UDG Healthcare plc – Annual report – 30 September 2019
31. Financial Instruments and Financial Risk (extract 1)
Valuation Techniques and Significant Unobservable Inputs
Fair Value Hierarchy of Assets and Liabilities Measured at Fair Value
The Group has adopted the following fair value hierarchy in relation to its financial instruments that are carried in the balance sheet at the fair values at the year end:
• Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 – inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices); and
• Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The following table sets out the fair value of all financial assets and liabilities that are measured at fair value:
Fair value measurement as at 30 September 2019
Fair value measurement as at 30 September 2018
31. Financial Instruments and Financial Risk (extract 2)
Deferred Contingent Consideration
Deferred contingent consideration is included in Level 3 of the fair value hierarchy. Details of the movement in the year are included in Note 26. The fair value is determined considering the expected payment, discounted to present value using a risk adjusted discount rate. The expected payment is determined separately in respect of each individual earn-out agreement taking into consideration the expected level of profitability of each acquisition. The provision for deferred contingent consideration is principally in respect of acquisitions completed during 2017 to 2019.
The significant unobservable inputs are:
• forecast weighted average EBIT growth rate 19% (2018: 24%); and
• risk adjusted discount rate 0.7%–2.8% (2018: 0.02%–2.75%).
Inter-relationship Between Significant Unobservable Inputs and Fair Value Measurement
The estimated fair value would increase/(decrease) if:
• the EBIT growth rate was higher/(lower); and
• the risk adjusted discount rate was lower/(higher).
For the fair value of deferred contingent consideration, a reasonably possible change to one of the significant unobservable inputs at 30 September 2019, holding the other inputs constant, would have the following effects:
26. Provisions (extract)
Deferred Contingent Consideration
The deferred contingent consideration liability represents the fair value of amounts which may become payable over the period from October 2019 to October 2024 in connection with the acquisition of subsidiaries. Payment is dependent on achieving predetermined targets based on future performance and profitability. During the year, payments were made of $812,000 (2018: $5,911,000) with respect to prior year acquisitions. A further $41,566,000 was transferred to deferred consideration, presented within trade and other payables as there are no longer any contingencies associated with these future payments other than the passage of time. Deferred contingent consideration of $4,143,000 (2018: $11,576,000) in respect of prior year acquisitions was released in the year following a review of expected performance against earn-out targets (Note 9). Further details on the measurement of contingent consideration and sensitivities are disclosed in Note 31.