REG-Capita PLC: IFRS 15 early adoption and presentation <Origin Href="QuoteRef">CPI.L</Origin> - Part 1
07/09/2017 07:05
IFRS 15 early adoption and presentation
Capita plc (‘Capita’) is today hosting a presentation for institutional
investors and analysts on the application of the International Accounting
Standards Board's IFRS 15, Revenue from Contracts with Customers which, as
previously stated, the Group adopted from 1 January 2017. Capita’s results
for the first six months of 2017 are due to be released, as planned, on 21
September and are expected to be in line with the outlook provided in our AGM
statement on 13 June 2017.
Summary of key points of adopting IFRS 15:
No impact on:
• Lifetime profitability of contracts
• Cash flow of contracts
• Majority of transactional businesses.
Key impacts:
• The main changes for Capita from the adoption of IFRS 15 are in its
long-term contracts and software business.
• Revenue is more evenly phased over the life of contracts and active
software licences in line with the delivery of valued outcomes to clients and,
consequently, the timing of profits is re-profiled.
• Capita will potentially recognise lower profits or losses in the early
years of contracts where there are significant upfront restructuring costs or
higher operating costs prior to transformation, with a compensating increase
in profits in later years. The total net impact at Group level is a function
of the balance of contracts in early or late stage of their life cycle at
transition to IFRS 15.
• Balance sheet includes:
• New “contract fulfilment assets” created in the process of
transforming services
• Deferred income in relation to contracts where payments have been received
from clients to undertake transformation prior to the planned outcomes being
delivered.
Nick Greatorex, Group Finance Director, commented:
“We believe early adoption of IFRS 15 is a sensible step to take in this
transitional year for Capita. Adoption in 2017 immediately provides a
consistent basis for our investors to evaluate our business going forwards.
It ensures we have embedded the new standard well in advance of the 2018
deadline and is in line with our strategy of simplifying the business and
improving transparency.
The new standard more closely aligns our revenue recognition with the
commercial substance of our contracts. The application of IFRS 15 has no
impact on the lifetime profitability or cash flow of our contracts, or the
majority of our transactional businesses. Instead, the resulting changes in
the timing of revenue and cost recognition more closely aligns our financial
results with the timing of the delivery of our valued outcomes to clients.
For comparative purposes, we have applied the new standard to our 2016
financial results with support from EY and these financial results have been
reviewed by KPMG.”
Capita’s adoption of IFRS 15
Revenue recognition
• The standard introduces a clear link between the value provided to a
client via the transformation and delivery of a service and the timing of
revenue recognition. For the majority of Capita’s contracts this value is
delivered over time, regardless of upfront restructuring, necessary
transformation activities and any price step downs over the life of the
contract. This means that under IFRS 15 revenue will be recognised more evenly
over the lifetime of those contracts, which will affect 2017 and future years.
• Similarly, for software licences where the Group retains an active role in
the updating and maintenance of a sold licence to ensure its continuing value
to the client, revenue will be recognised evenly over the expected length of
the contract or related client relationship. Again, this has resulted in a
change in the phasing of when revenue is recognised, which will affect 2017
and future years.
Profits
• As a result of the above, the timing of revenue and therefore profits
recognised on contracts is likely to be later across the life of the
contracts, with potentially lower profits or losses in the early years of
contracts and potentially higher profits in later years. This occurs where
there are significant upfront restructuring, transformation, or higher
operating costs prior to completion of transformation.
• Profits are further impacted by a new class of asset, “contract
fulfilment assets”, which are created in the process of transforming a
service and amortised over the life of the associated contract, such as
process mapping and design.
• Total net impact for the Group is a function of the balance of contracts
in early or late stages of their life cycle at transition to IFRS 15 and in
subsequent years.
Balance sheet
• The balance sheet includes:
• The new contract fulfilment assets; and
• An increased level of deferred income in relation to contracts where cash
payment has been received in advance of revenue recognition associated with
delivering specific planned outcomes for clients. The majority of deferred
income will unwind within the following 12 months and is expected to be
replaced by similar advanced payments subject to additions or changes to the
Group’s contract portfolio.
• The recognition of the significant deferred income balances results in the
Group recording net liabilities on 1 January 2016. As noted above, the
deferred income reflects cash payments received in advance of when revenue
will now be recognised on the majority of our contracts and the accounting
liability represents our promise to deliver planned outcomes for clients in
future periods.
Application of IFRS 15 to Capita’s 2016 results:
As part of its early adoption of IFRS 15 and for consistent comparability,
Capita has applied the new standard to its 2016 financial results and these
are published today. The Capita Asset Services businesses, the disposal of
which was announced on 23 June, have been treated as a discontinued operation.
The changes reflected in the 2016 results under IFRS 15 predominantly relate
to the timing of revenue recognition with revenues now recognised later across
the life of contracts as valued outcomes are delivered to clients.
Revenue, under IFRS 15, in 2016 therefore reflects changes in the timing of
recognition of transformation revenue and price step downs across some major
contracts, the impact of recognising revenue over time for certain clients
within our software business rather than at the point of sale of licences and
additionally an adjustment in moving from principal to agency accounting in
certain transactional businesses.
Profit before tax, under IFRS 15, in 2016 therefore reflects the
aforementioned changes in the timing of revenue recognition across some major
contracts and software licences, the amortisation charge of the new contract
fulfilment assets, and the inclusion of certain non-recurring items previously
disclosed within non-underlying.
Under IFRS 15, 2016 results major movements
In 2016 the impact of applying IFRS 15 was a reduction in underlying revenue
from £4.6bn (excluding Capita Asset Services businesses £0.3bn) to £4.4bn,
approximately three fifths of which is due to the re-profiling of long-term
contracted revenue. The remaining changes result from a move from principal
to agent basis of revenue recognition for certain transactional revenue under
IFRS 15, which has no impact on profit.
In 2016 the impact of applying IFRS 15 was a reduction in underlying operating
profit from £481m to £335m. This is as a result of a blend of impacts, the
most significant of which are the aforementioned change in long-term
contracted revenue and moving last year’s Group re-structuring provision of
£59m into underlying profits. This is consistent with the approach Capita
will adopt in the future where the impact of significant new contracts and
restructuring will form part of the Group’s underlying earnings, albeit
disclosed clearly to show the impact these items have in the first year that
they arise.
The Group’s net assets move from £483m to net liabilities of £553m. The
£1bn swing can be summarised as follows. Under IFRS 15 Capita ended 2016
with deferred income of £1.6bn, an increase of £1.3bn. This represents
cash received in 2016 which is for services delivered or to be delivered but
not recognised as revenue until 2017 or later. Furthermore, accrued income
reduces by some £250m with the re-profiling of when revenue is
recognised. These were partially offset by contract fulfilment assets of some
£300m at the end of the year, being costs incurred on improving services for
the long term which have been capitalised under IFRS 15 and will be released
over the relevant contract term, and the recognition of a net deferred tax
asset of some £200m.
Capita's 2016 debt covenants do not need to be retested and for 2017 the
covenants have been updated to include the adoption of IFRS 15 with effect
from 1 January 2017.
Finally, cash flow does not change. In 2016 Capita generated £750m of
operating cash and this remains the case.
2016 full year IFRS 15 Pre-IFRS 15
Underlying revenue £4,357m £4,582m
Underlying operating profit £335m £481m
Net (liabilities)/assets £(553)m £483m
Underlying operating cash £750m £750m
Presentation and webcast
Today’s presentation will commence at 08:30 UK time and is expected to
conclude at around 11:00 UK time, including a question and answer session.
There will be a live audio webcast of the presentation at 08:30 UK time and
slides will be available on the Capita website at that time.
Link: http://www.investis-live.com/capita/5994012e0954050c000f1919/qzmn
To register for the webcast please click on the link above and follow the
on-screen instructions.
-ENDS-
This announcement contains inside information.
For further information:
Capita plc
Tel: 020 7799 1525
Shona Nichols, Executive Director, Communications
Andrew Ripper, Head of Investor Relations
Media enquiries
Powerscourt Tel: 020 7250 1446
capita@powerscourt-group.com
Victoria Palmer-Moore, Peter Ogden and Andy Jones
About Capita
Capita is a leading UK provider of technology enabled customer and business
process services and integrated professional support services. With 73,000
people at over 450 sites, including 98 business centres across the UK, Europe,
India and South Africa, Capita uses its expertise, infrastructure and scale
benefits to transform its clients' services, driving down costs and adding
value. Capita is quoted on the London Stock Exchange (CPI.L). Further
information on Capita can be found at: www.capita.com.
Financial statements under IFRS 15 Revenue from Contracts with Customers
The Group early adopted IFRS 15 Revenue from Contracts with Customers ("IFRS
15") on 1 January 2017 using the full retrospective method. This document
details the Group's new accounting policy for revenue and shows the impact of
the adoption of IFRS 15 on the Group’s primary financial statements.
The cumulative effect of the adoption of IFRS 15 has resulted in a decrease in
net assets of £942.3 million as at 1 January 2016 (31 December 2016:
£1,036.3million). This reflects an important change in accounting policy as
the Group moves from one based predominantly on percentage of completion
revenue recognition to a methodology that is focused on aligning revenue
recognition to the delivery of solutions and value to its customers.
Discontinued operation
The Capita Asset Services businesses, the disposal of which was announced on
the 23 June 2017, have been treated as a discontinued operation in this
restatement so as to be in line with how these will be presented in the 2017
half year report. As at 31 December 2016, the disposal of Capita Asset
Services did not meet the criteria to be held for sale.
Initial adoption of IFRS 15
The standard has an effective date of 1 January 2018 but the Group has decided
to early adopt this standard with a date of initial application to the Group
of 1 January 2017.
IFRS 15 replaces all existing revenue requirements in IFRS and applies to all
revenue arising from contracts with customers unless the contracts are within
the scope of other standards such as IAS 17 Leases.
The standard outlines the principles entities must apply to measure and
recognise revenue with the core principle being that entities should recognise
revenue at an amount that reflects the consideration to which the entity
expects to be entitled in exchange for fulfilling its performance obligations
to a customer.
The principles in IFRS 15 must be applied using the following 5 step model:
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the
contract
5. Recognise revenue when or as the entity satisfies its performance
obligations
The 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)).
Accounting policy for revenue
The Group generates revenue largely in the UK and Europe.
The Group operates a number of diverse businesses and accordingly applies a
variety of methods for revenue recognition, based on the principles set out in
IFRS 15. Many of the contracts entered into are long term and complex in
nature given the breadth of solutions the Group offers.
The revenue and profits recognised in any period are based on the delivery of
performance obligations and an assessment of when control is transferred to
the customer.
In determining the amount of revenue and profits to record, and related
balance sheet items (such as contract fulfilment assets, capitalisation of
costs to obtain a contract, trade receivables, accrued income and deferred
income) to recognise in the period, management is required to form a number of
key judgements and assumptions. This includes an assessment of the costs the
Group incurs to deliver the contractual commitments and whether such costs
should be expensed as incurred or capitalised. These judgements are inherently
subjective and may cover future events such as the achievement of contractual
milestones, performance KPIs and planned cost savings. In addition, for
certain contracts, key assumptions are made concerning contract extensions and
amendments, as well as opportunities to use the contract developed systems and
technologies on other similar projects.
Revenue is recognised either when the performance obligation in the contract
has been performed (so 'point in time' recognition) or 'over time' as control
of the performance obligation is transferred to the customer.
For all contracts, the Group determines if the arrangement with a customer
creates enforceable rights and obligations. This assessment results in certain
Master Service Agreements (‘MSA’s’) not meeting the definition of a
contract under IFRS 15 and as such the individual call-off agreements, linked
to the MSA, are treated as individual contracts.
The Group enters into contracts which contain extension periods, where either
the customer or both parties can choose to extend the contract or there is an
automatic annual renewal, and/or termination clauses that could impact the
actual duration of the contract. Judgement is applied to assess the impact
that these clauses have when determining the appropriate contract term. The
term of the contract impacts both the period over which revenue from
performance obligations may be recognised and the period over which contract
fulfilment assets and capitalised costs to obtain a contract are expensed.
For contracts with multiple components to be delivered such as transformation,
transitions and the delivery of outsourced services, management applies
judgement to consider whether those promised goods and services are (i)
distinct - to be accounted for as separate performance obligations; (ii) not
distinct - to be combined with other promised goods or services until a bundle
is identified that is distinct or (iii) part of a series of distinct goods and
services that are substantially the same and have the same pattern of transfer
to the customer.
At contract inception the total transaction price is estimated, being the
amount to which the Group expects to be entitled and has rights to under the
present contract. This includes an assessment of any variable consideration
where the Group's performance may result in additional revenues based on the
achievement of agreed KPIs. Such amounts are only included based on the
expected value or the most likely outcome method, and only to the extent that
it is highly probable that no revenue reversal will occur.
The transaction price does not include estimates of consideration resulting
from change orders for additional goods and services unless these are agreed.
Once the total transaction price is determined, the Group allocates this to
the identified performance obligations in proportion to their relative
stand-alone selling prices and recognises revenue when (or as) those
performance obligations are satisfied. The Group infrequently sells standard
products with observable standalone prices due to the specialised services
required by customers and therefore the Group applies judgement to determine
an appropriate standalone selling price. More frequently, the Group sells a
customer bespoke solution, and in these cases the Group typically uses the
expected cost plus margin or a contractually stated price approach to estimate
the standalone selling price of each performance obligation.
The Group may offer price step downs during the life of a contract, but with
no change to the underlying scope of services to be delivered. In general, any
such variable consideration, price step down or discount is included in the
total transaction price to be allocated across all performance obligations
unless it relates to only one performance obligation in the contract.
For each performance obligation, the Group determines if revenue will be
recognised over time or at a point in time. Where the Group recognises revenue
over time for long term contracts, this is in general due to the Group
performing and the customer simultaneously receiving and consuming the
benefits provided over the life of the contract.
For each performance obligation to be recognised over time, the Group applies
a revenue recognition method that faithfully depicts the Group’s performance
in transferring control of the goods or services to the customer. This
decision requires assessment of the real nature of the goods or services that
the Group has promised to transfer to the customer. The Group applies the
relevant output or input method consistently to similar performance
obligations in other contracts.
When using the output method the Group recognises revenue on the basis of
direct measurements of the value to the customer of the goods and services
transferred to date relative to the remaining goods and services under the
contract. Where the output method is used, in particular for long term service
contracts where the series guidance is applied (see below for further
details), the Group often uses a method of time elapsed which requires minimal
estimation. Certain long term contracts use output methods based upon
estimation of number of users, level of service activity or fees collected.
If performance obligations in a contract do not meet the over time criteria,
the Group recognises revenue at a point in time (see below for further
details).
The Group disaggregates revenue from contracts with customers by contract
type, as management believe this best depicts how the nature, amount, timing
and uncertainty of the Group’s revenue and cash flows are affected by
economic factors:
Contract term longer than 2 years
The Group provides a range of services in the majority of its reportable
segments under customer contracts with a duration of more than two years.
The nature of contracts or performance obligations categorised within this
revenue type is diverse and includes (i) long term outsourced service
arrangements in the public and private sectors; and (ii) active software
licence arrangements (see definition below).
The service contracts in this category include contracts with either a single
or multiple performance obligations.
The Group considers that the services provided meet the definition of a series
of distinct goods and services as they are (i) substantially the same and (ii)
have the same pattern of transfer (as the series constitutes services provided
in distinct time increments (e.g., daily, monthly, quarterly or annual
services)) and therefore treats the series as one performance obligation. Even
if the underlying activities performed by the Group to satisfy a promise vary
significantly throughout the day and from day to day, that fact, by itself,
does not mean the distinct goods or services are not substantially the same.
For the majority of long service contracts with customers in this category,
the Group recognises revenue using the output method as it best reflects the
nature in which the Group is transferring control of the goods or services to
the customer
Active software licences are those where the Group has a continuing
involvement after the sale or transfer of control to the customer, which
significantly affects the intellectual property to which the customer has
rights. The Group is in a majority of cases responsible for any maintenance,
continuing support, updates and upgrades and accordingly the sale of the
initial software is not distinct. The Group’s accounting policy for licences
is discussed in more detail below.
Over time service with contract length less than 2 years
The nature of contracts or performance obligations categorised within this
revenue type is diverse and includes (i) short term outsourced service
arrangements in the public and private sectors; and (ii) software maintenance
contracts.
The Group has assessed that maintenance and support (i.e. on-call support,
remote support) for software licences is a performance obligation that can be
considered capable of being distinct and separately identifiable in a contract
if the customer has a passive licence. These recurring services are
substantially the same as the nature of the promise is for the Group to 'stand
ready' to perform maintenance and support when required by the customer. Each
day of standing ready is then distinct from each following day and is
transferred in the same pattern to the customer.
Transactional (Point in time) contracts
The Group delivers a range of goods or services in all reportable segments
that are transactional services for which revenue is recognised at the point
in time when control of the goods or services has transferred to the customer.
This may be at the point of physical delivery of goods and acceptance by a
customer or when the customer obtains control of an asset or service in a
contract with customer-specified acceptance criteria.
The nature of contracts or performance obligations categorised within this
revenue type is diverse and includes (i) provision of IT hardware goods; (ii)
passive software licence agreements; (iii) commission received as agent from
the sale of third party software; and (iv) fees received in relation to
delivery of professional services.
Passive software licences are licences which have significant stand-alone
functionality and the contract does not require, and the customer does not
reasonably expect, the Group to undertake activities that significantly affect
the licence. Any ongoing maintenance or support services for passive licences
are likely to be separate performance obligations. The Group’s accounting
policy for licences is discussed in more detail below.
Contract modifications
The Group’s contracts are often amended for changes in contract
specifications and requirements. Contract modifications exist when the
amendment either creates new or changes the existing enforceable rights and
obligations. The effect of a contract modification on the transaction price
and the Group’s measure of progress for the performance obligation to which
it relates, is recognised as an adjustment to revenue in one of the following
ways:
1. Prospectively as an additional separate contract;
2. Prospectively as a termination of the existing contract and creation of a
new contract;
3. As part of the original contract using a cumulative catch up; or
4. As a combination of b) and c).
For contracts for which the Group has decided there is a series of distinct
goods and services that are substantially the same and have the same pattern
of transfer where revenue is recognised over time, the modification will
always be treated under either a) or b). d) may arise when a contract has a
part termination and a modification of the remaining performance obligations.
The facts and circumstances of any contract modification are considered
individually as the types of modifications will vary contract by contract and
may result in different accounting outcomes.
Judgement is applied in relation to the accounting for such modifications
where the final terms or legal contracts have not been agreed prior to the
period end as management need to determine if a modification has been approved
and if it either creates new or changes existing enforceable rights and
obligations of the parties. Depending upon the outcome of such negotiations,
the timing and amount of revenue recognised may be different in the relevant
accounting periods. Modification and amendments to contracts are undertaken
via an agreed formal process. For example, if a change in scope has been
approved but the corresponding change in price is still being negotiated,
management use their judgement to estimate the change to the total transaction
price. Importantly any variable consideration is only recognised to the
extent that it is highly probably that no revenue reversal will occur.
Principal versus agent
The Group has arrangements with some of its customers whereby it needs to
determine if it acts as a principal or an agent as more than one party is
involved in providing the goods and services to the customer. The Group acts
as a principal if it controls a promised good or service before transferring
that good or service to the customer. The Group is an agent if its role is to
arrange for another entity to provide the goods or services. Factors
considered in making this assessment are most notably the discretion the Group
has in establishing the price for the specified good or service, whether the
Group has inventory risk and whether the Group is primarily responsible for
fulfilling the promise to deliver the service or good.
This assessment of control requires judgement in particular in relation to
certain service contracts. An example, is the provision of certain
recruitment and learning services where the Group may be assessed to be agent
or principal dependent upon the facts and circumstances of the arrangement and
the nature of the services being delivered.
Where the Group is acting as a principal, revenue is recorded on a gross
basis. Where the Group is acting as an agent revenue is recorded at a net
amount reflecting the margin earned.
Licences
Software licences delivered by the Group can either be right to access
(‘active’) or right to use (‘passive’) licences. Active licences are
licences which require continuous upgrade and updates for the software to
remain useful, all other licences are treated as passive licences. The
assessment of whether a licence is active or passive involves judgement. The
key determinant of whether a licence is active is whether the Group is
required to undertake activities that significantly affect the licensed
intellectual property (or the customer has a reasonable expectation that it
will do so) and the customer is, therefore, exposed to positive or negative
impacts resulting from those changes.
When software upgrades are sold as part of the software licence agreement
(i.e. software upgrades are promised to the customer), the Group applies
judgement to assess whether the software upgrade is distinct from the licence
(i.e. a separate performance obligation). If the upgrade is considered
fundamental to the ongoing use of the software by the customer, the upgrades
are not considered distinct and not accounted for as a separate performance
obligation.
The Group considers for each contract that includes a separate licence
performance obligation all the facts and circumstances in determining whether
the licence revenue is recognised over time or at a point in time from the go
live date of the licence.
Contract related assets and liabilities
As a result of the contracts which the Group enters into with its customers,
a number of different assets and liabilities are recognised on the Group’s
balance sheet. These include but are not limited to:
* Property, plant and equipment*
* Intangible assets*
* Contract fulfilment assets^
* Contract assets derived from costs to obtain a contract^
* Trade receivables*
* Accrued income^
* Deferred income^
* No change in the accounting policies for these assets as a result of the
adoption of IFRS 15
^ Refer below for the accounting policy applied following the adoption of IFRS
15
Contract fulfilment assets
Contract fulfilment costs are divided into (i) costs that give rise to an
asset; and (ii) costs that are expensed as incurred.
When determining the appropriate accounting treatment for such costs, the
Group firstly considers any other applicable standards. If those other
standards preclude capitalisation of a particular cost, then an asset is not
recognised under IFRS 15.
If other standards are not applicable to contract fulfilment costs, the Group
applies the following criteria which, if met, result in capitalisation: (i)
the costs directly relate to a contract or to a specifically identifiable
anticipated contract; (ii) the costs generate or enhance resources of the
entity that will be used in satisfying (or in continuing to satisfy)
performance obligations in the future; and (iii) the costs are expected to be
recovered. The assessment of this criteria requires the application of
judgement, in particular when considering if costs generate or enhance
resources to be used to satisfy future performance obligations and whether
costs are expected to be recoverable.
The Group regularly incurs costs to deliver its outsourcing services in a more
efficient way (often referred to as ‘transformation’ costs). These costs
may include process mapping and design, system development, project
management, hardware (generally in scope of the Group’s accounting policy
for property, plant and equipment), software licence costs (generally in scope
of the Group’s accounting policy for intangible assets), recruitment costs
and training.
The Group has determined that, where the relevant specific criteria are met,
the costs for (i) process mapping and design; (ii) system development; and
(iii) project management are likely to qualify to be capitalised as contract
fulfilment assets.
Capitalisation of costs to obtain a contract
The incremental costs of obtaining a contract with a customer are recognised
as an asset if the Group expects to recover them. The Group incurs costs such
as bid costs, legal fees to draft a contract and sales commissions when it
enters into a new contract.
Judgement is applied by the Group when determining what costs qualify to be
capitalised in particular when considering whether these costs are incremental
and whether these are expected to be recoverable. For example, the Group
considers which type of sales commissions are incremental to the cost of
obtaining specific contracts and the point in time when the costs will be
capitalised.
The Group has determined that the following costs may be capitalised as
contract assets (i) legal fees to draft a contract (once the Group has been
selected as a preferred supplier for a bid); and (ii) sales commissions that
are directly related to winning a specific contract.
Costs incurred prior to selection as preferred supplier are not capitalised
but are expensed as incurred.
Utilisation, derecognition and impairment of contract fulfilment assets and
capitalised costs to obtain a contract
The Group utilises contract fulfilment assets and capitalised costs to obtain
a contract to cost of sales over the expected contract period using a
systematic basis that mirrors the pattern in which the Group transfers control
of the service to the customer. The utilisation charge is included within
cost of sales. Judgement is applied to determine this period, for example
whether this expected period would be the contract term or a longer period
such as the estimated life of the customer relationship for a particular
contract if, say, renewals are expected.
A contract fulfilment asset or capitalised costs to obtain a contract is
derecognised either when it is disposed of or when no further economic
benefits are expected to flow from its use or disposal.
Management is required to determine the recoverability of contract related
assets within property, plant and equipment, intangible assets as well as
contract fulfilment assets, capitalised costs to obtain a contract, accrued
income and trade receivables. At each reporting date, the Group determines
whether or not the contract fulfilment assets and capitalised costs to obtain
a contract are 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 uses the same
principles as it does to determine the contract transaction price, except that
any constraints used to reduce the transaction price will be removed for the
impairment test.
Where the relevant contracts or specific performance obligations are
demonstrating marginal profitability or other indicators of impairment,
judgement is required in ascertaining whether or not the future economic
benefits from these contracts are 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. Where a contract is anticipated to make a loss, these
judgements are also relevant in determining whether or not an onerous contract
provision is required and how this is to be measured.
Deferred and accrued income
The Group’s customer contracts include a diverse range of payment schedules
dependent upon the nature and type of goods and services being provided. The
Group often agrees payment schedules at the inception of long term contracts
under which it receives payments throughout the term of the contracts. These
payment schedules may include performance-based payments or progress payments
as well as regular monthly or quarterly payments for ongoing service
delivery. Payments for transactional goods and services may be at delivery
date, in arrears or part payment in advance.
Where payments made are greater than the revenue recognised at the period end
date, the Group recognises a deferred income contract liability for this
difference. Where payments made are less than the revenue recognised at the
period end date, the Group recognises an accrued income contract asset for
this difference.
Property commercialisation
Part of the Group’s strategy is to create and deliver maximum value from
assets that are either owned by its customers or are acquired by the Group as
part of a wider transaction. By combining the Group’s capabilities with the
expertise and assets of any organisation, the Group can significantly increase
the value that can be generated from often under-utilised assets. Our strategy
often involves the commercialisation of property assets, where the Group will
invest in real estate improvements to maximise the future capital value or
commercial letting potential. Such an investment approach can generate
substantial benefits that can be realised up-front or over time. Examples of
up-front value creation include entering into transactions when current market
values offer opportunities to generate immediate shareholder returns, with
opportunities for continued investment in the underlying asset. For example,
the Group will acquire property with a view to resale and subsequently
complete a sale and lease back transaction resulting in revenue and profit
recorded in the year. The Group applies judgement over the categorisation of
such transactions as operating or finance leases.
Consolidated income statement under IFRS 15
Adjustment As reported, six months ended 30 June 2016 Discontinued operations Impact of IFRS 15 Under IFRS 15, six months ended 30 June 2016
Underlying Business exit Specific items Total Underlying Specific items Underlying Specific items Underlying Business exit Specific items Total
£m £m £m £m £m £m £m £m £m £m £m £m
Revenue A,B,C 2,405.4 24.6 — 2,430.0 (147.3) — (126.8) — 2,131.3 24.6 — 2,155.9
Cost of sales A,D (1,716.9) (17.9) — (1,734.8) 57.2 — 3.1 — (1,656.6) (17.9 ) — (1,674.5)
Gross profit 688.5 6.7 — 695.2 (90.1) — (123.7) — 474.7 6.7 — 481.4
Administrative expenses H (370.9) (6.7) (81.3 ) (458.9) 62.2 2.6 — — (308.7) (6.7 ) (78.7 ) (394.1)
Operating profit 317.6 — (81.3 ) 236.3 (27.9) 2.6 (123.7) — 166.0 — (78.7 ) 87.3
Net finance costs (32.3) — (17.8 ) (50.1) — 0.1 — — (32.3 ) — (17.7 ) (50.0)
Loss on disposal — (0.1) — (0.1) — — — — — (0.1 ) — (0.1)
Profit before tax 285.3 (0.1) (99.1) 186.1 (27.9) 2.7 (123.7) — 133.7 (0.1 ) (96.4 ) 37.2
Income tax expense E (52.8) — 18.7 (34.1) 4.4 (0.5 ) 27.4 — (21.0 ) — 18.2 (2.8)
Profit for the period from continuing operations 232.5 (0.1) (80.4) 152.0 (23.5) 2.2 (96.3) — 112.7 (0.1 ) (78.2 ) 34.4
Profit for the period from discontinued operations — — — — 23.5 (2.2) — — — 23.5 (2.2 ) 21.3
Total profit for the period 232.5 (0.1) (80.4) 152.0 — — (96.3) — 112.7 23.4 (80.4) 55.7
Attributable to:
Owners of the Company 227.1 (0.1) (78.1 ) 148.9 (96.7) — 106.9 23.4 (78.1 ) 52.2
Non-controlling interests 5.4 — (2.3 ) 3.1 0.4 — 5.8 — (2.3 ) 3.5
232.5 (0.1) (80.4 ) 152.0 (96.3 ) — 112.7 23.4 (80.4 ) 55.7
Earnings per share
Continuing operations:
– basic 34.24 p (0.02) p (11.78) p 22.45 p (3.54) p 0.33 p (14.58) p — p 16.12 p (0.02) p (11.44) p 4.66p
– diluted 34.05 p (0.01) p (11.71) p 22.33 p (3.52) p 0.33 p (14.50) p — p 16.03 p (0.01) p (11.38) p 4.63p
Total operations:
– basic 34.24 p (0.02) p (11.78) p 22.45 p — p — p (14.58) p — p 16.12 p 3.53 p (11.78) p 7.87p
– diluted 34.05 p (0.01) p (11.71) p 22.33 p — p — p (14.50) p — p 16.03 p 3.51 p (11.71) p 7.83p
Consolidated income statement under IFRS 15 (continued)
Adjustment As reported, year ended 31 December 2016 Discontinued operations Impact of IFRS 15 Under IFRS 15, year ended 31 December 2016
Underlying Business exit Specific items Total Underlying Specific items Underlying Specific items Underlying Business exit Specific items Total
£m £m £m £m £m £m £m £m £m £m £m £m
Revenue A,B,C 4,897.9 11.3 — 4,909.2 (316.3 ) — (224.3 ) — 4,357.3 11.3 — 4,368.6
Cost of sales A,D (3,627.7 ) (6.7 ) (7.5 ) (3,641.9 ) 111.8 — 97.4 (34.8 ) (3,418.5 ) (6.7 ) (42.3 ) (3,467.5 )
Gross profit 1,270.2 4.6 (7.5 ) 1,267.3 (204.5 ) — (126.9 ) (34.8 ) 938.8 4.6 (42.3 ) 901.1
Administrative expenses H (728.9 ) (1.8 ) (388.3 ) (1,119.0 ) 144.5 4.3 (19.8 ) 59.4 (604.2 ) (1.8 ) (324.6 ) (930.6 )
Operating profit 541.3 2.8 (395.8 ) 148.3 (60.0 ) 4.3 (146.7 ) 24.6 334.6 2.8 (366.9 ) (29.5 )
Net finance costs (66.0 ) — (7.6 ) (73.6 ) (0.1 ) (0.1 ) — — (66.1 ) — (7.7 ) (73.8 )
Loss on disposal — 0.1 — 0.1 — — — — — 0.1 — 0.1
Profit before tax 475.3 2.9 (403.4 ) 74.8 (60.1 ) 4.2 (146.7 ) 24.6 268.5 2.9 (374.6 ) (103.2 )
Income tax expense E (87.9 ) 0.5 54.9 (32.5 ) 9.5 (0.9 ) 32.0 (3.9 ) (46.4 ) 0.5 50.1 4.2
Profit for the period from continuing operations 387.4 3.4 (348.5 ) 42.3 (50.6 ) 3.3 (114.7 ) 20.7 222.1 3.4 (324.5 ) (99.0 )
Profit for the period from discontinued operations — — — — 50.6 (3.3 ) — — — 50.6 (3.3 ) 47.3
Total profit for the period 387.4 3.4 (348.5 ) 42.3 — — (114.7 ) 20.7 222.1 54.0 (327.8 ) (51.7 )
Attributable to:
Owners of the Company 376.7 3.4 (343.2 ) 36.9 (115.5 ) 20.7 210.6 54.0 (322.5 ) (57.9 )
Non-controlling interests 10.7 — (5.3 ) 5.4 0.8 — 11.5 — (5.3 ) 6.2
387.4 3.4 (348.5 ) 42.3 (114.7 ) 20.7 222.1 54.0 (327.8 ) (51.7 )
Earnings per share
Continuing operations: 56.67 p 0.51 p (51.63) p 5.55 p (7.61) p 0.50 p (17.38) p 3.11 p 31.68 p 0.51 p (48.02) p (15.83) p
– basic 56.67 p 0.51 p (51.63) p 5.55 p (7.61) p 0.50 p (17.38) p 3.11 p 31.68 p 0.51 p (48.02) p (15.83) p
– diluted
Total operations:
– basic 56.67 p 0.51 p (51.63) p 5.55 p — p — p (17.38) p 3.11 p 31.68 p 8.12 p (48.52) p (8.71) p
– diluted 56.67 p 0.51 p (51.63) p 5.55 p — p — p (17.38) p 3.11 p 31.68 p 8.12 p (48.52) p (8.71) p
Total adjustment to Total profit for the period due to the adoption of IFRS 15
is £(114.7)m to underlying + £20.7m to specific items, being £94.0m.
Consolidated balance sheet under IFRS 15 Adjustment As reported 1 Jan 2016 Impact of IFRS 15 Under IFRS 15 1 Jan 2016 As reported 31 Dec 2016 Impact of Under IFRS 15 31 Dec 2016
IFRS 15
£m £m £m £m £m £m
Non-current assets
Property, plant and equipment 406.0 — 406.0 394.7 — 394.7
Intangible assets 2,810.0 — 2,810.0 2,754.2 — 2,754.2
Contract fulfilment assets D — 277.6 277.6 — 240.6 240.6
Financial assets 186.6 — 186.6 337.6 — 337.6
Deferred taxation E 18.8 162.8 181.6 32.0 190.4 222.4
Trade and other receivables F 86.1 (41.7 ) 44.4 128.4 (79.6 ) 48.8
3,507.5 398.7 3,906.2 3,646.9 351.4 3,998.3
Current assets
Financial assets 44.3 — 44.3 92.6 — 92.6
Contract fulfilment assets D — 40.4 40.4 — 41.6 41.6
Disposal group assets held for sale 84.1 — 84.1 — — —
Funds assets 161.7 — 161.7 173.6 — 173.6
Trade and other receivables F 1,011.9 (284.1 ) 727.8 976.0 (174.9 ) 801.1
Cash 534.0 — 534.0 1,098.3 — 1,098.3
1,836.0 (243.7 ) 1,592.3 2,340.5 (133.3 ) 2,207.2
Total assets 5,343.5 155.0 5,498.5 5,987.4 218.1 6,205.5
Current liabilities
Trade and other payables G 1,144.0 (271.0 ) 873.0 1,297.6 (320.6 ) 977.0
Deferred income B,C,G — 1,157.3 1,157.3 — 1,374.9 1,374.9
Overdrafts 448.7 — 448.7 532.5 —
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