REG-Capita PLC: IFRS 15 early adoption and presentation <Origin Href="QuoteRef">CPI.L</Origin> - Part 2
07/09/2017 07:05
- Part 2: For the preceding part double click ID:nPRr6F339a
532.5
Financial liabilities 230.8 — 230.8 224.2 — 224.2
Disposal group liabilities held for sale 40.4 — 40.4 — — —
Funds liabilities 161.7 — 161.7 173.6 — 173.6
Provisions 69.4 — 69.4 112.5 — 112.5
Income tax payable E 46.2 — 46.2 18.6 — 18.6
2,141.2 886.3 3,027.5 2,359.0 1,054.3 3,413.3
Non-current liabilities
Trade and other payables G 29.3 (15.5 ) 13.8 35.1 (14.1 ) 21.0
Deferred income B,C,G — 228.5 228.5 — 216.7 216.7
Financial liabilities 2,163.4 — 2,163.4 2,694.4 — 2,694.4
Deferred taxation E 19.0 (2.0 ) 17.0 22.1 (2.5 ) 19.6
Provisions 49.0 — 49.0 48.2 — 48.2
Employee benefits 188.3 — 188.3 345.2 — 345.2
2,449.0 211.0 2,660.0 3,145.0 200.1 3,345.1
Total liabilities 4,590.2 1,097.3 5,687.5 5,504.0 1,254.4 6,758.4
Net assets / (liabilities) 753.3 (942.3 ) (189.0 ) 483.4 (1,036.3 ) (552.9 )
Capital and reserves
Issued share capital 13.8 — 13.8 13.8 — 13.8
Share premium 500.7 — 500.7 501.3 — 501.3
Employee benefit trust and treasury shares (0.3 ) — (0.3 ) (0.2 ) — (0.2 )
Capital redemption reserve 1.8 — 1.8 1.8 — 1.8
Foreign currency translation reserve (21.2 ) — (21.2 ) (6.2 ) — (6.2 )
Cash flow hedging reserve (12.0 ) — (12.0 ) — — —
Retained earnings 196.5 (934.7 ) (738.2 ) (102.3 ) (1,029.3 ) (1,131.6 )
Equity attributable to owners of the Company 679.3 (934.7 ) (255.4 ) 408.2 (1,029.3 ) (621.1 )
Non-controlling interests 74.0 (7.6 ) 66.4 75.2 (7.0 ) 68.2
Total equity 753.3 (942.3 ) (189.0 ) 483.4 (1,036.3 ) (552.9 )
Consolidated cash flow statement under IFRS 15
As a result of the adoption of IFRS 15, certain reclassifications are required
in relation to the following cash flow movements between relevant balance
sheet accounts. There has been no change in the net cash generated from
operations as a result of these reclassifications or adjustment of these
balance sheet accounts:
* As identified in adjustment H (below), in 2016, the Group recognised a write
down of accrued income in underlying profit and specific items in relation to
certain long term service contracts. Under IFRS 15 this accrued income would
not have been originally recognised and hence has been reversed out of the
income statement on adoption of IFRS 15. Movements in the operating cash
flow note reflect the reversal of this non-cash movement;
* As identified in adjustment D (below), the Group has recognised new contract
fulfilment assets on adoption of IFRS 15 from 1 January 2016 with amortisation
and impairment expenses recorded through the income statement in the six
months ended 30 June 2016 and year ended 31 December 2016. Movements in the
operating cash flow note reflect these non-cash movements recorded in the
income statement; and
* As identified in adjustments D, B and C, on transition to IFRS 15 as at 1
January 2016, the Group has recognised contract fulfilment assets and an
adjustment to the accrued income and deferred revenue accounts recorded in the
balance sheet. Movements in the operating cash flow note reflect the relevant
cash and non-cash movements in reclassified line items.
Consolidated statement of changes in equity under IFRS 15
No reconciliation of the consolidated statement of changes in equity is
presented as the only changes to this primary statement for the relevant
period presented are as follows:
• Consolidated statement of changes in equity as at 1 January 2016:
recognition of the adjusted retained earnings figure as presented in the
adjusted consolidated balance sheet as at this date.
• Consolidated statement of changes in equity as at 30 June 2016:
recognition of the adjusted profit for the six month period ended 30 June 2016
as presented in the adjusted consolidated income statement for this period.
• Consolidated statement of changes in equity as at 31 December 2016:
recognition of the adjusted profit for the year ended 31 December 2016 as
presented in the adjusted consolidated income statement for this year.
Notes to the financial statements under IFRS 15
Management has undertaken an extensive exercise to consider the Group's major
contractual arrangements as part of the implementation of IFRS 15. A number
of significant areas have been identified for adjustment which include:
* Recognition of revenue by the Group as agent or principal (Adjustment A);
* Accounting for software licences (Adjustment B);
* Recognition of profit from service contracts over time in line with the
output method (Adjustment C);
* Recognition, utilisation and derecognition of contract fulfilment assets
(Adjustment D);
* Impact on tax balances as a result of adoption of IFRS 15 (Adjustment E);
* Decrease in trade and other receivables (Adjustment F);
* Reclassification of trade and other payables (Adjustment G);
* Reversal of prior period accrued income impairment within specific items
(Adjustment H); and
* Reclassification of significant restructuring to underlying (Adjustment I).
These adjustments are discussed in the relevant sections below.
Under IFRS 15, the pattern and timing of revenue recognition has changed
resulting in an overall decrease of £126.8m in revenue for the 6 months ended
30 June 2016 (year ended 31 December 2016: £224.3m), increase in deferred
income of £1,099.3m at the 1 January 2016 opening balance sheet date (31
December 2016: £1,256.9m) and decrease in accrued income of £325.8m at the 1
January 2016 opening balance sheet date (31 December 2016: £254.5m).
Table 1 on the following page reconciles the movements in relation to IFRS 15
for the income statement for the six months ended 30 June 2016 and the year
ended 31 December 2016 and the balance sheet as at 1 January 2016 and as at 31
December 2016.
Table 2 provides further detail on the reconciling movements for the income
statement for the year ended 31 December 2016.
Following the tables are explanatory notes for each of the adjustments
referred to above.
The table below reconciles movements in relation to IFRS 15 for the income
statement for the six months ended 30 June 2016 and the year ended 31 December
2016 and the balance sheet as at 1 January 2016 and as at 31 December 2016.
Refer to below the tables for explanatory notes on each of the adjustments.
Table 1: Consolidated income statement for the six months ended 30 June 2016
Adjustment to net assets at 1 January 2016 Underlying Specific items Profit for the period Trade and other receivables Deferred income Trade and other payables Contract fulfilment asset Deferred tax Adjustment to net liabilities at 31 December 2016
Adjustment Revenue Cost of sales Admin expenses Tax Cost of sales Admin expenses Tax Non-current Current Current Non-current Current Non-current Non-current Current Asset Liability
£m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m £m
A - Agent vs. principal — 0.7 (0.7) — — — — — —
B - Software licences (163.2) (7.2) — — — — — — (7.2)
C - Recognition in line with output (1,214.8) (120.3) — — — — — — (120.3)
D - Recognition of non-current contract fulfilment assets 214.7 — (3.7) — — — — — (3.7)
D - Recognition of software contract fulfilment assets 62.9 — 1.7 — — — — — 1.7
D - Recognition of current contract fulfilment assets 40.4 — 5.8 — — — — — 5.8
E - Tax 164.8 — — — 27.4 — — — 27.4
H - Reversal of accrued income impairment (47.1 ) — — — — — — — —
I - Reclassification of significant restructuring — — — — — — — — —
Total (942.3) (126.8) 3.1 — 27.4 — — — (96.3)
Consolidated income statement for the year ended 31 December 2016 Consolidated balance sheet for the year ended 31 December 2016
A - Agent vs. principal — (90.9 ) 90.9 — — — — — — — — — — — — — — — — —
B - Software licences (163.2 ) (15.3 ) — — — — — — (15.3 ) — — (104.8 ) (73.7 ) — — — — — — (178.5 )
C - Recognition in line with output (1,214.8 ) (118.1 ) — — — — — — (118.1 ) (79.6 ) (174.9 ) (949.5 ) (128.9 ) — — — — — — (1,332.9 )
D - Recognition of non-current contract fulfilment assets 214.7 — (0.6 ) — — (42.3 ) — — (42.9 ) — — — — — — 171.8 — — — 171.8
D - Recognition of software contract fulfilment assets 62.9 — 5.9 — — — — — 5.9 — — — — — — 68.8 — — — 68.8
D - Recognition of current contract fulfilment assets 40.4 — 1.2 — — — — — 1.2 — — — — — — — 41.6 — — 41.6
E - Tax 164.8 — — — 32.0 — — (3.9 ) 28.1 — — — — — — — — 190.4 2.5 192.9
G - Reclassification of trade and other payables — — — — — — — — — — — (320.6 ) (14.1 ) 320.6 14.1 — — — — —
H - Reversal of accrued income impairment (47.1 ) — — 39.6 — 7.5 — — 47.1 — — — — — — — — — — —
I - Reclassification of significant restructuring — — — (59.4 ) — — 59.4 — — — — — — — — — — — — —
Total (942.3 ) (224.3 ) 97.4 (19.8 ) 32.0 (34.8 ) 59.4 (3.9 ) (94.0 ) (79.6 ) (174.9 ) (1,374.9 ) (216.7 ) 320.6 14.1 240.6 41.6 190.4 2.5 (1,036.3 )
The table below provides further detail on the reconciling movements for the
income statement for the year ended 31 December 2016. Refer to below the table
for explanatory notes in respect of each adjustment.
Table 2: Consolidated income statement for the year ended 31 December 2016
Adjustment As reported Discontinued operations As reported - continuing operations Adjustments: from pre 1 Jan 16 and recognised in 2016 Adjustments: previously recognised in 2016 now spread forward Reclassifications Under IFRS 15
£m £m £m £m £m £m £m
Agent vs. Principal A — — — — — (90.9)
Software revenue from pre 1 Jan 16 and recognised in 2016 B — — — 100.0 — —
Software revenue previously recognised in 2016 now spread forward B — — — — (115.3) —
Recognition in line with output from pre 1 Jan 16 and recognised in 2016 C — — — 1,096.6 — —
Recognition in line with output previously recognised in 2016 now spread forward C — — — — (1,214.7) —
Underlying Revenue 4,897.9 (316.3) 4,581.6 1,196.6 (1,330.0) (90.9) 4,357.3
Agent vs. Principal A — — — — — 90.9
Non-current contract fulfilment asset utilisation in 2016 D — — — (47.1 ) — —
Non-current contract fulfilment asset disposals in 2016 D — — — (17.0 ) — —
Non-current contract fulfilment asset additions in 2016 D — — — — 63.5 —
Software contract fulfilment asset utilisation in 2016 D — — — (7.1 ) — —
Software contract fulfilment asset additions in 2016 D — — — — 13.0 —
Completion of point in time performance obligations D — — — (40.4 ) — —
Costs deferred to future point in time performance obligations D — — — — 41.6 —
Underlying cost of sales (3,627.7) 111.8 (3,515.9) (111.6) 118.1 90.9 (3,418.5)
Reversal of accrued income impairment H — — — 39.6 — —
Reclassification of 2016 group restructuring to underlying from specific items I — — — — — (59.4 )
Underlying admin expenses (728.9 ) 144.5 (584.4 ) 39.6 — (59.4 ) (604.2 )
Underlying operating profit 541.3 (60.0 ) 481.3 1,124.6 (1,211.9 ) (59.4 ) 334.6
Underlying profit before tax 475.3 (60.1 ) 415.2 1,124.6 (1,211.9 ) (59.4 ) 268.5
Specific items - contract fulfilment asset disposal D — — — (42.3 ) — —
Specific items - reversal of accrued income impairment H — — — 7.5 — —
Specific items cost of sales (7.5 ) — (7.5 ) (34.8 ) — — (42.3 )
Reclassification of 2016 group restructuring to underlying from specific items I — — — — — 59.4
Specific Items admin expenses (388.3 ) 4.3 (384.0 ) — — 59.4 (324.6 )
Specific items profit before tax (403.4 ) 4.2 (399.2 ) (34.8 ) — 59.4 (374.6 )
Profit before tax 74.8 (55.9 ) 18.9 1,089.8 (1,211.9 ) — (103.2 )
Adjustment A - Accounting for agent vs. principal
The previous agent vs. principal guidance contained in IAS 18 has been
revisited by the Group in light of the revised guidance under IFRS 15 in
assessing whether it acts as an agent or as a principal in its major
contractual arrangements.
As a result of this assessment, the Group concluded that for certain contracts
it is appropriate to move from principal to agency accounting or vice versa.
In respect to moving from principal to agency, this related to certain
software sales arrangements as the Group has concluded that the Group does not
control the good or service being provided to the customer. As a result, there
is a net adjustment of £0.7m to increase revenue and cost of sales for the 6
months period ended 30 June 2016, and of £90.9m to reduce revenue and cost of
sales for the year ended 31 December 2016.
Adjustment B - Accounting for software licences
Under previous accounting, revenue in relation to certain software licences
was recognised at a point in time. Under IFRS 15, the Group has determined
that a number of these arrangements result in the customer having the right to
access the licence (an ‘active’ licence) rather than having the right to
use the licence (a ‘passive’ licence). Under an active licence the ongoing
support and upgrades are fundamental to the ongoing use of the licences by the
customer.
Hence total revenue for the licence and upgrades are combined with these
revenues now recognised over the term of the customer contract rather than at
a point in time resulting in a net decrease in accrued/deferred income at 1
January 2016 of £163.2m, 31 December 2016: £178.5m; and a net decrease in
revenue in the six months ended 30 June 2016 of £7.2m and in the year ended
31 December 2016 of £15.3m.
For the year ended 31 December 2016 the net decrease in revenue comprises the
recognition of £100.0m of revenue from pre 1 January 2016 and the deferral of
£115.3m of revenue previously recognised in 2016.
Adjustment C - Revenue recognition in line with output
Under the previous accounting, revenue for certain contracts was recognised
under the percentage of completion method based upon costs incurred to date as
a proportion of the estimated full cost of completing the contract, and
applying the percentage to the total revenue expected to be earned. Such
percentage of completion accounting would typically result in higher levels of
revenue recognised in the earlier stages of a contract in line with the
profile of costs incurred.
Under IFRS 15, all elements of the contract, including transformation
activity, are combined. Due to the application of the series guidance and
output methodology within IFRS 15, these contracts now have revenue recognised
in line with their output measured on a contract specific basis.
As such, revenue is now spread over the expected life of the contract rather
than in line with the costs profile, which has resulted in a reduction in
revenue recognised in periods prior to 1 January 2016 and a net increase in
deferred/accrued income as at 1 January 2016 of £1,214.8m, as at 31 December
2016: £1,332.9m; and a decrease in opening retained earnings as at 1 January
2016 of £1,214.8m, a decrease in revenue in the six months ended 30 June 2016
of £120.3m, and year ended 31 December 2016 of £118.1m.
For the year ended 31 December 2016 the net decrease in revenue comprises the
recognition of £1,096.6m of revenue from pre 1 January 2016 and the deferral
of £1,214.7m of revenue previously recognised in 2016.
Adjustment D - Recognition, utilisation and derecognition of contract
fulfilment assets
IFRS 15 specifies that certain costs to fulfil a contract are to be
capitalised as contract fulfilment assets if relevant criteria are met.
The Group incurred costs that were previously expensed and which related to
resources to allow it to deliver services under its long term contracts and
active software licence arrangements. In certain situations, costs associated
with the installation of certain IT equipment in contracts have also been
capitalised as contract fulfilment assets.
The adjustments to recognise contract fulfilment assets on the balance sheet
as at 1 January 2016 of £318.0m recognises the net book value of the
identified contract fulfilment assets at the opening balance sheet date.
These adjustments also include the recognition of certain costs of obtaining a
contract. IFRS 15 specifies that the incremental costs of obtaining a contract
with a customer are capitalised if the entity expects to recover them.
The cost of utilising these assets is recognised within cost of sales on a
consistent basis over the life of the relevant customer contract.
The adjustment of £3.8m for the 6 months period ended 30 June 2016 (year
ended 31 December 2016: £6.5m) is to recognise a net decrease in cost of
sales due to the de-recognition of contract costs now capitalised as contract
fulfilment assets net of the utilisation charge recorded for the period in
relation to these assets and the de-recognition of certain contract fulfilment
assets.
For the year ended 31 December 2016, the above net adjustment of £6.5m
comprises: non-current contract fulfilment additions of £63.5m, utilisation
of £47.1m, and disposals of £17.0m; software contract fulfilment additions
of £13.0m, and utilisation of £7.1m; and current contract fulfilment
additions of £41.6m, and utilisation of £40.4m.
Specific item
As disclosed in the 31 December 2016 financial statements, Capita ceased to
work on the IT system transformation in respect of its contract with The
Co-operative Bank plc. Under IFRS 15 this modification has led to an
impairment of a contract fulfilment asset in respect of this contract as these
costs were no longer considered recoverable.
The adjustment of £42.3m in the year ended 31 December 2016 recognises the
charge incurred on derecognising this contract fulfilment asset. This item has
been included within the other non-underlying column because it is one-off in
nature and is due to a contractual dispute rather than arising as a result of
service credit penalties
Adjustment E - Tax
Due to the changes in assets, liabilities, income and expenses recognised as a
result of the application of IFRS 15, there are consequent IAS 12 Income taxes
differences that arise as discussed below.
Deferred tax
Due to the changes in the pattern and timing of revenue recognition under IFRS
15, a deferred income liability is recognised on the balance sheet from 1
January 2016, which will be recognised through the income statement in later
periods. The impact of these revenue recognition changes is only recognised
for tax purposes via a one-off transitional tax adjustment on 1 January 2017,
so no tax deduction is available in 2016 for the reduction in historic revenue
recognised.
Contract fulfilment assets have also been recognised on the balance sheet from
1 January 2016, which will be charged to the income statement in later
periods. Under IAS 12, the tax base of an asset is the amount that will be
deductible for tax purposes against any taxable economic benefits that will
flow to an entity when it recovers the carrying amount of the asset. The tax
base of the contract fulfilment asset recognised on the balance sheet prior to
1 January 2017 is therefore reduced by the amounts for which tax deductions
have already been taken, creating a temporary difference.
Under the principles of IAS 12, a movement of £164.8m in deferred tax
therefore arises, recognised as an increase in the deferred tax asset of
£162.8m and a reduction in the deferred tax liability of £2.0m as at 1
January 2016 (31 December 2016: £192.9m movement, increase in deferred tax
asset of £190.4m, and reduction in deferred tax liability of £2.5m) as a
result of the transition to IFRS 15.
Income statement deferred tax credit
The deferred tax asset balance increase of £190.4m and the deferred tax
liability decrease of £2.5m as at 31 December 2016, give rise to an income
statement deferred tax credit of £27.4m for the 6 month period to 30 June
2016 and of £28.1m for the year ended 31 December 2016.
Income statement current tax expense
There is no income statement current tax expense impact for the 6 months ended
30 June 2016 or the year ended 31 December 2016.
Adjustment F - Decrease in trade and other receivables
The decrease in trade and other receivables relates to the adjustment to
accrued revenues as detailed in Adjustments B and C above, The decrease in
non-current accrued income is £41.7m as at 1 January 2016, and £79.6m at 31
December 2016, and the decrease in current accrued income is £284.1m and
£174.9m at 31 December 2016.
Adjustment G - Reclassification of trade and other payables
In order to provide users with relevant financial information in the primary
financial statements, the Group has decided to reclassify deferred income into
its own primary statement line item reflecting the materiality and nature of
this balance in the context of the Group’s business.
The decrease in trade and other payables relates to the reclassification and
adjustment of deferred income as discussed above. Prior to adoption of IFRS
15, deferred income was classified within ‘Trade and other payables’
although this was not accounted for as a financial liability.
Adjustment H - Reversal of accrued income impairments
In 2016, the Group recognised an impairment of £47.1m historic accrued
income, of which £39.6m was recognised in underlying profit, and £7.5m
within the specific items column in relation to the dispute with The
Co-operative Bank plc. Under IFRS 15 this accrued income would not have been
originally recognised as the timing of revenue recognition has changed in
comparison to the previous accounting policy as discussed in Adjustment C
above, hence the adjustment of £47.1m for the year ended 31 December 2016
recognises the reversal of these previous impairments.
Adjustment I - Reclassification of significant restructuring
Following the adoption of IFRS 15, the Board has adopted a policy to
separately disclose the in year operating profit/loss from significant new
contract wins and related, or significant, restructuring ("Significant new
contract wins and restructuring") within underlying results, in order for
users of the financial statements to obtain a proper understanding of the
financial information and the performance of the business.
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 contract
wins and restructuring" results. A significant restructuring is assessed as
that above this normal level of restructuring.
In the year ended 31 December 2016, the Board announced a major programme,
with the restructuring of the Group into 6 new reporting divisions under a
Group-wide programme. The cost of this Group-wide programme, £59.4m, was
charged to specific items, being the element above the normal level of
restructuring undertaken by the Group. Following the adoption of the above
policy, the 2016 income statement has been represented to reclassify the cost
of this programme to 'Significant new contract wins and restructuring' within
underlying.
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