sell certain inventory which has limited future product demand forecasted, due to the nature of the evidence available related to the expectation. 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 process to assess excess or obsolete inventory. this included controls related to the determination of the estimated market value and the evaluation of management’s assumptions used to evaluate whether they could sell certain inventory with limited future product demand forecasted. we challenged management’s expectation to sell certain inventory by evaluating the historical results of similar assumptions management has made and by assessing the reasonableness of management’s planned actions through independent corroboration. we performed an assessment of physical inventory disposals to determine whether inventory write-downs were taken in the correct period. we also performed inquiries with product line managers and examined product roadmaps to determine whether new product launches would contradict management’s assumption that they could sell inventory with limited future product demand. 54 evaluation of the fair value of certain intangible assets acquired in the aerohive networks, inc. business combination as discussed in note 4 to the consolidated financial statements, on august 9, 2019, the company acquired aerohive networks, inc. (“aerohive”) for total consideration of $267 million. in connection with the acquisition, the company recorded various intangible assets, which included developed technology and customer relationships with an acquisition-date fair value of $39.1 million and $11.4 million, respectively.we identified the evaluation of the fair value of developed technology and customer relationships acquired in the aerohive transaction as a critical audit matter. there was a high degree of subjectivity in developing the key assumptions used to determine the acquisition-date fair value of these intangible assets. specifically, the discounted cash flow models included internally-developed assumptions for which there was limited observable market information. in addition, the fair value of these intangible asset was sensitive to possible changes to the following key assumptions:developed technology: •forecasted revenues, including technology life •forecasted cost of sales and operating expenses, including research and development maintenance rates customer relationships: •forecasted revenues and earnings before interest, and taxes (ebit) margins •estimated annual customer retention 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 acquisition-date valuation process to develop the key assumptions, as listed above. we evaluated the company’s forecasted revenues, annual customer retention rate, and ebit margins attributable to customer relationships by comparing to relevant support including, where applicable, (a) peer group and market participant data, (b) actual ebit margins for technology distributors, (c) industry reports, and (d) historical actual aerohive results. we evaluated the forecasted revenues, technology life, costs of sales and operating expenses, and research and development maintenance rates attributable to developed technology by comparing to relevant support including, where applicable, (a) peer group and market participant data, (b) industry reports and (c) historical actual aerohive results. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in: •evaluating the valuation methodologies used by the company; •evaluating the peer group and market participant data used in the assessment of assumptions noted above; and •assessing the reasonableness of technology life and research and development maintenance rates based on the nature of the technology acquired. /s/kpmg llp we have served as the company’s auditor since 2010. | 3 |
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