IFRS 15 early
adoption and presentation
Capita plc (‘Capita’) is today hosting a presentation for
institutional investors and analysts on the application of the
International Accounting Standards Board's IFRS 15, Revenue from
Contracts with Customers which, as previously stated, the Group
adopted from 1 January 2017. Capita’s
results for the first six months of 2017 are due to be released, as
planned, on 21 September and are expected to be in line with the
outlook provided in our AGM statement on 13
June 2017.
Summary of key points of adopting IFRS 15:
No impact on:
• Lifetime profitability of contracts
• Cash flow of contracts
• Majority of transactional businesses.
Key impacts:
• The main changes for Capita from the adoption of IFRS 15 are
in its long-term contracts and software business.
• Revenue is more evenly phased over the life of contracts and
active software licences in line with the delivery of valued
outcomes to clients and, consequently, the timing of profits is
re-profiled.
• Capita will potentially recognise lower profits or losses in
the early years of contracts where there are significant upfront
restructuring costs or higher operating costs prior to
transformation, with a compensating increase in profits in later
years. The total net impact at Group level is a function of the
balance of contracts in early or late stage of their life cycle at
transition to IFRS 15.
• Balance sheet includes:
• New “contract fulfilment assets” created in the process of
transforming services
• Deferred income in relation to contracts where payments have
been received from clients to undertake transformation prior to the
planned outcomes being delivered.
Nick Greatorex, Group Finance
Director, commented:
“We believe early adoption of IFRS 15 is a sensible step to take
in this transitional year for Capita. Adoption in 2017 immediately
provides a consistent basis for our investors to evaluate our
business going forwards. It ensures we have embedded the new
standard well in advance of the 2018 deadline and is in line with
our strategy of simplifying the business and improving
transparency.
The new standard more closely aligns our revenue recognition
with the commercial substance of our contracts. The application of
IFRS 15 has no impact on the lifetime profitability or cash flow of
our contracts, or the majority of our transactional businesses.
Instead, the resulting changes in the timing of revenue and cost
recognition more closely aligns our financial results with the
timing of the delivery of our valued outcomes to clients.
For comparative purposes, we have applied the new standard to
our 2016 financial results with support from EY and these financial
results have been reviewed by KPMG.”
Capita’s adoption of IFRS 15
Revenue recognition
• The standard introduces a clear link between the value
provided to a client via the transformation and delivery of a
service and the timing of revenue recognition. For the majority of
Capita’s contracts this value is delivered over time, regardless of
upfront restructuring, necessary transformation activities and any
price step downs over the life of the contract. This means that
under IFRS 15 revenue will be recognised more evenly over the
lifetime of those contracts, which will affect 2017 and future
years.
• Similarly, for software licences where the Group retains an
active role in the updating and maintenance of a sold licence to
ensure its continuing value to the client, revenue will be
recognised evenly over the expected length of the contract or
related client relationship. Again, this has resulted in a change
in the phasing of when revenue is recognised, which will affect
2017 and future years.
Profits
• As a result of the above, the timing of revenue and therefore
profits recognised on contracts is likely to be later across the
life of the contracts, with potentially lower profits or losses in
the early years of contracts and potentially higher profits in
later years. This occurs where there are significant upfront
restructuring, transformation, or higher operating costs prior to
completion of transformation.
• Profits are further impacted by a new class of asset,
“contract fulfilment assets”, which are created in the process of
transforming a service and amortised over the life of the
associated contract, such as process mapping and design.
• Total net impact for the Group is a function of the balance of
contracts in early or late stages of their life cycle at transition
to IFRS 15 and in subsequent years.
Balance sheet
• The balance sheet includes:
• The new contract fulfilment assets; and
• An increased level of deferred income in relation to contracts
where cash payment has been received in advance of revenue
recognition associated with delivering specific planned outcomes
for clients. The majority of deferred income will unwind within the
following 12 months and is expected to be replaced by similar
advanced payments subject to additions or changes to the Group’s
contract portfolio.
• The recognition of the significant deferred income balances
results in the Group recording net liabilities on 1 January
2016. As noted above, the deferred income reflects cash
payments received in advance of when revenue will now be recognised
on the majority of our contracts and the accounting liability
represents our promise to deliver planned outcomes for clients in
future periods.
Application of IFRS 15 to Capita’s 2016 results:
As part of its early adoption of IFRS 15 and for consistent
comparability, Capita has applied the new standard to its 2016
financial results and these are published today. The Capita Asset
Services businesses, the disposal of which was announced on 23
June, have been treated as a discontinued operation.
The changes reflected in the 2016 results under IFRS 15
predominantly relate to the timing of revenue recognition with
revenues now recognised later across the life of contracts as
valued outcomes are delivered to clients.
Revenue, under IFRS 15, in 2016 therefore reflects changes in
the timing of recognition of transformation revenue and price step
downs across some major contracts, the impact of recognising
revenue over time for certain clients within our software business
rather than at the point of sale of licences and additionally an
adjustment in moving from principal to agency accounting in certain
transactional businesses.
Profit before tax, under IFRS 15, in 2016 therefore reflects the
aforementioned changes in the timing of revenue recognition across
some major contracts and software licences, the amortisation charge
of the new contract fulfilment assets, and the inclusion of certain
non-recurring items previously disclosed within non-underlying.
Under IFRS 15, 2016 results major movements
In 2016 the impact of applying IFRS 15 was a reduction in
underlying revenue from £4.6bn (excluding Capita Asset Services
businesses £0.3bn) to £4.4bn, approximately three fifths of which
is due to the re-profiling of long-term contracted
revenue. The remaining changes result from a move from
principal to agent basis of revenue recognition for certain
transactional revenue under IFRS 15, which has no impact on
profit.
In 2016 the impact of applying IFRS 15 was a reduction in
underlying operating profit from £481m to £335m. This is as a
result of a blend of impacts, the most significant of which are the
aforementioned change in long-term contracted revenue and moving
last year’s Group re-structuring provision of £59m into underlying
profits. This is consistent with the approach Capita will
adopt in the future where the impact of significant new contracts
and restructuring will form part of the Group’s underlying
earnings, albeit disclosed clearly to show the impact these items
have in the first year that they arise.
The Group’s net assets move from £483m to net liabilities of
£553m. The £1bn swing can be summarised as follows.
Under IFRS 15 Capita ended 2016 with deferred income of £1.6bn, an
increase of £1.3bn. This represents cash received in 2016
which is for services delivered or to be delivered but not
recognised as revenue until 2017 or later. Furthermore,
accrued income reduces by some £250m with the re-profiling of when
revenue is recognised. These were partially offset by contract
fulfilment assets of some £300m at the end of the year, being costs
incurred on improving services for the long term which have been
capitalised under IFRS 15 and will be released over the relevant
contract term, and the recognition of a net deferred tax asset of
some £200m.
Capita's 2016 debt covenants do not need to be retested and for
2017 the covenants have been updated to include the adoption of
IFRS 15 with effect from 1 January
2017.
Finally, cash flow does not change. In 2016 Capita generated
£750m of operating cash and this remains the case.
| 2016 full
year |
IFRS
15 |
Pre-IFRS 15 |
| Underlying
revenue |
£4,357m |
£4,582m |
| Underlying operating
profit |
£335m |
£481m |
| Net
(liabilities)/assets |
£(553)m |
£483m |
| Underlying operating
cash |
£750m |
£750m |
Presentation and webcast
Today’s presentation will commence at 08:30 UK time and is
expected to conclude at around 11:00 UK time, including a question
and answer session. There will be a live audio webcast of the
presentation at 08:30 UK time and slides will be available on the
Capita website at that time.
Link:
http://www.investis-live.com/capita/5994012e0954050c000f1919/qzmn
To register for the webcast please click on the link above and
follow the on-screen instructions.
-ENDS-
This announcement contains inside
information.
For further information:
Capita plc
Tel: 020 7799 1525
Shona Nichols, Executive Director,
Communications
Andrew Ripper, Head of Investor
Relations
Media enquiries
Powerscourt Tel: 020 7250 1446
capita@powerscourt-group.com
Victoria Palmer-Moore, Peter Ogden and Andy
Jones
About Capita
Capita is a leading UK provider of technology enabled
customer and business process services and integrated professional
support services. With 73,000 people at over 450 sites, including
98 business centres across the UK, Europe, India
and South Africa, Capita uses its
expertise, infrastructure and scale benefits to transform its
clients' services, driving down costs and adding value. Capita is
quoted on the London Stock Exchange (CPI.L). Further information on
Capita can be found at: www.capita.com.
Financial statements under IFRS 15
Revenue from Contracts with Customers
The Group early adopted IFRS 15 Revenue from Contracts with
Customers ("IFRS 15") on 1 January
2017 using the full retrospective method. This document
details the Group's new accounting policy for revenue and shows the
impact of the adoption of IFRS 15 on the Group’s primary financial
statements.
The cumulative effect of the adoption of IFRS 15 has resulted in
a decrease in net assets of £942.3 million as at 1 January 2016 (31
December 2016: £1,036.3million). This reflects an important
change in accounting policy as the Group moves from one based
predominantly on percentage of completion revenue recognition to a
methodology that is focused on aligning revenue recognition to the
delivery of solutions and value to its customers.
Discontinued
operation
The Capita Asset Services businesses, the disposal of which was
announced on the 23 June 2017, have
been treated as a discontinued operation in this restatement so as
to be in line with how these will be presented in the 2017 half
year report. As at 31 December 2016,
the disposal of Capita Asset Services did not meet the criteria to
be held for sale.
Initial adoption
of IFRS 15
The standard has an effective date of 1
January 2018 but the Group has decided to early adopt this
standard with a date of initial application to the Group of
1 January 2017.
IFRS 15 replaces all existing revenue requirements in IFRS and
applies to all revenue arising from contracts with customers unless
the contracts are within the scope of other standards such as IAS
17 Leases.
The standard outlines the principles entities must apply to
measure and recognise revenue with the core principle being that
entities should recognise revenue at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for fulfilling its performance obligations to a
customer.
The principles in IFRS 15 must be applied using the following 5
step model:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
in the contract
- Recognise revenue when or as the entity satisfies its
performance obligations
The standard requires entities to exercise considerable
judgement taking into account all the relevant facts and
circumstances when applying each step of this model to its
contracts with customers. The standard also specifies how to
account for the incremental costs of obtaining a contract and the
costs directly related to fulfilling a contract as well as
requirements covering matters such as licences of intellectual
property, warranties, principal versus agent assessment and options
to acquire additional goods or services.
The Group has applied IFRS 15 fully retrospectively in
accordance with paragraph C3 (a) of the standard restating the
prior period’s comparatives and electing to use the following
expedients:
- In respect of completed contracts, the Group will not restate
contracts that (i) begin and end within the same annual reporting
period; or (ii) are completed contracts at the beginning of the
earliest period presented (para. C5(a));
- In respect of completed contracts that have variable
consideration, the Group will use the transaction price at the date
the contract was completed rather than estimating variable
consideration amounts in the comparative periods (para. C5(b));
and
- For all reporting periods presented before the date of initial
application, the Group will not disclose the amount of the
transaction price allocated to the remaining performance
obligations or an explanation of when the Group expects to
recognise that amount as revenue (para C5(c)).
Accounting policy
for revenue
The Group generates revenue largely in the UK and Europe.
The Group operates a number of diverse businesses and
accordingly applies a variety of methods for revenue recognition,
based on the principles set out in IFRS 15. Many of the
contracts entered into are long term and complex in nature given
the breadth of solutions the Group offers.
The revenue and profits recognised in any period are based on
the delivery of performance obligations and an assessment of when
control is transferred to the customer.
In determining the amount of revenue and profits to record, and
related balance sheet items (such as contract fulfilment assets,
capitalisation of costs to obtain a contract, trade receivables,
accrued income and deferred income) to recognise in the period,
management is required to form a number of key judgements and
assumptions. This includes an assessment of the costs the Group
incurs to deliver the contractual commitments and whether such
costs should be expensed as incurred or capitalised. These
judgements are inherently subjective and may cover future events
such as the achievement of contractual milestones, performance KPIs
and planned cost savings. In addition, for certain contracts, key
assumptions are made concerning contract extensions and amendments,
as well as opportunities to use the contract developed systems and
technologies on other similar projects.
Revenue is recognised either when the performance obligation in
the contract has been performed (so 'point in time' recognition) or
'over time' as control of the performance obligation is transferred
to the customer.
For all contracts, the Group determines if the arrangement with
a customer creates enforceable rights and obligations. This
assessment results in certain Master Service Agreements (‘MSA’s’)
not meeting the definition of a contract under IFRS 15 and as such
the individual call-off agreements, linked to the MSA, are treated
as individual contracts.
The Group enters into contracts which contain extension periods,
where either the customer or both parties can choose to extend the
contract or there is an automatic annual renewal, and/or
termination clauses that could impact the actual duration of the
contract. Judgement is applied to assess the impact that
these clauses have when determining the appropriate contract term.
The term of the contract impacts both the period over which revenue
from performance obligations may be recognised and the period over
which contract fulfilment assets and capitalised costs to obtain a
contract are expensed.
For contracts with multiple components to be delivered such as
transformation, transitions and the delivery of outsourced
services, management applies judgement to consider whether those
promised goods and services are (i) distinct - to be accounted for
as separate performance obligations; (ii) not distinct - to be
combined with other promised goods or services until a bundle is
identified that is distinct or (iii) part of a series of distinct
goods and services that are substantially the same and have the
same pattern of transfer to the customer.
At contract inception the total transaction price is estimated,
being the amount to which the Group expects to be entitled and has
rights to under the present contract. This includes an assessment
of any variable consideration where the Group's performance may
result in additional revenues based on the achievement of agreed
KPIs. Such amounts are only included based on the expected value or
the most likely outcome method, and only to the extent that it is
highly probable that no revenue reversal will occur.
The transaction price does not include estimates of
consideration resulting from change orders for additional goods and
services unless these are agreed.
Once the total transaction price is determined, the Group
allocates this to the identified performance obligations in
proportion to their relative stand-alone selling prices and
recognises revenue when (or as) those performance obligations are
satisfied. The Group infrequently sells standard products
with observable standalone prices due to the specialised services
required by customers and therefore the Group applies judgement to
determine an appropriate standalone selling price. More frequently,
the Group sells a customer bespoke solution, and in these cases the
Group typically uses the expected cost plus margin or a
contractually stated price approach to estimate the standalone
selling price of each performance obligation.
The Group may offer price step downs during the life of a
contract, but with no change to the underlying scope of services to
be delivered. In general, any such variable consideration, price
step down or discount is included in the total transaction price to
be allocated across all performance obligations unless it relates
to only one performance obligation in the contract.
For each performance obligation, the Group determines if revenue
will be recognised over time or at a point in time. Where the Group
recognises revenue over time for long term contracts, this is in
general due to the Group performing and the customer simultaneously
receiving and consuming the benefits provided over the life of the
contract.
For each performance obligation to be recognised over time, the
Group applies a revenue recognition method that faithfully depicts
the Group’s performance in transferring control of the goods or
services to the customer. This decision requires assessment of the
real nature of the goods or services that the Group has promised to
transfer to the customer. The Group applies the relevant output or
input method consistently to similar performance obligations in
other contracts.
When using the output method the Group recognises revenue on the
basis of direct measurements of the value to the customer of the
goods and services transferred to date relative to the remaining
goods and services under the contract. Where the output method is
used, in particular for long term service contracts where the
series guidance is applied (see below for further details), the
Group often uses a method of time elapsed which requires minimal
estimation. Certain long term contracts use output methods based
upon estimation of number of users, level of service activity or
fees collected.
If performance obligations in a contract do not meet the over
time criteria, the Group recognises revenue at a point in time (see
below for further details).
The Group disaggregates revenue from contracts with customers by
contract type, as management believe this best depicts how the
nature, amount, timing and uncertainty of the Group’s revenue and
cash flows are affected by economic factors:
Contract term
longer than 2 years
The Group provides a range of services in the majority of its
reportable segments under customer contracts with a duration of
more than two years.
The nature of contracts or performance obligations categorised
within this revenue type is diverse and includes (i) long term
outsourced service arrangements in the public and private sectors;
and (ii) active software licence arrangements (see definition
below).
The service contracts in this category include contracts with
either a single or multiple performance obligations.
The Group considers that the services provided meet the
definition of a series of distinct goods and services as they are
(i) substantially the same and (ii) have the same pattern of
transfer (as the series constitutes services provided in distinct
time increments (e.g., daily, monthly, quarterly or annual
services)) and therefore treats the series as one performance
obligation. Even if the underlying activities performed by the
Group to satisfy a promise vary significantly throughout the day
and from day to day, that fact, by itself, does not mean the
distinct goods or services are not substantially the same. For the
majority of long service contracts with customers in this category,
the Group recognises revenue using the output method as it best
reflects the nature in which the Group is transferring control of
the goods or services to the customer
Active software licences are those where the Group has a
continuing involvement after the sale or transfer of control to the
customer, which significantly affects the intellectual property to
which the customer has rights. The Group is in a majority of cases
responsible for any maintenance, continuing support, updates and
upgrades and accordingly the sale of the initial software is not
distinct. The Group’s accounting policy for licences is discussed
in more detail below.
Over time service
with contract length less than 2 years
The nature of contracts or performance obligations categorised
within this revenue type is diverse and includes (i) short term
outsourced service arrangements in the public and private sectors;
and (ii) software maintenance contracts.
The Group has assessed that maintenance and support (i.e.
on-call support, remote support) for software licences is a
performance obligation that can be considered capable of being
distinct and separately identifiable in a contract if the customer
has a passive licence. These recurring services are substantially
the same as the nature of the promise is for the Group to 'stand
ready' to perform maintenance and support when required by the
customer. Each day of standing ready is then distinct from each
following day and is transferred in the same pattern to the
customer.
Transactional
(Point in time) contracts
The Group delivers a range of goods or services in all
reportable segments that are transactional services for which
revenue is recognised at the point in time when control of the
goods or services has transferred to the customer. This may be at
the point of physical delivery of goods and acceptance by a
customer or when the customer obtains control of an asset or
service in a contract with customer-specified acceptance
criteria.
The nature of contracts or performance obligations categorised
within this revenue type is diverse and includes (i) provision of
IT hardware goods; (ii) passive software licence agreements; (iii)
commission received as agent from the sale of third party software;
and (iv) fees received in relation to delivery of professional
services.
Passive software licences are licences which have significant
stand-alone functionality and the contract does not require, and
the customer does not reasonably expect, the Group to undertake
activities that significantly affect the licence. Any ongoing
maintenance or support services for passive licences are likely to
be separate performance obligations. The Group’s accounting policy
for licences is discussed in more detail below.
Contract
modifications
The Group’s contracts are often amended for changes in contract
specifications and requirements. Contract modifications exist when
the amendment either creates new or changes the existing
enforceable rights and obligations. The effect of a contract
modification on the transaction price and the Group’s measure of
progress for the performance obligation to which it relates, is
recognised as an adjustment to revenue in one of the following
ways:
- Prospectively as an additional separate contract;
- Prospectively as a termination of the existing contract and
creation of a new contract;
- As part of the original contract using a cumulative catch up;
or
- As a combination of b) and c).
For contracts for which the Group has decided there is a series
of distinct goods and services that are substantially the same and
have the same pattern of transfer where revenue is recognised over
time, the modification will always be treated under either a) or
b). d) may arise when a contract has a part termination and a
modification of the remaining performance obligations.
The facts and circumstances of any contract modification are
considered individually as the types of modifications will vary
contract by contract and may result in different accounting
outcomes.
Judgement is applied in relation to the accounting for such
modifications where the final terms or legal contracts have not
been agreed prior to the period end as management need to determine
if a modification has been approved and if it either creates new or
changes existing enforceable rights and obligations of the parties.
Depending upon the outcome of such negotiations, the timing and
amount of revenue recognised may be different in the relevant
accounting periods. Modification and amendments to contracts are
undertaken via an agreed formal process. For example, if a change
in scope has been approved but the corresponding change in price is
still being negotiated, management use their judgement to estimate
the change to the total transaction price. Importantly any
variable consideration is only recognised to the extent that it is
highly probably that no revenue reversal will occur.
Principal versus
agent
The Group has arrangements with some of its customers whereby it
needs to determine if it acts as a principal or an agent as more
than one party is involved in providing the goods and services to
the customer. The Group acts as a principal if it controls a
promised good or service before transferring that good or service
to the customer. The Group is an agent if its role is to arrange
for another entity to provide the goods or services. Factors
considered in making this assessment are most notably the
discretion the Group has in establishing the price for the
specified good or service, whether the Group has inventory risk and
whether the Group is primarily responsible for fulfilling the
promise to deliver the service or good.
This assessment of control requires judgement in particular in
relation to certain service contracts. An example, is the
provision of certain recruitment and learning services where the
Group may be assessed to be agent or principal dependent upon the
facts and circumstances of the arrangement and the nature of the
services being delivered.
Where the Group is acting as a principal, revenue is recorded on
a gross basis. Where the Group is acting as an agent revenue is
recorded at a net amount reflecting the margin earned.
Licences
Software licences delivered by the Group can either be right to
access (‘active’) or right to use (‘passive’) licences. Active
licences are licences which require continuous upgrade and updates
for the software to remain useful, all other licences are treated
as passive licences. The assessment of whether a licence is
active or passive involves judgement. The key determinant of
whether a licence is active is whether the Group is required to
undertake activities that significantly affect the licensed
intellectual property (or the customer has a reasonable expectation
that it will do so) and the customer is, therefore, exposed to
positive or negative impacts resulting from those changes.
When software upgrades are sold as part of the software licence
agreement (i.e. software upgrades are promised to the customer),
the Group applies judgement to assess whether the software upgrade
is distinct from the licence (i.e. a separate performance
obligation). If the upgrade is considered fundamental to the
ongoing use of the software by the customer, the upgrades are not
considered distinct and not accounted for as a separate performance
obligation.
The Group considers for each contract that includes a separate
licence performance obligation all the facts and circumstances in
determining whether the licence revenue is recognised over time or
at a point in time from the go live date of the licence.
Contract related
assets and liabilities
As a result of the contracts which the Group enters into
with its customers, a number of different assets and liabilities
are recognised on the Group’s balance sheet. These include but are
not limited to:
- Property, plant and equipment*
- Intangible assets*
- Contract fulfilment assets^
- Contract assets derived from costs to obtain a contract^
- Trade receivables*
- Accrued income^
- Deferred income^
* No change in the accounting policies for these assets as a
result of the adoption of IFRS 15
^ Refer below for the accounting policy applied following the
adoption of IFRS 15
Contract
fulfilment assets
Contract fulfilment costs are divided into (i) costs that give
rise to an asset; and (ii) costs that are expensed as incurred.
When determining the appropriate accounting treatment for such
costs, the Group firstly considers any other applicable standards.
If those other standards preclude capitalisation of a particular
cost, then an asset is not recognised under IFRS 15.
If other standards are not applicable to contract fulfilment
costs, the Group applies the following criteria which, if met,
result in capitalisation: (i) the costs directly relate to a
contract or to a specifically identifiable anticipated contract;
(ii) the costs generate or enhance resources of the entity that
will be used in satisfying (or in continuing to satisfy)
performance obligations in the future; and (iii) the costs are
expected to be recovered. The assessment of this criteria
requires the application of judgement, in particular when
considering if costs generate or enhance resources to be used to
satisfy future performance obligations and whether costs are
expected to be recoverable.
The Group regularly incurs costs to deliver its outsourcing
services in a more efficient way (often referred to as
‘transformation’ costs). These costs may include process mapping
and design, system development, project management, hardware
(generally in scope of the Group’s accounting policy for property,
plant and equipment), software licence costs (generally in scope of
the Group’s accounting policy for intangible assets), recruitment
costs and training.
The Group has determined that, where the relevant specific
criteria are met, the costs for (i) process mapping and design;
(ii) system development; and (iii) project management are likely to
qualify to be capitalised as contract fulfilment assets.
Capitalisation of
costs to obtain a contract
The incremental costs of obtaining a contract with a customer
are recognised as an asset if the Group expects to recover them.
The Group incurs costs such as bid costs, legal fees to draft a
contract and sales commissions when it enters into a new
contract.
Judgement is applied by the Group when determining what costs
qualify to be capitalised in particular when considering whether
these costs are incremental and whether these are expected to be
recoverable. For example, the Group considers which type of
sales commissions are incremental to the cost of obtaining specific
contracts and the point in time when the costs will be
capitalised.
The Group has determined that the following costs may be
capitalised as contract assets (i) legal fees to draft a contract
(once the Group has been selected as a preferred supplier for a
bid); and (ii) sales commissions that are directly related to
winning a specific contract.
Costs incurred prior to selection as preferred supplier are not
capitalised but are expensed as incurred.
Utilisation,
derecognition and impairment of contract fulfilment assets and
capitalised costs to obtain a contract
The Group utilises contract fulfilment assets and capitalised
costs to obtain a contract to cost of sales over the expected
contract period using a systematic basis that mirrors the pattern
in which the Group transfers control of the service to the
customer. The utilisation charge is included within cost of
sales. Judgement is applied to determine this period, for
example whether this expected period would be the contract term or
a longer period such as the estimated life of the customer
relationship for a particular contract if, say, renewals are
expected.
A contract fulfilment asset or capitalised costs to obtain a
contract is derecognised either when it is disposed of or when no
further economic benefits are expected to flow from its use or
disposal.
Management is required to determine the recoverability of
contract related assets within property, plant and equipment,
intangible assets as well as contract fulfilment assets,
capitalised costs to obtain a contract, accrued income and trade
receivables. At each reporting date, the Group determines whether
or not the contract fulfilment assets and capitalised costs to
obtain a contract are impaired by comparing the carrying amount of
the asset to the remaining amount of consideration that the Group
expects to receive less the costs that relate to providing services
under the relevant contract. In determining the estimated amount of
consideration, the Group uses the same principles as it does to
determine the contract transaction price, except that any
constraints used to reduce the transaction price will be removed
for the impairment test.
Where the relevant contracts or specific performance obligations
are demonstrating marginal profitability or other indicators of
impairment, judgement is required in ascertaining whether or not
the future economic benefits from these contracts are sufficient to
recover these assets. In performing this impairment
assessment, management is required to make an assessment of the
costs to complete the contract. The ability to accurately forecast
such costs involves estimates around cost savings to be achieved
over time, anticipated profitability of the contract, as well as
future performance against any contract-specific KPIs that could
trigger variable consideration, or service credits. Where a
contract is anticipated to make a loss, these judgements are also
relevant in determining whether or not an onerous contract
provision is required and how this is to be measured.
Deferred and
accrued income
The Group’s customer contracts include a diverse range of
payment schedules dependent upon the nature and type of goods and
services being provided. The Group often agrees payment
schedules at the inception of long term contracts under which it
receives payments throughout the term of the contracts. These
payment schedules may include performance-based payments or
progress payments as well as regular monthly or quarterly payments
for ongoing service delivery. Payments for transactional
goods and services may be at delivery date, in arrears or part
payment in advance.
Where payments made are greater than the revenue recognised at
the period end date, the Group recognises a deferred income
contract liability for this difference. Where payments made are
less than the revenue recognised at the period end date, the Group
recognises an accrued income contract asset for this
difference.
Property
commercialisation
Part of the Group’s strategy is to create and deliver maximum
value from assets that are either owned by its customers or are
acquired by the Group as part of a wider transaction. By combining
the Group’s capabilities with the expertise and assets of any
organisation, the Group can significantly increase the value that
can be generated from often under-utilised assets. Our strategy
often involves the commercialisation of property assets, where the
Group will invest in real estate improvements to maximise the
future capital value or commercial letting potential. Such an
investment approach can generate substantial benefits that can be
realised up-front or over time. Examples of up-front value creation
include entering into transactions when current market values offer
opportunities to generate immediate shareholder returns, with
opportunities for continued investment in the underlying asset. For
example, the Group will acquire property with a view to resale and
subsequently complete a sale and lease back transaction resulting
in revenue and profit recorded in the year. The Group applies
judgement over the categorisation of such transactions as operating
or finance leases.
Consolidated income statement under
IFRS 15
|
Adjustment |
As reported, six months ended 30 June 2016 |
|
Discontinued operations |
Impact of IFRS 15 |
|
Under IFRS 15, six months ended 30 June 2016 |
|
|
Underlying |
Business exit |
Specific items |
Total |
|
Underlying |
Specific items |
Underlying |
Specific items |
|
Underlying |
Business exit |
Specific items |
Total |
|
|
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
| Revenue |
A,B,C |
2,405.4 |
|
24.6 |
|
— |
|
2,430.0 |
|
|
(147.3) |
|
— |
|
(126.8) |
|
— |
|
|
2,131.3 |
|
24.6 |
|
— |
|
2,155.9 |
| Cost of sales |
A,D |
(1,716.9) |
|
(17.9) |
|
— |
|
(1,734.8) |
|
|
57.2 |
|
— |
|
3.1 |
|
— |
|
|
(1,656.6) |
|
(17.9 |
) |
— |
|
(1,674.5) |
| Gross profit |
|
688.5 |
|
6.7 |
|
— |
|
695.2 |
|
|
(90.1) |
|
— |
|
(123.7) |
|
— |
|
|
474.7 |
|
6.7 |
|
— |
|
481.4 |
| Administrative
expenses |
H |
(370.9) |
|
(6.7) |
|
(81.3 |
) |
(458.9) |
|
|
62.2 |
|
2.6 |
|
— |
|
— |
|
|
(308.7) |
|
(6.7 |
) |
(78.7 |
) |
(394.1) |
| Operating
profit |
|
317.6 |
|
— |
|
(81.3 |
) |
236.3 |
|
|
(27.9) |
|
2.6 |
|
(123.7) |
|
— |
|
|
166.0 |
|
— |
|
(78.7 |
) |
87.3 |
| Net finance costs |
|
(32.3) |
|
— |
|
(17.8 |
) |
(50.1) |
|
|
— |
|
0.1 |
|
— |
|
— |
|
|
(32.3 |
) |
— |
|
(17.7 |
) |
(50.0) |
| Loss on disposal |
|
— |
|
(0.1) |
|
— |
|
(0.1) |
|
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
(0.1 |
) |
— |
|
(0.1) |
| Profit before
tax |
|
285.3 |
|
(0.1) |
|
(99.1) |
|
186.1 |
|
|
(27.9) |
|
2.7 |
|
(123.7) |
|
— |
|
|
133.7 |
|
(0.1 |
) |
(96.4 |
) |
37.2 |
| Income tax
expense |
E |
(52.8) |
|
— |
|
18.7 |
|
(34.1) |
|
|
4.4 |
|
(0.5 |
) |
27.4 |
|
— |
|
|
(21.0 |
) |
— |
|
18.2 |
|
(2.8) |
| Profit for the
period from continuing operations |
|
232.5 |
|
(0.1) |
|
(80.4) |
|
152.0 |
|
|
(23.5) |
|
2.2 |
|
(96.3) |
|
— |
|
|
112.7 |
|
(0.1 |
) |
(78.2 |
) |
34.4 |
| Profit for the period
from discontinued operations |
|
— |
|
— |
|
— |
|
— |
|
|
23.5 |
|
(2.2) |
|
— |
|
— |
|
|
— |
|
23.5 |
|
(2.2 |
) |
21.3 |
| Total profit for
the period |
|
232.5 |
|
(0.1) |
|
(80.4) |
|
152.0 |
|
|
— |
|
— |
|
(96.3) |
|
— |
|
|
112.7 |
|
23.4 |
|
(80.4) |
|
55.7 |
| Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Owners of the
Company |
|
227.1 |
|
(0.1) |
|
(78.1 |
) |
148.9 |
|
|
|
|
(96.7) |
|
— |
|
|
106.9 |
|
23.4 |
|
(78.1 |
) |
52.2 |
| Non-controlling
interests |
|
5.4 |
|
— |
|
(2.3 |
) |
3.1 |
|
|
|
|
0.4 |
|
— |
|
|
5.8 |
|
— |
|
(2.3 |
) |
3.5 |
|
|
232.5 |
|
(0.1) |
|
(80.4 |
) |
152.0 |
|
|
|
|
(96.3 |
) |
— |
|
|
112.7 |
|
23.4 |
|
(80.4 |
) |
55.7 |
| Earnings per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| – basic |
|
34.24 |
p |
(0.02) |
p |
(11.78) |
p |
22.45 |
p |
|
(3.54) |
p |
0.33 |
p |
(14.58) |
p |
— |
p |
|
16.12 |
p |
(0.02) |
p |
(11.44) |
p |
4.66p |
| – diluted |
|
34.05 |
p |
(0.01) |
p |
(11.71) |
p |
22.33 |
p |
|
(3.52) |
p |
0.33 |
p |
(14.50) |
p |
— |
p |
|
16.03 |
p |
(0.01) |
p |
(11.38) |
p |
4.63p |
| Total operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| – basic |
|
34.24 |
p |
(0.02) |
p |
(11.78) |
p |
22.45 |
p |
|
— |
p |
— |
p |
(14.58) |
p |
— |
p |
|
16.12 |
p |
3.53 |
p |
(11.78) |
p |
7.87p |
| – diluted |
|
34.05 |
p |
(0.01) |
p |
(11.71) |
p |
22.33 |
p |
|
— |
p |
— |
p |
(14.50) |
p |
— |
p |
|
16.03 |
p |
3.51 |
p |
(11.71) |
p |
7.83p |
Consolidated income statement under IFRS 15 (continued)
|
Adjustment |
As reported, year ended 31 December 2016 |
|
Discontinued operations |
Impact of IFRS 15 |
|
Under IFRS 15, year ended 31 December 2016 |
|
|
Underlying |
Business exit |
Specific items |
Total |
|
Underlying |
Specific items |
Underlying |
Specific items |
|
Underlying |
Business exit |
Specific items |
Total |
|
|
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
| Revenue |
A,B,C |
4,897.9 |
|
11.3 |
|
— |
|
4,909.2 |
|
|
(316.3 |
) |
— |
|
(224.3 |
) |
— |
|
|
4,357.3 |
|
11.3 |
|
— |
|
4,368.6 |
|
| Cost of sales |
A,D |
(3,627.7 |
) |
(6.7 |
) |
(7.5 |
) |
(3,641.9 |
) |
|
111.8 |
|
— |
|
97.4 |
|
(34.8 |
) |
|
(3,418.5 |
) |
(6.7 |
) |
(42.3 |
) |
(3,467.5 |
) |
| Gross profit |
|
1,270.2 |
|
4.6 |
|
(7.5 |
) |
1,267.3 |
|
|
(204.5 |
) |
— |
|
(126.9 |
) |
(34.8 |
) |
|
938.8 |
|
4.6 |
|
(42.3 |
) |
901.1 |
|
| Administrative
expenses |
H |
(728.9 |
) |
(1.8 |
) |
(388.3 |
) |
(1,119.0 |
) |
|
144.5 |
|
4.3 |
|
(19.8 |
) |
59.4 |
|
|
(604.2 |
) |
(1.8 |
) |
(324.6 |
) |
(930.6 |
) |
| Operating
profit |
|
541.3 |
|
2.8 |
|
(395.8 |
) |
148.3 |
|
|
(60.0 |
) |
4.3 |
|
(146.7 |
) |
24.6 |
|
|
334.6 |
|
2.8 |
|
(366.9 |
) |
(29.5 |
) |
| Net finance costs |
|
(66.0 |
) |
— |
|
(7.6 |
) |
(73.6 |
) |
|
(0.1 |
) |
(0.1 |
) |
— |
|
— |
|
|
(66.1 |
) |
— |
|
(7.7 |
) |
(73.8 |
) |
| Loss on disposal |
|
— |
|
0.1 |
|
— |
|
0.1 |
|
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
0.1 |
|
— |
|
0.1 |
|
| Profit before
tax |
|
475.3 |
|
2.9 |
|
(403.4 |
) |
74.8 |
|
|
(60.1 |
) |
4.2 |
|
(146.7 |
) |
24.6 |
|
|
268.5 |
|
2.9 |
|
(374.6 |
) |
(103.2 |
) |
| Income tax
expense |
E |
(87.9 |
) |
0.5 |
|
54.9 |
|
(32.5 |
) |
|
9.5 |
|
(0.9 |
) |
32.0 |
|
(3.9 |
) |
|
(46.4 |
) |
0.5 |
|
50.1 |
|
4.2 |
|
| Profit for the
period from continuing operations |
|
387.4 |
|
3.4 |
|
(348.5 |
) |
42.3 |
|
|
(50.6 |
) |
3.3 |
|
(114.7 |
) |
20.7 |
|
|
222.1 |
|
3.4 |
|
(324.5 |
) |
(99.0 |
) |
| Profit for the period
from discontinued operations |
|
— |
|
— |
|
— |
|
— |
|
|
50.6 |
|
(3.3 |
) |
— |
|
— |
|
|
— |
|
50.6 |
|
(3.3 |
) |
47.3 |
|
| Total profit for
the period |
|
387.4 |
|
3.4 |
|
(348.5 |
) |
42.3 |
|
|
— |
|
— |
|
(114.7 |
) |
20.7 |
|
|
222.1 |
|
54.0 |
|
(327.8 |
) |
(51.7 |
) |
| Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Owners of the
Company |
|
376.7 |
|
3.4 |
|
(343.2 |
) |
36.9 |
|
|
|
|
(115.5 |
) |
20.7 |
|
|
210.6 |
|
54.0 |
|
(322.5 |
) |
(57.9 |
) |
| Non-controlling
interests |
|
10.7 |
|
— |
|
(5.3 |
) |
5.4 |
|
|
|
|
0.8 |
|
— |
|
|
11.5 |
|
— |
|
(5.3 |
) |
6.2 |
|
|
|
387.4 |
|
3.4 |
|
(348.5 |
) |
42.3 |
|
|
|
|
(114.7 |
) |
20.7 |
|
|
222.1 |
|
54.0 |
|
(327.8 |
) |
(51.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Continuing
operations: |
|
56.67 |
p |
0.51 |
p |
(51.63) |
p |
5.55 |
p |
|
(7.61) |
p |
0.50 |
p |
(17.38) |
p |
3.11 |
p |
|
31.68 |
p |
0.51 |
p |
(48.02) |
p |
(15.83) |
p |
| – basic |
|
56.67 |
p |
0.51 |
p |
(51.63) |
p |
5.55 |
p |
|
(7.61) |
p |
0.50 |
p |
(17.38) |
p |
3.11 |
p |
|
31.68 |
p |
0.51 |
p |
(48.02) |
p |
(15.83) |
p |
| – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| – basic |
|
56.67 |
p |
0.51 |
p |
(51.63) |
p |
5.55 |
p |
|
— |
p |
— |
p |
(17.38) |
p |
3.11 |
p |
|
31.68 |
p |
8.12 |
p |
(48.52) |
p |
(8.71) |
p |
| – diluted |
|
56.67 |
p |
0.51 |
p |
(51.63) |
p |
5.55 |
p |
|
— |
p |
— |
p |
(17.38) |
p |
3.11 |
p |
|
31.68 |
p |
8.12 |
p |
(48.52) |
p |
(8.71) |
p |
Total adjustment to Total profit for the period due to the
adoption of IFRS 15 is £(114.7)m to underlying + £20.7m to specific
items, being £94.0m.
| Consolidated
balance sheet under IFRS 15 |
Adjustment |
As reported
1 Jan 2016 |
Impact of
IFRS 15 |
Under IFRS 15
1 Jan 2016 |
|
As reported
31 Dec 2016 |
Impact of
IFRS 15 |
Under IFRS 15
31 Dec 2016 |
|
|
£m |
£m |
£m |
|
£m |
£m |
£m |
| Non-current
assets |
|
|
|
|
|
|
|
|
| Property, plant and
equipment |
|
406.0 |
|
— |
|
406.0 |
|
|
394.7 |
|
— |
|
394.7 |
|
| Intangible assets |
|
2,810.0 |
|
— |
|
2,810.0 |
|
|
2,754.2 |
|
— |
|
2,754.2 |
|
| Contract fulfilment
assets |
D |
— |
|
277.6 |
|
277.6 |
|
|
— |
|
240.6 |
|
240.6 |
|
| Financial assets |
|
186.6 |
|
— |
|
186.6 |
|
|
337.6 |
|
— |
|
337.6 |
|
| Deferred taxation |
E |
18.8 |
|
162.8 |
|
181.6 |
|
|
32.0 |
|
190.4 |
|
222.4 |
|
| Trade and other
receivables |
F |
86.1 |
|
(41.7 |
) |
44.4 |
|
|
128.4 |
|
(79.6 |
) |
48.8 |
|
|
|
3,507.5 |
|
398.7 |
|
3,906.2 |
|
|
3,646.9 |
|
351.4 |
|
3,998.3 |
|
| Current
assets |
|
|
|
|
|
|
|
|
| Financial assets |
|
44.3 |
|
— |
|
44.3 |
|
|
92.6 |
|
— |
|
92.6 |
|
| Contract fulfilment
assets |
D |
— |
|
40.4 |
|
40.4 |
|
|
— |
|
41.6 |
|
41.6 |
|
| Disposal group assets
held for sale |
|
84.1 |
|
— |
|
84.1 |
|
|
— |
|
— |
|
— |
|
| Funds assets |
|
161.7 |
|
— |
|
161.7 |
|
|
173.6 |
|
— |
|
173.6 |
|
| Trade and other
receivables |
F |
1,011.9 |
|
(284.1 |
) |
727.8 |
|
|
976.0 |
|
(174.9 |
) |
801.1 |
|
| Cash |
|
534.0 |
|
— |
|
534.0 |
|
|
1,098.3 |
|
— |
|
1,098.3 |
|
|
|
1,836.0 |
|
(243.7 |
) |
1,592.3 |
|
|
2,340.5 |
|
(133.3 |
) |
2,207.2 |
|
| Total
assets |
|
5,343.5 |
|
155.0 |
|
5,498.5 |
|
|
5,987.4 |
|
218.1 |
|
6,205.5 |
|
| Current
liabilities |
|
|
|
|
|
|
|
|
| Trade and other
payables |
G |
1,144.0 |
|
(271.0 |
) |
873.0 |
|
|
1,297.6 |
|
(320.6 |
) |
977.0 |
|
| Deferred income |
B,C,G |
— |
|
1,157.3 |
|
1,157.3 |
|
|
— |
|
1,374.9 |
|
1,374.9 |
|
| Overdrafts |
|
448.7 |
|
— |
|
448.7 |
|
|
532.5 |
|
— |
|
532.5 |
|
| Financial
liabilities |
|
230.8 |
|
— |
|
230.8 |
|
|
224.2 |
|
— |
|
224.2 |
|
| Disposal group
liabilities held for sale |
|
40.4 |
|
— |
|
40.4 |
|
|
— |
|
— |
|
— |
|
| Funds liabilities |
|
161.7 |
|
— |
|
161.7 |
|
|
173.6 |
|
— |
|
173.6 |
|
| Provisions |
|
69.4 |
|
— |
|
69.4 |
|
|
112.5 |
|
— |
|
112.5 |
|
| Income tax
payable |
E |
46.2 |
|
— |
|
46.2 |
|
|
18.6 |
|
— |
|
18.6 |
|
|
|
2,141.2 |
|
886.3 |
|
3,027.5 |
|
|
2,359.0 |
|
1,054.3 |
|
3,413.3 |
|
| Non-current
liabilities |
|
|
|
|
|
|
|
|
| Trade and other
payables |
G |
29.3 |
|
(15.5 |
) |
13.8 |
|
|
35.1 |
|
(14.1 |
) |
21.0 |
|
| Deferred income |
B,C,G |
— |
|
228.5 |
|
228.5 |
|
|
— |
|
216.7 |
|
216.7 |
|
| Financial
liabilities |
|
2,163.4 |
|
— |
|
2,163.4 |
|
|
2,694.4 |
|
— |
|
2,694.4 |
|
| Deferred taxation |
E |
19.0 |
|
(2.0 |
) |
17.0 |
|
|
22.1 |
|
(2.5 |
) |
19.6 |
|
| Provisions |
|
49.0 |
|
— |
|
49.0 |
|
|
48.2 |
|
— |
|
48.2 |
|
| Employee benefits |
|
188.3 |
|
— |
|
188.3 |
|
|
345.2 |
|
— |
|
345.2 |
|
|
|
2,449.0 |
|
211.0 |
|
2,660.0 |
|
|
3,145.0 |
|
200.1 |
|
3,345.1 |
|
| Total
liabilities |
|
4,590.2 |
|
1,097.3 |
|
5,687.5 |
|
|
5,504.0 |
|
1,254.4 |
|
6,758.4 |
|
| Net assets /
(liabilities) |
|
753.3 |
|
(942.3 |
) |
(189.0 |
) |
|
483.4 |
|
(1,036.3 |
) |
(552.9 |
) |
| Capital and
reserves |
|
|
|
|
|
|
|
|
| Issued share
capital |
|
13.8 |
|
— |
|
13.8 |
|
|
13.8 |
|
— |
|
13.8 |
|
| Share premium |
|
500.7 |
|
— |
|
500.7 |
|
|
501.3 |
|
— |
|
501.3 |
|
Employee
benefit trust
and treasury shares |
|
(0.3 |
) |
— |
|
(0.3 |
) |
|
(0.2 |
) |
— |
|
(0.2 |
) |
| Capital redemption
reserve |
|
1.8 |
|
— |
|
1.8 |
|
|
1.8 |
|
— |
|
1.8 |
|
| Foreign currency
translation reserve |
|
(21.2 |
) |
— |
|
(21.2 |
) |
|
(6.2 |
) |
— |
|
(6.2 |
) |
| Cash flow hedging
reserve |
|
(12.0 |
) |
— |
|
(12.0 |
) |
|
— |
|
— |
|
— |
|
| Retained earnings |
|
196.5 |
|
(934.7 |
) |
(738.2 |
) |
|
(102.3 |
) |
(1,029.3 |
) |
(1,131.6 |
) |
Equity
attributable to
owners of the Company |
|
679.3 |
|
(934.7 |
) |
(255.4 |
) |
|
408.2 |
|
(1,029.3 |
) |
(621.1 |
) |
| Non-controlling
interests |
|
74.0 |
|
(7.6 |
) |
66.4 |
|
|
75.2 |
|
(7.0 |
) |
68.2 |
|
| Total
equity |
|
753.3 |
|
(942.3 |
) |
(189.0 |
) |
|
483.4 |
|
(1,036.3 |
) |
(552.9 |
) |
Consolidated cash flow statement under IFRS 15
As a result of the adoption of IFRS 15, certain
reclassifications are required in relation to the following cash
flow movements between relevant balance sheet accounts. There
has been no change in the net cash generated from operations as a
result of these reclassifications or adjustment of these balance
sheet accounts:
- As identified in adjustment H (below), in 2016, the Group
recognised a write down of accrued income in underlying profit and
specific items in relation to certain long term service
contracts. Under IFRS 15 this accrued income would not have
been originally recognised and hence has been reversed out of the
income statement on adoption of IFRS 15. Movements in the
operating cash flow note reflect the reversal of this non-cash
movement;
- As identified in adjustment D (below), the Group has recognised
new contract fulfilment assets on adoption of IFRS 15 from
1 January 2016 with amortisation and
impairment expenses recorded through the income statement in the
six months ended 30 June 2016 and
year ended 31 December 2016. Movements in the operating cash
flow note reflect these non-cash movements recorded in the income
statement; and
- As identified in adjustments D, B and C, on transition to IFRS
15 as at 1 January 2016, the Group
has recognised contract fulfilment assets and an adjustment to the
accrued income and deferred revenue accounts recorded in the
balance sheet. Movements in the operating cash flow note
reflect the relevant cash and non-cash movements in reclassified
line items.
Consolidated statement of changes in equity under IFRS
15
No reconciliation of the consolidated statement of changes in
equity is presented as the only changes to this primary statement
for the relevant period presented are as follows:
• Consolidated statement of changes in equity as at
1 January 2016: recognition
of the adjusted retained earnings figure as presented in the
adjusted consolidated balance sheet as at this date.
• Consolidated statement of changes in equity as at
30 June 2016: recognition of
the adjusted profit for the six month period ended 30 June 2016 as presented in the adjusted
consolidated income statement for this period.
• Consolidated statement of changes in equity as at
31 December 2016: recognition
of the adjusted profit for the year ended 31
December 2016 as presented in the adjusted consolidated
income statement for this year.
Notes to the financial statements
under IFRS 15
Management has undertaken an extensive exercise to consider the
Group's major contractual arrangements as part of the
implementation of IFRS 15. A number of significant areas have
been identified for adjustment which include:
- Recognition of revenue by the Group as agent or principal
(Adjustment A);
- Accounting for software licences (Adjustment B);
- Recognition of profit from service contracts over time in line
with the output method (Adjustment C);
- Recognition, utilisation and derecognition of contract
fulfilment assets (Adjustment D);
- Impact on tax balances as a result of adoption of IFRS 15
(Adjustment E);
- Decrease in trade and other receivables (Adjustment F);
- Reclassification of trade and other payables (Adjustment
G);
- Reversal of prior period accrued income impairment within
specific items (Adjustment H); and
- Reclassification of significant restructuring to underlying
(Adjustment I).
These adjustments are discussed in the relevant sections
below.
Under IFRS 15, the pattern and timing of revenue recognition has
changed resulting in an overall decrease of £126.8m in revenue for
the 6 months ended 30 June 2016 (year
ended 31 December 2016: £224.3m),
increase in deferred income of £1,099.3m at the 1 January 2016 opening balance sheet date
(31 December 2016: £1,256.9m) and
decrease in accrued income of £325.8m at the 1 January 2016 opening balance sheet date
(31 December 2016:
£254.5m).
Table 1 on the following page reconciles the movements in
relation to IFRS 15 for the income statement for the six months
ended 30 June 2016 and the year ended
31 December 2016 and the balance
sheet as at 1 January 2016 and as at
31 December 2016.
Table 2 provides further detail on the reconciling movements for
the income statement for the year ended 31
December 2016.
Following the tables are explanatory notes for each of the
adjustments referred to above.
The table below reconciles movements in relation to IFRS 15 for
the income statement for the six months ended 30 June 2016 and the year ended 31 December 2016 and the balance sheet as at
1 January 2016 and as at 31 December
2016. Refer to below the tables for explanatory notes on each
of the adjustments.
| Table 1: |
Consolidated income statement for the six months ended
30 June 2016 |
|
|
|
Adjustment to net assets at 1 January
2016 |
Underlying |
Specific items |
Profit for the period |
|
Trade and other receivables |
Deferred income |
Trade and other payables |
Contract fulfilment asset |
Deferred tax |
Adjustment to net liabilities at 31 December
2016 |
| Adjustment |
Revenue |
Cost of sales |
Admin expenses |
Tax |
Cost of sales |
Admin expenses |
Tax |
|
Non-current |
Current |
Current |
Non-current |
Current |
Non-current |
Non-current |
Current |
Asset |
Liability |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
| A - Agent vs.
principal |
— |
|
0.7 |
|
(0.7) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| B - Software
licences |
(163.2) |
|
(7.2) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(7.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| C - Recognition in
line with output |
(1,214.8) |
|
(120.3) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(120.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| D - Recognition of
non-current contract fulfilment assets |
214.7 |
|
— |
|
(3.7) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(3.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| D - Recognition of
software contract fulfilment assets |
62.9 |
|
— |
|
1.7 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| D - Recognition of
current contract fulfilment assets |
40.4 |
|
— |
|
5.8 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| E - Tax |
164.8 |
|
— |
|
— |
|
— |
|
27.4 |
|
— |
|
— |
|
— |
|
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| H - Reversal of
accrued income impairment |
(47.1 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| I - Reclassification
of significant restructuring |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
(942.3) |
|
(126.8) |
|
3.1 |
|
— |
|
27.4 |
|
— |
|
— |
|
— |
|
(96.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income statement for the year ended 31
December 2016 |
|
Consolidated balance sheet for the year ended 31
December 2016 |
| A - Agent vs.
principal |
— |
|
(90.9 |
) |
90.9 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
| B - Software
licences |
(163.2 |
) |
(15.3 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(15.3 |
) |
|
— |
|
— |
|
(104.8 |
) |
(73.7 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(178.5 |
) |
| C - Recognition in
line with output |
(1,214.8 |
) |
(118.1 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(118.1 |
) |
|
(79.6 |
) |
(174.9 |
) |
(949.5 |
) |
(128.9 |
) |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1,332.9 |
) |
| D - Recognition of
non-current contract fulfilment assets |
214.7 |
|
— |
|
(0.6 |
) |
— |
|
— |
|
(42.3 |
) |
— |
|
— |
|
(42.9 |
) |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
171.8 |
|
— |
|
— |
|
— |
|
171.8 |
|
| D - Recognition of
software contract fulfilment assets |
62.9 |
|
— |
|
5.9 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
5.9 |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
68.8 |
|
— |
|
— |
|
— |
|
68.8 |
|
| D - Recognition of
current contract fulfilment assets |
40.4 |
|
— |
|
1.2 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
1.2 |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
41.6 |
|
— |
|
— |
|
41.6 |
|
| E - Tax |
164.8 |
|
— |
|
— |
|
— |
|
32.0 |
|
— |
|
— |
|
(3.9 |
) |
28.1 |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
190.4 |
|
2.5 |
|
192.9 |
|
| G - Reclassification
of trade and other payables |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
(320.6 |
) |
(14.1 |
) |
320.6 |
|
14.1 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
| H - Reversal of
accrued income impairment |
(47.1 |
) |
— |
|
— |
|
39.6 |
|
— |
|
7.5 |
|
— |
|
— |
|
47.1 |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
| I - Reclassification
of significant restructuring |
— |
|
— |
|
— |
|
(59.4 |
) |
— |
|
— |
|
59.4 |
|
— |
|
— |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
| Total |
(942.3 |
) |
(224.3 |
) |
97.4 |
|
(19.8 |
) |
32.0 |
|
(34.8 |
) |
59.4 |
|
(3.9 |
) |
(94.0 |
) |
|
(79.6 |
) |
(174.9 |
) |
(1,374.9 |
) |
(216.7 |
) |
320.6 |
|
14.1 |
|
240.6 |
|
41.6 |
|
190.4 |
|
2.5 |
|
(1,036.3 |
) |
The table below provides further detail on the reconciling
movements for the income statement for the year ended 31 December 2016. Refer to below the table for
explanatory notes in respect of each adjustment.
| Table 2: |
Consolidated income statement for the year ended 31
December 2016 |
| Adjustment |
|
As reported |
Discontinued operations |
As reported - continuing operations |
Adjustments: from pre 1 Jan 16 and recognised in 2016 |
Adjustments: previously recognised in 2016 now spread
forward |
Reclassifications |
Under IFRS 15 |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
| Agent vs.
Principal |
A |
— |
|
— |
|
— |
|
— |
|
— |
|
(90.9) |
|
|
| Software revenue from
pre 1 Jan 16 and recognised in 2016 |
B |
— |
|
— |
|
— |
|
100.0 |
|
— |
|
— |
|
|
| Software revenue
previously recognised in 2016 now spread forward |
B |
— |
|
— |
|
— |
|
— |
|
(115.3) |
|
— |
|
|
| Recognition in line
with output from pre 1 Jan 16 and recognised in 2016 |
C |
— |
|
— |
|
— |
|
1,096.6 |
|
— |
|
— |
|
|
| Recognition in line
with output previously recognised in 2016 now spread forward |
C |
— |
|
— |
|
— |
|
— |
|
(1,214.7) |
|
— |
|
|
| Underlying
Revenue |
|
4,897.9 |
|
(316.3) |
|
4,581.6 |
|
1,196.6 |
|
(1,330.0) |
|
(90.9) |
|
4,357.3 |
|
|
|
|
|
|
|
|
|
|
| Agent vs.
Principal |
A |
— |
|
— |
|
— |
|
— |
|
— |
|
90.9 |
|
|
| Non-current contract
fulfilment asset utilisation in 2016 |
D |
— |
|
— |
|
— |
|
(47.1 |
) |
— |
|
— |
|
|
| Non-current contract
fulfilment asset disposals in 2016 |
D |
— |
|
— |
|
— |
|
(17.0 |
) |
— |
|
— |
|
|
| Non-current contract
fulfilment asset additions in 2016 |
D |
— |
|
— |
|
— |
|
— |
|
63.5 |
|
— |
|
|
| Software contract
fulfilment asset utilisation in 2016 |
D |
— |
|
— |
|
— |
|
(7.1 |
) |
— |
|
— |
|
|
| Software contract
fulfilment asset additions in 2016 |
D |
— |
|
— |
|
— |
|
— |
|
13.0 |
|
— |
|
|
| Completion of point in
time performance obligations |
D |
— |
|
— |
|
— |
|
(40.4 |
) |
— |
|
— |
|
|
| Costs deferred to
future point in time performance obligations |
D |
— |
|
— |
|
— |
|
— |
|
41.6 |
|
— |
|
|
| Underlying cost of
sales |
|
(3,627.7) |
|
111.8 |
|
(3,515.9) |
|
(111.6) |
|
118.1 |
|
90.9 |
|
(3,418.5) |
|
|
|
|
|
|
|
|
|
|
| Reversal of accrued
income impairment |
H |
— |
|
— |
|
— |
|
39.6 |
|
— |
|
— |
|
|
| Reclassification of
2016 group restructuring to underlying from specific items |
I |
— |
|
— |
|
— |
|
— |
|
— |
|
(59.4 |
) |
|
| Underlying admin
expenses |
|
(728.9 |
) |
144.5 |
|
(584.4 |
) |
39.6 |
|
— |
|
(59.4 |
) |
(604.2 |
) |
|
|
|
|
|
|
|
|
|
| Underlying
operating profit |
|
541.3 |
|
(60.0 |
) |
481.3 |
|
1,124.6 |
|
(1,211.9 |
) |
(59.4 |
) |
334.6 |
|
|
|
|
|
|
|
|
|
|
| Underlying profit
before tax |
|
475.3 |
|
(60.1 |
) |
415.2 |
|
1,124.6 |
|
(1,211.9 |
) |
(59.4 |
) |
268.5 |
|
|
|
|
|
|
|
|
|
|
| Specific items -
contract fulfilment asset disposal |
D |
— |
|
— |
|
— |
|
(42.3 |
) |
— |
|
— |
|
|
| Specific items -
reversal of accrued income impairment |
H |
— |
|
— |
|
— |
|
7.5 |
|
— |
|
— |
|
|
| Specific items cost
of sales |
|
(7.5 |
) |
— |
|
(7.5 |
) |
(34.8 |
) |
— |
|
— |
|
(42.3 |
) |
|
|
|
|
|
|
|
|
|
| Reclassification of
2016 group restructuring to underlying from specific items |
I |
— |
|
— |
|
— |
|
— |
|
— |
|
59.4 |
|
|
| Specific Items
admin expenses |
|
(388.3 |
) |
4.3 |
|
(384.0 |
) |
— |
|
— |
|
59.4 |
|
(324.6 |
) |
|
|
|
|
|
|
|
|
|
| Specific items
profit before tax |
|
(403.4 |
) |
4.2 |
|
(399.2 |
) |
(34.8 |
) |
— |
|
59.4 |
|
(374.6 |
) |
|
|
|
|
|
|
|
|
|
| Profit before
tax |
|
74.8 |
|
(55.9 |
) |
18.9 |
|
1,089.8 |
|
(1,211.9 |
) |
— |
|
(103.2 |
) |
Adjustment A - Accounting for agent vs. principal
The previous agent vs. principal guidance contained in IAS 18
has been revisited by the Group in light of the revised guidance
under IFRS 15 in assessing whether it acts as an agent or as a
principal in its major contractual arrangements.
As a result of this assessment, the Group concluded that for
certain contracts it is appropriate to move from principal to
agency accounting or vice versa. In respect to moving from
principal to agency, this related to certain software sales
arrangements as the Group has concluded that the Group does not
control the good or service being provided to the customer. As a
result, there is a net adjustment of £0.7m to increase revenue and
cost of sales for the 6 months period ended 30 June 2016, and of £90.9m to reduce revenue and
cost of sales for the year ended 31 December
2016.
Adjustment B - Accounting for software
licences
Under previous accounting, revenue in relation to certain
software licences was recognised at a point in time. Under
IFRS 15, the Group has determined that a number of these
arrangements result in the customer having the right to access the
licence (an ‘active’ licence) rather than having the right to use
the licence (a ‘passive’ licence). Under an active licence the
ongoing support and upgrades are fundamental to the ongoing use of
the licences by the customer.
Hence total revenue for the licence and upgrades are combined
with these revenues now recognised over the term of the customer
contract rather than at a point in time resulting in a net decrease
in accrued/deferred income at 1 January
2016 of £163.2m, 31 December
2016: £178.5m; and a net decrease in revenue in the six
months ended 30 June 2016 of £7.2m
and in the year ended 31 December
2016 of £15.3m.
For the year ended 31 December
2016 the net decrease in revenue comprises the recognition
of £100.0m of revenue from pre 1 January
2016 and the deferral of £115.3m of revenue previously
recognised in 2016.
Adjustment C - Revenue recognition in
line with output
Under the previous accounting, revenue for certain contracts was
recognised under the percentage of completion method based upon
costs incurred to date as a proportion of the estimated full cost
of completing the contract, and applying the percentage to the
total revenue expected to be earned. Such percentage of completion
accounting would typically result in higher levels of revenue
recognised in the earlier stages of a contract in line with the
profile of costs incurred.
Under IFRS 15, all elements of the contract, including
transformation activity, are combined. Due to the application of
the series guidance and output methodology within IFRS 15, these
contracts now have revenue recognised in line with their output
measured on a contract specific basis.
As such, revenue is now spread over the expected life of the
contract rather than in line with the costs profile, which has
resulted in a reduction in revenue recognised in periods prior to
1 January 2016 and a net increase in
deferred/accrued income as at 1 January
2016 of £1,214.8m, as at 31 December
2016: £1,332.9m; and a decrease in opening retained earnings
as at 1 January 2016 of £1,214.8m, a
decrease in revenue in the six months ended 30 June 2016 of £120.3m, and year ended
31 December 2016 of £118.1m.
For the year ended 31 December
2016 the net decrease in revenue comprises the recognition
of £1,096.6m of revenue from pre 1 January
2016 and the deferral of £1,214.7m of revenue previously
recognised in 2016.
Adjustment D - Recognition,
utilisation and derecognition of contract fulfilment assets
IFRS 15 specifies that certain costs to fulfil a contract are to
be capitalised as contract fulfilment assets if relevant criteria
are met.
The Group incurred costs that were previously expensed and which
related to resources to allow it to deliver services under its long
term contracts and active software licence arrangements. In certain
situations, costs associated with the installation of certain IT
equipment in contracts have also been capitalised as contract
fulfilment assets.
The adjustments to recognise contract fulfilment assets on the
balance sheet as at 1 January 2016 of
£318.0m recognises the net book value of the identified contract
fulfilment assets at the opening balance sheet date.
These adjustments also include the recognition of certain costs
of obtaining a contract. IFRS 15 specifies that the incremental
costs of obtaining a contract with a customer are capitalised if
the entity expects to recover them.
The cost of utilising these assets is recognised within cost of
sales on a consistent basis over the life of the relevant customer
contract.
The adjustment of £3.8m for the 6 months period ended
30 June 2016 (year ended 31 December 2016: £6.5m) is to recognise a net
decrease in cost of sales due to the de-recognition of contract
costs now capitalised as contract fulfilment assets net of the
utilisation charge recorded for the period in relation to these
assets and the de-recognition of certain contract fulfilment
assets.
For the year ended 31 December
2016, the above net adjustment of £6.5m comprises:
non-current contract fulfilment additions of £63.5m, utilisation of
£47.1m, and disposals of £17.0m; software contract fulfilment
additions of £13.0m, and utilisation of £7.1m; and current contract
fulfilment additions of £41.6m, and utilisation of £40.4m.
Specific item
As disclosed in the 31 December
2016 financial statements, Capita ceased to work on the IT
system transformation in respect of its contract with The
Co-operative Bank plc. Under IFRS 15 this modification has led to
an impairment of a contract fulfilment asset in respect of this
contract as these costs were no longer considered recoverable.
The adjustment of £42.3m in the year ended 31 December 2016 recognises the charge incurred
on derecognising this contract fulfilment asset. This item has been
included within the other non-underlying column because it is
one-off in nature and is due to a contractual dispute rather than
arising as a result of service credit penalties
Adjustment E - Tax
Due to the changes in assets, liabilities, income and expenses
recognised as a result of the application of IFRS 15, there are
consequent IAS 12 Income taxes differences that arise as discussed
below.
Deferred tax
Due to the changes in the pattern and timing of revenue
recognition under IFRS 15, a deferred income liability is
recognised on the balance sheet from 1
January 2016, which will be recognised through the income
statement in later periods. The impact of these revenue
recognition changes is only recognised for tax purposes via a
one-off transitional tax adjustment on 1
January 2017, so no tax deduction is available in 2016 for
the reduction in historic revenue recognised.
Contract fulfilment assets have also been recognised on the
balance sheet from 1 January 2016,
which will be charged to the income statement in later periods.
Under IAS 12, the tax base of an asset is the amount that
will be deductible for tax purposes against any taxable economic
benefits that will flow to an entity when it recovers the carrying
amount of the asset. The tax base of the contract fulfilment
asset recognised on the balance sheet prior to 1 January 2017 is therefore reduced by the
amounts for which tax deductions have already been taken, creating
a temporary difference.
Under the principles of IAS 12, a movement of £164.8m in
deferred tax therefore arises, recognised as an increase in the
deferred tax asset of £162.8m and a reduction in the deferred tax
liability of £2.0m as at 1 January
2016 (31 December 2016:
£192.9m movement, increase in deferred tax asset of £190.4m, and
reduction in deferred tax liability of £2.5m) as a result of the
transition to IFRS 15.
Income statement deferred tax
credit
The deferred tax asset balance increase of £190.4m and the
deferred tax liability decrease of £2.5m as at 31 December 2016, give rise to an income
statement deferred tax credit of £27.4m for the 6 month period to
30 June 2016 and of £28.1m for the
year ended 31 December 2016.
Income statement current tax
expense
There is no income statement current tax expense impact for the
6 months ended 30 June 2016 or the
year ended 31 December 2016.
Adjustment F - Decrease in trade and
other receivables
The decrease in trade and other receivables relates to the
adjustment to accrued revenues as detailed in Adjustments B and C
above, The decrease in non-current accrued income is £41.7m
as at 1 January 2016, and £79.6m at
31 December 2016, and the decrease in
current accrued income is £284.1m and £174.9m at 31 December 2016.
Adjustment G - Reclassification of
trade and other payables
In order to provide users with relevant financial information in
the primary financial statements, the Group has decided to
reclassify deferred income into its own primary statement line item
reflecting the materiality and nature of this balance in the
context of the Group’s business.
The decrease in trade and other payables relates to the
reclassification and adjustment of deferred income as discussed
above. Prior to adoption of IFRS 15, deferred income was
classified within ‘Trade and other payables’ although this was not
accounted for as a financial liability.
Adjustment H - Reversal of accrued
income impairments
In 2016, the Group recognised an impairment of £47.1m historic
accrued income, of which £39.6m was recognised in underlying
profit, and £7.5m within the specific items column in relation to
the dispute with The Co-operative Bank plc. Under IFRS 15
this accrued income would not have been originally recognised as
the timing of revenue recognition has changed in comparison to the
previous accounting policy as discussed in Adjustment C above,
hence the adjustment of £47.1m for the year ended 31 December 2016 recognises the reversal of these
previous impairments.
Adjustment I - Reclassification of
significant restructuring
Following the adoption of IFRS 15, the Board has adopted a
policy to separately disclose the in year operating profit/loss
from significant new contract wins and related, or significant,
restructuring ("Significant new contract wins and restructuring")
within underlying results, in order for users of the financial
statements to obtain a proper understanding of the financial
information and the performance of the business.
The Group continually assesses the resourcing levels, both at a
divisional level and also in relation to the management and
delivery of individual contracts. This results in restructuring in
the normal course of business and any such charges are recorded in
"underlying before significant new contract wins and restructuring"
results. A significant restructuring is assessed as that above this
normal level of restructuring.
In the year ended 31 December
2016, the Board announced a major programme, with the
restructuring of the Group into 6 new reporting divisions under a
Group-wide programme. The cost of this Group-wide programme,
£59.4m, was charged to specific items, being the element above the
normal level of restructuring undertaken by the Group. Following
the adoption of the above policy, the 2016 income statement has
been represented to reclassify the cost of this programme to
'Significant new contract wins and restructuring' within
underlying.
