Dear Shareholder

I am pleased to present the Audit Committee (the “Committee”) report covering the work of the Committee during FY2021. This provides an overview of the Committee’s activities in the year under review and looks ahead to our anticipated activities in the coming year.

Year in Review

The Committee throughout the year continued to play a key role in assisting the Board in fulfilling its oversight responsibility. Its activities included reviewing and monitoring the integrity of financial information, key accounting judgements and related disclosures, audit quality and the robustness of the Group’s risk management and system of internal controls. In discharging its duties, the Committee works to a structured agenda closely linked to the events in the Company’s reporting cycle.

The Committee’s work was supported by the Group’s well established risk and financial management structures. The exceptional and unprecedented challenges posed by the COVID-19 pandemic and the impact on the Group’s businesses has tested the robustness of those structures and the established working processes between management and the Committee.

I am pleased to report that the Group’s risk and financial management structures have operated effectively during the year under review. I would like to thank my colleagues and fellow Board members for their contribution and counsel over the past 12 months, which enabled the Committee to fulfil its role in providing effective scrutiny and challenge.

As in previous years, the Committee’s primary focus was on the integrity of the Group’s financial reporting processes. In considering the financial statements, the Committee concentrated on the accounting judgements and disclosures relating to the impact of COVID-19 on the Group’s businesses, including government support and tax deferral initiatives, liquidity and the impact on financial covenants, cost control and cost saving measures. Other focus areas included going concern, recoverability of trade receivables and advances to customers, asset impairment testing, the valuation of property, plant and equipment and revenue recognition. Careful consideration was given to the Group’s viability disclosures and its ability to continue as a going concern, with particular scrutiny being given to the reports prepared and assumptions used by management to support those statements.

There were eleven meetings during the year and after each Committee meeting I provided an update to the Board on the key issues discussed during our meetings. I also met separately with the external audit partner and senior management on a number of occasions during the year.

More information about the Committee’s activities during the year can be found in the pages which follow.

The Year Ahead

COVID-19 has had a profound impact on the sectors in which we operate, and on the Group, and we continue to respond to the challenges and opportunities that this brings. The Committee fulfils a key role in assisting the Board in ensuring that the integrity of the Group’s financial statements and the effectiveness of the Group’s internal financial controls and risk management systems are maintained. Through the Committee’s composition, resources and the commitment of its members, I believe that it remains well placed to meet those challenges and to discharge its duties in the year ahead.

On behalf of the Board.

Emer Finnan

Chair of the Audit Committee

26 May 2021

Role and Responsibilities of the Committee

The Committee supports the Board in fulfilling its responsibilities in relation to financial reporting, monitoring the integrity of the financial statements and other announcements of financial results published by the Group; and reviewing and challenging any significant financial reporting issues, judgements and actions of management in relation to the financial statements. The Committee reviews the effectiveness of the Group’s internal controls and risk management systems and the effectiveness of the Group’s Internal Audit function. On behalf of the Board, the Committee manages the appointment and remuneration of the External Auditor and monitors its performance and independence. The Group supports an independent and confidential whistleblowing procedure and the Committee monitors the operation of this facility.

In accordance with the Code, the Board requested that the Committee advise it whether it believes the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

The Committee’s Terms of Reference reflect this requirement and can be found in the Investor Centre section of the Group’s website. A copy may be obtained from the Company Secretary.

Membership and Attendance

The following non-executive Directors served on the Committee during the year:

All members of the Committee are, and were considered by the Board to be throughout the year under review, independent.

The Committee members have been selected to provide the wide range of financial and commercial expertise necessary to fulfil the Committee’s duties and responsibilities and provide effective governance. As a qualified chartered accountant, I am considered by the Board to have recent and relevant financial experience, as required by the Code. The Committee is considered by the Board as a whole to have competence relevant to the sector in which the Group operates. Details of the skills and experience of the Directors are contained in the Directors’ biographies on pages 74 and 75 of the Annual Report and Accounts.

The Committee has access to the Group’s finance team, to its Internal Audit function and to its External Auditor and can seek further professional training and advice, at the Group’s cost, as appropriate.

Meeting Frequency and Main Activities in the Year

The Committee met on five scheduled occasions during FY2021. In addition there were six ad hoc meetings. All members of the Committee attended every meeting. The quorum necessary for the transaction of business by the Committee is two, each of whom must be a Non-Executive Director. Only members of the Committee have the right to attend Committee meetings, however, during the year, Stewart Gilliland (in his capacity as Chair), David Forde, Group Chief Executive Officer, Jonathan Solesbury, Group Chief Financial Officer and his successor as Group Chief Financial Officer, Patrick McMahon, the Head of Internal Audit together with members of the Internal Audit team, Director of Group Finance, and representatives from Ernst & Young, the External Auditor, were invited to attend meetings. The Committee also meets separately with the Head of Internal Audit and the External Auditor without management being present.

The Company Secretary and Group General Counsel is Secretary to the Committee.

Significant Judgemental Areas

The key matters reviewed and evaluated by the Committee during the year are set out below. Each of these areas received particular focus from the External Auditor, who provided detailed analysis and assessment of the matters in their report to the Committee.

Going Concern

The Committee and the Board reviewed and challenged the evidence and assumptions supporting the adoption of the going concern basis for the FY2021 financial statements.

In assessing the impact of the COVID-19 pandemic on the Going Concern Statement and Viability Statement, the Committee considered a base case scenario, along with a reasonable worse case scenario, both of which exclude any upside from the potential rights issue. The Committee assessed the Group’s cash flow forecasts for the period ending 31 August 2022 (the going concern “assessment period”). It also assessed the assumptions relating to the profitability and cash generation of the business. The key assumption in the assessment is the phased reopening of the on-trade business in the Company’s main markets of England, Scotland and Ireland based on available Government advice and roadmaps.

The Group’s scenarios are outlined below:

• The base case projection assumes on-trade recovery in England and Scotland continuing from April and May 2021 respectively, Ireland’s on-trade recovery commencing from June 2021.
• The pace of recovery is assumed to be similar across each territory once on-trade restrictions are eased, with gradual improvement to volumes.
• In aggregate on-trade volumes over the assessment period are projected to be approximately 79% of FY2020 in the base case scenario over the assessment period.
• The reasonable worst case projection assumes the same timeline for re-opening of on-trade as the base case; however volumes are projected to hold flat at modest levels for the remainder of the summer as many on-trade restrictions are assumed to remain in place over that period and then build more gradually from that point.
• The reasonable worst case projection contains linked working capital assumptions reflecting a more challenged supplier credit environment.

The going concern base case and reasonable worse case scenarios also consider the achievement of cost saving measures, the Group’s financing facilities, the use of temporary government supports and projected dividend payments. The Group benchmarked the impacts of both scenarios against the monthly liquidity and gross debt covenant waiver tests through the going concern assessment period. The Group has obtained waivers on its original covenant requirements up to, but not including, the August 2022 test date whether or not the rights issue is successful. The headroom on the covenants within the financing facilities have been reviewed in detail by management and assessed by the Committee. Refinancing activities, including the extension of facilities, and the covenant waivers obtained on the Group’s debt, have been reviewed by the Committee, in addition to Going Concern and Viability Statement reports which include details of the projected revenue and profitability and the related impact on projected cash flows.

Having considered these factors, the Committee and the Board have concluded that monthly liquidity and gross debt covenant waiver tests will be satisfied under both the base case and reasonable worse cast scenarios (without any benefit of the proposed rights issue) and therefore consider it appropriate to adopt the going concern basis of accounting with no material uncertainties as to the Group’s ability to continue to do so.

In making this assessment, the Committee and Board considered the continued impact of COVID-19 and in particular the assumptions in respect of forecasted level of the on-trade business in each of the Group’s main trading locations. While it was recognised that COVID-19 continues to have a negative impact on the on-trade business, given the actions available to management, the Committee and the Board do not expect any reasonably anticipated deterioration in the forecasted revenues to impact the Group’s ability to continue as a going concern.

The Committee also reviewed the Viability Statement. The viability period has been reduced from previous reports, from a three-year period, to a two-year period to align with the working capital statement prepared in contemplation of the proposed rights issue. This two-year period to February 2023 was considered appropriate for this year only given the continued uncertainty of COVID-19. The scenario workings assessing the ability of the Group to continue trading for this two-year period are consistent with the going concern assumptions above, projected out to February 2023 and assume that the Group will seek to have the necessary financing requirements in place in the absence of the potential rights issue throughout the viability period.

For further information on the work undertaken by the Committee, the Board and management in relation to the going concern basis of preparation for the FY2021 financial statements, please see ‘Going Concern’ on page 41 and ‘Viability Statement’ on pages 41 to 42. The Directors’ Going Concern statement is set out on page 41.

Recoverability of Trade Receivables and Advances to Customers

The Group has a risk through exposure to on-trade receivable balances and advances to customers who may experience financial difficulties. Given the uniqueness of the COVID-19 outbreak, the assessment of the impact of the outbreak on the Group’s expected credit loss model required significant judgement by the Committee. In particular, the Committee considered the basis used by management in calculating the expected credit losses, whether it adequately captured the additional risks in the current environment and the level of security in respect of those loans. As a result of the review process, the Committee concluded that the expected credit loss on trade receivables and loans was prudent but appropriate and were properly reflected in the consolidated financial statements.

Asset impairment testing

The Committee considered the carrying value of goodwill, intangible assets and equity accounted investments as at the year-end date to assess whether or not it exceeded the expected recoverable amounts for these assets. In particular, the Committee considered and challenged the valuation financial models, including sensitivity analysis, used to support the valuation and the key assumptions and judgements used by management underlying these models including consideration for COVID-19. The key assumptions used in the financial models and consequently the key focus areas for the Committee relate to future volume, net revenue and operating profit, the growth rate in perpetuity and the discount rate applied to the resulting cash flows. The Committee considered the outcome of the financial models and found the methodology to be robust, and in all instances concluded that the outcome was appropriate. This included the recognition of an impairment with respect to the Group’s carrying value of its investment in Admiral Taverns of €8.9 million and an impairment of €0.2 million with respect to its carrying value of its investment in Drygate Brewing Company Limited.

Valuation of property, plant and equipment

The Group values its land and buildings and plant, machinery and equipment at market value/depreciated replacement cost and consequently carries out an annual valuation. The Group engages external valuers to value the Group’s property, plant and machinery at a minimum every three years or as at the date of acquisition for assets acquired as part of a business combination. An external valuation was conducted at 28 February 2021 by PricewaterhouseCoopers LLP to value the land and buildings and plant, machinery and equipment at the Group’s Clonmel (Tipperary), Wellpark (Glasgow) and Portugal sites. Following a review of PwC’s valuation report, the Committee is satisfied that the adjustments posted were reasonable and that the carrying values at 28 February 2021 are appropriate.

Revenue recognition

The Committee considered the Group’s revenue recognition policy and is satisfied it is appropriate and in line with IFRS 15 Revenue from Contracts with Customers.

Following discussions with the External Auditor, and the deliberations set out above, we were satisfied that the financial statements dealt appropriately with each of the areas of significant judgement.

Other Areas of Focus

The Committee also during the year:

• approved the Internal Audit plan and agreed the External Auditor’s work plans for the Group;
• considered regular reports from the Head of Internal Audit on their findings;
• reviewed and recommended revisions to the Board to the Group Risk Register and the Principal Risks and Uncertainties; and
• reviewed the External Auditor’s independence and objectivity, the effectiveness of the audit process, the re-appointment of the External Auditor and approved the External Auditor’s remuneration.

Fair, Balanced and Understandable Assessment

One of the key compliance requirements of a group’s financial statements is for the Annual Report and Accounts to be fair, balanced and understandable. The coordination and review of Group wide contributions into the Annual Report and Accounts follows a well established and documented process, which is performed in parallel with the formal process undertaken by the External Auditor.

The Committee received a summary of the approach taken by management in the preparation of the FY 2021 Annual Report and Accounts to ensure that it met the requirements of the Code. This, and our own scrutiny of the document, enabled the Committee, and then the Board, to confirm that the 2021 Annual Report and Accounts taken as a whole, was fair, balanced and understandable and provided the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.

Internal Controls and Risk Management Systems

The Committee is responsible, on behalf of the Board, for reviewing the effectiveness of the Group’s internal controls and risk management systems, including financial, operational and compliance controls.

In order to keep the Committee abreast with latest developments, the Head of Internal Audit reported to each meeting on developments and emerging risks to internal control systems and on the evolution of our principal risks. The Committee reviewed the updated principal risks, their evolution during the year, and the associated risk appetites and metrics in light of business changes and performance, challenging and confirming their alignment to the achievement of the Group’s strategic objectives. This included consideration of the impact of COVID-19 and Brexit. On a regular and ongoing basis, the Committee considered the ongoing overall assessment of each risk, their associated metrics and management actions and mitigations in place and planned. This review was supported through consideration of risk dashboards outlining both principal risks and any escalated or emerging risks resulting in the reclassification of two risks, namely Information Technology, and Cyber and Information Security and Data Protection. Those changes to our risk profile were then approved by the Board. The Group’s principal risks and uncertainties are set out on pages 32 to 42.

In addition, the Committee reviewed reports issued by both Internal Audit and the External Auditor and held regular discussions with the Group Chief Financial Officer, the Head of Internal Audit and representatives of the External Auditor.

Internal Audit

The Committee is responsible for monitoring and reviewing the operation and effectiveness of the Internal Audit function including its focus, work plan, activities and resources.

At the beginning of the financial year, the Committee reviewed and approved the Internal Audit plan for the year having considered the principal areas of risk in the business and the adequacy of staffing levels and expertise within the function. The Committee also reviewed those plans again during the year in light of COVID-19, which resulted in the Internal Audit function changing direction and focus having regard to imposed working restrictions and the placing on furlough of a number of our colleagues. As national lockdowns were imposed, the team took a risk based approach to the rest of the year, while at the same time establishing new ways of working. A number of high risk audits were conducted remotely and others were deferred into FY2022 where appropriate. This was a position endorsed by the Committee in recognition of the operational challenges being experienced at the time by the business and to the businesses of our customers, which required immediate prioritisation and focus. The FY2022 audit plan has considered all existing and emerging risks and what was deferred from FY2021, incorporating both elements where appropriate. The ability to achieve the FY2022 Internal Audit plan in spite of continued lockdown and social distancing restrictions has also been considered, with additional resources deployed when able.

During the year, the Committee received regular verbal and written reports from the Head of Internal Audit summarising findings from the work of Internal Audit and the responses from management to deal with the findings.

The Committee monitors progress on the implementation of any action plans arising on significant findings to ensure these are completed satisfactorily and meets with the Head of Internal Audit in the absence of management.

External Audit

It is the responsibility of the Committee to monitor the performance, objectivity and independence of Ernst and Young (“EY”), the External Auditor. In December 2020, we met with EY to agree the audit plan for the year end, highlighting the key financial statement and audit risks, to ensure that the audit was appropriately focused. In addition, EY’s letter of engagement and independence was reviewed by the Committee in advance of the audit.

In May 2021, in advance of the finalisation of the financial statements, we received a report from EY on their key audit findings, which included the key areas of risk and significant judgements referred to above, and discussed the issues with them in order for the Committee to form a judgement on the financial statements. In addition, we considered the Letter of Representation that the External Auditor requires from the Board.

The Committee meets with the External Auditor privately at least once a year to discuss any matters they may wish to raise without management being present.

Assessment of Effectiveness of External Audit

During the year, the Committee reviewed EY’s fees for its services performed, its effectiveness and whether the agreed audit plan had been fulfilled and the reasons for any variation from the plan. The review included a formal evaluation process including the completion of a short questionnaire by each member of the Committee, the Group Chief Financial Officer, the Director of Group Finance and applicable senior finance executives across the business.

The Committee also considered the robustness of the FY2021 audit, the degree to which EY was able to assess key accounting and audit judgements and the content of the audit committee report issued by the External Auditor. Due to governmental advice and restrictions regarding social distancing and travel, EY’s audit teams have followed different levels of remote working in the locations where the Group operates. The Committee is satisfied that this has not impacted the effectiveness of the audit or the audit process. On the basis of the Committee’s evaluation and taking into account the views of other key internal stakeholders, the Committee concluded that both the audit and the audit process were effective.

Audit Tender

Following a tender process, the current External Auditor was first appointed for the year ended 28 February 2018. The Group’s lead audit engagement partner has been the same since that date. The external audit had not been tendered since then.

There are no contractual obligations restricting the Company’s choice of External Auditor. The Committee will continue to review the auditor appointment and the need to tender the audit, ensuring the Group’s compliance with the Code and any related regulations.

The Committee confirmed compliance with the Statutory Audit Services for Large Companies Market Investigation (mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, having last carried out a competitive tender for audit services in 2017.

Non-Audit Services

The Group has a policy in place governing the provision of non-audit services by the External Auditor in order to ensure that the External Auditor’s objectivity and independence is safeguarded.

Under this policy the auditor is prohibited from providing non-audit services if the auditor:

• may, as a result, be required to audit its own firm’s work;
• would participate in activities that would normally be undertaken by management;
• would be remunerated through a “success fee” structure or have some other mutual financial interest with the Group; and
• would be acting in an advocacy role for the Group.

Other than above, the Company does not impose an automatic ban on the External Auditor providing non-audit services. However, the External Auditor is only permitted to provide non-audit services that are not, or are not perceived to be, in conflict with auditor independence and objectivity, if it has the skill, competence and integrity to carry out the work and it is considered by the Audit Committee to be the most appropriate firm to undertake such work in the best interests of the Group. The engagement of the External Auditor to provide non-audit services must be approved in advance by the Audit Committee or entered into pursuant to pre-approved policies and procedures established by the Audit Committee and approved by the Board.

The nature, extent and scope of non-audit services provided to the Group by the External Auditor and the economic importance of the Group to the External Auditor are also monitored to ensure that the External Auditor’s independence and objectivity is not impaired. The Audit Committee has adopted a policy that, except in exceptional circumstances with the prior approval of the Audit Committee, non-audit fees paid to the Group’s auditor should not exceed 100% of audit fees in any one financial year.

EY provided no non-audit services in FY2021.

Confidential Reporting Programme

In line with best practice, the Group has an independent and confidential reporting programme in all of its operations whereby employees can, in confidence, report on matters where they feel a malpractice has taken or is taking place, or if health and safety standards have been or are being compromised. Additional areas that are addressed by this procedure include criminal activities, improper or unethical behaviour and risks to the environment.

The programme allows employees to raise their concerns with their line manager or, if that is inappropriate, to raise them on a confidential basis. An externally facilitated confidential helpline and confidential email facility are provided to protect the identity of employees in these circumstances. Any concerns are investigated on a confidential basis by the Human Resources Department and/or the Company Secretary and Group General Counsel and feedback is given to the person making the complaint as appropriate via the confidential email facility. An official written record is kept of each stage of the procedure and results are summarised for the Committee.

The Audit Committee is also responsible for ensuring that arrangements are in place for the proportionate independent investigation and appropriate follow up of any concerns which might be raised. The Committee receives regular reports on all whistleblowing incidents. The Board also receives a report on whistleblowing in the Company Secretary and Group General Counsel’s regular report to Board meetings. In FY2021, no incidences of concern were uncovered.

We encourage employees to report genuine issues and concerns as they arise. Those concerns are taken seriously. They are investigated where appropriate and confidentiality is respected.

Evaluation of the Committee

The evaluation of the Committee was completed as part of the 2021 internal board evaluation process. An explanation of how this process was conducted, the conclusions arising from it and the action items identified is set out on page 84. The Committee has considered this in the context of the matters that are applicable to the Committee.

This report was approved by the Board of Directors on 26 May 2021.

Emer Finnan

Chair of the Audit Committee