REG - Computacenter - Final Results 2016 <Origin Href="QuoteRef">CCC.L</Origin> - Part 3
13/03/2017 07:07
- Part 3: For the preceding part double click ID:nRSM2152Zb
Group at the rate of exchange
ruling at the Balance Sheet date and their Income Statements are translated at
the average exchange rates for the year. Exchange differences arising on the
retranslation are recognised in the Consolidated Statement of Comprehensive
Income. On disposal of a foreign entity, the deferred cumulative amount
recognised in the Consolidated Statement of Comprehensive Income relating to
that particular foreign operation is recognised in the Consolidated Income
Statement.
2.3. Revenue
Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the Group and the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received or
receivable, excluding discounts and rebates given to customers, VAT and other
sales tax or duty. In contracts with customers, where more than one good
(Supply Chain) or service (Professional Services or Managed Services) is
provided to the customer, consideration is allocated between Supply Chain,
Professional Services and Managed Services using relative fair value
principal. The following specific recognition criteria must also be met before
revenue is recognised:
2.3.1. Supply Chain
The Group supplies hardware and software (together as 'goods') to customers
that is sourced from and delivered by a number of suppliers.
Supply Chain revenue is recognised when the significant risks and rewards of
ownership of the goods have passed to the buyer, usually on dispatch of
goods.
2.3.2. Professional Services
The Group provides skilled professionals to customers either on a 'resource on
demand' basis where the revenue is billed on a timesheet basis, or operating
within a project framework where revenue is recognised with reference to the
costs incurred as a proportion of the total estimated costs (percentage of
completion basis) of the contract. Unbilled revenue is recognised within
accrued income. If the total estimated costs and revenues of a contract cannot
be reliably estimated, revenue is recognised only to the extent that costs
have been incurred. A provision is made as soon as a loss is foreseen.
2.3.3. Managed Services
The Group sells maintenance, support and management of customer's IT
infrastructures and operations.
The Group identifies individual revenue generating activities or performance
obligations within each contract and allocates revenue between them. This
revenue is then assessed for recognition purposes based on the nature of the
activity.
Managed Services revenue is recognised over the term of the contract as
services are delivered. Unearned Managed Services revenue is included within
deferred income in the Consolidated Balance Sheet. Amounts invoiced relating
to more than one year are deferred and recognised over the relevant period.
Where a contract contains several elements, the individual elements are
accounted for separately where appropriate and revenue thereon is measured at
the fair value of the consideration received. The related costs are recognised
as they are incurred. However, a portion of costs incurred in the initial
phase of outsourcing contracts (transition and/or transformation costs) may be
deferred when they are specific to a given contract and/or will generate
future economic benefits, and are recoverable. These costs are allocated to
work-in-progress and any reimbursement by the client is recorded as a
deduction from the costs incurred.
On a limited number of Managed Services contracts revenue is recognised on a
percentage of completion basis which is determined by reference to the costs
incurred as a proportion of the total estimated costs of the contract (see
note 3.1.1 to the summary financial information included within this
announcement, for further detail). Unbilled revenue is recognised within
accrued income. If a contract cannot be reliably estimated, revenue is
restricted to the extent that it is probable that costs incurred will be
recoverable.
2.3.4. Bid and set-up costs
The Group operates in a highly competitive environment and is frequently
involved in contract bids with multiple competitors with the outcome usually
unknown until the contract is awarded and signed.
Any bid costs incurred by the Group's Central Bid Management Engines are not
capitalised or charged to the contract, but instead directly charged to
selling, general and administrative expenses as they are incurred. These costs
associated with bids are not separately identifiable nor can they be measured
reliably as the Group's internal bid teams work across multiple bids at any
one time. Further, it cannot be assessed as probable that the contract will be
obtained until the tender process has completed and the contract has been
awarded.
2.3.5. Finance income
Income is recognised as interest accrues.
2.3.6. Operating lease income
Rental income arising from operating leases is accounted for on a
straight-line basis over the lease term.
2.4. Exceptional items
The Group presents as exceptional items on the face of the Income Statement,
those material items of income and expense which, because of the nature and
expected infrequency of the events giving rise to them, merit separate
presentation to allow shareholders to understand better elements of financial
performance in the year, so as to facilitate comparison with prior years and
to assess better trends in financial performance.
2.5. Adjusted1 measures
The Group uses a number of non-Generally Accepted Accounting Practice
(non-GAAP) financial measures in addition to those reported in accordance with
IFRS. The Directors believe that these non-GAAP measures, listed below, are
important when assessing the underlying financial and operating performance of
the Group.
These non-GAAP measures comprise of:
Adjusted revenue, adjusted Services revenue, adjusted Professional Services
revenue, adjusted Supply Chain revenue, and adjusted administrative expenses
excludes the revenue and administrative expenses from a disposed subsidiary,
RDC, for the comparative reporting year. RDC was sold on 2 February 2015.
Adjusted operating profit or loss, adjusted profit or loss before tax,
adjusted tax, adjusted profit or loss for the year, adjusted earnings per
share and adjusted diluted earnings per share are, as appropriate, each stated
before: exceptional and other adjusting items including gain or loss on
business disposals, amortisation of acquired intangibles, utilisation of
deferred tax assets (where initial recognition was as an exceptional item or a
fair value adjustment on acquisition), and the related tax effect of these
exceptional and other adjusting items, as Management do not consider these
items when reviewing the underlying performance of the Segment or the Group as
a whole. Each of these measures also excludes the results of RDC for the
comparative periods.
Additionally, adjusted gross profit or loss and adjusted operating profit or
loss includes the interest paid on customer-specific financing (CSF) which
Management considers to be a cost of sale.
A reconciliation between key adjusted and statutory measures is provided in
the Group Finance Director's Review included within this announcement which
details the impact of Exceptional and other adjusted items when comparing to
the non-GAAP financial measures in addition to those reported in accordance
with IFRS. Further detail is also provided within note 4 to the summary
financial information included within this announcement, Segment Information.
2.6. Impairment of assets
The Group assesses at each reporting date whether there is an indication that
an asset may be impaired. If any such indication exists, or when annual
impairment testing for an asset is required, the Group makes an estimate of
the asset's recoverable amount. Where an asset does not have independent cash
flows, the recoverable amount is assessed for the CGU to which it belongs.
Certain other corporate assets are unable to be allocated against specific
CGUs. These assets are tested across an aggregation of CGUs that utilise the
asset. The recoverable amount is the higher of the fair value less costs to
sell and the value in use of the asset or CGU. Where the carrying amount of an
asset exceeds its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset. Impairment losses of
continuing operations are recognised in the Income Statement in those expense
categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date
whether there is any indication that previously recognised impairment losses
may no longer exist or may have decreased. If such indication exists, the
Group estimates the asset's or CGU's recoverable amount. A previously
recognised impairment loss is reversed only if there has been a change in the
assumptions used to determine the asset's recoverable amount since the last
impairment was recognised. The reversal is limited so that the carrying amount
of the asset does not exceed its recoverable amount, nor exceed the carrying
amount that would have been determined, net of depreciation, had no impairment
loss been recognised for the asset in prior years. As the Group has no assets
carried at revalued amounts, such reversal is recognised in the Income
Statement.
2.7. Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation
and any accumulated impairment losses.
Depreciation, down to residual value, is calculated on a straight-line basis
over the estimated useful life of the asset as follows:
• Freehold buildings: 25-50 years
• Short leasehold improvements: shorter of 7 years and period to
expiry of lease
• Fixtures and fittings
- Head office: 5-15 years
- Other: shorter of 7 years and period to expiry of lease
• Office machinery and computer hardware: 2-15 years
• Motor vehicles: 3 years
Freehold land is not depreciated. An item of property, plant and equipment is
derecognised upon disposal or when no future economic benefits are expected to
arise from the continued use of the asset. Any gain or loss arising on
derecognition of the asset (calculated as the difference between the net
disposal proceeds and the carrying amount of the item) is included in the
Income Statement in the year the item is derecognised.
2.8. Leases
Assets held under finance leases, which transfer to the Group substantially
all the risks and benefits incidental to ownership of the leased item, are
capitalised at the inception of the lease at the fair value of the leased
asset or, if lower, at the present value of the minimum lease payments. Lease
payments are apportioned between the finance charges and reduction of the
lease liability so as to achieve a constant rate of interest on the remaining
balance of the liability. Finance charges are charged directly against
income.
Capitalised leased assets are depreciated over the shorter of the estimated
useful life of the asset and the lease term.
Leases where the lessor retains substantially all the risks and benefits of
ownership of the asset are classified as operating leases. Operating lease
payments are recognised as an expense in the Income Statement on a
straight-line basis over the lease term.
2.9. Investment property
Investment property is defined as land and/or buildings held by the Group to
earn rental income or for capital appreciation or both, rather than for sale
in the ordinary course of business or for use in the supply of goods or
services or for administrative purposes. The Group recognises any part of an
owned (or leased under a finance lease) property that is leased to third
parties as investment property, unless it represents an insignificant portion
of the property.
Investment property is measured initially at cost including transaction costs.
Subsequent to initial recognition, the Group elects to measure investment
property at cost less accumulated depreciation and accumulated impairment
losses, if any (i.e. applying the same accounting policies (including useful
lives) as for property, plant and equipment). The fair values reflect the
market conditions as at the balance sheet date.
2.10. Intangible assets
Software and software licences
Software and software licences include computer software that is not integral
to a related item of hardware. These assets are stated at cost less
accumulated amortisation and any impairment in value. Amortisation is
calculated on a straight-line basis over the estimated useful life of the
asset. Currently software is amortised over four years.
The carrying values of software and software licences are reviewed for
impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable. If any such indication exists and where the
carrying values exceed the estimated recoverable amount, the assets are
written down to their recoverable amount.
2.10.1. Software under development
Costs that are incurred and that can be specifically attributed to the
development phase of management information systems for internal use are
capitalised and amortised over their useful life, once the asset becomes
available for use.
2.10.2. Other intangible assets
Intangible assets acquired as part of a business combination are carried
initially at fair value. Following initial recognition intangible assets are
carried at cost less accumulated amortisation and any impairment in value.
Intangible assets with a finite life have no residual value and are amortised
on a straight-line basis over their expected useful lives with charges
included in administrative expenses as follows:
• Existing customer contracts: 5 years
• Existing customer relationships: 10 years
• Tools and technology: 7 years
The carrying value of intangible assets is reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable.
2.10.3. Goodwill
Business combinations are accounted for under IFRS 3 Business Combinations
using the acquisition method. Any excess of the cost of the business
combination over the Group's interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities is recognised in
the Consolidated Balance Sheet as goodwill and is not amortised. Any goodwill
arising on the acquisition of equity accounted entities is included within the
cost of those entities.
After initial recognition, goodwill is stated at cost less any accumulated
impairment losses, with the carrying value being reviewed for impairment at
least annually and whenever events or changes in circumstances indicate that
the carrying value may be impaired.
For the purpose of impairment testing, goodwill is allocated to the related
CGU monitored by Management, usually at business Segment level or statutory
Company level as the case may be. Where the recoverable amount of the CGU is
less than its carrying amount, including goodwill, an impairment loss is
recognised in the Consolidated Income Statement.
2.11. Inventories
Inventories are carried at the lower of weighted average cost and net
realisable value after making allowance for any obsolete or slow-moving items.
Costs include those incurred in bringing each product to its present location
and condition, on a first-in, first-out basis.
Net realisable value is the estimated selling price in the ordinary course of
business, less the estimated costs necessary to make the sale.
2.12. Financial assets
Financial assets are recognised at their fair value which initially equates to
the consideration given plus directly attributable transaction costs
associated with the investment.
The subsequent measurement of financial assets depends on their classification
as described in each category below:
2.12.1. Trade and other receivables
Trade receivables, which generally have 30 to 90-day credit terms, are
recognised and carried at their original invoice amount less an allowance for
any uncollectable amounts. An estimate for doubtful debts is made when
collection of the full amount is no longer probable. Balances are written off
when the probability of recovery is assessed as being remote.
2.12.2. Current asset investments
Current asset investments comprise deposits held for a term of greater than
three months from the date of deposit and which are not available to the Group
on demand. Subsequent to initial measurement, current asset investments are
measured at fair value.
2.12.3. Cash and cash equivalents
Cash and short-term deposits in the Consolidated Balance Sheet comprise cash
at bank and in hand, and short-term deposits with an original maturity of
three months or less.
For the purpose of the Consolidated Cash Flow Statement, cash and cash
equivalents consist of cash and short-term deposits as defined above, net of
outstanding bank overdrafts.
2.13. Financial liabilities
Financial liabilities are initially recognised at their fair value and, in the
case of loans and borrowings, net of directly attributable transaction costs.
The subsequent measurement of financial liabilities depends on their
classification as described in each category below:
2.13.1. Provisions (excluding Restructuring provision)
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the
obligation and a reliable estimate can be made of the amount of the
obligation.
If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate
that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability. Where discounting is used,
the increase in the provision due to the passage of time is recognised as a
borrowing cost.
Customer contract provisions
In respect of contracts where revenue is recognised on a percentage of
completion basis, and where the performance of one of these limited number of
contracts results in a margin that was less than anticipated at the time that
it was agreed, then the future financial performance of that contract will be
reviewed in detail. If, after further financial analysis, the full financial
consequence of the contract can be reliably estimated, and it is determined
that the contract is potentially loss-making, then the best estimate of the
losses expected to be incurred until the end of the contract will be provided
for.
The Group has elected to apply IAS 11 in its assessment of whether contracts
are considered onerous and in subsequently estimating the provision as IAS 18
considers the requirements of IAS 11 are generally applicable to the
recognition of revenue and the associated expenses for a transaction involving
the rendering of services.
A contract that is accounted for under IAS 11 that is considered potentially
onerous is assessed according to the recognition of expected losses in IAS 11
ahead of the onerous contract guidance in IAS 37 and considers total estimated
costs (i.e. directly attributable variable costs and fixed allocated costs) as
included in the assessment of whether the contract is onerous or not and in
the measurement of the provision.
2.13.2. Restructuring provisions
The Group recognises a 'restructuring' provision when there is a programme
planned and controlled by Management that changes materially the scope of the
business or the manner in which it is conducted.
Further to the Group's general provision recognition policy, a restructuring
provision is only considered when the Group has a detailed formal plan for the
restructuring identifying, as a minimum; the business or part of the business
concerned; the principal locations affected; the location, function and
approximate number of employees who will be compensated for terminating their
services; the expenditures that will be undertaken and when the plan will be
implemented.
The Group will only recognise a specific restructuring provision once a valid
expectation in those affected that it will carry out the restructuring by
starting to implement that plan or announcing its main features to those
affected by it.
The Group only includes incremental costs associated directly with the
restructuring within the restructuring provisions such as employee termination
benefits and consulting fees. The Group specifically excludes from recognition
in a restructuring provision any costs associated with ongoing activities such
as the costs of training or relocating staff that are redeployed within the
business rather than retrenched and costs for employees who continue to be
employed in ongoing operations, regardless of the status of these operations
post restructure.
2.13.3. Pensions and other post-employment benefits
The Group operates a defined contribution pension scheme available to all UK
employees. Contributions are recognised as an expense in the Income Statement
as they become payable in accordance with the rules of the scheme. There are
no material pension schemes within the Group's overseas operations.
The Group has an obligation to make a one-off payment to French employees upon
retirement, the Indemnités de Fin de Carrière (IFC).
French employment law requires that a company pays employees a one-time
contribution when (and only when) the employee leaves the Company for
retirement at the mandatory age. This is a legal requirement for all
businesses who incur the obligation upon departure, due to retirement, of an
employee.
Typically the retirement benefit is based on length of service of the employee
and his or her salary at retirement. The amount is set via a legal minimum but
the retirement premiums can be improved by the collective agreement or
employment contract in some cases. In Computacenter France, the payment is
based on accrued service and ranges from 1 month of salary after 5 years of
service to 9.4 months of salary after 47 years of service.
If the employee leaves voluntarily at any point before retirement, all
liability is extinguished and any accrued service is not transferred to any
new employment.
Management continues to account for this obligation according to IAS 19
(revised). Due to the materiality of the obligation, Management considers no
further disclosures are relevant at this time.
2.14. Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable, a part of a financial asset or part
of a group of similar financial assets) is derecognised where:
• the rights to receive cash flows from the asset have expired;
or
• the Group retains the right to receive cash flows from the
asset, but has assumed an obligation to pay them in full without material
delay to a third party under a 'pass-through' arrangement; or
• the Group has transferred its rights to receive cash flows
from the asset and either (a) has transferred substantially all the risks and
rewards of the asset, or (b) has neither transferred nor retained
substantially all the risks and rewards of the asset, but has transferred
control of the asset.
Financial liabilities
A financial liability is derecognised when the obligation under the liability
is discharged or cancelled or expired.
2.15. Derivative financial instruments and hedge accounting
The Group uses foreign currency forward contracts to hedge its foreign
currency risks associated with foreign currency fluctuations affecting cash
flows from forecasted transactions and unrecognised firm commitments.
At the inception of a hedge relationship, the Group formally designates and
documents the hedge relationship to which the Group wishes to apply hedge
accounting and the risk management objective and strategy for undertaking the
hedge. The documentation includes identification of the hedging instrument,
the hedged item or transaction, the nature of the risk being hedged and how
the entity will assess the effectiveness of changes in the hedging
instrument's fair value in offsetting the exposure to changes in the hedged
item's fair value or cash flows attributable to the hedged risk. Such hedges
are expected to be highly effective in achieving offsetting changes in cash
flows and are addressed on an ongoing basis to determine that they actually
have been highly effective throughout the financial reporting years for which
they are designated.
Forward contracts are initially recognised at fair value on the date that the
contract is entered into and are subsequently remeasured at fair value at each
reporting date. The fair value of forward currency contracts is calculated by
reference to current forward exchange rates for contracts with similar
maturity profiles. Forward contracts are recorded as assets when the fair
value is positive and as liabilities when the fair value is negative.
For the purposes of hedge accounting, hedges are classified as cash flow
hedges when hedging the exposure to variability in cash flows that is either
attributable to a particular risk associated with a recognised asset or
liability or a highly probable forecast transaction or the foreign currency
risk in an unrecognised firm commitment.
Cash flow hedges that meet the strict criteria for hedge accounting are
accounted for as follows: the effective portion of the gain or loss on the
hedging instrument is recognised directly in other comprehensive income in the
cash flow hedge reserve, while any ineffective portion is recognised
immediately in the Income Statement in administrative expenses.
Amounts recognised within other comprehensive income are transferred to the
Income Statement, within administrative expenses, when the hedged transaction
affects the Income Statement, such as when the hedged financial expense is
recognised.
If the forecast transaction or firm commitment is no longer expected to occur,
the cumulative gain or loss previously recognised in equity is transferred to
the Income Statement within administrative expenses. If the hedging instrument
expires or is sold, terminated or exercised without replacement or rollover,
or if its designation as a hedge is revoked, any cumulative gain or loss
previously recognised within other comprehensive income remains within other
comprehensive income until after the forecast transaction or firm commitment
affects the Income Statement.
Any other gains or losses arising from changes in fair value on forward
contracts are taken directly to administrative expenses in the Income
Statement.
2.16. Taxation
2.16.1. Current tax
Current tax assets and liabilities for the current and prior years are
measured at the amount expected to be recovered from or paid to the tax
authorities. The tax rates and tax laws used to compute the amount are those
that are enacted or substantively enacted by the balance sheet date.
2.16.2. Deferred tax
Deferred income tax is recognised on all temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts in the
Financial Statements, with the following exceptions:
• where the temporary difference arises from the initial
recognition of goodwill or from an asset or liability in a transaction that is
not a business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss;
• in respect of taxable temporary differences associated with
investments in subsidiaries, associates and joint ventures, where the timing
of the reversal of the temporary differences can be controlled and it is
probable that the temporary differences will not reverse in the foreseeable
future; and
• deferred income tax assets are recognised only to the extent
that it is probable that taxable profit will be available in the future
against which the deductible temporary differences, carried forward tax
credits or tax losses, can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted
basis at the tax rates that are expected to apply when the related asset is
realised or liability is settled, based on tax rates and laws enacted or
substantively enacted at the balance sheet date.
Income tax is charged or credited directly to the statement of comprehensive
income if it relates to items that are credited or charged to the statement of
comprehensive income. Otherwise, income tax is recognised in the Income
Statement.
2.17. Share-based payment transactions
Employees (including Executive Directors) of the Group can receive
remuneration in the form of share-based payment transactions, whereby
employees render services in exchange for shares or rights over shares
('equity-settled transactions').
The cost of equity-settled transactions with employees is measured by
reference to the fair value of the award at the date at which they are
granted. The fair value is determined by utilising an appropriate valuation
model. In valuing equity settled transactions, no account is taken of any
performance conditions as none of the conditions set are market-related ones.
The cost of equity-settled transactions is recognised, together with a
corresponding increase in equity, over the period in which the performance
and/or service conditions are fulfilled, ending on the date on which the
relevant employees become fully entitled to the award ('vesting date'). The
cumulative expense recognised for equity-settled transactions at each
reporting date, until the vesting date, reflects the extent to which the
vesting period has expired and the Directors' best estimate of the number of
equity instruments that will ultimately vest. The Income Statement charge or
credit for a period represents the movement in cumulative expense recognised
as at the beginning and end of that period. As the schemes do not include any
market-related performance conditions, no expense is recognised for awards
that do not ultimately vest.
The dilutive effect of outstanding options is reflected as additional share
dilution in the computation of earnings per share (see note 7 to the summary
financial information included within this announcement).
The Group has an employee share trust for the granting of non-transferable
options to executives and senior employees. Shares in the Group held by the
employee share trust are treated as investment in own shares and are recorded
at cost as a deduction from equity.
2.18. Fair value measurement
The Group measures certain financial instruments at fair value at each balance
sheet date.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data is available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs.
2.19. Own shares held
Computacenter plc shares held by the Group are classified in shareholders'
equity as 'own shares held' and are recognised at cost. Consideration received
for the sale of such shares is also recognised in equity, with any difference
between the proceeds from sale and the original cost being taken to reserves.
No gain or loss is recognised in the performance statements on the purchase,
sale, issue or cancellation of equity shares.
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of Financial Statements requires Management to exercise
judgement in applying the Group's accounting policies. It also requires the
use of estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses. Due to the inherent uncertainty in making
these critical judgements and estimates, actual outcomes could be different.
During the year, Management set aside time to consider the critical accounting
estimates and judgements for the Group. This process included reviewing the
last reporting period's disclosures and the current period's challenging
accounting issues. Where Management deemed an area of accounting to be no
longer a critical estimate or judgement, an explanation for this decision is
found in the relevant accounting note to the Consolidated Financial
Statements.
3.1. Critical estimates
Estimates and underlying assumptions are reviewed on an ongoing basis, with
revisions recognised in the year in which the estimates are revised and in any
future years affected. The areas involving significant risk resulting in a
material adjustment to the carrying amounts of assets and liabilities within
the next financial year are as follows:
3.1.1. Services revenue recognition
The Group accounted for certain Services contracts using the percentage of
completion method, recognising revenue by reference to the stage of completion
of the contract which is determined by actual costs incurred as a proportion
of total forecast contract costs. This method places considerable importance
on accurate estimates of the extent of progress towards completion of the
contract and may involve estimates on the scope of services required for
fulfilling the contractually defined obligations. These significant estimates
include total contract costs, total contract revenues, contract risks,
including technical risks, and other assumptions. Under the percentage of
completion method, the changes in these estimates and assumptions may lead to
an increase or decrease in revenue recognised at the balance sheet date with
the in-year revenue recognition appropriately adjusted as required. When the
outcome of the contract cannot be estimated reliably, revenue is recognised
only to the extent that expenses incurred are eligible to be recovered. No
revenue is recognised if there are significant uncertainties regarding
recovery of the consideration.
The key judgements are the extent to which revenue should be recognised and
also, where total contract costs are not covered by total contract revenue,
the extent to which an adjustment is required.
Additionally, where contracts are renegotiated mid-life, Management will
consider when to make a revenue adjustment. A major contract was under
renegotiation at year end with the terms largely agreed but not yet signed.
Shortly after the balance sheet date, an agreement was signed including
settlement of outstanding revenue claims relating to the second half of 2016.
This additional information resulted in an update to the original revenue
estimate with an adjustment of £1.7 million made to increase 2016 revenue and
margins.
During the year, Management held a number of 'difficult' contracts under
review that were considered to be performing below expectation. The number of
contracts under review fluctuated during the year between eight and 12. Each
contract was subject to a detailed review to consider the reasons behind the
lower than anticipated performance and the potential accounting impacts
related effect on revenue recognition estimates.
For a limited number of these 'difficult' contracts, where there was no
immediate operational or commercial remedy for the performance, a range of
possible outcomes for the estimate of the total contract costs and total
contract revenues was considered to determine the best estimate of stage of
completion.
The gross revenue recognised in the year from these contracts under review was
approximately £10.4 million. The range of potential scenarios considered by
management in respect of these specific contracts included a reduction in
revenue, and margins, recognised in 2016 of £4.1 million. Also, based on
Management's best estimate, the total cost to complete on these contracts were
£26.6 million.
3.2. Critical judgements
Judgements made by Management in the process of applying the Group's
accounting policies, that have the most significant effect on the amounts
recognised in the Financial Statements, are as follows:
3.2.1. Exceptional items
Exceptional items remain a core focus of Management with the recent
Alternative Performance Measure regulations providing further guidance in this
area.
Management is required to exercise its judgement in the classification of
certain items as exceptional and outside of the Group's adjusted1 results. The
overall goal of Management is to present the Group's underlying performance
without distortion from one-off or non-trading events regardless of whether
they be favourable or unfavourable to the underlying result.
To achieve this, Management have considered the materiality, infrequency and
nature of the various items classified as exceptional this year against the
requirements and guidance provided by IAS 1, our Group accounting policies and
the recent regulatory interpretations and guidance.
In reaching their conclusions, Management consider not only the effect on the
overall underlying Group performance but also where an item is critical in
understanding the performance of one of its component Segments which is of
relevance to investors and analysts when assessing the Group result and its
future prospects as a whole.
Further details of the individual exceptional items, and the reasons for their
disclosure treatment, are set out in note 5 to the summary financial
information included within this announcement.
3.3. Change in critical estimates and critical judgements
During the year, Management reassessed the critical estimates and critical
judgements and resolved that the following were no longer considered
critical.
3.3.1. Critical estimates
Provisions
The Group's provisions principally relate to obligations arising from onerous
lease property provisions, customer contract provisions, restructuring
provisions and retirement benefit obligations.
Management has considered each element that makes up the total provision
balance as at the year end and decided that assumptions used to estimate these
elements of provisions were not sensitive enough to change the provision
balance materially hence provisions are no longer considered a critical
estimate.
Providing for doubtful debts
The level of provision for doubtful debts has decreased significantly from
previous years and hence is no longer a critical estimate as the range of
possible outcomes resulting from various assumptions applied by management are
now not considered material. This was previously considered a critical
estimate due to the higher than normal trade receivables balances in our
French Segment at 31 December 2014.
3.3.2. Critical judgements
Asset held for sale
At the time of approving the 2014 year end Annual Report and Accounts,
Management made a judgement in deciding that the sale of its subsidiary, RDC,
should not be accounted for as an asset held for sale under the Group's
relevant accounting policy disclosed at the time. However, the Group did not
carry any assets classified as 'held for sale' or have any 'discontinued
operations' as at 31 December 2016 therefore this is no longer considered an
area of critical judgement by Management.
4 SEGMENT INFORMATION
For Management purposes, the Group is organised into geographical Segments,
with each Segment determined by the location of the Group's assets and
operations. The Group's business in each geography is managed separately and
held in separate statutory entities.
No operating Segments have been aggregated to form the below reportable
operating Segments.
Management monitors the operating results of its geographical Segments
separately for the purposes of making decisions about resource allocation and
performance assessment. Segment performance is evaluated based on adjusted1
operating profit or loss which is measured differently from statutory
operating profit or loss in the Consolidated Financial Statements as defined
above.
Segmental performance for the years ended 31 December 2016 and 2015 was as
follows:
Year ended 31 December 2016
UK£'000 Germany£'000 France£'000 Belgium£'000 Total£'000
Revenue
Adjusted1 Supply Chain revenue 899,822 934,214 335,612 37,907 2,207,555
Adjusted1 Services revenue
Adjusted1 Professional Services revenue 118,636 138,218 15,470 1,868 274,192
Managed Services revenue 373,292 319,744 53,627 16,987 763,650
Total adjusted1 Services revenue 491,928 457,962 69,097 18,855 1,037,842
Total adjusted1 revenue 1,391,750 1,392,176 404,709 56,762 3,245,397
RDC
Supply Chain revenue - - - - -
Professional Services revenue - - - - -
Total RDC revenue - - - - -
Statutory revenue 1,391,750 1,392,176 404,709 56,762 3,245,397
Results
Adjusted1 gross profit 202,556 175,273 42,520 7,479 427,828
Adjusted1 administrative expenses (155,812) (139,683) (39,649) (6,524) (341,668)
Adjusted1 operating profit 46,744 35,590 2,871 955 86,160
Adjusted1 net interest 717 (212) (208) (28) 269
Adjusted1 profit before tax 47,461 35,378 2,663 927 86,429
Exceptional items:
- onerous contracts trading losses - - - - -
- onerous contracts provision for future losses - - - - -
- exceptional losses on redundancy and other restructuring costs - - (1,169) - (1,169)
- gain on reversal of fair value adjustments - 3,045 - - 3,045
Total exceptional items - 3,045 (1,169) - 1,876
Exceptional loss on disposal of a subsidiary (522) - - - (522)
Amortisation of acquired intangibles - (627) - (83) (710)
RDC - - - - -
Statutory profit before tax 46,939 37,796 1,494 844 87,073
The reconciliation for adjusted1 operating profit to statutory operating
profit as disclosed in the Consolidated Income Statement is as follows:
UK£'000 Germany£'000 France£'000 Belgium£'000 Total£'000
Adjusted1 operating profit 46,744 35,590 2,871 955 86,160
Add-back interest on CSF 9 210 - - 219
Amortisation of acquired intangibles - (627) - (83) (710)
Exceptional items - 3,045 (1,169) - 1,876
RDC - - - - -
Statutory operating profit 46,753 38,218 1,702 872 87,545
Other segment information
Property, plant and equipment 39,636 14,825 6,830 1,729 63,020
Investment property 10,033 - - - 10,033
Intangible assets 54,817 19,416 39 2,013 76,285
Capital expenditure:
Property, plant and equipment 12,076 5,026 501 38 17,641
Software 3,179 1,754 9 1 4,943
Depreciation of property, plant and equipment 6,966 6,681 1,820 164 15,631
Depreciation of investment property 227 - - - 227
Amortisation of software 11,536 846 29 2 12,413
Share-based payments 2,702 607 36 - 3,345
Year ended 31 December 2015
UK£'000 Germany£'000 France£'000 Belgium£'000 Total£'000
Revenue
Adjusted1 Supply Chain revenue 875,041 820,196 335,024 33,686 2,063,947
Adjusted1 Services revenue
Adjusted1 Professional Services revenue 137,390 107,416 16,101 1,645 262,552
Managed Services revenue 394,943 272,006 46,934 13,785 727,668
Total adjusted1 Services revenue 532,333 379,422 63,035 15,430 990,220
Total adjusted1 revenue 1,407,374 1,199,618 398,059 49,116 3,054,167
RDC
Supply Chain revenue 3,158 - - - 3,158
Professional Services revenue 290 - - - 290
Total RDC revenue 3,448 - - - 3,448
Statutory Supply Chain revenue 878,199 820,196 335,024 33,686 2,067,105
Statutory Services revenue
Statutory Professional Services revenue 137,680 107,416 16,101 1,645 262,842
Statutory Managed Services revenue 394,943 272,006 46,934 13,785 727,668
Total statutory Services revenue 532,623 379,422 63,035 15,430 990,510
Statutory revenue 1,410,822 1,199,618 398,059 49,116 3,057,615
Results
Adjusted1 gross profit 216,445 147,346 32,083 6,258 402,132
Adjusted1 administrative expenses (157,110) (119,937) (33,715) (4,263) (315,025)
Adjusted1 operating profit/(loss) 59,335 27,409 (1,632) 1,995 87,107
Adjusted1 net interest 601 (577) (178) (79) (233)
Adjusted1 profit/(loss) before tax 59,936 26,832 (1,810) 1,916 86,874
Exceptional items:
- onerous contracts trading losses - (1,123) - - (1,123)
- onerous contracts provision for future losses - 1,559 - - 1,559
- exceptional losses on redundancy and other restructuring costs - - (1,465) - (1,465)
Total exceptional items - 436 (1,465) - (1,029)
Exceptional gain on disposal of a subsidiary 42,155 - - - 42,155
Amortisation of acquired intangibles (361) (1,116) - (76) (1,553)
RDC 320 - - - 320
Statutory profit/(loss) before tax 102,050 26,152 (3,275) 1,840 126,767
The reconciliation for adjusted1 operating profit to statutory operating
profit as disclosed in the Consolidated Income Statement is as follows:
UK£'000 Germany£'000 France£'000 Belgium£'000 Total£'000
Adjusted1 operating profit/(loss) 59,335 27,409 (1,632) 1,995 87,107
Add-back interest on CSF 56 284 - - 340
Amortisation of acquired intangibles (361) (1,116) - (76) (1,553)
Exceptional items - 436 (1,465) - (1,029)
RDC 320 - - - 320
Statutory operating profit/(loss) 59,350 27,013 (3,097) 1,919 85,185
Other segment information
Property, plant and equipment 34,037 14,286 7,210 1,599 57,132
Investment property 10,260 - - - 10,260
Intangible assets 63,173 16,520 56 1,784 81,533
Capital expenditure:
Property, plant and equipment 5,904 5,224 1,307 868 13,303
Software 6,052 1,186 50 6 7,294
Depreciation of property, plant and equipment 10,667 6,121 1,687 410 18,885
Depreciation of investment property 227 - - - 227
Amortisation of software 11,059 635 59 5 11,758
Share-based payments 4,095 542 33 - 4,670
Information about major customers
Included in revenues arising from the UK segment are revenues of approximately
£271 million (2015: £281 million) which arose from sales to the Group's
largest customer. For the purposes of this disclosure a single customer is
considered to be a group of entities known to be under common control. This
customer consists of entities under control of the UK Government.
5 Exceptional items
2016£'000 2015£'000
Operating profit
Redundancy and other restructuring costs (1,169) (1,465)
Onerous contracts - 436
Gain on reversal of fair value adjustments 3,045 -
1,876 (1,029)
Exceptional (loss)/gain on disposal of a subsidiary (522) 42,155
Exceptional items before taxation 1,354 41,126
Income tax
Tax on onerous contracts included in operating profit - (52)
Tax on gain on reversal of fair value adjustments (192) -
Exceptional items after taxation 1,162 41,074
2016: Included within the current year are the following exceptional items:
· As outlined in our 2016 Interim Report, a Line of Business restructure
was agreed with the business in France. This initiative to reduce the
underutilised resources within our Professional Services arm completed in the
second half of 2016, for a cost of £1.0 million. This restructure has seen
France exit the direct provision of Group Field Maintenance Services. This
Line of Business had materially decreased over time, leading to significant
resourcing overcapacity. Any residual customer requirement will be
sub-contracted to an existing third party provider. Additionally, as also
detailed in the 2016 Interim Report, further provisioning to the existing 2014
Social Plan in France of £0.1 million was also required during the period.
· The most significant item within exceptional items during 2016 was the
£3.0 million release of historical fair value adjustments made on the 2009
acquisition of becom Informationssysteme GmbH (becom). This followed the final
payment of the contingent consideration to the vendor during 2016. Due to the
materiality and nature of the item, Management decided to classify this
one-off gain as exceptional.
· During the third quarter, a Group subsidiary domiciled in Luxembourg,
Computacenter PSF SA, was disposed of for a net loss of £0.5 million. As the
principal item in the year to 31 December 2015 was the gain on the disposal of
a Group subsidiary, R.D. Trading Limited (RDC), of
£42.2 million, the current year loss on disposal activity has also been
classified as exceptional.
2015: Included within the prior year are the following exceptional items:
· Computacenter (UK) Limited disposed of its wholly-owned subsidiary RDC
during the year. An exceptional gain of £42.2 million was recognised on the
disposal. In line with our accounting policy, Management has elected under IAS
1 to report this gain as a separate line item on the face of the Consolidated
Income Statement due to the materiality, infrequency and nature of this gain.
As noted within the summary of significant accounting policies the adjusted1
results exclude this gain. This election provides the best guidance to users
of our external reporting as to the underlying profitability trends within the
Group and to present the results of the Group in a way that is fair, balanced
and understandable.
· Computacenter France continued with its substantial restructuring
exercise that began in 2014. An additional cost of £1.5 million has been
recognised as part of the Social Plan. As the redundancy and restructuring
costs were treated as an exceptional item on recognition, the further
provision has also been treated as an exceptional item. Within this balance,
Management has provided for legal expenses of £0.4 million directly related to
individual legal challenges to termination settlements provided under the
Social Plan.
· The Group's remaining two onerous contracts continue to show operational
improvements therefore Management has revised its estimates of the losses to
be incurred. On this basis, the Group has released £0.4 million of the
provision. As the onerous contracts were treated as an exceptional item on
recognition, the write-back of the provision has also been released as an
exceptional item.
6 Income tax
a) Tax on profit from ordinary activities
2016£'000 2015£'000
Tax charged in the consolidated income statement
Current income tax
UK corporation tax 12,992 14,639
Foreign tax
- operating results before exceptional items 7,702 6,485
Total foreign tax 7,702 6,485
Adjustments in respect of prior years (170) (232)
Total current income tax 20,524 20,892
Deferred tax
Operating results before exceptional items:
- origination and reversal of temporary differences 194 (1,276)
- adjustments in respect of prior years (360) (276)
- changes in recoverable amounts of deferred tax assets 2,750 4,265
Exceptional items 192 52
Total deferred tax
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