REG - Serco Group PLC - 2015 full year results <Origin Href="QuoteRef">SRP.L</Origin> - Part 5
25/02/2016 07:12
- Part 5: For the preceding part double click ID:nRSY0914Qd
50.6 13.8 11.1 23.8 4.3 28.1
Non current assets 583.7 10.5 44.9 199.8 18.1 217.9
Current assets 246.5 72.9 74.4 118.6 31.5 150.1
Current liabilities (230.1) (83.5) (65.7) (118.4) (29.4) (147.8)
Non current liabilities (583.3) (6.0) (51.1) (197.5) (21.1) (218.6)
Net assets 16.8 (6.1) 2.5 2.5 (0.9) 1.6
Proportion of group ownership 33% 50% - - - -
Carrying amount of investment 5.5 (3.0) (0.9) 2.5 (0.9) 1.6
5. Disposals
Disposals relating to discontinued operations are included in Note 2.
In May 2015 the Group completed the sale of its Great Southern Rail (GSR) business in Australia for a cash consideration of
£2.9m, resulting in a loss on disposal of £2.8m. The transaction is part of the disposal programme of businesses identified
as not being core to Serco's future strategy, as announced initially in November 2014. In addition, in January 2015, the
Group disposed of its National Physical Laboratory (NPL) business for a consideration of £12.1m, with no gain or loss on
disposal. AgPlus was a subsidiary of NPL which was retained and sold separately with a gain of £0.5m recognised. All of
these businesses were classified as held for sale as at 31 December 2014.
In June 2015, the Group also disposed of its Serco India Private Limited business, representing the Group's frontline
public services operations in the Indian transport sector, for a consideration of £1.0m, resulting in a loss on disposal of
£0.8m. Details of these transactions are given below:
The net assets at the date of disposal were: Great Southern Rail 2015 £m National Physical Laboratory2015£m Other2015£m Total 2015 £m Total 2014£m
Goodwill - - - - 3.4
Other intangible assets - - - - 0.2
Property, plant and equipment 0.9 25.4 - 26.3 0.2
Deferred tax assets - 1.1 - 1.1 -
Current tax assets - - 0.9 0.9 -
Inventories 1.2 - - 1.2 -
Trade and other receivables 9.7 13.9 0.8 24.4 6.3
Cash and cash equivalents 7.3 10.6 0.4 18.3 1.0
Trade and other payables (14.2) (14.9) - (29.1) (1.8)
Tax liabilities - - (0.4) (0.4) (0.1)
Non recourse loans - (24.0) - (24.0) -
Other loans - - (0.1) (0.1) -
Provisions (0.7) - - (0.7) -
Net assets disposed 4.2 12.1 1.6 17.9 9.2
The (loss)/profit on disposal is calculated as follows:
Cash consideration 2.9 12.1 1.4 16.4 6.3
Less:Net assets disposed (4.2) (12.1) (1.6) (17.9) (9.2)
Non-controlling interest dispose of - - 0.4 0.4 -
Impairment of loan receivable in respect of prior year disposal - - - - (4.6)
Disposal related costs (1.5) - - (1.5) 5.2
(Loss)/profit on disposal (2.8) - 0.2 (2.6) (2.3)
The net cash inflow/(outflow) arising on disposals is as follows:
Consideration received 2.9 12.1 1.4 16.4 8.3
Less:
Deferred consideration - - - - 0.5
Cash and cash equivalents disposed (7.3) (10.6) (0.4) (18.3) (1.0)
Disposal related costs paid during the period (1.1) - - (1.1) (2.3)
Net cash (outflow)/inflow on disposal (5.5) 1.5 1.0 (3.0) 5.5
6. Exceptional Items
Exceptional items are non recurring items of financial performance that are outside normal operations and are material to
the results of the Group either by virtue of size or nature. As such, the items set out below require separate disclosure
on the face of the income statement to assist in the understanding of the underlying performance of the Group.
In the year exceptional items have arisen on both the continuing and discontinued operations of the Group. Exceptional
items arising on discontinued operations are disclosed on the face of the income statement within the loss attributable to
discontinued operations, those arising on continuing operations are disclosed on the face of the income statement within
exceptional operating items. Further information regarding the exceptional items arising on discontinued operations can be
seen in note 2.
Net (loss)/profit on disposal of subsidiaries and operations
The exceptional net loss on disposal of subsidiaries and operations is included in note 5.
Other Exceptional Operating Items arising on continuing operations
For the year ended 31 December 2015 2014
£m £m
Impairment of goodwill (87.5) (181.2)
Restructuring costs (19.7) (24.0)
Aborted transaction costs (1.7) -
Costs associated with UK Government review (1.2) (9.2)
UK frontline clinical health contract provisions 2.8 (16.1)
Provision for settlement relating to DLR pension deficit funding dispute - (35.6)
Other provision for legal claims - (20.1)
Impairment and related charges of Australian rail business - (37.2)
Other exceptional operating items (107.3) (323.4)
Goodwill is tested for impairment annually or more frequently if there are indications that there is a risk that it could
be impaired. The recoverable amount of each cash generating unit (CGU) is based on value in use calculations derived from
forecast cash flows based on past experience, adjusted to reflect market trends, economic conditions, the Group's strategy
and key risks. These forecasts include an estimated level of new business wins and contract attrition and an assumption
that the final year forecast continues into perpetuity at a CGU-specific terminal growth rate. The terminal growth rates
are provided by external sources and are based on the long-term inflation rates of the geographic market in which the CGUs
operate and therefore do not exceed the average long-term growth rates forecast for the individual markets.
In 2015, we conducted impairment testing of our CGUs that has identified a non-cash exceptional impairment to continuing
operations of £87.5m (2014: £181.2m), primarily due to a higher level of contract attrition than previously forecast and
the associated impact on future cash flows. This arose in the Americas CGU in the current year, which is also a reportable
segment as defined in IFRS8. In the prior year impairments arose in the Direct Services & Europe business and UK Health
operations, both of which form part of the UK Local & Regional Government segment.
Year ended 31 December 2015 2014
£m £m
UK Local & Regional Government: Direct Services & Europe - (57.6)
UK Local & Regional Government: UK Health - (22.9)
Americas (87.5) (100.7)
Total exceptional goodwill impairment charge (87.5) (181.2)
6. Exceptional Items (continued)
In 2015, a charge of £19.7m (2014: £24.0m) arose in relation to the restructuring programme resulting from the Strategy
Review. This included redundancy payments, provisions, external advisory fees and other incremental costs.
The disposal of the Environmental and Leisure businesses were aborted in the year and as a result one-off costs of £1.7m
associated with the aborted sale have been treated as exceptional.
In 2014 there were exceptional costs totalling £9.2m associated with the UK Government reviews and the programme of
corporate renewal. This reflected external costs related to these reviews and the Corporate Renewal Programme. In 2015,
£1.2m of external adviser costs arose from dealing with these historic matters.
In 2015 the exit of the UK Frontline Clinical Health contracts was completed with the Cornwall Out of Hours contract exited
in May and the Suffolk Community Healthcare contract exited in September. On completion of the contract exits onerous
contract provisions of £2.8m, for which the charges were recorded as exceptional costs and that are no longer expected to
be utilised, were released as credits through exceptional items.
In November 2014 the Group agreed to settle a dispute with the Trustees of the Docklands Light Railway (DLR) Pension Scheme
over the extent of its liability to fund the deficit on the scheme. The settlement resulted in a total exceptional charge
inclusive of costs of £35.6m, consisting of the full and final settlement amount of £33.0m and costs of £2.6m. The
settlement is to be paid over four equal annual instalments from January 2015 to January 2018 covering all past and any
future DLR associated pension liabilities.
In 2014 an exceptional provision of £20.1m was recognised for legal claims made against Serco for commercial disputes. This
provision was based on legal advice received by the Company. There have been no further charges in 2015 in relation to
these disputes.
In 2014 an impairment review was performed on the Australian rail business, Great Southern Rail (GSR), resulting in a
charge totalling £37.2m. This consisted of an impairment of £23.1m to reduce the carrying value of its net assets to the
estimated recoverable amount and a charge of £14.1m in relation to the break costs of leases relating to the business. The
GSR business was exited in May 2015, with the loss on disposal included within loss on disposal of businesses.
Exceptional Finance Costs
In December 2014, agreement was reached for the Group to defer its December 2014 covenant test until 31 May 2015.As a
result costs were incurred in 2015 to preserve the existing finance facilities. In addition, payments were made to the US
Private Placement (USPP) Noteholders as a result of early settlement following the Group refinancing. Total charges of
£32.8m have been treated as exceptional items as they are outside of the normal financing arrangements of the Group and are
significant in size.
Tax Impact of above Items
The tax impact of these exceptional items was a tax credit of £0.4m (2014: £8.2m).
7. Investment Revenue
Year ended 31 December 2015 £m 2014 £m
Interest receivable on other loans and deposits 1.1 1.5
Net interest receivable on retirement benefit obligations 4.9 3.1
Movement in discount on other debtors 0.1 -
6.1 4.6
8. Finance Costs
Year ended 31 December 2015 £m 2014 £m
Interest payable on non recourse loans - 0.8
Interest payable on obligations under finance leases 2.5 2.9
Interest payable on other loans 24.7 29.4
Facility fees and other charges 6.2 9.5
Movement in discount on provisions 5.6 -
39.0 42.6
9. Tax
The effective tax rate on profit before exceptional items is 24.4% (2014: 1.1%). The principal drivers of this tax rate
are, higher tax on profits arising on our international operations, together with the absence of any deferred tax credit
for losses incurred in the UK.
The effective tax rate on exceptional items is 0.3% (2014: 2.5%). The principal reasons for the reduced credit on these
exceptional costs is that no UK deferred tax asset is being recognised in respect of UK losses and no tax deduction is
available for the impairment of goodwill.
As at 31 December 2015 the Group has a gross unrecognised deferred tax asset of £1.05bn, £890m of which relate to tax
losses. A £10.5m (2014: £10.5m) deferred tax asset has been recognised in respect of UK losses on the basis of forecast
utilisation against future profits.
10. Dividends
2015£m 2014£m
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2014 of £nil per share (2014: Final dividend for the year ended 31 December 2013 of 7.45p per share on 487.4 million ordinary shares) - 36.4
Interim dividend for the year ended 31 December 2015 of £nil per share (2014: Interim dividend for the year ended 31 December 2014 of 3.10p per share on 538.4 million ordinary shares) - 16.7
- 53.1
Proposed final dividend for the year ended 31 December 2015 of £nil per share (2014: £nil per share) - -
A dividend waiver is effective for those shares held on behalf of the Company by its Employee Share Ownership Trust.
11. Earnings per Share
Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS 33Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares
2015 2014 (restated*)
Millions Millions
Weighted average number of ordinary shares for the purpose of basic EPS 986.5 655.1
Effect of dilutive potential ordinary shares: share options - -
Weighted average number of ordinary shares for the purpose of diluted EPS 986.5 655.1
*Restatement of earnings per share reflects adjustments associated with the rights issue
At 31 December 2015 options over 560,060 (2014 (restated): 1,855,924) shares were excluded from the weighted average number
of shares used for calculating diluted earnings per share because their exercise price was above the average share price
for the year and they were, therefore, anti-dilutive.
A further 26.5m shares are potentially dilutive but are not included in the above calculation due to the loss making
position in the year.
Earnings per share Continuing and Discontinued Earnings2015 Per share amount2015 Earnings2014 Per share amount2014
EPS £m Pence (restated*)£m (restated*)Pence
Earnings for the purpose of basic EPS (152.6) (15.47) (1,347.3) (205.66)
Effect of dilutive potential ordinary shares - - - -
Diluted EPS (152.6) (15.47) (1,347.3) (205.66)
Basic EPS Excluding Exceptional Items
Earnings for the purpose of basic EPS (152.6) (15.47) (1,347.3) (205.66)
Add back exceptional operating items 220.3 22.33 661.5 100.98
Add back tax on exceptional items (3.1) (0.31) (18.0) (2.75)
Earnings excluding exceptional operating items for the purpose of basic EPS 64.6 6.55 (703.8) (107.43)
*Restatement of earnings per share reflects adjustments associated with the rights issue
Earnings per share Continuing Earnings2015 Per share amount2015 Earnings2014 Per share amount2014
EPS £m Pence (restated*)£m (restated*)Pence
Earnings for the purpose of basic EPS (86.6) (8.78) (990.0) (151.12)
Effect of dilutive potential ordinary shares - - - -
Diluted EPS (86.6) (8.78) (990.0) (151.12)
Basic EPS Excluding Exceptional Items
Earnings for the purpose of basic EPS (86.6) (8.78) (990.0) (151.12)
Add back exceptional operating items 142.7 14.47 325.7 49.72
Add back tax on exceptional items (0.4) (0.04) (8.2) (1.25)
Earnings excluding exceptional operating items for the purpose of basic EPS 55.7 5.65 (672.5) (102.66)
*Restatement of earnings per share reflects adjustments associated with the rights issue
Notes to the Consolidated Financial Statements
11. Earnings per Share (continued)
Earnings per share Discontinued Earnings2015 Per share amount2015 Earnings2014 Per share amount2014
EPS £m Pence (restated*)£m (restated*)Pence
Earnings for the purpose of basic EPS (66.0) (6.69) (357.3) (54.54)
Effect of dilutive potential ordinary shares - - - -
Diluted EPS (66.0) (6.69) (357.3) (54.54)
Basic EPS Excluding Exceptional Items
Earnings for the purpose of basic EPS (66.0) (6.69) (357.3) (54.54)
Add back exceptional operating items 77.6 7.87 335.8 51.26
Add back tax on exceptional items (2.7) (0.27) (9.8) (1.5)
Earnings excluding exceptional operating items for the purpose of basic EPS 8.9 0.90 (31.3) (4.78)
*Restatement of earnings per share reflects adjustments associated with the rights issue
12. Goodwill
Cost£m Accumulated impairment losses£m Carrying amount£m
At 1 January 2014 1,270.8 - 1,270.8
Additions 4.4 - 4.4
Disposals (3.4) - (3.4)
Exchange differences 20.2 (5.4) 14.8
Impairment (exceptional) - (466.0) (466.0)
Transfer to held for sale (618.8) 339.7 (279.1)
At 1 January 2015 673.2 (131.7) 541.5
Exchange differences 17.6 (7.8) 9.8
Impairment (exceptional) - (87.5) (87.5)
Transfer from held for sale 108.3 (62.2) 46.1
At 31 December 2015 799.1 (289.2) 509.9
Further details of the exceptional impairment can be seen in note 6.
12. Goodwill (continued)
Movements in the balance since the prior year end can be seen as follows:
Goodwill balance31 December2014£m Additions2015£m Disposals2015£m Exchange differences2015£m Impairment2015£m Transfer from held for sale2015£m Goodwill balance2015£m Headroom on impairment analysis2015£m Headroom on impairment analysis2014£m
UK Central Government
Justice & Immigration 49.6 - - - - - 49.6 59.3 147.0
Local & Regional Government
UK Health 60.6 - - - - - 60.6 2.3 -
Direct Services & Europe 18.5 - - (0.9) - 46.1 63.7 83.5 -
Americas 303.6 - - 15.9 (87.5) - 232.0 - -
AsPac 100.4 - - (5.7) - - 94.7 161.6 314.8
Middle East 8.8 - - 0.5 - - 9.3 134.2 136.5
541.5 - - 9.8 (87.5) 46.1 509.9 440.9 598.3
Included above is the detail of the headroom on the CGUs existing at the year end. For the Americas CGU impaired in the
year, no headroom exists and therefore any reduction in forecasts or unfavourable movements in key assumptions would lead
to an additional impairment. Headroom shown in respect of the other CGUs reflects where future discounted cash flows are
greater than the underlying assets and includes all relevant cash flows including where provisions have been made for
future costs and losses. The increase in the Direct Services & Europe headroom partly reflects the impact of the decision
that the Environmental and Leisure businesses no longer be sold, reflecting the fact that the expected proceeds on disposal
were less than the expected future cash flows.
The key assumptions applied in the impairment review are set out below:
Discount rate 2015% Discount rate 2014* % Terminal growth rates 2015% Terminal growth rates 2014%
UK Central Government
Justice & Immigration 10.3 9.2 2.0 1.9
Local & Regional Government
UK Health 10.1 9.7 2.0 1.9
Direct Services & Europe 10.1 9.7 2.0 1.9
Americas 10.3 11.3 2.4 2.0
AsPac 10.7 12.4 2.4 2.3
Middle East 9.7 9.0 2.1 2.2
*The Americas discount rate for 2014 of 11.3% has been amended from 13.3% to correct a typographical error.
12. Goodwill (continued)
Discount Rate
Pre-tax discount rates, derived from the Group's post-tax weighted average cost of capital have been used in discounting
the projected cash flows. These rates are reviewed annually with external advisers and are adjusted for risks specific to
the market in which the CGU operates.
Short Term Growth Rates
The annual impairment test is performed immediately prior to the year end, based initially on five year cash flow forecasts
approved by senior management. Short term revenue growth rates used in each CGU five year plan are based on internal data
regarding our current contracted position, the pipeline of opportunities and forecast growth for the relevant market.
Short-term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to
expected changes in both. Where businesses have been poor performers in recent history, turnaround has only been assumed
where a detailed and achievable plan is in place and all forecasts include cash flows relating to contracts where onerous
contract provisions have been made.
Terminal Growth Rates
The calculations include a terminal value based on the projections for the fifth year of the short-term plan, with a growth
rate assumption applied which extrapolates the business into perpetuity. The terminal growth rates are based on long-term
inflation rates of the geographic market in which the CGUs operate and therefore do not exceed the average long-term growth
rates forecast for the individual markets. These are provided by external sources.
Sensitivity Analysis
Sensitivity analysis has been performed for each key assumption and the only CGUs impacted by a reasonably possible change
in a key assumption are the Americas and Health. A 2% movement in discount rates and a 1% movement in terminal growth
rates are considered to be reasonably possible.
The impact of changes in key assumptions on CGUs with marginal headroom is as follows:
· Health: The CGU represents the UK healthcare market segment. A 2% increase in the discount rate gives rise to an
impairment of £8m and a 1% decline in the terminal growth rate by itself leads to an impairment of £7m. If there is both a
2% increase in the discount rate and a 1% decline in the terminal growth rates an impairment charge of £22m would occur.
· Americas: If the terminal growth rate were to fall by 1%, the impairment charge would increase by £114m, whereas a
2% increase in the discount rate results in an additional impairment charge of £92m. If both assumptions moved adversely
by these rates, the impairment charge would increase by £161m.
13. Analysis of Net Debt
At 1 January 2015£m Cash flow£m Reclassified as held for sale£m Acquisitions*£m Disposals£m Exchange differences£m Non cash movements£m At 31 December 2015£m
Cash and cash equivalents 180.1 128.8 17.2 - (0.4) (2.1) - 323.6
Loan receivables 1.0 (0.6) - - - - 19.5 19.9
Non recourse loans - - - -
Other loans (797.3) 449.0 (0.8) - - (30.8) (2.0) (381.9)
Obligations under finance leases (26.5) 9.3 (26.7) - - - 0.1 (43.8)
(642.7) 586.5 (10.3) - (0.4) (32.9) 17.6 (82.2)
At 1 January 2014£m Cash flow£m Reclassified as held for sale£m Acquisitions*£m Disposals£m Exchange differences£m Non cash movements £m At 31 December 2014£m
Cash and cash equivalents 125.1 74.1 (22.4) 2.1 (1.0) 2.2 - 180.1
Loan receivables 5.8 (0.2) - - - - (4.6) 1.0
Non recourse loans (20.3) (3.7) 24.0 - - - - -
Other loans (788.0) 18.8 0.8 - - (32.5) 3.6 (797.3)
Obligations under finance leases (68.0) 18.2 37.1 - - (0.1) (13.7) (26.5)
(745.4) 107.2 39.5 2.1 (1.0) (30.4) (14.7) (642.7)
*Acquisitions represent the net cash/(debt) acquired on acquisition.
14. Provisions
Employeerelated£m Property£m Contract£m Other£m Total£m
At 1 January 2014 15.7 5.3 25.9 14.2 61.1
Reclassified from trade and other receivables - - (3.9) - (3.9)
Recognised on acquisition of subsidiary 0.2 0.1 - - 0.3
Charged to income statement - exceptional 8.8 2.2 19.4 57.7 88.1
Charged to income statement - other 19.8 15.1 456.7 41.5 533.1
Released to income statement (0.2) (0.1) (3.5) (4.2) (8.0)
Utilised during the year (7.7) (1.7) (36.3) (5.1) (50.8)
Transferred to trade payables - - - (8.2) (8.2)
Assets held for sale (1.7) - (21.5) (6.8) (30.0)
Unwinding of discount - 0.1 - - 0.1
Exchange differences 0.2 0.5 (6.4) 1.8 (3.9)
At 1 January 2015 35.1 21.5 430.4 90.9 577.9
Reclassified from trade and other payables - - - 15.9 15.9
Charged to income statement - exceptional 5.1 - - 30.7 35.8
Charged to income statement - other 16.6 3.1 89.1 14.0 122.8
Released to income statement - exceptional (1.4) - (2.8) (0.8) (5.0)
Released to income statement (1.0) (0.5) (90.2) (13.5) (105.2)
Utilised during the year (10.7) (6.0) (116.8) (16.6) (150.1)
Reclassification - (0.3) 0.3 - -
Assets held for sale (8.0) - (4.9) 2.6 (10.3)
Unwinding of discount - 0.1 5.5 - 5.6
Exchange differences 0.7 0.4 (8.5) 1.7 (5.7)
At 31 December 2015 36.4 18.3 302.1 124.9 481.7
Analysed as:
Current 14.2 5.7 90.5 58.2 168.6
Non current 22.2 12.6 211.6 66.7 313.1
Total provisions held by the Group at 31 December 2015 amount to £506.2m (2014: £607.9m) and include £481.7m (2014:
£577.9m) shown above and £24.5m (2014: £30.0m) included within amounts held for sale on the balance sheet.
Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract, up to a
maximum of 8 ¼ years from the balance sheet date. The present value of the estimated future cash outflows required to
settle the contract obligations as they fall due over the respective contracts has been used in determining the provision.
The individual provisions are discounted where the impact is assessed to be material.
A full analysis is performed at least annually of the future profitability of all contracts with marginal performances and
of the balance sheet items directly linked to these contracts.
Due to the significant size of the balance and the inherent level of uncertainty over the amount and timing of the related
cash flows upon which onerous contract provisions are based, if the expected operational performance varies from the best
estimates made at the year end, a material change in estimate may be required. The key drivers behind operational
performance is the level of activity required to be serviced, which is often directed by the actions of the UK Government,
and the efficiency of Group employees and resources.
14. Provisions (continued)
Employee related provisions are for long-term service awards and terminal gratuities liabilities which have been accrued
and are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until
retirement and receive all relevant amounts. There are also amounts included in relation to restructuring. The provisions
will be utilised over various periods driven by local legal or regulatory requirements, the timing of which is not
certain.
Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs
associated with the lease exceed the economic benefits expected to be generated in the future. The provision has been
calculated based on the discounted cash outflows required to settle the lease obligations as they fall due, with the
longest running lease ending in April 2039.
Other provisions are held for indemnities given on disposed businesses, legal and other costs that the Group expects to
incur over an extended period. These costs are based on past experience of similar items and other known factors and
represent management's best estimate of the likely outcome and will be utilised with reference to the specific facts and
circumstances, with the majority expecting to be settled by 31 December 2021.
15. Contingent Liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value
of £21.1m (2014: £26.2m). The actual commitment outstanding at 31 December 2015 was £20.8m (2014: £21.4m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other
bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31
December 2015 was £211.8m (2014: £192.1m).
The Group is aware of other claims and potential claims which involve or may involve legal proceedings against the Group.
The Directors are of the opinion, having regard to legal advice received and the Group's insurance arrangements, that it is
unlikely that these matters will, in aggregate, have a material effect on the Group's financial position.
On 31 May 2011 we filed a claim with the Authority for Advance Rulings (AAR) to seek confirmation that Serco was not
obliged to withhold Indian income tax from the purchase price on the acquisition of Intelenet. The AAR declined to rule on
the matter, so Serco filed a claim with the High Court to decide or direct the AAR to rule on the matter. The High Court
has issued a judgement in favour of Serco, that is, there was no requirement to withhold income tax. Further litigation to
a higher court is a possibility. Should the matter be decided against Serco, it would be liable for unprovided tax of £27m
together with accrued interest to 31 December 2015 of £14m. Having taken appropriate professional advice, Management
considers it likely that Serco will ultimately be successful in this matter.
As we have disclosed before, we are under investigation by the Serious Fraud Office. In November 2013, the UK's Serious
Fraud Office announced that it had opened an investigation, which remains ongoing, into our Group's Electronic Monitoring
Contract. We are cooperating fully with the Serious Fraud Office's investigation but it is not possible to predict the
outcome. However, disclosed in the Principle Risks and Uncertainties in the Group's Annual Report and Accounts is a
description of the range of possible outcomes in the event that the Serious Fraud Office decides to prosecute the
individuals and /or the Serco entities involved.
16. Financial Risk Management
Fair Value of Financial Instruments
i) Hierarchy of fair value
The classification of the fair value measurement falls into three levels, based on the degree to which the fair value is
observable. The levels are as follows:
Level 1: inputs derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or
liability, either directly or indirectly; and
Level 3: inputs are unobservable inputs for the asset or liability.
Based on the above, the derivative financial instruments held by the Group at 31 December 2015 and the comparison fair
values for loans and finance leases, are all considered to fall into Level 2. Market prices are sourced from Bloomberg and
third party valuations. The valuation models incorporate various inputs including foreign exchange spot and forward rates
and interest rate curves. There have been no transfers between levels in the year.
16. Financial Risk Management (continued)
The Group held the following financial instruments which fall within the scope of IAS 39 Financial Instruments: Recognition
and Measurement at 31 December:
Carrying amount (measurement basis) Comparison fair value Carrying amount (measurement basis) Comparison fair value
Amortised cost Fair value - Level 2 Amortised cost Fair value - Level 2 Level 2
2015 2015 2015 2014 2014 2014
£m £m £m £m £m £m
Financial assets
Financial assets - current
Cash and bank balances 323.6 - 323.6 180.1 - 180.1
Derivatives designated as FVTPL
Forward foreign exchange contracts - 6.6 - 5.6
Derivative instruments in designated hedge accounting relationships
Cross currency swaps - 2.6 - 0.1
Forward foreign exchange contracts - 0.2 - 0.2
Loans and receivables
Trade receivables 173.6 - 173.6 146.8 - 146.8
Loan receivables 0.4 - 0.4 1.0 - 1.0
Security deposits 0.2 - 0.2 0.2 - 0.2
Amounts owed by joint ventures 0.8 - 0.8 0.1 - 0.1
Financial assets - non-current
Derivative instruments in designated hedge accounting relationships
Cross currency swap - 7.8 - 7.0
Loans and receivables
Loan receivables 19.5 - 19.5 - - -
Other investments 3.4 - 3.4 3.9 - 3.9
Amounts owed by joint ventures 7.2 - 7.2 9.0 - 9.0
Financial liabilities - current
Derivatives designated as FVTPL
Forward foreign exchange contracts - (2.4) - (17.3)
Derivative instruments in designated hedge accounting relationships
Cross Currency Swaps - - - (0.3)
Forward foreign exchange contracts - - - (0.1)
Financial liabilities at amortised cost
Trade payables (93.6) - (93.6) (99.8) - (99.8)
Loans (132.2) - (132.2) (43.9) - (43.9)
Obligations under finance leases (15.8) - (15.8) (9.6) - (9.6)
Financial liabilities - non-current
Financial liabilities at amortised cost
Loans (249.7) - (246.8) (753.4) - (762.9)
Obligations under finance leases (28.0) - (28.0) (16.9) - (16.9)
17. Notes to the Consolidated Cash Flow Statement
Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
Year ended 31 December 2015Before Exceptional Items£m 2015Exceptional Items£m 2015Total£m 2014Before Exceptional Items£m 2014Exceptional Items£m 2014Total£m
Operating profit/(loss) for the year - continuing operations 106.2 (109.9) (3.7) (626.8) (325.7) (952.5)
Operating profit/(loss) for the year - discontinued operations 26.5 (77.6) (51.1) (29.0) (335.8) (364.8)
Operating profit/(loss) for the year 132.7 (187.5) (54.8) (655.8) (661.5) (1,317.3)
Adjustments for:
Share of profits in joint ventures (37.0) - (37.0) (30.0) - (30.0)
Share-based payment expense 9.8 - 9.8 5.4 - 5.4
Exceptional impairment of goodwill - 153.4 153.4 - 466.0 466.0
Exceptional impairment of property, plant and equipment - 0.8 0.8 - 18.6 18.6
Exceptional impairment of intangible assets - (0.3) (0.3) - 6.0 6.0
Impairment and write down of intangible assets - other 11.5 - 11.5 38.6 - 38.6
Impairment of property, plant and equipment - other 2.1 - 2.1 22.1 - 22.1
Depreciation of property, plant and equipment 28.9 - 28.9 41.8 - 41.8
Amortisation of intangible assets 29.0 - 29.0 38.7 - 38.7
Exceptional profit on disposal of subsidiariesand operations - (2.8) (2.8) - 0.8 0.8
Exceptional impairment of loan receivable - - - - 4.6 4.6
Loss on disposal of property, plant and equipment 0.1 - 0.1 - - -
Loss on disposal of intangible assets 1.5 - 1.5 0.2 - 0.2
Non cash R&D expenditure offset against intangible assets 0.8 - 0.8 - - -
Increase/(decrease) in provisions (116.0) (9.5) (125.5) 472.6 85.5 558.1
Increase in deferred consideration in relationto prior year acquisition - - - 4.0 - 4.0
Other non-cash movements 19.1 - 19.1 -
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