REG-Capita PLC: Half year results 2017 <Origin Href="QuoteRef">CPI.L</Origin> - Part 2
21/09/2017 07:06
- Part 2: For the preceding part double click ID:nPRrK4B84a
standard requires entities to exercise considerable judgement taking into
account all the relevant facts and circumstances when applying each step of
this model to its contracts with customers. The standard also specifies how to
account for the incremental costs of obtaining a contract and the costs
directly related to fulfilling a contract, as well as requirements covering
matters such as licences of intellectual property, warranties, principal
versus agent assessment and options to acquire additional goods or services.
The Group has applied IFRS 15 fully retrospectively in accordance with
paragraph C3 (a) of the standard, restating the prior period’s comparatives
and electing to use the following expedients:
• in respect of completed contracts, the Group will not restate contracts
that (i) begin and end within the same annual reporting period; or (ii) are
completed contracts at the beginning of the earliest period presented (para.
C5(a));
• in respect of completed contracts that have variable consideration, the
Group will use the transaction price at the date the contract was completed
rather than estimating variable consideration amounts in the comparative
periods (para. C5(b)); and
• for all reporting periods presented before the date of initial
application, the Group will not disclose the amount of the transaction price
allocated to the remaining performance obligations or an explanation of when
the Group expects to recognise that amount as revenue (para C5(c)).
Details of the change in the Group’s accounting policy in respect of revenue
recognition, related matters consequent upon the early adoption of IFRS 15 and
an explanation of the impact on the Group’s prior period financial
statements are set out in appendix 2.
IFRS 16 Leases
The adoption of IFRS 16 Leases is mandatory for the Group for the financial
year beginning 1 January 2019.
IFRS 16 replaces the existing accounting requirements in IAS 17 Leases. A
single model for lessees will be required, eliminating off balance sheet
accounting for non-exempt operating leases. As a result, lease liabilities and
corresponding right of use lease assets would come onto the balance sheet and
would generally be unwound and depreciated over the term of the lease. The
presentation and timing of income and expense recognition in the income
statement would change, however the total income and expense over the term of
the lease remains the same. There would be no impact on cash flows as the
payments received or paid under the leases remain the same, although there
would be a change in presentation of cash flows. The application of the new
standard would have a varying impact on opening retained earnings at the
initial date of adoption dependent upon which transition method is chosen.
The Group is assessing the potential impact on its consolidated financial
statements resulting from the application of IFRS 16 and expects to disclose a
range of estimates for the quantitative impact prior to initial adoption. It
is not practicable to provide a reasonable estimate of the effect of IFRS 16
or to conclude on the transition approach to be taken until the detailed
reviews have been completed.
(d) Principal risks and uncertainties and going concern
The Directors have considered the principal risks and uncertainties affecting
the Group’s financial position and prospects in 2017 and out 12 months
beyond the reporting date. As described on pages 46 to 55 of the Group’s
annual report for 2016, the Group continues to be exposed to a number of risks
and has well established systems and procedures in place to identify, assess
and mitigate those risks.
The principal risks include those arising from: significant failures in
internal control systems; lack of corporate financial stability; failures in
information security controls; legal and regulatory risk; adverse
financial/business performance; failure to innovate; increased internal
business complexity; adverse changes in the national or international
political landscape; operational issues leading to reputational risk;
operational IT risks; failure to effectively manage the Group’s talent and
human resources; and weaknesses in the acquisition and contracting life cycle.
The Directors continue to review the principal risks on an ongoing basis and
confirm that there are no further principal risks, although noting that the
residual risk arising from the lack of corporate financial stability has
reduced during 2017 as the mitigating measures undertaken have impacted our
position. Further the residual risk from Operational IT risk has increased due
to identified dependencies on certain aged infrastructure which the Group will
address through its longer term IT strategy.
In assessing the basis of preparation for the period 30 June 2017, the
Directors have considered the principles of the FRC's “Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting
2014”, namely assessing the applicability of the going concern basis, the
review period and disclosures.
The Group has net debt of £1,595.5m at 30 June 2017 (31 December
2016: £1,778.8m).
The Group’s committed revolving credit facility, bank term loan facilities
and private placement notes are subject to compliance with covenant
requirements including maximum ratios of adjusted net debt to adjusted EBITDA
before exceptional items. The Group's covenanted maximum ratio for all debt
instruments is currently 3.5 times falling to 3.0 times under some debt
instruments following receipt of the proceeds of the sale of the Capita Asset
Services businesses. They are tested semi-annually. The Group’s
calculation of adjusted net debt to adjusted EBITDA at 30 June 2017 is 2.86
times and is in compliance with the relevant ratios.
The Board has undertaken a rigorous assessment of the forecast assumptions
that support the going concern basis, taking into account the financial
forecasts, the Group’s existing debt levels, the committed funding and
liquidity positions, the Group’s historic experience in generating cash from
trading activities, and the working capital management strategies available to
it. They have applied sensitivity analysis to these forecasts through both
reductions in cash collections, underperformance against the 2017 business
plan, a potential delay of the completion of the sale of the Capita Asset
Services businesses into 2018, and the possible range of settlements described
in note 19 Contingent Liabilities. They have considered mitigating actions
available to the Group in response to these sensitivities. After applying
these sensitivities and mitigating actions, the Group forecasts that it will
continue to operate within its covenants.
Accordingly and notwithstanding that the half year condensed consolidated
balance sheet shows a net liability position (which from December 2017 will
have the effect of adding all outstanding contingent liabilities under
performance bonds and bank guarantees to adjusted net debt under the covenant
calculation), the Board has a reasonable expectation that the Company and the
Group will be able to operate as a going concern for the foreseeable future
and are satisfied that the half year condensed consolidated financial
statements should be prepared on a going concern basis.
3 Segmental information
The Group’s operations are managed separately according to the nature of the
services provided, with each segment representing a strategic business
division offering a different package of client outcomes across the markets
the Group serves. As announced at the 2016 year end, the Group from 1
January 2017 introduced a new simplified structure that better aligns sales
and operations to the markets and customers that the Group addresses. This
is now reflected in the segment reporting and the comparatives have been
restated on this same basis. No segments are aggregated to form the
operating segments below, and the information presents the information as it
is reported to the Group Board. In preparing these interim statements, the
Board has considered how business performance is assessed internally and in
addition to the announced new business divisions, Group trading and central
functions will also be reported separately going forwards. Comparative
information has been restated accordingly. The Board believe the changes
improve accountability and transparency across the Group.
Digital & Software Solutions IT Services Public Sector Partnerships Professional Services Private Sector Partnerships Group trading and central functions Total underlying Total non-underlying Total
6 months to 30 June 2017 £m £m £m £m £m £m £m £m £m
Continuing operations
Contract length > 2 years 185.7 169.6 382.9 109.5 601.7 5.0 1,454.4 — 1,454.4
Contract length < 2 years 17.2 31.8 86.2 44.3 156.0 — 335.5 0.9 336.4
Transactional (point in time) 4.0 72.5 69.7 96.8 33.0 — 276.0 60.5 336.5
Total segment revenue 206.9 273.9 538.8 250.6 790.7 5.0 2,065.9 61.4 2,127.3
Trading revenue 224.1 378.5 577.6 310.0 857.7 40.2 2,388.1 — 2,388.1
Inter-segment revenue (17.2 ) (104.6 ) (38.8 ) (59.4 ) (67.0 ) (35.2 ) (322.2 ) — (322.2 )
Total underlying segment revenue 206.9 273.9 538.8 250.6 790.7 5.0 2,065.9 — 2,065.9
Non-underlying revenue — — 5.9 54.6 0.9 — 61.4 61.4
Total segment revenue 206.9 273.9 544.7 305.2 791.6 5.0 2,127.3
Underlying trading result 58.6 46.2 45.8 51.2 81.5 (54.9 ) 228.4 — 228.4
Non-underlying trading result — — 0.2 0.2 0.1 — 0.5 0.5
Total trading result 58.6 46.2 46.0 51.4 81.6 (54.9 ) 228.9
Non-trading items:
Business exit costs (64.4 )
Intangible amortisation (63.9 )
Acquisition costs (1.1 )
Contingent consideration movement 0.1
Asset Services settlement provision (37.0 )
Operating profit 62.6
Net finance costs (31.3 )
Loss on business disposal (3.7 )
Profit before tax 27.6
Income tax expense (23.9 )
Profit for the period - continuing operations 3.7
Profit for the period - discontinued operations 25.8
Profit for the period - total 29.5
Digital & Software Solutions IT Services Public Sector Partnerships Professional Services Private Sector Partnerships Group trading and central functions Total underlying Total non-underlying Total
6 months to 30 June 2016 (restated) £m £m £m £m £m £m £m £m £m
Continuing operations
Contract length > 2 years 189.4 136.5 394.0 118.7 576.3 10.1 1,425.0 24.6 1,449.6
Contract length < 2 years 16.4 35.6 112.4 39.2 132.4 — 336.0 — 336.0
Transactional (point in time) 3.8 69.1 64.1 195.2 38.1 — 370.3 — 370.3
Total segment revenue 209.6 241.2 570.5 353.1 746.8 10.1 2,131.3 24.6 2,155.9
Trading revenue 227.8 362.0 599.4 417.6 800.3 35.8 2,442.9 — 2,442.9
Inter-segment revenue (18.2 ) (120.8 ) (28.9 ) (64.5 ) (53.5 ) (25.7 ) (311.6 ) — (311.6 )
Total underlying segment revenue 209.6 241.2 570.5 353.1 746.8 10.1 2,131.3 — 2,131.3
Non-underlying revenue — — 22.5 — 2.1 — 24.6 24.6
Total segment revenue 209.6 241.2 593.0 353.1 748.9 10.1 2,155.9
Underlying trading result 67.1 15.3 5.4 46.8 45.5 (14.1 ) 166.0 — 166.0
Non-underlying trading result — — (0.8 ) — 0.8 — — —
Total trading result 67.1 15.3 4.6 46.8 46.3 (14.1 ) 166.0
Non-trading items:
Intangible amortisation (72.6 )
Acquisition costs (5.5 )
Contingent consideration movement (0.6 )
Operating profit 87.3
Net finance costs (50.0 )
Loss on business disposal (0.1 )
Profit before tax 37.2
Income tax expense (2.8 )
Profit for the period - continuing operations 34.4
Profit for the period - discontinued operations 21.3
Profit for the period - total 55.7
4 Underlying operating profit
30 June 2017 30 June 2016 (restated)
Underlying before significant new contracts and restructuring Significant new contracts and restructuring Total underlying Underlying before significant new contracts and restructuring Significant new contracts and restructuring Total underlying
£m £m £m £m £m £m
Continuing operations:
Revenue 2,065.9 — 2,065.9 2,131.3 — 2,131.3
Cost of sales (1,524.3 ) — (1,524.3 ) (1,656.6 ) — (1,656.6 )
Gross profit 541.6 — 541.6 474.7 — 474.7
Administrative expenses (313.2 ) — (313.2 ) (308.7 ) — (308.7 )
Operating profit 228.4 — 228.4 166.0 — 166.0
Following the adoption of IFRS 15, the Board has adopted a policy to
separately disclose the in-period operating profit/loss from significant new
contract wins and significant restructuring, in order for users of the
financial statements to obtain a proper understanding of the financial
information and the performance of the business.
A new contract is assessed as that which is either entirely new to the Group,
or a significant amendment to the scope and scale of an existing contract.
The Group continually assesses the resourcing levels, both at a divisional
level and also in relation to the management and delivery of individual
contracts. This results in restructuring in the normal course of business
and any such charges are recorded in "Underlying before significant new
contracts and restructuring" results. A significant restructuring is
assessed as that above this normal level of restructuring.
Contract terminations arising in the normal course of business and which
result in the disposal of a contract fulfilment asset and/or a true-up of
revenue recognised, will be included within "Underlying before significant new
contracts and restructuring", and separately disclosed if considered material.
5 Business exits
2017 business exits
Business exits are businesses that have been exited during the year or in the
process of being disposed of. None of these business exits meet the
definition of “discontinued operations” as stipulated by IFRS 5, which
requires disclosure and comparatives to be restated where the relative size of
a disposal or business closure is significant, which is normally understood to
mean a reported segment. Accordingly, the separate presentation described
below does not fall within the requirements of IFRS 5 concerning discontinued
operations. The expected disposal of Capita Asset Services does meet the
definition of a discontinued operation, and is disclosed separately in note 6
- Discontinued Operations.
In the 2016 annual report, we disclosed that the Group intended to dispose of
the majority of our specialist recruitment businesses which no longer fit the
Group's core business strategy. At 31 December 2016, neither of these
businesses met the criteria to be treated as held for sale.
During the period, the disposal of the specialist recruitment businesses has
been completed, along with the disposal of part of the Capita Europe business,
and the closure of an events business, and their results are all included
within business exits for the period. As at 30 June 2017, the Group was in
an active process to sell a non core property business and has treated this as
a disposal group held for sale at this date.
Income statement impact
Non-trading
Trading £m Cash Non-cash Total Total
£m £m £m £m
Revenue 61.4 — — — 61.4
Cost of sales (49.7 ) — — — (49.7 )
Gross profit 11.7 — — — 11.7
Administrative expenses (11.2 ) (56.4 ) (8.0 ) (64.4 ) (75.6 )
Operating profit/(loss) 0.5 (56.4 ) (8.0 ) (64.4 ) (63.9 )
Profit/(loss) on business disposal (see below) — 16.3 (20.0 ) (3.7 ) (3.7 )
Profit/(loss) before tax 0.5 (40.1 ) (28.0 ) (68.1 ) (67.6 )
Income tax expense (0.1 ) — — — (0.1 )
Profit/(loss) for the period 0.4 (40.1 ) (28.0 ) (68.1 ) (67.7 )
Trading revenue and costs represent the current period trading performance of
those businesses being exited or disposed.
There are no cumulative income or expenses included in other comprehensive
income relating to the disposal group.
Loss on business disposal Cash Non-cash Total
£m £m £m
Property, plant and equipment — 1.2 1.2
Intangible assets — 6.9 6.9
Trade and other receivables — 24.0 24.0
Cash 0.1 — 0.1
Trade and other payables — (11.0 ) (11.0 )
Income tax — (0.2 ) (0.2 )
Deferred tax — (0.8 ) (0.8 )
Provisions — (0.1 ) (0.1 )
Total net assets disposed of 0.1 20.0 20.1
Cash consideration received 17.0 — 17.0
Costs of disposal (0.6 ) — (0.6 )
Proceeds, less costs, on disposal 16.4 — 16.4
Loss on business disposal 16.3 (20.0 ) (3.7 )
Non-trading administrative expenses Disposal/ closure Held for disposal Total
£m £m £m
Cash paid or to be paid:
Separation costs paid (0.5 ) (5.0 ) (5.5 )
Provision in respect of disposal and closure costs (3.4 ) (47.5 ) (50.9 )
(3.9 ) (52.5 ) (56.4 )
Non-cash:
Accelerated depreciation on property, plant and equipment (1.7 ) — (1.7 )
Accelerated amortisation on goodwill — (6.3 ) (6.3 )
(1.7 ) (6.3 ) (8.0 )
(5.6 ) (58.8 ) (64.4 )
Analysed above are non-trading administrative expenses which include cash
costs from exiting the disposed business, the ongoing stranded costs such as
property and redundancy payments and impairment losses recognised in the
disposal group. These include costs in respect of the disposal of Capita
Asset Services as at 30 June 2017.
As at 30 June 2017, the Group was in an active process to sell a non core
property business and has treated this as a disposal group held for sale at
this date.
Assets and liabilities of disposal group held for sale - continuing operations
As at As at 31 December 2016
30 June 2017
£m £m
Property, plant and equipment — 0.1
Intangible assets 2.4 —
Trade and other receivables 3.5 4.2
Assets held for sale 5.9 4.3
Trade and other payables (1.7 ) (9.1 )
Provisions (0.2 ) —
Liabilities held for sale (1.9 ) (9.1 )
Disposal group as reported on balance sheet Continuing operations Discontinued operations Total
£m £m £m
Assets held for sale 5.9 749.4 755.3
Liabilities held for sale (1.9 ) (344.4 ) (346.3 )
2016 business exits
In the 6 months to 30 June 2016, the Group exited some of its small non-core
health businesses.
Income statement impact Non-trading
Trading £m Cash Non-cash Total £m Total
£m £m £m
Revenue 24.6 — — — 24.6
Cost of sales (17.9 ) — — — (17.9 )
Gross profit 6.7 — — — 6.7
Administrative expenses (6.7 ) — — — (6.7 )
Operating loss — — — — —
Loss on business disposal — 39.6 (39.7 ) (0.1 ) (0.1 )
Loss before tax — 39.6 (39.7 ) (0.1 ) (0.1 )
Income tax expense — — — — —
Loss for the period — 39.6 (39.7 ) (0.1 ) (0.1 )
Trading revenue and costs represent the trading performance of these
businesses in the period to the date of exit.
Non-trading costs include the costs of exiting a number of small non-core
health businesses and ongoing stranded costs such as IT, property lease and
redundancy payments.
Loss on business disposal Cash Non-cash Total
£m £m £m
Disposal group assets — 63.7 63.7
Disposal group liabilities — (20.0 ) (20.0 )
Total net assets disposed of — 43.7 43.7
Cash (net of cash disposed of) 19.6 — 19.6
Deferred consideration receivable 20.0 — 20.0
Fair value of residual interest — 4.0 4.0
Proceeds on disposal 39.6 4.0 43.6
Loss on business disposal 39.6 (39.7 ) (0.1 )
6 Discontinued operations
In the 2016 annual report, we disclosed that the Group intended to dispose of
the majority of the Capita Asset Services Division. At 31 December 2016,
this business did not meet the criteria to be treated as held for sale as the
sale process had not progressed sufficiently to be reasonably certain at that
time, but at 30 June 2017 the disposal process met the criteria to be treated
as held for sale.
The disposal meets the definition of a discontinued operation as stipulated by
IFRS 5. The comparatives have been restated. The following presentation,
and that included in other notes, follows the requirements of IFRS 5.
30 June 2017 30 June 2016
Trading Non-trading Total Trading Non-trading To
ta
l
£m £m £m £m £m £m
Discontinued operations:
Revenue 157.9 — 157.9 147.3 — 147.3
Cost of sales (56.4 ) — (56.4 ) (57.2 ) — (57.2 )
Gross profit 101.5 — 101.5 90.1 — 90.1
Administrative expenses (70.7 ) (0.6 ) (71.3 ) (62.2 ) (2.6 ) (64.8 )
Operating profit 30.8 (0.6 ) 30.2 27.9 (2.6 ) 25.3
Net finance costs — 0.6 0.6 — (0.1 ) (0.1 )
Profit before tax 30.8 — 30.8 27.9 (2.7 ) 25.2
Income tax expense (5.0 ) — (5.0 ) (4.4 ) 0.5 (3.9 )
Profit for the period 25.8 — 25.8 23.5 (2.2 ) 21.3
Non-trading items include amortisation on acquired intangibles within
administrative expenses, and fair value movements on available for sale assets
in net finance costs.
Note 30 June 2017 31 December 2016
£m £m
Non-current assets
Property, plant and equipment 72.6 76.3
Intangible assets 250.5 250.8
Financial assets — 3.5
Deferred taxation 1.1 0.6
Trade and other receivables 1.9 5.9
326.1 337.1
Current assets
Financial assets 5.0 10.5
Funds assets 282.6 173.6
Income tax receivable 4.6 3.0
Trade and other receivables 77.8 113.6
Cash 53.3 37.7
423.3 338.4
Assets held for sale 749.4 675.5
Current liabilities
Trade and other payables 36.4 109.9
Deferred income 13.9 7.9
Funds liabilities 282.6 173.6
Provisions 14 0.2 24.4
333.1 315.8
Non-current liabilities
Trade and other payables 0.3 0.4
Deferred taxation 11.0 5.1
11.3 5.5
Liabilities held for sale 344.4 321.3
Net assets held for sale 405.0 354.2
30 June 2017 30 June 2016
£m £m
Cash flows from (used in) discontinued operations
Net cash inflow from operating activities 13.6 7.4
Net cash outflow from investing activities (7.5 ) (8.4 )
Net cash flow for period 6.1 (1.0 )
7 Specific items
Included within the specific items column are:
6 months to 30 June 2017 6 months to 30 June 2016 (restated)
Cash in year Cash in future Non-cash Total Cash in year Cash in future Non-cash Total
Notes £m £m £m £m £m £m £m £m
Amortisation of acquired intangibles — — 63.9 63.9 — — 72.6 72.6
Contingent consideration movements 16 — — (0.1 ) (0.1 ) — — 0.6 0.6
Asset Services settlement provision — 37.0 — 37.0 — — — —
Professional fees regarding acquisitions 0.7 0.3 — 1.0 3.3 2.0 — 5.3
Stamp duty paid on acquisitions 0.1 — — 0.1 0.2 — — 0.2
Total 0.8 37.3 63.8 101.9 3.5 2.0 73.2 78.7
The above items are presented as specific items as the Board has concluded
that these items are not reflective of the in-period performance of the Group.
The tax impact of the above items is a £12.6m credit (30 June 2016: £14.6m
credit). These items are discussed below:
Amortisation of acquired intangible assets: the Group carries on its balance
sheet significant balances related to acquired intangible assets. The
amortisation of these assets, and any impairment charges, are reported
separately as they distort the in-year trading results and performance of the
acquired businesses is assessed through the underlying operational results.
Contingent consideration movements: in accordance with IFRS 3, movements in
the fair value of contingent consideration on acquisitions go through the
Group income statement. These are reported separately because performance of
the acquired businesses is assessed through the underlying operational results
and such a charge/credit movement would distort underlying results.
Asset services settlement provision: these costs relate to the litigation and
regulatory review concerning the Connaught Income series 1 Fund (“The
Fund”) (see note 14), and are included in specific items as they are not
reflective of the in-year performance of the Group's operational activities.
Acquisition related costs and stamp duty: these costs incurred with
acquisitions are not included in the assessment of business performance which
is based on the underlying results. IFRS requires certain costs incurred in
connection with acquired businesses to be recorded within the Group income
statement. These charges are not included in the internal assessment of
business performance which as above is based on the underlying operational
results. These charges are therefore separately disclosed as specific items.
8 Net finance costs
6 months to 6 months to
30 June 2017 30 June 2016
£m £m
Interest receivable (0.1 ) (0.1 )
Bonds 18.8 18.0
Fixed rate interest rate swaps - realised 3.2 5.9
Finance lease — 0.1
Bank loans and overdrafts 6.8 5.2
Net interest cost on defined benefit pension schemes 4.7 3.2
Interest payable 33.5 32.4
Underlying net finance costs 33.4 32.3
Fixed rate interest rate swaps – mark to market (0.5 ) 22.8
Discount unwind on public sector subsidiary partnership payment 1.0 1.0
Fair value movement in trade investments — 0.1
Non-designated foreign exchange forward contracts – mark to market (1.6 ) (7.3 )
Derivatives’ counterparty credit risk adjustment – mark to market (1.0 ) 0.9
Derivatives’ own credit risk adjustment – mark to market — 0.2
Non-underlying net finance (income)/costs (2.1 ) 17.7
Total net finance costs 31.3 50.0
9 Earnings/(loss) per share
Basic earnings per share have been calculated using the weighted average
number of shares in issue during the period of 665.3m (30 June 2016:
663.2m). The diluted average number of shares is 666.7m (30 June 2016:
666.9m) having adjusted the weighted average number of shares for shares yet
to be issued that will be dilutive.
The profits used to calculate the measures are:
30 June 2017 30 June 2016
Continuing operations Total operations Continuing operations Total operations
£m £m £m £m
Underlying profit attributable to shareholders 152.5 152.5 106.9 106.9
Total profit/(loss) attributable to shareholders (0.7 ) 25.1 30.9 52.2
As at 20 September 2017, there were 670.2m shares in issue.
10 Dividends
The interim dividend of 11.1p (2016: 11.1p) per share (not recognised as a
liability at 30 June 2017) will be payable on 20 October 2017 to ordinary
shareholders on the register at the close of business on 30 November 2017.
The dividend disclosed in the statement of changes in equity represents the
final ordinary dividend of 20.6p (2016: 21.2p) per share as proposed in the 31
December 2016 financial statements and approved at the Group’s AGM (not
recognised as a liability at 31 December 2016) that was paid on 3 July 2017
and so recognised as a financial liability at 30 June 2017.
11 Goodwill
Goodwill acquired through business combinations has been allocated to
Cash-Generating Units (CGUs), for impairment testing purposes, on the basis of
the expected benefit that will accrue to the individual CGU through synergies
realised from the acquisitions and integration with the Group as a whole.
These represent the lowest level within the Group at which goodwill can be
allocated on a reasonable and consistent basis.
Following the difficult trading conditions witnessed in 2016 as a result of
certain economic and political factors and having reviewed the constituent
businesses and markets in which Capita operates and the underlying assumptions
used to calculate the value in use for each CGU, goodwill was impaired by
£66.6m as at 31 December 2016.
In the 2016 annual financial statements, it was noted that the CGUs impaired
in the year are the most sensitive to a change in a single or combination of
assumptions and therefore any deterioration in assumptions would lead to
further impairment. In preparing these half year condensed consolidated
financial statements, the Group undertook a review to identify indicators of
impairment of goodwill for those CGUs. Consideration was given to their
operating performance in 2017 versus the 1 year budget forecast used in
identifying the cash flows for each CGU during the impairment testing
performed for the 2016 annual financial statements. Where this gave rise to
an indicator of potential impairment, further review was performed.
No impairments were identified as at 30 June 2017.
12 Contract fulfilment assets
In preparing these half year condensed consolidated financial statements, the
Group undertook a review to identify indicators of impairment of contract
fulfilment assets. The Group determined whether or not the contract
fulfilment assets and capitalised costs to obtain a contract were impaired by
comparing the carrying amount of the asset to the remaining amount of
consideration that the Group expects to receive less the costs that relate to
providing services under the relevant contract. In determining the estimated
amount of consideration, the Group used the same principles as it does to
determine the contract transaction price, except that any constraints used to
reduce the transaction price were removed for the impairment test.
In line with our accounting policy, as set out in Appendix 2, if a contract or
specific performance obligation exhibited marginal profitability or other
indicators of impairment, judgement was applied to ascertain whether or not
the future economic benefits from these contracts were sufficient to recover
these assets. In performing this impairment assessment, management is
required to make an assessment of the costs to complete the contract. The
ability to accurately forecast such costs involves estimates around cost
savings to be achieved over time, anticipated profitability of the contract,
as well as future performance against any contract-specific KPIs that could
trigger variable consideration, or service credits.
No contract fulfilment asset impairments were identified as at 30 June 2017
(31 December 2016: £nil).
13 Business combinations
The Group has made two acquisitions in the period which are shown in aggregate
below:
Provisional fair value to Group
£m
Intangible assets 5.6
Trade and other receivables < 1 year 7.0
Cash and cash equivalents 4.2
Trade and other payables < 1 year (0.6 )
Accruals < 1 year (2.4 )
Income tax (0.4 )
Deferred tax (1.0 )
Total identifiable net assets 12.4
Goodwill arising on acquisition 9.4
Total 21.8
Discharged by:
Cash consideration paid 15.6
Contingent consideration accrued 6.2
Total consideration 21.8
The full exercise to determine the fair value of intangible assets acquired is
still to be completed, thus the above numbers are provisional. In respect of
the acquisitions made in 2017, the Group has agreed to pay the vendors
additional consideration dependent on the achievement of performance targets
in the periods post-acquisition. These performance periods are of up to 3
years in duration and will be settled in cash on their payment date on
achieving the relevant target. The range of the additional consideration
payment is between £nil and £7.0m and the Group has included £6.2m as
contingent consideration related to the additional consideration, which
represents its fair value at the acquisition date. The fair value of the
contingent consideration has been calculated based on the Group’s
expectation of what it will pay in relation to the post-acquisition
performance of the acquired entities by weighting the probability of a range
of payments to give an estimate of the final obligation.
Further cash consideration was paid in respect of previous acquisitions of
£7.6m.
Detail on the total amount of contingent consideration the Group has provided
as at 30 June 2017 is disclosed in note 16.
Acquisition related costs
The Group incurred acquisition related costs of £1.1m related to professional
fees paid for due diligence, general professional fees and legal related
costs. These costs have been included in specific items administrative costs
in the Group's consolidated income statement.
14 Provisions
Restructuring provision Business exit provision Asset services settlement
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