REG - Serco Group PLC - Annual Financial Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 2
24/03/2016 13:52
- Part 2: For the preceding part double click ID:nRSX2025Ta
report, on page 30. We have nothing material to add or draw attention to in relation to: • theDirectors' confirmation on page16 that they havecarried out a robustassessment of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity;• the disclosures on pages 16 to 29 that describe those risks and explain how they are being managed or mitigated;• theDirectors' statement innote 2 to
thefinancial statements, aboutwhether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identificationof any material uncertaintiesto the Group's abilityto continue to doso over a periodof at least
twelvemonths from the dateof approval of thefinancial statements; and• theDirectors'explanationonpage30astohowtheyhaveassessedtheprospectsoftheGroup, overwhatperiodtheyhavedonesoandwhytheyconsiderthatperiodtobeappropriate,and
theirstatementastowhethertheyhaveareasonableexpectationthatthe Groupwillbeableto continueinoperationandmeetitsliabilitiesastheyfalldueovertheperiodoftheirassessment, includinganyrelateddisclosuresdrawingattentiontoanynecessaryqualificationsorassumptions.We
agreed with the Directors' adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's
ability to continue as a going concern.
Independence We are required to comply with the Financial Reporting Council's Ethical Standards for Auditors andwe confirmthat weare independentof theGroup and wehave fulfilledour otherethical responsibilitiesin accordance withthose standards. We alsoconfirm we havenot
provided any of the prohibited non-audit services referred to in those standards.
Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
Risk How the scope to our audit responded to the risk
Revenue and profit recognition including onerous contract provisionsRevenueandprofit recognitiononcontracts requires significantmanagementjudgement intheassessment of currentandfuture financialperformance.Complex areas in determining the Group's right to The key procedures we have performed are: • Where we have taken a controls approach, we tested the operating effectiveness of controls over the contract lifecycle including tendering controls and estimating, contract monitoring, billings and approvals, contract ledger reconciliations and contract forecasting. • We havechallengedtherighttorecogniserevenue throughreviewofcontractualtermsandassessed management's judgementregardingtheappropriate timingofrevenuerecognition, includingwherea percentageofcompletion basiswasapplied.Weobtained contractforecastsandcomparedtheassumptions tocontracttermsandwhererelevant inspected correspondencewith partiestothecontract. • We developed an expectation of revenue from contracts wherethe contractsstipulate fixedrevenue ona regular basis or by using external volume data and applying the rates per unit as per the contract to test the revenue recognised by the Group. • Wheretherevenue isnotbased onafixed amountorfixed rates per unit, we have performed test of details by testing the underlying work order / change orders for the contracts and the actual expenses incurred to provide those services. • Wechallengedmanagement'sjudgements ofspecific contract forecasts and historic operational costs comparing contract forecasts to past performance versus contractual targets to assess whether contracts are deemed to be onerous and reviewed provisions for anticipated losses. This has included a review and challenge of evidence produced by third party experts, where used by management in determining certain future contract costs and the models for these onerous contracts. • Forcontractswhereonerouscontractprovisions have beenrecognisedorreleasedduringtheyear, we have assessedwhethertheprovisionsorreleases werea changeofestimatearisingfrom newcircumstances inthe yearorwhethertheyrepresentedthecorrectionofaprior perioderror. • Wehaveverified capitalisedcontract coststo underlying documentation and assessed the accounting treatment
recognise revenue and profitinthecurrent periodinclude: • interpretation of contract terms and conditions, including thebillingandcash flowarrangements • consideration of onerous contract terms • recognition and recoverability of pre contract costs • adopted by management
assessment of stage of completion and forecast costs to complete TheGroupisrequiredtomakeanassessmentofthestageof completionandcoststocompleteoverperiodsthatcanextend upto15yearsintothefutureinordertoestimatetheonerous
contractprovisions.Thepredictionoffutureeventscontains inherentriskandahighdegreeofmanagementjudgement. At 31 December 2014, the Group recognised provisions for a number of contracts that became onerous of £447.1m to cover the excess of unavoidable costs
of meeting the obligations underthe contractsover theeconomic benefitsexpected to be received over the remaining term of such contracts. Such provisions arose predominantly where contractual volume and / or price risk rest with the Group and forecast
revenues are largelyfixed. During 2015, the Group has continued to assess both those contracts for which onerous contract provisions were made at 31 December 2014, and other contracts which may display similar characteristics and potential onerous
outcomes. The total onerous contract provision at 31 December 2015 was £302.1m following utilisation of £116.8m, new provisions of £89.1m, release of £93.0m of provisions no longer required and net movement of £7.6m relating to foreign exchange,
unwindingofdiscount,andreclassifications. Refer to notes 2 and 3 for the Group's accounting policy andcriticalaccounting judgementsover revenueand profit recognition and refer to note 30 for detailed disclosures of onerous contract provisions recognised by
the Group as at 31 December 2015.
Impairment of goodwillThe Group haspreviouslyrecognisedgoodwillof£541.5m allocatedtoitsvariouscashgenerating units(CGUs). In thecurrentyear,the Group hasrecognisedan impairment of£87.5mofgoodwillasa resultof worseningcashflows The key procedures we performed are: • We have challenged the results of management's strategy reviewanditsimplicationsonthecarryingvalueofgoodwill for certain CGUs through our review of the forecasts. • We challenged management's assumptions within the cash flowforecasts usedin the valuein use calculationsfor CGUs including revenue, growth, discount rates and economic assumptions such as long-term growth rates (by reference to independent data where possible) and by performing tests on historical forecasting accuracy. • We have challenged the discount rate applied to the separate CGUs by utilising valuation experts, the prevailing Group cost of capital at the year end and our understanding of the future prospects of the Group. • We have tested the consistency of forecasts used by management for assessment of contracts for onerous contract provisions, recoverability of deferred tax assets and going concern. • We have challenged the sensitivity of changes to the various inputs into the impairment model by reperformance of the calculations using different levels of discount rates and other inputs. • We have recalculated the goodwill balance to determine whether changes to the business in 2015 have been appropriatelyreflected. • We also considered the adequacy of the Group's disclosures in respect of its goodwill impairment testing and whether disclosures about the sensitivity of the outcome of the impairment assessment to reasonably possiblechangesin keyassumptionsproperly reflected the risks inherent in such assumptions
experiencedbytheAmericasdivisioncomparedtothe 2014forecasts. TheGroup isrequiredto assess goodwillforimpairment onanannual basis. In makingthatassessment, management estimate therecoverableamountsfor theCGUtowhich the
goodwillattaches.Thisrequiresmanagement judgementtomake assumptionsinrespectofforecast operatingcashflows and discountrates.Inso doing consideration will be giventoanticipatedrevenuegrowth, cashconversionand wider economicinputstogether with anychangesin
theGroup'sstrategy. Further details on the impairment can be found at notes 11 and 20 and notes 2 and 3 for the Group's accounting policy and critical judgements over impairment of goodwill.
Pension commitmentsThe Group has a net pension related asset of £115.6m as at 31 December 2015, comprising £1.308.9m assets and £1,196.4m liabilities adjusted by £1.9m for franchise arrangements and £1.2mfor themembers' shareof scheme deficits.The net The key procedures we performed are: • We evaluated the appropriateness of the principal actuarial assumptions used in the calculation of the Group's pension commitments, using our own actuarial experts, and by benchmarking certain assumptions to independent data. • As part of our work we reviewed advice received by the Group from its external actuaries and used our actuaries to challenge the advice in relation to the Group's unconditional right of refund and the recoverability of pension surplus amounts. • Wechallengedcontractspecificpension commitmentsrecorded includingthosearising fromfranchisearrangements. • We performed substantive audit procedures on the data provided by management to their actuaries, to determine whether it is accurate and complete. • We have substantively tested pension contributions to and from the pension scheme to determine whether they reflectpayrolldeductionsand pensionpayments.
asset value is based on actuarial assumptions used in the measurement of the Group's pension commitments which involvesjudgementsin relationto mortality,price inflation, discount rates, and rate of pension and salary increases, around which there are
inherent uncertainties. Judgement is also exercised in determining whether a pension surplus should be recognised as an asset, and the extent of the Group's pension liability in respect of franchise and other contractual agreements. Please refer to note 34
which details the valuation of the pension assets and the actuarial assumptions used in measuring the Group's pension commitments. The Group's accounting policy and critical judgement disclosures in relation to recognition of pension assets and liabilities
are set out in note 2 and 3.
Pension commitments
The Group has a net pension related asset of £115.6m as at 31 December 2015, comprising £1.308.9m assets and £1,196.4m
liabilities adjusted by £1.9m for franchise arrangements and £1.2mfor themembers' shareof scheme deficits.The net asset
value is based on actuarial assumptions used in the measurement of the Group's pension commitments which
involvesjudgementsin relationto mortality,price inflation, discount rates, and rate of pension and salary increases, around
which there are inherent uncertainties. Judgement is also exercised in determining whether a pension surplus should be
recognised as an asset, and the extent of the Group's pension liability in respect of franchise and other contractual
agreements. Please refer to note 34 which details the valuation of the pension assets and the actuarial assumptions used in
measuring the Group's pension commitments. The Group's accounting policy and critical judgement disclosures in relation to
recognition of pension assets and liabilities are set out in note 2 and 3.
The key procedures we performed are: • We evaluated the appropriateness of the principal actuarial assumptions used in the
calculation of the Group's pension commitments, using our own actuarial experts, and by benchmarking certain assumptions to
independent data. • As part of our work we reviewed advice received by the Group from its external actuaries and used our
actuaries to challenge the advice in relation to the Group's unconditional right of refund and the recoverability of
pension surplus amounts. • Wechallengedcontractspecificpension commitmentsrecorded includingthosearising
fromfranchisearrangements. • We performed substantive audit procedures on the data provided by management to their
actuaries, to determine whether it is accurate and complete. • We have substantively tested pension contributions to and
from the pension scheme to determine whether they reflectpayrolldeductionsand pensionpayments.
Changes in risk In the current year, we no longer present going concern and covenant compliance (for which there was an emphasis of matter) and presentation of exceptional items as risks. The risk related to going concern and covenant compliance was removed following the
successful completion of the Group's rights issue and reduction in the Group's net debt together with the conclusion of the Group's strategy review. The risk with respect to exceptional items was removed as exceptionalitems are significantly lowerand
involve a lowerlevel of judgement inthe current year. As a result the impact on our audit strategy and allocation of audit resource has also changed. Thedescription of risksabove should be readin conjunction with thesignificant issues considered by the
Audit Committee discussed on page 105. Thesematters were addressed inthe context of our auditof the financial statements asa whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Our application of materiality Wedefinemateriality asthe magnitudeof misstatementin thefinancial statementsthat makesit probable that the economic decisions of a reasonably knowledgeable person would be changed orinfluenced. We use materialityboth in planning the scopeof our audit work
andin evaluating the results of our work. We determined materiality for the Group to be £9m (2014: £20m). In the prior year, the materiality of £20m was around 3% of adjusted pre-tax loss. Pre-tax loss was basedon adding back netexceptional costs of
£661.5m;this base was used toreflect the particular circumstances of 2014, where the exceptional costs were one-off and did not represent the underlying performance of the business. Aspart of the RightsIssue in April 2015,the Company provided Trading
Profitguidance to the marketfor the year-ended 31December 2015 of £90m.Trading Profit is a keymeasure of the business. The requirements of the London Stock Exchange are that any deviation of 10% from their estimate (£9m) would necessitate an announcement
to the market. As such we considered £9m to be the most important measure for the shareholders and the best measure on which to base our materiality. Our selected materiality is less than 1% of total assets of the Group. We agreed with the Audit Committee
that we would report to the Committee all audit differences in excess of £0.18m (2014: £0.4m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure
mattersthatwe identifiedwhenassessing theoverall presentationofthe financialstatements
An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope
primarily on the audit work at seven (2014: seven) components, all of which were subject to a full scope audit. The seven components, and the levels of materiality applicable to each component, are described below: Component Component auditor used 2015
Materiality (£ million) 2014 Materiality(£ million) UK Central Government (CG) No 4.20 4.60 UK & Europe Local & Regional Government (LRG) No 4.20 3.90 Asia Pacific (AsPac) Yes 3.85 3.90 Middle East (ME) Yes 3.50 3.50 Serco Global Services (SGS) Yes 3.85
3.90 Americas Yes 3.85 3.90 Corporate No 3.50 3.50 The scope of work over the components above provided us with 100% coverage over the Group's revenue and net assets. The CG and LRG divisions were audited by the Group audit team. The ME division has been
audited using a component audit team under instructions from the Group team; in the prior year this was audited directly by the Group team. The Group audit team continued to follow a programme of planned visits to the component audit teams, visiting
America (Americas component), Australia (AsPac component) and the United Arab Emirates (ME component) during the current year audit. During the year we did not visit India (SGS component)however we includedthe component audit teamin our teambriefing,
discussed their riskassessment, andreviewed documentation ofthe findings fromtheir work. In addition to the components described above, we have directed the performance of the audit procedures at the Group's shared service centre in India, including
visiting the audit team during the current year audit. At the Parent entity level we also tested the consolidation process and carried out analytical procedurestoconfirm ourconclusion thatthere wereno significantrisks ofmaterial misstatementof
theaggregated financial informationof the remaining componentsnot subject to auditor audit of specifiedaccountbalances Included within the components above are some joint ventures; the joint venture auditors report to the relevant component teams and we
review the work of the component teams in respect of their supervision of the joint venture auditors.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and• theinformation given inthe Strategic Report andthe Directors' Report forthe financial year forwhichthe
financialstatementsare preparedis consistentwiththe financialstatements.
Component
Component auditor used
2015 Materiality (£ million)
2014 Materiality(£ million)
UK Central Government (CG)
No
4.20
4.60
UK & Europe Local & Regional Government (LRG)
No
4.20
3.90
Asia Pacific (AsPac)
Yes
3.85
3.90
Middle East (ME)
Yes
3.50
3.50
Serco Global Services (SGS)
Yes
3.85
3.90
Americas
Yes
3.85
3.90
Corporate
No
3.50
3.50
The scope of work over the components above provided us with 100% coverage over the Group's revenue and net assets. The CG
and LRG divisions were audited by the Group audit team. The ME division has been audited using a component audit team under
instructions from the Group team; in the prior year this was audited directly by the Group team. The Group audit team
continued to follow a programme of planned visits to the component audit teams, visiting America (Americas component),
Australia (AsPac component) and the United Arab Emirates (ME component) during the current year audit. During the year we
did not visit India (SGS component)however we includedthe component audit teamin our teambriefing, discussed their
riskassessment, andreviewed documentation ofthe findings fromtheir work. In addition to the components described above, we
have directed the performance of the audit procedures at the Group's shared service centre in India, including visiting the
audit team during the current year audit. At the Parent entity level we also tested the consolidation process and carried
out analytical procedurestoconfirm ourconclusion thatthere wereno significantrisks ofmaterial misstatementof theaggregated
financial informationof the remaining componentsnot subject to auditor audit of specifiedaccountbalances Included within
the components above are some joint ventures; the joint venture auditors report to the relevant component teams and we
review the work of the component teams in respect of their supervision of the joint venture auditors.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion: • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance
with the Companies Act 2006; and• theinformation given inthe Strategic Report andthe Directors' Report forthe financial
year forwhichthe financialstatementsare preparedis consistentwiththe financialstatements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion:• we have not received all the information and explanations we require for our audit; or• adequate accounting records have not been kept by the Parent company, or returns
adequate for our audit have not been received from branches not visited by us; or• the Parent company financialstatements are notin agreement withthe accounting records and returns.We have nothing to report in respect of these matters.
Directors' remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records
and returns. We have nothing to report arising from these matters.
Corporate Governance Statement Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company's compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Our duty
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