Financial statements. Additional information

Transcription

1 Financial statements 60 Independent auditors report to the members of plc on the consolidated financial statements 65 Consolidated income statement 66 Consolidated statement of comprehensive income 67 Consolidated balance sheet 68 Consolidated statement of changes in equity 69 Consolidated statement of cash flows 70 Notes to the consolidated financial statements 105 Independent auditors report to the members of plc on the parent Company financial statements 107 Company balance sheet 108 Company statement of changes in equity 109 Company statement of cash flows 110 Notes to the plc Company financial statements Additional information 116 Financial glossary 117 Trading and brand name index 118 Shareholder information Annual Report and Accounts 59

2 Independent auditors report to the members of plc on the consolidated financial statements Our opinion In our opinion, plc s consolidated financial statements (the financial statements ): give a true and fair view of the state of the group s affairs as at 31 March and of its loss and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. What we have audited The financial statements, included within the Annual Report and Accounts (the Annual Report ), comprise: the consolidated balance sheet as at 31 March ; the consolidated income statement and consolidated statement of comprehensive income for the year then ended; the consolidated statement of cash flows for the year then ended; the consolidated statement of changes in equity for the year then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. Our audit approach Overview Audit scope Materiality Areas of focus Overall group materiality: 494,750 which represents 5% of profit before tax, adjusted for headline items. We performed a full scope audit of the complete financial information of 7 reporting units. We also performed specific audit procedures at the Cooney/Waters Group and Nelson Bostock Group based on the materiality of specific balances to the group. The reporting units where we performed our audit work accounted for 82% of Group revenues and 75% of Group net profit before tax, adjusted for headline items (i.e. the sum of the numerical values without regard to whether they were profits or losses for the relevant reporting units). Goodwill impairment assessment. Classification and measurement of headline items. The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ( ISAs (UK & Ireland) ). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as areas of focus in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. 60 Annual Report and Accounts

3 Area of focus Goodwill impairment assessment Refer to page 19 (Our risk and uncertainties), page 76 (Accounting estimates and judgements) page 85 (note 10), and page 38 (Audit Committee report). The Group has significant goodwill balances of 96 million as at 31 March. Management are required to annually assess the carrying value of goodwill for any impairments required and have identified total impairments in the year to 31 March of 15 million. The determination of the value of this impairment charge involved significant judgements about the future results and cash flows of the cash generating units ( CGUs ) in the business, principally: short term revenue and EBITDA growth rates; long term growth rates; and the discount rate adopted by management. We focused on this area in light of the impairment in the year and certain CGUs in the Group underperforming against management forecasts, with a particular focus on ICM Unlimited and DJM PAN Unlimited where impairment was identified by management. Classification and measurement of headline items Headline items are presented on the face of the consolidated income statement and include the following: non-recurring items that do not occur as a result of the Group s underlying operations. These items are not regarded by management as relevant to the assessment of the Group s underlying earnings; and certain items which have a material impact and introduce volatility to the reported figures. The headline items related mainly to: impairment of goodwill 15.2m: 10.7m for ICM Unlimited and 4.5 for DJM PAN Unlimited; amortisation on acquired intangibles of 0.7m related to acquisition of Splendid Unlimited and 0.3m for share-based payment charge in relation to Splendid Unlimited for valuation of liquidity forgone for the non-controlling interest; restructuring costs in relation to the Health division and combination of DJM Unlimited and PAN Unlimited of 0.5m; acquisition related costs of 0.9m in relation to the acquisition of Splendid Limited and 18 Feet&Rising; and start-up related costs of 0.4m, generated mainly by losses of the following start-up projects: Reflected Life ( 0.11m), Real Data ( 0.08m), Affinity ( 0.08m) and others ( 0.13m); We focused on whether each item was properly classified as a headline item. We also checked the amount included for each headline item. How our audit addressed the area of focus We understood and evaluated the controls around management s impairment model and we assessed the appropriateness of management s forecasts. This included a review of the performance of the underlying businesses and consideration of management s projections of performance in the context of internally and externally available information. We examined the future cash flow forecasts in the model for each CGU, and the process by which they were drawn up, including comparing them to the latest Board approved budgets and testing the underlying calculations. We found the forecasts were consistent with approved budgets and the calculations used were accurate. We challenged the key assumptions in the model, including: Short term revenue and EBITDA growth rates used in the cash flow forecasts by comparing them to historical results to assess historic forecasting accuracy and growth rate trends, as well as considering economic factors, including brokers notes and target share prices for the Group; long term growth rates adopted by management ensuring that they do not exceed long term GDP growth rates for the United Kingdom and United States of America; and the discount rate applied by management by assessing the cost of capital for the Group and reviewing discount rates adopted by comparable organisations. We found the key assumptions to be reasonable as a result of the procedures identified above and in the context of forecast headroom. We found the Group discount rate of 9.9 per cent to be within our expected range, albeit at the lower end of the range. We performed our own sensitivity analysis and this, along with our other procedures, identified ICM Unlimited and DJM PAN Unlimited as CGUs that were impaired and were sensitive to changes in management s assumptions. We focused particular attention in our sensitivity testing on management s projections for these two entities. We evaluated the results and disclosure of the sensitivity analyses performed by management (as set out in Note 10). As the carrying value of ICM Unlimited and DJM PAN Unlimited was impaired down to the Value in Use there was no further headroom, and any unfavourable change in assumptions used in the additional sensitivities showed further impairments to Goodwill. We determined the results of these sensitivities to be appropriately disclosed and the sensitivities present a fair reflection of reasonably possible changes to assumptions used in the Value in Use model. We discussed our findings with management and the Audit Committee and evaluated management s assessment of the carrying value of goodwill as presented by them to the Audit Committee. We considered whether the headline items recorded were in accordance with the Group s disclosed accounting policy. In some cases headline items of the same nature had been incurred in both the current period and in prior years. We challenged management as to whether such costs were therefore non-recurring in nature. As these costs related to distinct acquisitions of entities which commenced in the previous year and completed in the current financial year, we believe, given the evidence provided, that the classification of these items as non-recurring is appropriate. Our work in relation to the measurement of each type of headline item is summarised below: Goodwill impairment we analysed and challenged the underlying assumptions applied by management as detailed above. Acquisition related costs We agreed the amounts recorded to invoices received from suppliers and understood the nature of these amounts incurred to check that they were in relation to the acquisition of Splendid Unlimited or 18 Feet&Rising. We tested the calculation of amortisation on acquired intangibles and traced underlying data to the third party valuation report. We also assessed reliability and reasonableness of the valuation performed by the third party. Start-up related costs we confirmed that classification of projects as start-up is justified and consistent with the description in note 3. We have also verified how costs were allocated to each material project. Annual Report and Accounts 61

4 Independent auditors report to the members of plc on the consolidated financial statements continued How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the group, the accounting processes and controls, and the industry in which the group operates. The Group is structured into 3 divisions, being Communications & Insight, Health and a central head office function. Within each operating division are a number of trading entities. The Group financial statements are a consolidation of 25 trading entities and the centralised head office function. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the trading entities by us, as the Group engagement team. In our view, based on their size or risk characteristics, 7 components required an audit of their complete financial information and certain specific audit procedures were required over material balances at Cooney/Waters Group and over revenue at Nelson Bostock Group. Our audit scope addressed 82% of Group revenues and 75% of Group profit before tax, adjusted for headline items (i.e. the sum of the numerical values without regard to whether they were profits or losses for the relevant reporting units). This gave us the evidence we needed for our opinion on the Group financial statements as a whole. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall group materiality 494,750 (: 475,000). How we determined it Rationale for benchmark applied 5% of profit before tax, adjusted for headline items. We believe that profit before tax, adjusted for headline items is the key measure used both by management and, we believe, externally by shareholders in evaluating the performance of the Group. We consider the removal of one-off items better reflects the ongoing nature of operations for the Group. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above 24,730 (: 23,750) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the directors statement, set out on page 33, in relation to going concern. We have nothing to report having performed our review. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. As noted in the directors statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the group s ability to continue as a going concern. 62 Annual Report and Accounts

5 Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic report and the Directors report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: information in the Annual Report is: materially inconsistent with the information in the audited financial statements; or We have no exceptions to report. apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or otherwise misleading. the statement given by the directors on page 58, in accordance with provision C.1.1 of the UK Corporate Governance Code (the Code ), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the group s position and performance, business model and strategy is materially inconsistent with our knowledge of the group acquired in the course of performing our audit. the section of the Annual Report on page 38, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report. We have no exceptions to report. The directors assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: the directors confirmation on page 20 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. the directors explanation on page 20 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. Under the Listing Rules we are required to review the directors statement that they have carried out a robust assessment of the principal risks facing the group and the directors statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review. Annual Report and Accounts 63

6 Independent auditors report to the members of plc on the consolidated financial statements continued Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Directors remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the Code. We have nothing to report having performed our review. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors responsibilities set out on page 58, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the parent company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Other matters We have reported separately on the parent company financial statements of plc for the year ended 31 March and on the information in the Directors remuneration report that is described as having been audited. Philip Stokes (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 11 July 64 Annual Report and Accounts

7 Consolidated income statement for the year ended 31 March Turnover (billings) 2 108, ,135 Cost of sales Note (25,399) (23,257) Revenue 2 82,645 76,878 Impairment charge 2, 3 (15,156) Operating costs 4 (74,762) (67,081) (Loss)/Profit before finance income, finance costs and taxation 2, 3 (7,273) 9,797 Finance income Finance costs 6 (248) (184) Share of loss of investment 14 (64) (Loss)/Profit before taxation 2, 3 (7,584) 9,623 Taxation 7 (1,990) (2,216) (Loss)/Profit for the year (9,574) 7,407 Attributable to: Equity holders of the parent (9,683) 7,321 Non-controlling interest (9,574) 7,407 Basic (loss)/earnings per share (pence) 8 (16.66) Diluted (loss)/earnings per share (pence) 8 (16.63) Headline profit before finance income, finance costs and taxation 3 10,087 10,001 Headline profit before taxation 3 9,854 9,852 Headline profit for the year 3 7,838 7,775 Annual Report and Accounts 65

8 Consolidated statement of comprehensive income for the year ended 31 March (Loss)/Profit for the year Other comprehensive income: Items may be reclassified subsequently to profit and loss: (9,574) 7,407 Exchange differences on translation of foreign operations 417 1,298 Other comprehensive income for the year, net of tax 417 1,298 Total comprehensive (loss)/income for the year (9,157) 8,705 Attributable to: Equity holders of the parent (9,266) 8,619 Non-controlling interest (9,157) 8, Annual Report and Accounts

9 Consolidated balance sheet as at 31 March Non-current assets Intangible assets Goodwill 10 95, ,381 Other 11 4,071 1,256 Property, plant and equipment 12 3,244 3,985 Investments Deferred tax asset ,141 Current assets Note 104, ,763 Inventories and work in progress ,001 Trade and other receivables 16 29,380 28,195 Cash and cash equivalents 27 1,441 8,312 Current liabilities 31,556 37,508 Trade and other payables 17 (26,776) (25,559) Corporation tax payable (38) (1,328) Provision for contingent deferred consideration 18 (1,384) (26,814) (28,271) Net current assets 4,742 9,237 Total assets less current liabilities 109, ,000 Non-current liabilities Trade and other payables 17 (1,485) (2,078) Provision for other liabilities and charges 19 (784) (841) Deferred tax liability 23 (1,655) (808) (3,924) (3,727) Net assets 105, ,273 Equity Called-up share capital 24 6,134 6,134 Share premium account 26 35,943 35,943 Own shares 26 (3,267) (3,371) Shares to be issued Other reserves 26 30,822 30,822 Foreign currency translation reserve Retained earnings 26 34,836 46,668 Equity attributable to equity holders of the parent 105, ,187 Non-controlling interest Total equity 105, ,273 The financial statements, which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated balance sheet, the Consolidated statement of changes in equity, the Consolidated statement of cash flows and the related notes, were approved by the Board on 11 July and were signed by: Kathryn Herrick Chief Financial Officer Annual Report and Accounts 67

10 Consolidated statement of changes in equity for the year ended 31 March Changes in equity for Called-up share capital Share premium account Own shares Shares to be issued Other reserves Foreign currency translation reserve Retained earnings Total attributable to equity holders of parent Noncontrolling interest At 1 April 6,134 35,943 (3,371) , , , ,273 Total equity Loss for the year (9,683) (9,683) 109 (9,574) Other comprehensive income: Exchange differences on translation of foreign operations Total comprehensive income/(expense) for the financial year 417 (9,683) (9,266) 109 (9,157) (Debit)/credit for sharebased incentive schemes (65) Transfer between reserves in respect of lapsed share options (31) 31 Exercise of share award 140 (128) Loss on employee benefit trust (20) (20) (20) Purchase of treasury shares (36) (36) (36) Dividends (note 9) (2,484) (2,484) (98) (2,582) At 31 March 6,134 35,943 (3,267) , , , ,749 Changes in equity for Called-up share capital Share premium account Own shares Shares to be issued Other reserves Foreign currency translation reserve Retained earnings Total attributable to equity holders of parent Noncontrolling interest At 1 April ,134 35,943 (1,679) ,822 (730) 41, , ,558 Profit for the year 7,321 7, ,407 Other comprehensive income: Exchange differences on translation of foreign operations 1,298 1,298 1,298 Total comprehensive income for the financial year 1,298 7,321 8, ,705 Credit for share-based incentive schemes Transfer between reserves in respect of lapsed share options (683) 683 Exercise of share award 60 (158) (98) (98) Gain on employee benefit trust Purchase of treasury shares (1,752) (1,752) (1,752) Dividends (note 9) (2,384) (2,384) (107) (2,491) At 31 March 6,134 35,943 (3,371) , , , ,273 Total equity 68 Annual Report and Accounts

11 Consolidated statement of cash flows for the year ended 31 March (Loss)/Profit for the financial year (9,574) 7,407 Taxation 7 1,990 2,216 (Loss)/Profit before taxation Note (7,584) 9,623 Finance income 6 (1) (10) Finance costs Investment income 64 (Loss)/Profit before finance income, finance costs and taxation (7,273) 9,797 Depreciation of property, plant and equipment 12 1,527 1,491 Amortisation of intangible assets Share-based payment charge Charge for future acquisition payments to employees deemed as remuneration Movement in fair value of contingent deferred consideration 18 (384) Impairment of goodwill 10 15,156 Loss on disposal of property, plant and equipment 8 4 Loss on disposal of intangible assets 1 Decrease/(increase) in inventories and work in progress 291 (78) Decrease in trade and other receivables Decrease in trade and other payables (544) (3,828) Operating cash flow 10,636 8,649 Tax paid (3,279) (2,003) Net cash inflow from operating activities 7,357 6,646 Investing activities Finance income 1 10 Purchase of subsidiary undertakings net of cash acquired 13 (7,843) Purchase of investments 14 (1,000) Payment of deferred consideration 18 (1,387) Purchase of property, plant and equipment 12 (767) (787) Proceeds from sale of property, plant and equipment 5 Purchase of intangible assets 11 (295) (181) Net cash outflow from investing activities (11,291) (953) Financing activities Finance costs (209) (200) Dividends paid 9 (2,484) (2,384) Dividends paid to non-controlling interest (98) (107) Purchase of treasury shares (36) (1,752) Net cash outflow from financing activities (2,827) (4,443) (Decrease)/increase in cash and cash equivalents 27 (6,761) 1,250 Cash and cash equivalents at start of the financial year 27 8,312 7,452 Effect of foreign exchange rates 27 (110) (390) Cash and cash equivalents at end of the financial year 27 1,441 8,312 Annual Report and Accounts 69

12 Notes to the consolidated financial statements for the year ended 31 March 1 Accounting policies Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and IFRS Interpretations Committee interpretations adopted for use in the European Union and those parts of the Companies Act 2006 which are applicable to companies reporting under IFRS. The consolidated financial statements are consolidated and include all Group entities. The Company s domicile and country of incorporation is England and Wales, and both its registered office and Head Office are located at House, 10 Great Pulteney Street, London W1F 9NB. The financial statements have been prepared in Sterling, the currency in which the majority of the Group s transactions are denominated, on the historical cost basis, except where IFRS as adopted by the European Union (EU) requires a fair value adjustment, and on a going concern basis. The following standards, amendments and interpretations are relevant to the Group, but not yet effective and have not been early adopted by the Group: IFRS 9 Financial Instruments (effective for periods beginning on or after 1 January 2018 not yet endorsed by the EU). This is a new standard which enhances the ability of investors and other users of financial information to understand the accounting for financial assets and reduces complexity. The standard uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the various rules in IAS 39. IFRS 15 Revenue from contracts with customers (effective for periods beginning on or after 1 January 2018 not yet endorsed by the EU). The standard establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction Contracts and related interpretations. IFRS 16 Leases (effective for periods beginning on or after 1 January 2019 not yet endorsed by the EU). This is a new standard which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract. The standard eliminates the classification of leases as either operating or finance leases as required by IAS 17, and instead, introduces a single lessee accounting model. A lessee will be required to recognise assets and liabilities for all leases with a term of more than 12 months and depreciated lease assets separately from interest in the income statement. The standard replaces IAS 17 Leases. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. The principal accounting policies applied in the preparation of these financial statements are set out below and on the following pages. These policies have been consistently applied to the Group and to all years presented, unless otherwise stated. Basis of consolidation Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group applies the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest s proportionate share of the recognised amounts of the acquiree s identifiable net assets. Acquisition related costs are expensed as incurred. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of any contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 in profit or loss. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. 70 Annual Report and Accounts

13 1 Accounting policies continued Profits and losses resulting from inter-company transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency. Turnover (billings) Turnover represents amounts received or receivable from clients for the rendering of services and is stated after deduction of trade discounts and excluding value-added tax or similar sales taxes outside the UK. Turnover is recognised at fair value as service activity progresses on the following basis: Project fees are recognised over the period of the relevant assignments or agreements. Retainer fees are spread over the period of the contract on a straight-line basis. Third-party production fees are recognised at the point the client accepts delivery of each component of a project. Turnover includes all charges paid to external suppliers where they are retained to perform part or all of a client assignment. Revenue When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction is recognised by reference to the level of services performed. In determining the level of services performed a percentage of completion method is adopted as detailed below: Project fees for creative services The level of services performed is based on actual chargeable hours undertaken versus total budgeted hours of a project. This percentage of completion is corroborated with progress against agreed project milestones to ensure the level of work undertaken is in line with actual service delivery. Retainers The level of services performed is based on the chargeable hours incurred in proportion to the total hours committed under the retainer. Long-term contracts The level of services performed is based on costs incurred versus total budgeted costs, where costs include chargeable hours undertaken. This percentage of completion is corroborated with progress against agreed project milestones to ensure the level of work undertaken is in line with actual service delivery. Attributable profit on long-term contracts is only recognised once their outcome can be assessed with reasonable certainty. Full provision is made for any losses on projects in the period in which the loss is first foreseen. Commissions on third-party costs Where agencies are able to mark up third-party costs then the associated revenue will be recognised when the cost is incurred and where this cost reflects services delivered. Mark-ups on third-party costs are becoming an increasingly small part of the Group s revenue with the majority of costs simply being pass-through costs with no margin. Intangible assets (a) Goodwill Goodwill arising from the purchase of subsidiary undertakings represents the difference between the purchase consideration and the fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary acquired, and is capitalised in accordance with the requirements of IFRS 3. Future anticipated payments to vendors in respect of earn-outs are based on the fair value of these obligations. Earn-outs are dependent on the future performance of the relevant business and are reviewed semi-annually. Any subsequent movements in the fair value of such consideration as a result of post-acquisition events are recognised as a gain or loss in the Consolidated income statement. The contingent deferred consideration is discounted to its fair value in accordance with IFRS 3 and IAS 39. The difference between the fair value of these liabilities and the actual amounts payable is charged to the Consolidated income statement as notional finance costs over the life of the associated liability. Goodwill is carried at cost less accumulated impairment losses. The carrying value of goodwill is reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Under IFRS, an impairment charge is required for both goodwill and other assets with an indefinite useful life when the carrying value exceeds the recoverable amount, defined as the higher of fair value less costs to sell and value in use. In accordance with IFRS 3, the carrying value of goodwill will continue to be reviewed for impairment on the basis stipulated, and adjusted should this be required. Impairment is recognised in the Consolidated income statement and is not subsequently reversed. Annual Report and Accounts 71

14 Notes to the consolidated financial statements continued 1 Accounting policies continued The individual circumstances of each future acquisition will be assessed to determine the appropriate treatment of any related goodwill. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts at the date of transition, subject to being tested for impairment at that date. Factors making up goodwill The Directors consider the goodwill to reflect the acquired value of the creative workforce and the industry expertise developed through ongoing employee training and recruitment. (b) Other intangible assets Other acquired intangible assets are carried at cost less accumulated amortisation and impairment losses. Intangible assets acquired as part of a business combination are capitalised at fair value at the date of acquisition. The list of such intangible assets is significantly more comprehensive under IFRS. Intangible assets are amortised to residual values over the useful economic life of the asset. Where an asset s life is considered to be indefinite an annual impairment test is performed. The identified intangible assets and associated periods of amortisation are as follows: Intangible asset Customer relationships Brand names Customer contracts Period of amortisation Over the expected life of the customer relationship (generally three to ten years) on a straight-line basis Indefinite life subject to annual impairment testing Over the notice period of the contract (generally one to three months) on a straight-line basis Customer relationships Where a customer relationship is identified within an acquisition that meets the separability or contractual legal criterion, its fair value is recognised separately from goodwill within other intangible assets where this is material and can be reliably measured. The separability criterion is met when the customer relationships acquired are capable of being separated or divided from the acquiree and sold, transferred, licensed, rented, or exchanged and the contractual legal criterion is met where the customer relationship exists as a result of a present contract or where the entity has a practice of establishing relationships with its customers through contracts. Value is ascribed to customer relationships where future economic benefit is expected beyond any previous or existing contracts, with the entity more likely to be awarded future work as a result of its relationship. Where future work is awarded by way of competitive pitches, the likelihood of the entity successfully securing such work is considered when determining whether a material customer relationship exists and an intangible asset should be recognised. The customer relationships are amortised over a period of three to ten years because the Directors consider this to be the typical length of customer contracts active at the time of acquisition. Brand names Brands are considered to have an indefinite economic life because of their proven market position and the Group s commitment to develop and enhance their value. On this basis, the Directors consider it reasonable to assign an indefinite life to these intangible assets but consider it appropriate to review this on an annual basis in order to assess whether there has been any degradation of a company s brand name and image. The carrying values of brand names are reviewed for impairment in the same manner as goodwill. Customer contracts Customer contracts are amortised over a period of one to three months because the Directors consider this to be the typical notice period of customer contracts. (c) Software licences Acquired computer software licences which do not form part of the operating software acquired with a piece of hardware are capitalised on the basis of all costs incurred in bringing them into use. These assets are carried at cost less accumulated amortisation and impairment losses and are amortised on a straight-line basis over a five-year period. 72 Annual Report and Accounts

15 1 Accounting policies continued (d) Software development costs Costs associated with the development of identifiable and unique software products controlled by the Group that will probably generate economic benefits exceeding costs are recognised as intangible assets. These assets are carried at cost less accumulated amortisation and impairment losses and are amortised on a straight-line basis over a period of between three and five years. Provisions for contingent deferred consideration The terms of an acquisition may provide that the value of the purchase consideration, which may be payable in cash, shares or other securities at a future date, depends on uncertain future events such as the future performance of the acquired company. Where it is not possible to estimate the amounts payable with any degree of certainty, the amounts recognised in the financial statements represent a fair value estimate at the balance sheet date of the amounts expected to be paid. These amounts are based on discounting management s estimate of the most likely outcome. The difference between the fair value of the liabilities and the amounts payable is charged to the Consolidated income statement as notional finance costs (calculated at the annual rate of 3.3 per cent (2014: 3.3 per cent) based on the weighted average rate appropriate to the expected method of settlement) over the life of the associated liability. Subsequent movements in the fair value of the expected future contingent deferred consideration payment are recognised in the Consolidated income statement. Where contingent deferred consideration may be settled by the issue of either shares or loan notes, it is classified in the balance sheet in accordance with the substance of the transaction. Where the agreement gives rise to an obligation that is settled by the delivery of a variable number of shares to meet a monetary defined liability, these amounts are disclosed as debt. In accordance with IFRS 3, certain payments made to employees in respect of earn-out arrangements are treated as remuneration within the Consolidated income statement over the relating vesting period. Provisions for other liabilities and charges Provisions are recognised where there is a present obligation, arising from a past event, that has a probable future economic outflow that can be estimated reliably. The amount of each provision recognised is based on management s best estimate. Share-based payment transactions The Group has applied the requirements of IFRS 2 Share-based payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January The Group issues equity-settled and cash-settled share-based payments (LTIPs and options) to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group s estimate of the number of shares that will eventually vest. At each balance sheet date, the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the Consolidated income statement with a corresponding adjustment to equity. Fair value is measured by use of a Black-Scholes model on the grounds that there are no market-related vesting conditions. The expected life used in the model has been adjusted, based on management s best estimate, for the effects of nontransferability and exercise restrictions. Details of the risk-free rate and dividend yield used to underpin these assumptions are included in note 25. Market price on any given day is obtained from external publicly available sources. A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date for cash-settled share-based payments. Over the vesting period, where remeasurements materialise, differences are taken to the Consolidated income statement. The share-based plans are subject to performance criteria and continued employment. These are assessed on an annual basis. Further details of share options are included in note 25. Annual Report and Accounts 73

16 Notes to the consolidated financial statements continued 1 Accounting policies continued Property, plant and equipment All property, plant and equipment is stated at historical cost (or fair value on acquisition where appropriate) less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less the estimated residual value of each asset, evenly over its expected useful economic life, as follows: Property, plant and equipment Leasehold improvements Motor vehicles Fixtures, fittings and equipment Period of depreciation Period of the lease on a straight-line basis Four years Three to ten years Residual values and lives are reviewed, and adjusted if appropriate, at each balance sheet date. Inventories and work in progress Inventories are stated at the lower of cost and net realisable value. The cost of work in progress includes the costs of direct materials and purchases. Where projects have the characteristics of long-term contracts, attributable profit is only recognised once their outcome can be assessed with reasonable certainty. Such profit reflects the proportion of work on the project completed to date. Amounts recoverable on such projects are included within trade and other receivables after provision for any foreseeable losses and the deduction of applicable payments on account. Full provision is made for any losses on projects in the year in which the loss is first foreseen. Current taxation The tax expense represents the sum of the tax currently payable and deferred tax. The current tax is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred taxation Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or the initial recognition (other than a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The carrying amount of the deferred tax asset is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 74 Annual Report and Accounts