REG - TP ICAP PLC - Final Results <Origin Href="QuoteRef">TCAPI.L</Origin> - Part 3
14/03/2017 07:07
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equivalents comprise cash at bank and other short term highly
liquid investments with an original maturity of three months or less. As at
31 December 2016 cash and cash equivalents, net of overdrafts, amounted to
£696.1m (2015: £358.9m). Cash at bank earns interest at floating rates based
on daily bank deposit rates. Short term deposits are made for varying periods
of between one day and three months depending on the immediate cash
requirements of the Group, and earn interest at the respective short term
deposit rates.
Financial assets comprise short term government securities, term deposits and
restricted funds held with banks and clearing organisations.
15. Provisions
Property Re-structuring Legaland other Total
2016 £m £m £m £m
At 1 January 2016 5.6 21.4 2.1 29.1
Charge to income statement 1.1 3.1 2.2 6.4
Acquired with acquisitions - ICAP 1.0 - 12.8 13.8
Utilisation of provisions (0.3) (22.3) (0.5) (23.1)
Effect of movements in exchange rates 1.0 1.0 0.5 2.5
At 31 December 2016 8.4 3.2 17.1 28.7
2015
At 1 January 2015 5.9 8.9 1.5 16.3
(Credit)/charge to income statement (0.2) 21.4 0.6 21.8
Utilisation of provisions (0.3) (9.4) (0.1) (9.8)
Effect of movements in exchange rates 0.2 0.5 0.1 0.8
At 31 December 2015 5.6 21.4 2.1 29.1
Property provisions outstanding as at 31 December 2016 relate to provisions in
respect of onerous leases and building dilapidations. The onerous lease
provision represents the net present value of the future rental cost net of
expected sub-lease income. These leases expire in one to ten years (2015: one
to eleven years). The building dilapidations provision represents the
estimated cost of making good dilapidations and disrepair on various leasehold
buildings. The leases expire in one to six years.
Restructuring provisions outstanding as at 31 December 2015 relate to
termination and other employee related costs, the majority of which were
discharged during 2016.
Legal and other provisions include provisions for legal claims brought against
subsidiaries of the Group together with provisions against obligations for
certain employee related costs and non-property related onerous contracts. At
present the timing of any payments is uncertain and provisions are subject to
regular review. It is expected that the obligations will be discharged over
the next three years.
In February 2015 the European Commission imposed a fine of £12.8m (E14.9m) on
ICAP Europe Limited ('IEL') for alleged competition violations in relation to
the involvement of certain of IEL's brokers in the attempted manipulation of
Yen LIBOR by bank traders between October 2006 and January 2011. While this
matter relates to alleged conduct violations prior to completion of the
Company's acquisition of ICAP the Company notes that ICAP has appealed the
fine imposed by the European Commission and is seeking a full annulment of the
Commission's decision. This is recognised as a provision of £12.8m as at 31
December 2016. In the event that the Commission imposes a fine in excess of
E15.0m such excess will be borne by NEX Group plc ('NEX').
16. Contingent liabilities
FCA investigation
Tullett Prebon Europe Limited ('TPEL') is currently under investigation by the
FCA in relation to certain trades undertaken between 2008 and 2011, including
trades which are risk free, which are alleged to have no commercial rationale
or economic purpose, on which brokerage is paid, and trades on which brokerage
may have been improperly charged. As part of its investigation, the FCA is
considering the extent to which during the relevant period (i) TPEL's systems
and controls were adequate to manage the risks associated with such trades and
(ii) whether certain of TPEL's managers were aware of, and/or managed
appropriately the risks associated with, the trades. The FCA is also reviewing
the circumstances surrounding a failure in 2011 by TPEL to discover certain
audio files and produce them to the FCA in a timely manner. As the
investigation is ongoing, it is not possible to predict its ultimate outcome
and accordingly any potential liability and/or financial impact cannot
currently be reliably estimated.
Bank Bill Swap Reference Rate case
On 16 August 2016, a new litigation was filed in the United States District
Court for the Southern District of New York naming the Company, ICAP plc, ICAP
Australia Pty LTD ('IAPL') and Tullett Prebon (Australia) Pty. Limited as
defendants together with various Bank Bill Swap Reference Rate ('BBSW')
setting banks. The complaint alleges collusion by the defendants to fix
BBSW-based derivatives prices through manipulative trading during the fixing
window and false BBSW rate submissions. Each of the defendants named above
intend to defend the litigation vigorously. It is not possible to predict the
ultimate outcome of the litigation or to provide an estimate of any potential
financial impact.
Euroyen TIBOR case and Yen LIBOR case
ICAP plc was previously named as a defendant to an existing civil litigation
originally filed in April 2012 against certain Yen LIBOR and Euroyen TIBOR
panel banks in the US District Court for the Southern District of New York
(the 'Laydon action'). The complaint alleges that the plaintiff, who traded
positions in Euroyen TIBOR futures contracts, was injured as a result of the
purported manipulation of Yen LIBOR and Euroyen TIBOR by certain panel banks
and interdealer brokers. ICAP plc was dismissed as a defendant from the Laydon
action in March 2015. However, at that time the plaintiff was given permission
to add ICAP Europe Limited ('IEL') along with certain other parties as
defendants. Other plaintiffs have filed a related complaint related to the
Laydon action which includes IEL and ICAP plc as defendants (the 'Sonterra
action'). In 2015 the Company was also named as a defendant in both the Laydon
action and the Sonterra action. In March 2017, the Court dismissed the
plaintiff's claims against the Company and IEL. No subsidiary of the Group is
therefore currently named as a defendant in relation to these class actions.
EURIBOR case
In 2013, a civil class action was filed in the United States District Court
for the Southern District of New York against a number of banks asserting
claims of EURIBOR manipulation. On 13 August 2015, the plaintiffs filed a
fourth amended complaint adding new defendants including ICAP plc and IEL.
Defendants briefed motions to dismiss for failure to state a claim and lack of
jurisdiction, which were fully submitted as of 23 December 2015. The Court
dismissed the plaintiff's claims against ICAP plc and IEL in February 2017. No
subsidiary of the Group is therefore currently named as a defendant in
relation to this class action.
Labour claims - ICAP Brazil
ICAP do Brasil Corretora De Títulos e Varoles Mobiliários Ltda ('ICAP Brazil')
is a defendant in sixteen pending lawsuits filed in the Brazilian Labour Court
by persons formerly associated with ICAP Brazil seeking damages under various
statutory labour rights accorded to employees and in relation to various other
claims including wrongful termination, breach of contract and harassment
(together the 'Labour claims'). ICAP Brazil estimates the maximum potential
aggregate exposure in relation to the Labour claims to be BRL 48.4m. The
Company may also be exposed to a potential social security tax liability in
relation to the Labour claims. The Group is covered by an indemnity from NEX
in relation to any outflow in respect of the Labour claims.
Flow case - Tullett Prebon Brazil
In December 2012, Flow Participações Ltda. and Brasil Plural Corretora de
Câmbio, Títulos e Valores ('Flow') initiated a lawsuit against Tullett Prebon
Brasil S.A. Corretora de Valores e Câmbio and Tullett Prebon Holdings do
Brasil Ltda alleging that the defendants have committed a series of unfair
competition misconducts, such as the recruitment of Flow's former employees,
the illegal obtainment and use of systems and software developed by the
plaintiffs, as well as the transfer of technology and confidential information
from Flow and the collusion to do so in order to increase profits from
economic activities. The amount currently claimed is BRL 182m. Tullett intends
to vigorously defend itself but there is no certainty as to the outcome of
these claims. The case is currently in an early evidentiary phase and it is
stayed pending discussion before the Superior Court of Justice regarding the
production of evidence. Therefore, the case is not anticipated to be resolved
in 2017.
ISDA Fix
The CFTC and other government agencies have requested information from the NEX
Group in relation to the setting of the US dollar segment of a benchmark known
as ISDA Fix. ICAP plc's successor firm, NEX, continues to cooperate with the
agencies' inquiries into the setting of that rate. ICAP Capital Markets LLC
('ICM') was the collection agent for ISDA Fix panel bank submissions in US
dollars, but was not a panel member itself. It is not possible to predict the
ultimate outcome of the CFTC investigation or to provide an estimate of any
potential financial impact. In September and October 2014, five class actions
were filed alleging injury due to purported manipulation of the USD ISDA Fix
rate. ICM is a defendant in those actions, which have now been consolidated
into a single action, along with several ISDA Fix panel banks. Pursuant to the
terms of the sale and purchase agreement between the Company and NEX it was
agreed that ICM would transfer its activities and business to the Company but
that ICM would not be transferred to the Company's ownership at completion. It
was further agreed that in the event of any claims or losses arising in
relation to ISDA Fix, these would be for the account of NEX. It is not
possible to predict the ultimate outcome of the litigation or the CFTC's
enquiries or to provide an estimate of any potential financial impact. The
Company and its Group may nevertheless suffer financial loss either directly
or as a consequence of damage to its reputation as a result of these matters.
Swaps civil litigation
In December 2016, ICAP SEF (US) LLC and ICAP Global Derivatives Limited were
named in a class action alleging that they and certain dealer banks colluded
to prevent buy side customers from accessing all-to-all anonymous electronic
trading platforms and therefore prevented buy side customers from getting
access to the best interest rate swap prices. The actions generally asserted
claims of violation of antitrust laws and unjust enrichment. Each of ICAP SEF
(US) LLC and ICAP Global Derivatives Limited intend to defend these litigation
claims vigorously. It is not possible to predict the ultimate outcome of the
litigation or to provide an estimate of any potential financial impact. The
Company expects that it will benefit from the warranty provisions of the sale
and purchase agreement with NEX such that any outflow in respect of the ICAP
entities with regards to this litigation will be borne by NEX.
General note
From time to time the Company's subsidiaries are engaged in litigation in
relation to a variety of matters, and is required to provide information to
regulators and other government agencies as part of informal and formal
enquiries or market reviews. The Company's reputation may also be damaged by
any involvement or the involvement of any of its employees or former employees
in any regulatory investigation and by any allegations or findings, even where
the associated fine or penalty is not material.
In the normal course of business, certain of the Company's subsidiaries enter
into guarantees and indemnities to cover trading arrangements and/or the use
of third party services or software.
Save as outlined above in respect of legal matters or disputes for which a
provision has not been made, notwithstanding the uncertainties that are
inherent in the outcome of such matters, there are no individual matters which
are considered to pose a significant risk of material adverse financial impact
on the Company's results or net assets.
The Group operates in a wide variety of jurisdictions around the world and
uncertainties therefore exist with respect to the interpretation of complex
tax laws and practices of those territories. The Group establishes provisions
for taxes other than current and deferred income taxes, based upon various
factors which are continually evaluated, if there is a present obligation as a
result of past events, it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a reliable
estimate of the amount of the obligation can be made.
17. Events after the balance sheet date
In January 2017, the Group issued £500m unsecured Sterling Notes due January
2024. The Notes have a semi-annual coupon of 5.25%, subject to compliance with
the terms of the Notes. Proceeds were used to repay the £470m bank loan.
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OTHER INFORMATION
The Annual General Meeting of TP ICAP plc will be held on 11 May 2017 at
12.15pm.
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Independent Auditors' Report to the Members of TP ICAP plc on the Preliminary
Announcement of TP ICAP plc
We confirm that we have issued an unqualified opinion on the full financial
statements of TP ICAP plc.
Our assessment of risks of material misstatement
When planning our audit, we made an assessment of the relative significance of
the key risks of material misstatement to the Group financial statements. 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.
We identified two new key risks of material misstatement relating to the
accounting for the acquisition of ICAP's Global Broking Business ('ICAP') and
presentation and disclosure of acquisition, disposal and integration related
items. Both arise from the acquisition of ICAP. Last year, our audit report on
the full financial statements also included Matched Principal revenue and the
valuation of group tax provisions as key risks. In relation to Matched
Principal revenue, we focus particularly on the risk of material misstatement
in respect of revenue associated with trades which fail to settle within
standard market settlement periods. As the revenue associated with such trades
was not material at 31 December 2016 and 31 December 2015 this risk has not
been included in our report in the current year. In relation to the valuation
of group tax provisions, this risk required relatively less audit effort than
in previous years, largely due to a reduction in the Group's potential tax
exposures.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
Name Passing revenue
Risk description Name Passing revenue is earned for the service of matching buyers and sellers of financial instruments. The Group is not a counterparty to the trade and commissions are invoiced for the service provided by the Group. It accounts for approximately 76% of
the Group's broking revenue.As invoices for services provided are not issued until the end of each month, the cash collection period is typically longer than for Matched Principal revenue. The risk of misstatement of revenue increases where the invoice
becomes past due or where post year-end trade adjustments or credit notes arise.As the acquisition of ICAP was completed on 30 December 2016, no Name Passing revenue is reflected in the 2016 financial statements in respect of ICAP and therefore this risk
was only applicable to the Tullett Prebon business in 2016.
How the scope of our audit responded to the risk We tested the operating effectiveness of relevant controls relating to Name Passing invoicing and cash collection.We confirmed a sample of trades to cash received throughout the year. We agreed a further sample of Name Passing transactions, which were
outstanding at year-end, to cash received post year-end. We tested the aged debtor analysis through re-performance and, focusing on higher risk aged items, we confirmed that revenue recognised on each transaction was supportable by obtaining evidence to
corroborate the validity of the underlying trade and reviewing communications with counterparties.We tested a sample of post year-end trade adjustments and credit notes to evaluate whether these items were accurate and valid.
Key observations Our testing of the effectiveness of internal controls over Name Passing invoicing and cash collection identified no issues. During 2016 the Group implemented improvements in controls over trade amendments. As the improved controls were not in place
throughout the year, we performed additional substantive testing of trade amendments. No issues were identified from this testing.No issues were identified through our detailed testing of cash receipts and aged debtors.We determined the recognition of Name
Passing revenue to be appropriate and in line with the Group's accounting policy.
Impairment of goodwill and other intangibles
Risk description As required by IAS 36, goodwill and other intangible assets are reviewed for impairment at least annually. Determining whether the goodwill of £1,063.9m, other intangible assets of £70.1m and other intangible assets arising on consolidation of £649.2m are
impaired requires an estimation of the recoverable amount of the Group's cash generating units ('CGUs'), using the higher of the value in use or fair value less costs to sell.The value in use takes into account expected future cash flows and requires the
selection of suitable discount rates and forecast future growth rates and is therefore inherently subjective. The value in use of each CGU is sensitive to changes in underlying assumptions. We focused our testing on the CGUs where we identified increased
sensitivity to the growth rate assumptions.The value in use method was used to assess the recoverable amount of all CGUs excluding ICAP.Following the acquisition of ICAP, £687.0m of goodwill and £639.0m of other intangible assets were recognised as at 31
December 2016. The provisional amount of goodwill and other intangible assets arising on the acquisition of ICAP have not been allocated to CGUs due to the proximity of the acquisition to the year-end and therefore the Company is not required to assess the
ICAP related goodwill for impairment as at 31 December 2016. As permitted by IAS 36, the initial allocation to CGUs will be completed before the end of 2017.No impairment was recorded in the year for any of the CGUs.
How the scope of our audit responded to the risk We challenged the identification of the Group's CGUs, by assessing whether the CGUs reflected the lowest aggregation of assets that generate largely independent cash flows.We performed detailed analysis and challenge of the Group's assumptions used in the
annual impairment review, in particular forecast future growth rates, the cash flow projections and discount rates used by the Group in its impairment tests of the CGUs. We challenged cash flow forecasts and growth rates by evaluating recent performance,
trend analysis and comparing growth rates to those achieved historically and to external market data where available. Our internal valuations specialists independently derived discount rates which we compared to the rates used by the Group and we
benchmarked discount and growth rates to available external peer group data.As the impairment tests for the Europe and the Middle East, North America and Asia Pacific CGUs were sensitive to changes in the growth rate assumption, we assessed the point at
which an impairment would occur and considered whether this was a reasonably possible change which required additional disclosure.
Key observations We concluded that the Directors' impairment test was appropriate and that no impairment of goodwill and other intangibles has arisen. We determined the identification of CGUs to be appropriate.The cash flow forecasts used in the annual impairment review
were consistent with the most recent financial budgets considered by the Board and were reasonable in the context of recent business performance.The discount rates used by the Group are within a reasonable range of rates implied by both our internally
derived discount rates and peer benchmarks. The impairment tests are insensitive to reasonably possible changes in discount rates.The growth rates used by management are reasonable and we considered that the disclosures made by the Directors that a
reasonably possible change in the growth rate assumptions for the Europe and the Middle East, North America and Asia Pacific CGUs would result in the carrying value of these CGUs exceeding their recoverable amount is appropriate.
Accounting for the acquisition of ICAP
Risk description The Group completed the acquisition of ICAP on 30 December 2016. The acquisition resulted in the recognition of £687.0m of goodwill and £639.0m of other intangible assets as at 31 December 2016.Accounting for the acquisition gives rise to two key areas of
management judgement and estimation uncertainty:· the valuation and completeness of £639.0m of separately identifiable intangible assets; and· the valuation and completeness of adjustments required to reflect the assets and liabilities of ICAP at
their fair value as at 30 December 2016.The Directors engaged external specialists to support their assessment of the completeness and valuation of intangible assets. A majority of the separately identifiable intangible assets comprise £601.0m relating to
customer contracts and relationships and £27.0m relating to the ICAP brand and trademarks and hence we have focused on testing the assumptions to which the valuation of these assets are most sensitive.As required by IFRS 3, the Directors have measured the
fair value of assets and liabilities based on facts and circumstances that existed as at the acquisition date. The Directors have provisionally determined that no adjustments are required to the carrying value of assets and liabilities in ICAP's
acquisition date balance sheet. The fair value of net assets acquired was £117.2m.
How the scope of our audit responded to the risk We audited the Group's accounting for the acquisition, specifically focusing on the valuation and completeness of separately identifiable intangible assets and fair value adjustments.We used our own internal valuation specialists to challenge the
conclusions reached by the Directors in determining the separately identifiable intangible assets arising on acquisition. Our audit procedures included:· assessing the objectivity and expertise of the Group's external specialist, meeting with them to
discuss their approach and the findings within their final report;· comparing the intangible assets recognised by the Group against a list of reasonably possible intangible assets for comparable businesses;· testing the valuation methodology
applied through comparison to industry practice;· challenging the cash flow forecasts by reference to historical performance and the appropriateness of the underlying assumptions;· challenging the appropriateness of other inputs and significant
assumptions used in valuing the customer contracts and relationships and the ICAP brand and trademarks; and· comparing the relative split between goodwill and other intangible assets recognised by the Group to recent and comparable acquisitions made by
similar companies.We have challenged the methodology applied by the Directors to determine that no fair value adjustments are required to the assets and liabilities of ICAP as at 30 December 2016 by independently assessing whether any additional fair value
adjustments should be made based on the known facts and circumstances.
Key observations The valuations and allocation are provisional and subject to change in the measurement period.We considered the provisional identification of the ICAP brand and trademarks, the customer contracts and relationships and the provisional valuation methodology
used to be appropriate and in line with industry practice.We considered the cash flow forecasts, key inputs and assumptions to be reasonable in the context of the known facts and circumstances and historical performance. The provisional allocation between
goodwill and other intangible assets is reasonable.No material fair value adjustments were identified through our testing.
Presentation and disclosure of acquisition, disposal and integration related items
Risk description The Group reports acquisition, disposal and integration related items of £63.2m before taxation. These include costs relating to the acquisition of ICAP of £16.8m and integration costs of £19.3m.There is a risk that items that reflect the underlying
performance of the Group are incorrectly presented as acquisition, disposal and integration related items. In addition, there is a risk that undue prominence is given to underlying results compared to the statutory results of the Group in the Annual
Report.
How the scope of our audit responded to the risk For a sample of acquisition, disposal and integration related items we obtained supporting evidence to confirm whether the items relate to acquisitions, disposals or integration or should be presented as part of the Group's underlying results.We read the
Annual Report and challenged the prominence given to underlying results relative to the Group's statutory results and whether the presentation was misleading. We read the description of the basis of underlying results and whether it was consistently
applied. We also tested the completeness and accuracy of the reconciliation between underlying and statutory results.
Key observations We identified no items within acquisition, disposal and integration related items that should be presented in underlying results. We considered that the presentation of the Group's underlying results is appropriately explained, is understandable and that
the reconciliation to the Group's statutory results is complete and accurate. We considered that appropriate prominence has been given to the statutory results in the Annual Report.
Our liability for this report, and for our full audit report on the financial
statements is to the Company's members as a body, in accordance with Chapter 3
of Part 16 of the Companies Act 2006. Our audit work has been undertaken so
that we might state to the Company's members those matters we are required to
state to them in an auditor's report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company's members as a body, for our audit
work, for our audit report or this report, or for the opinions we have
formed.
Deloitte LLP
Chartered Accountants and Statutory Auditor
14 March 2017
This information is provided by RNS
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