Group Financial Statements

STRATEGIC REPORTIndependent Auditor’s UK ReportWhat we have auditedInterContinental Hotels Group PLC’s (IHG’s, the Group’s) Financial Statements for the yearended 31 December 2015 comprise:GroupCompanyGroup income statementParent company statement of financial positionGroup statement of comprehensive incomeParent company statement of changes in equityGroup statement of changes in equityRelated notes 1 to 10 to the Financial StatementsGOVERNANCEGroup statement of financial positionGroup statement of cash flowsRelated notes 1 to 33 to the Financial StatementsThe financial reporting framework that has been applied in the preparation of the GroupFinancial Statements is applicable law and IFRSs as adopted by the European Union. Thefinancial reporting framework that has been applied in the preparation of the Parent CompanyFinancial Statements is applicable law and United Kingdom Accounting Standards (UnitedKingdom Generally Accepted Accounting Practice), including Financial Reporting Standard101 ‘Reduced Disclosure Framework’.Overview of our audit approachRisks of materialmisstatement Accounting for the hotel assessments collected as part of the revenue cycle and the allocationof expenditures related to the marketing, advertising and loyalty programmes (the System Fund) The valuation of the future redemption of IHG Rewards Club points liability. Capitalisation of software assets and carrying value of legacy systems. Kimpton acquisition – purchase price accounting.Audit scope Materiality We performed an audit of the complete financial information of 19 components and auditprocedures on specific balances for a further 20 components.The components where we performed full or specific audit procedures accounted for 88%of profit before tax adjusted for pre-tax exceptional items and 79% of revenue.Overall Group materiality of 30m which represents 5% of profit before tax adjusted for pre-taxexceptional items.RiskOur response to the riskAccounting for the hotel assessmentscollected as part of the revenue cycle andthe allocation of expenditures related tothe marketing, advertising and loyaltyprogrammes (the System Fund)We have tested the controls over the calculation of hotel assessments,allocation of expenses, related IT systems and eliminations fromIHG’s ledgers.As outlined in the Strategic Report on page 47,the System Fund (the Fund) is a key part of theGroup’s business model.For the year ended 31 December 2015, and asdetailed in note 32, the Fund has assessmentfees and contributions of 1,351m and expensesof 1,455m. These amounts are not included inIHG’s income statement.For a sample of hotel assessments and expenses recorded in the Fund,we agreed that they are in accordance with the principles as agreed withthe IHG Owners Association; supported by appropriate documentationand, based on our inspection of that supporting documentation, havemade an independent assessment of whether the hotel assessmentsand contributions and expenses relate to the Fund.Given the accounting treatment adopted for the Fund is a key judgement;we considered the appropriateness of the classification of the SystemFund surplus between short-term and long-term, and the relateddisclosures provided in critical accounting policies and the use ofjudgements, estimates and assumptions (page 98) and note 32 of theGroup Financial Statements.What we concludedto the Audit CommitteeIn accordancewith the principlesagreed with the IHGOwners Associationwe are satisfied thatSystem Fund hotelrelated assessmentfees, contributionsand expenses, havebeen appropriatelyidentified and havebeen excluded fromIHG’s Group incomestatement.ADDITIONAL INFORMATIONWe focus on this area because there is a riskthat the hotel assessments could be includedin IHG’s reported revenue, which wouldoverstate IHG’s revenues; or that Group costsare incorrectly charged to the Fund, improperlyreducing IHG’s expenses and leading to amisstatement of IHG’s income statement.PARENT COMPANY FINANCIAL STATEMENTSOur assessment of risk of material misstatementWe identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation ofresources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below whichwere designed in the context of the Financial Statements as a whole and, consequently, we do not express any opinion on these individual areas.Refer to the Strategic Report (page 47), theAudit Committee Report (page 63); Criticalaccounting policies and the use of judgements,estimates and assumptions (page 98); andnote 32 of the Group Financial Statements.GROUP FINANCIAL STATEMENTSIndependent Auditor’s Report to themembers of InterContinental HotelsGroup PLCOur opinion on the Financial StatementsIn our opinion: InterContinental Hotels Group PLC’s GroupFinancial Statements and Parent CompanyFinancial Statements (the FinancialStatements) give a true and fair viewof the state of the Group’s and of the ParentCompany’s affairs as at 31 December2015 and of the Group’s profit for theyear then ended; the Group Financial Statements havebeen properly prepared in accordancewith International Financial ReportingStandards (IFRSs) as adopted bythe European Union; the Parent Company Financial Statementshave been properly prepared in accordancewith United Kingdom Accounting Standards(United Kingdom Generally AcceptedAccounting Practice), including FinancialReporting Standard 101 ‘Reduced DisclosureFramework’; and the Financial Statements have beenprepared in accordance with therequirements of the Companies Act 2006,and, as regards the Group FinancialStatements, Article 4 of the IAS Regulation.The magnitude of the risk (ie, the likelihoodof occurrence and the size of an error shouldit occur) is consistent with the prior year.IHG Annual Report and Form 20-F 201581

Independent Auditor’s UK Report continuedRiskOur response to the riskThe valuation of the future redemptionof IHG Rewards Club (IRC) points liabilityWe tested internal financial controls, including IT controls, overthe liability valuation process, including controls over validationof the completeness and accuracy of data provided to IHG’s externalactuarial adviser and management’s internal review process of theinputs and the overall estimate of the rewards point liability.Refer to the Audit Committee Report(page 63); Critical accounting policies andthe use of judgements, estimates andassumptions (page 98); and note 32 of theGroup Financial Statements.We focused on this area due to the size ofthe liability ( 649m at 31 December 2015),and its sensitivity, in particular, to the breakageestimate (as defined on page 98). Changes inthe valuation of the liability are charged to theSystem Fund surplus/deficit and not to IHG’sincome statement.There is an additional input assumption inthe calculation of the breakage estimate in thecurrent year, reflecting the announcement ofthe modification to the point expiration policyin April 2015.The magnitude of the risk (ie, the likelihoodof occurrence and the size of an error shouldit occur) has increased from the prior year,reflecting the additional input assumptionin the calculation of the breakage estimate.Capitalisation of software assets and carryingvalue of legacy systemsRefer to the Strategic Report (page 17); theAudit Committee Report (page 63); Criticalaccounting policies and the use of judgements,estimates and assumptions (page 99); and note13 of the Group Financial Statements.Given the Group’s continued development ofits technology environment and the size of thecapitalised software balance ( 296m as at31 December 2015), of which 94m has beencapitalised in the year, we continue to focus onthis area. Software projects can have complexdevelopments cycles, often over many phases,spanning two to three years, or more. Newtechnology also brings a risk of impairmentof legacy systems.The magnitude of the risk (ie, the likelihoodof occurrence and the size of an error shouldit occur) is consistent with the prior year.(New in 2015)Kimpton acquisition –purchase price accountingRefer to the Audit Committee Report (page 63);Critical accounting policies and the use ofjudgements, estimates and assumptions(page 99); and note 10 of the Group FinancialStatements.We focused on this area given the significantjudgements involved in assessing the fair valuesof assets and liabilities acquired as this directlyimpacts the amount of goodwill recognised onacquisition. The fair values of intangible assetssuch as brands and management contracts arebased on valuation techniques built, in part, onassumptions around the future performanceof the business.82For the three key inputs into the liability valuation we undertookthe following audit procedures:1. Outstanding loyalty points at 31 December 2015We tested controls over the complete and accurate recordingof point data and tested the roll forward of the points balanceto 31 December 2015, and verified to underlying records.2. The outstanding points redemption ratio (breakage)We engaged our own actuarial specialists to assist us in challengingand evaluating the appropriateness of the methodology, data andassumptions applied by management in determining the redemptionratio/breakage for member’s outstanding loyalty points at thebalance sheet date.In addition to testing the integrity of the company’s model,we developed our own model to form an independent viewon an acceptable range for the redemption ratios to assessthe reasonableness of key assumptions applied by managementin valuing the liability.3. Redeemed point cost (RPC)We performed substantive and analytical procedures to validatethe RPC to be applied to the liability calculation.We tested internal financial controls, including IT controls, over theapproval, acquisition, development of new software and management’sassessment of impairment.We obtained a listing of new projects initiated in the year, and agreeda sample to underlying documentation to test they had been reviewedand approved in line with the Group’s delegation of authority.What we concludedto the Audit CommitteeThe valuation ofthe futureredemptionof the IRC pointsliability at31 December 2015is within anacceptable range.The range ofprobable outcomesis wider than in prioryears reflecting thelack of historicalobservable trendsof the behaviouralimpact on breakagefollowing theintroduction of theexpiration policy.We concluded thatthe carrying valueof software assetsat 31 December 2015is appropriate.For both existing and new projects, we assessed the costs capitalisedas compared to the requirements of IAS 38 ‘Intangible Assets’.We performed tests of details by vouching specific expenditures tosupporting documentation to validate a sample of software additionsin the year.We inspected management’s impairment review and considered theappropriateness of the conclusions reached through inspection of theunderlying supporting workpapers, inquiries of management,independent validation that no carrying value was attributed to legacysystems no longer in use, and the inspection of a full asset listing.We tested internal financial controls over the identification of intangibleassets, the determination and review of assumptions used in thepurchase price allocation and classification of intangible assetsas definite lived or indefinite lived.We corroborated the assumptions underpinning the valuations,assessed the fair value of the identified assets and liabilities, andevaluated the adequacy of the acquisition disclosures in note 10of the Group Financial Statements.Assisted by our business valuation specialists, we corroboratedmanagement’s assumptions by comparing to relevant market discountand royalty rates and our experience of useful lives of similar intangibleassets. We corroborated that management had been consistent in itsapproach to valuation, in particular in respect of management contracts.IHG Annual Report and Form 20-F 2015The fair valuesof the assets andliabilities recognisedon the acquisitionof Kimpton havebeen measured ona reasonable basis.

STRATEGIC REPORTIn addition to the risks identified as part of our audit planning, the Group undertook the following material non-routine transactions in the yearwhich affected the allocation of resources and the direction of our audit efforts and for which our audit response was as follows:What we concludedto the Audit CommitteeDisposal of owned hotelsFor each hotel disposal: We tested internal financial controls over the disposal transactionand accounting; We inspected all key contracts in relation to the sale, including thesale and purchase agreement and the related hotel managementagreements, to corroborate that the risks and rewards of ownershipof the asset had passed and hence de-recognition of the hotelwas appropriate. We agreed the calculation of the accounting gain recognised ondisposal, including the fair value attributed to the hotel managementagreement. We tested the appropriateness of the assumptionsapplied to the discounted cash flow models used in determiningthe valuation of the management contract. Given the size and nature of the disposal gain, we consideredthe appropriateness of its classification as an exceptional itemin line with the Group’s accounting policy for such items as set outon page 98.Refer to the Audit Committee Report (page 63);and note 11 of the Group Financial Statements.We focus on this area due to the disposalof both InterContinental Paris – Le Grandand InterContinental Hong Kong in the yearresulting in the recognition of a combined 873m gain on disposal. Included within thecalculation of this gain is the recognition ofthe fair value of the management contractagreements entered in to as part of thedisposal transactions, the valuation of whichincorporates a number of judgements.We concludedthat the fair valueattributed to thehotel managementagreements enteredin to as part of bothtransactions to bereasonable and thatthe gains recognisedon disposal of theowned hotels havebeen correctlycalculated.The disclosureof these gains asexceptional items arein accordance withthe Group’s disclosedaccounting policy forexceptional items andis in accordance withthe requirements ofIAS 1, ‘Presentationof FinancialStatements’.impact on the significant accounts in the Financial Statements eitherbecause of the size of these accounts or their risk profile. The risks ofmaterial misstatement included in the table above were subject to fullaudit procedures.The scope of our auditTailoring the scopeOur assessment of audit risk, our evaluation of materiality and ourallocation of performance materiality determine our audit scope foreach entity within the Group. Taken together, this enables us to forman opinion on the Financial Statements. We take into account size,risk profile, the organisation of the Group, including IHG’s globalaccounting centre in India, and effectiveness of group-wide controls,changes in the business environment and other factors such as GlobalInternal Audit review findings when assessing the level of work to beperformed at each entity.For the current year, the full scope components contributed 59%(2014: 63%) of the Group’s profit before tax adjusted for pre-taxexceptional items, and 60% (2014: 70%) of the Group’s revenue.Of the 39 components selected, we performed an audit of the completefinancial information of 19 components (‘full scope components’)which were selected based on their size or risk characteristics.For the remaining 20 components (‘specific scope components’),we performed audit procedures on specific accounts within thatcomponent that we considered had the potential for the greatestThe specific scope component contributed 29% (2014: 23%) of theGroup’s profit before tax adjusted for pre-tax exceptional items,and 19% (2014: 7%) of the Group’s revenue. The audit scope of thesecomponents may not have included testing of all significant accountsof the component but will have contributed to the coverage ofsignificant accounts tested for the Group. This included specificprocedures on the income statement of the InterContinental HongKong hotel for the period prior to its disposal.Of the remaining components that together represent 12% of theGroup’s profit before tax adjusted for pre-tax exceptional items; noneare individually greater than 4% of the Group’s profit before taxadjusted for pre-tax exceptional items. For three components, weperformed review scope procedures. For the remaining components;none of which are individually greater than 2% of the Group’s profitbefore tax adjusted for pre-tax exceptional items, we performed otherprocedures, including analytical review at both regional levels andat owned hotels, and testing of journals across the Group to respondto any potential risks of material misstatement to the GroupFinancial Statements.IHG Annual Report and Form 20-F 201583ADDITIONAL INFORMATIONIn assessing the risk of material misstatement to the FinancialStatements, and to ensure we had adequate quantitative coverageof significant accounts in the Financial Statements, we selected 39components covering components within IHG’s global accountingcentre in India, the United States, the United Kingdom, and China,which represent the principal business units within the Group.The Primary Audit Engagement Team (the Primary Team) performsthe audit on those areas of accounting performed centrally such aslitigation and consolidation adjustments.The reporting components where we performed audit proceduresaccounted for 88% (2014: 86%) of the Group’s profit before taxadjusted for pre-tax exceptional items and 79% (2014: 77%) of theGroup’s revenue.PARENT COMPANY FINANCIAL STATEMENTSIn the prior year, our auditor’s report included a risk of materialmisstatement as follows: “the recognition of deferred tax assetsrelating to losses”. In the current year, the stability of profits in overseasjurisdictions and the related UK tax legislation means that the level ofjudgement required in determining the amount of deferred tax assets tobe recognised is no longer a risk of material misstatement that had thegreatest effect on our overall audit strategy, the allocation of resourcesin the audit and the direction of efforts in the audit team.GROUP FINANCIAL STATEMENTSOur response to the riskGOVERNANCERisk

Independent Auditor’s UK Report continuedThe charts below illustrate the coverage obtained from the workperformed by our audit teams.Profit before tax adjusted forpre-tax exceptional itemsRevenue12%MaterialityThe magnitude of an omission or misstatement that, individually or inthe aggregate, could reasonably be expected to influence the economicdecisions of the users of the Financial Statements. Materiality providesa basis for determining the nature and extent of our audit procedures.21%29%59%Our application of materialityWe apply the concept of materiality in planning and performing theaudit, in evaluating the effect of identified misstatements on the auditand in forming our audit opinion.60%19%We determined materiality for the Group to be 30 million (2014: 28million), which is 5% (2014: 5%) of profit before tax adjusted for pre-taxexceptional items. We believe that profit before tax adjusted for pre-taxexceptional items provides us with a consistent year-on-year basis fordetermining materiality and is the most relevant performance measureto the stakeholders of the entity. Detailed audit procedures areperformed on material exceptional items.Full scope componentsSpecific scope componentsStarting basisProfit before tax 1,412mAdjustmentAdjust for pre-tax exceptional items of 819mto determine adjusted profit before taxOther proceduresChanges from the prior yearWe have made the following changes to our scope: Following its disposal in May 2015, the income statement ofInterContinental Paris – Le Grand, for the period to the dateof disposal, was subject to review procedures performed bythe Primary Team (2014: full scope). Following its disposal in September 2015, InterContinentalHong Kong was designated specific scope (2014: full scope). IHG acquired Kimpton Hotels & Restaurants Group, LLCin January 2015. The purchase price allocation was subject tofull scope audit procedures performed by the Primary Team.In addition, the Kimpton component was designated a reviewscope with procedures performed by the Primary Team.Involvement with component teamsIn establishing our overall approach to the Group audit, we determinedthe type of work that needed to be undertaken at each of thecomponents by us, as the Primary Team, or by component auditorsfrom other EY global network firms operating under our instruction.Of the 19 full scope components, audit procedures were performed onthree of these directly by the Primary Team and 16 by component auditteams. Of the 20 specific scope components, audit procedures wereperformed on these by component audit teams. We determined theappropriate level of involvement with the component teams to enableus to determine that sufficient audit evidence had been obtained as abasis for our opinion on the Group as a whole.The Primary Team continued to follow a programme of planned visitsthat has been designed to ensure that the Senior Statutory Auditor, orher delegate, visits each of the key locations at both the interim andyear-end stages of the audit process. During the current year’s auditcycle, visits were undertaken, at least twice, by the Primary Team tothe component teams at key locations in the United States and IHG’sglobal accounting centre in India.These visits involved discussing the audit approach with thecomponent team and any issues arising from their work, meetingwith local management, and reviewing key audit working paperson the Group risk areas. The Primary Team interacted regularly withthe component teams, where appropriate, during various stages ofthe audit, reviewed key working papers and were responsible forthe scope and direction of the audit process. This, together with theadditional procedures performed at Group level, gave us appropriateevidence for our opinion on the Group Financial Statements.84Totals 593m (materiality basis)MaterialityMateriality of 30m (5% of materiality basis)During the course of our audit, we reassessed initial materiality andthe only change in final materiality was to reflect the actual reportedperformance of the Group in the year.Performance materialityThe application of materiality at the individual account or balance level.It is set at an amount to reduce to an appropriately low level the probabilitythat the aggregate of uncorrected and undetected misstatementsexceeds materiality.On the basis of our risk assessments, together with our assessmentof the Group’s overall control environment, our judgement was thatperformance materiality was 75% (2014: 75%) of our planningmateriality, namely 23m (2014: 21m). We have set performancemateriality at this percentage to ensure that the total uncorrectedand undetected audit differences in all accounts did not exceedour materiality.Audit work at component locations for the purpose of obtaining auditcoverage over significant financial statement accounts is undertakenbased on a percentage of total performance materiality. Theperformance materiality set for each component is based on therelative scale and risk of the component to the Group as a wholeand our assessment of the risk of misstatement at that component.In the current yea

IHG’s income statement. We focus on this area because there is a risk that the hotel assessments could be included in IHG’s reported revenue, which would overstate IHG’s revenues; or that Group costs are incorrectly charged to the Fund, improperly reducing IHG’s expenses and leading to a misstatement of IHG’s income statement.