Vodafone Group Plc Annual Report 2025 123
Strategic report
Governance
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Independent auditor’s report to the members of Vodafone Group Plc continued
– evaluating the reasonability of forecasted income from internal service activities, for example, by comparing underlying assumptions to historical performance, commercial rationale, the application of transfer pricing policies and with evidence obtained from other areas of our audit; and – evaluating the forecast finance expense, on a sample basis, recalculating the finance expense with reference to underlying agreements, and consideration of UK Corporate Interest Restrictions. Key observations communicated to the Audit and Risk Committee We agree with the recognition of the deferred tax assets in Luxembourg and in the UK and consequently the long recoverability period, on the basis of forecast profits, which are considered probable. In the case of Luxembourg, this reflects the commercial rationale and management’s intention to retain current activities in Luxembourg and the debt levels in Vodafone Germany, over the longer term, and, in respect of both the UK and Luxembourg, this reflects the track record of historical profitability, the established market structure for telecoms including high barriers to entry for new market entrants, the long-dated funding structure and local tax law. Changes in key assumptions, in particular for Luxembourg, including a plausible reduction in the level of intra-group debt levels with Germany, could lead to an increase in utilisation period beyond 60 years. The Group does not currently recognise deferred tax assets which are forecast to be used 60 years beyond the balance sheet date and consequently, should the assumptions change, a different conclusion could be reached in respect of the level of deferred tax asset recognised. We consider that the disclosures included within Note 6 to the consolidated financial statements acknowledges both the judgement made in respect of the timing and profile of the utilisation of the losses in the short to medium term and the longer-term uncertainties in relation to the carrying value of the related deferred tax asset. How we scoped our audit to respond to the risk and involvement with component teams Audit procedures on the recognition and recoverability of deferred tax assets on tax losses in Luxembourg were performed by the Group audit team and its tax professionals, with support from Luxembourg tax and transfer pricing specialists for certain procedures. Audit procedures on the recognition and recoverability of deferred tax assets in the UK were performed by the Group audit team and its tax professionals. Risk Revenue recognition As more fully described in Note 2, Note 14 and Note 15 to the consolidated financial statements, the Group reported revenue of €37,448 million (FY24: €36,717 million), contract assets of €2,969 million (FY24: €2,863 million) and contract liabilities of €2,228 million (FY24: €1,908 million) for the year ended or as at 31 March 2025. Management records revenue according to the principles of IFRS 15, Revenue from Contracts with Customers, including following the 5-step model therein. We identified a risk of management override through inappropriate manual topside revenue journal entries, given revenue is a key performance indicator, both in external communication and for management incentives. We also consider auditing the revenue recorded by the Group to involve greater auditor effort and attention, due to the multiple IT systems and tools utilised in the initiation, processing and recording of transactions, which includes a high volume of individually low monetary value transactions. The involvement of IT professionals was required to determine the audit approach to test and evaluate the relevant data that was captured and aggregated, and to assess the sufficiency of the audit evidence obtained.
calculation of the gross amount of deferred tax assets recorded and the preparation of the prospective financial information used to determine the Luxembourg and UK entities’ future taxable income. With the support of tax professionals and tax specialists, our audit procedures included, among others, assessing the existence of available losses and excess capital allowances, and evaluating management’s position on the recoverability of the losses and excess capital allowances with respect to local tax law and tax planning strategies adopted. We also evaluated the nature of reconciling items between forecast profit before tax and taxable profit and considered their appropriateness in accordance with IAS 12. We performed sensitivities to understand the impact of changes in key assumptions of forecast taxable income, on the utilisation timeframe, given the Company does not currently recognise deferred tax assets which are forecast to be used 60 years beyond the balance sheet date. This also included considering the appropriateness of the long recovery period, taking into account the track record of historical profitability, the established market structure for telecoms including high barriers to entry for new market entrants, the long-dated funding structure and local tax law. We evaluated the adequacy of the disclosures in respect of the recognition of the deferred tax asset – evaluating the forecast finance income by, on a sample basis, recalculating income with reference to underlying agreements, comparing future interest rates utilised in the forecasts to relevant external benchmarks and assessing the assumed projections in intra-group debt levels for consistency with our understanding of the business and relevant guidance in respect of transfer pricing of financial transactions; – assessing whether contrary evidence exists that is not consistent with either management’s stated intention that the financing structures, as projected, as well as the debt levels in Vodafone Germany, will remain in place or that it is probable that sufficient future taxable profits will exist in the relevant jurisdictions; against the requirements of IAS 12. Luxembourg specific procedures Our additional audit procedures included, among others; – evaluating how the assumptions leading to the impairment in the Germany CGU impact Luxembourg’s forecast interest income from Vodafone Germany, and therefore, the recoverability of the deferred tax assets in Luxembourg; and – assessing the reasonability of forecasted procurement and roaming taxable profits utilised in management’s assessment, by considering historical forecasting accuracy, changes in pricing models, and with evidence obtained from other areas of our audit. UK specific procedures Our additional audit procedures included, among others; – corroborating that the Vodafone UK forecast trading activities used within the deferred tax asset recognition model are consistent with those used as an input into the going concern, viability statement, impairment assessment and the information approved by the Board related to management’s business plans. – assessing management’s projected adjusted EBITDAaL growth, for example by comparing underlying assumptions including ARPU to external data, such as economic and industry forecasts and competitor data for the UK telecoms market and supporting evidence provided by management (e.g. supporting contracts and benchmarking);
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