The Directors present their Strategic report and financial statements for the year ended 31 December 2021.
Western Mortgage Services Limited ("t he C ompany ") is a wholly owned subsidiary of Capita plc (indirectly held). Capita plc along with all its subsidiaries is hereafter referred to as "the Group". The Company operates within the Capita Experience division of the Group.
As shown in the C ompany's income statement on page 13 , the Company's revenue increased from £38,364k in 2020 to £43,087k in 2021. Operating profit increased from £12,037k in 2020 to £13,229k in 2021. In December 2021, the Co-operative Bank announced their strategic decision to terminate their contract with the Company with effect from 30th November 2022. The two companies will therefore work together on a transfer of services throughout 2022. This termination will have a material effect on Western Mortgage Services revenue and Operating Profit from December 2022. During 2021 revenue and operating profit included £3.2m of termination compensation. This termination will not impact the Securitisation contracts or the ongoing going concern position of the Company.
Until 2020, costs that were directly attributable to revenue from operations were disclosed as administrative expenses. The Directors believe the nature of such costs are directly related to providing mortgage administration services and should be classified as 'Cost of Sales' in 2021 as it more appropriately reflects the nature of such costs and provides a better understanding of the Company's performance and operations. The Company has therefore re-presented the comparative information for 2020.
The balance sheet on pages 14 & 15 of the financial statements shows the Company's financial position at the year end. The Company's net assets increased from £74,781k in 2020 to £85,576k in 2021. Details of amounts owed by/to its parent Company and fellow subsidiary undertakings are shown in notes 12 and 14 to the financial statements.
The C ompany did not incur any significant impact from the ongoing COVID - 19 pandemic. All government guidelines were adhered to throughout the year.
Key performance indicators used by Capita plc are operating margins, free cash flow and return on capital employed. Capita plc and its subsidiaries manage their operations on a divisional basis and as a consequence, some of these indicators are monitored only at a divisional level. The 20 21 performance of the Capita Experience division of Capita plc is discussed in the G roup's annual report which does not form part of this report.
Western Mortgage Services Limited is authorised and regulated by the Financial Conduct Authority and is indirectly owned by Capita plc. The requirements of these regulations apply to Western Mortgage Services Limited only and it does not consolidate at a group level.
The Company has adequate capital resources and there are no foreseen events which may cause an adverse impact on capital requirement. Capital requirement calculation is as follows :
The risks faced by the Company can be summarised as follows:
Strategic :
Changes in economic and market conditions such as contract pricing and competition.
Financial:
Significant failures in internal systems of control and lack of corporate stability.
Operational:
Including recruitment and retention of staff, maintenance of reputation and strong supplier and customer relationships, operational IT risk, and failures in information security controls.
Compliance:
Non-compliance with laws and regulations. The Company must comply with an extensive range of requirements that govern and regulate its business, and decisions by regulators can affect the Company's business and operations and these effects are often adverse.
Credit and residual risk
Credit risk is not considered to be significant for the Company. Credit exposure is limited to routine working capital related balances primarily with its key commercial partner.
Market and securitisation risk
Western Mortgage Services Limited is not authorised to trade as principal and has no trading book. The Company has no Foreign Exchange risk. Securitisation risk is not applicable to the Company.
Liquidity risk
The Company has developed a Liquidity Management Framework to formalise the monitoring and control processes in place to ensure Western Mortgage Services Limited has sufficient liquid resources to meet its liabilities as they come due. This risk is therefore considered to be minimal.
Insurance risk
This is not applicable as the Company does not write insurance.
Interest rate risk
Western Mortgage Services Limited has no material exposure to interest rate risk .
Business risk
Business risk, or procyclicality (the risk of deterioration in business or economic conditions requiring a firm to raise capital), is not believed to be significant in Western Mortgage Services Limited due to the type of activities it is engaged in.
Concentration risk
The contract with the Co-operative Bank will cease on 30th November 2022. Western Mortgage Services L imi t e d will retain its Securitisation contracts with other counterparties.
Group risk
The Capita Plc accounts for 202 1 state a material uncertainty related to going concern, which sets out the risks around the refinancing of Capita Plc and the planned disposals. The Company is closely monitoring this situation and key risk indicators with early warnings are in place as part of the Risk Framework. The Directors do not expect this risk to materialise. Group risk is reviewed on at least a yearly basis.
Leverage risk
The Company currently has no borrowing.
Data Protection risk
The risk in this area is critical because there are new threats which need to be managed as well as programmes of work to be completed to enhance the control around data and IT systems. The risks and its potential impact s are as follows:
loss of client or customer data;
loss of one of Company’s data centres and not having disaster recovery and/or business continuity plans in place;
loss of service availability to Company and/or its customers due to cyber-attack;
unauthorised or inappropriate access to data due to cyber-attack;
reputational damage leading to loss of existing contracts and difficulty when bidding for new business; and
potential or significant regulatory fines.
Other risk
The Directors have considered the current Ukraine/Russian conflict, but do not anticipate this having any material impact on Western Mortgage Services.
To mitigate the effect of these risks and uncertainties, the Company adopts a number of systems and procedures, including:
Regularly reviewing trading conditions to be able to respond quickly to changes in market conditions.
Applying procedures and controls to manage compliance, financial and operational risks, including adhering to an internal control framework.
Capita plc has also implemented appropriate controls and risk governance techniques across all of its businesses. These are discussed in the Capita plc’s annual report which does not form part of this report.
Capita plc’s section 172 statement applies to both the Division and the Company to the extent it relates to the Company’s activities. Common policies and practices are applied across the Group through divisional management teams and a common governance framework. The following disclosure describes how the Directors have regard to the matters set out in section 172(1a) to (f) and forms the Directors’ statement as required under section 414CZA of the Companies Act 2006.
Further details of the Group’s approach to each stakeholder are provided in Capita plc’s section 172 statement on pages 40 and 41 of Capita plc’s 2021 Annual Report.
Our People |
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Why they are important?
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They deliver our business strategy; they support the organisation to build a values-based culture; and they deliver our products and services ensuring client satisfaction. |
What matters to them? |
Flexible working, learning and development opportunities leading to career progression, fair pay and benefits as a reward for performance, two-way communication, and feedback. |
How we engaged? |
People surveys, regular all-employee communications, employee director participation in Board discussions, employee focus groups and network groups and workforce engagement on remuneration. |
Topics of Engagement |
Protection of employees during Covid-19, human resources policies during Covid-19, future ways of working as a result of Covid-19, and creating an inclusive workplace. |
Outcomes and actions |
Issue of Capita specific Covid-19 guidance and regular updates, new and temporary human resource policies; increased provision and support for employee wellbeing and flexible working; and simplification of property portfolio and office space. |
Risks to stakeholder relationship |
Our ability to recruit due to the global economic bounceback, our ability to retain people, impacting the quality of service we can provide and our ability to change our culture and practices in line with our responsible business agenda. |
Key Metrics |
Employee net promoter score, people survey completion level. |
Clients and Customers |
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Why they are important? |
They are recipients of Capita’s services; and Capita’s reputation depends on delighting them. |
What matters to them? |
High-quality service delivery; delivery of transformation projects within agreed timeframes; rapid response to support pandemic planning; and responsible and sustainable business credentials. |
How we engaged? |
Client meetings and surveys, Regular meetings with government and annual review with Cabinet Office and Created a senior client partner programme giving an experienced, single point of contact for key clients and customers. |
Topics of Engagement |
Remote working on client services as a result of Covid-19, current service delivery, possible future services, co-creation of client value propositions. |
Outcomes and actions |
Feedback provided to business units to address any issues raised, client value propositions team supporting divisions with co‑creation ideas; and senior client partner programme undertaking client-focused growth sprints to build understanding of client issues and ideas to help address them. |
Risks to stakeholder relationship |
Loss of business by not providing the services they want, damage to reputation by not delivering to their requirements. |
Key Metrics |
Customer net promoter score, specific feedback on client engagements. |
Supplier and Partners |
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Why they are important? |
They share our values and help us deliver our purpose; maintain high standards in our supply chain; and achieve social, economic and environmental benefits aligned to the Social Value Act. |
What matters to them? |
Payments made within agreed payment terms, clear and fair procurement process, building lasting commercial relationships, and working inclusively with all types of business. |
How we engaged? |
Supplier meetings throughout the source to procure process, regular reviews with suppliers, and supplier questionnaires. |
Topics of Engagement |
Supplier payments, sourcing requirements, supplier performance, and the Supplier Charter. |
Outcomes and actions |
Alignment of payments with agreed terms, supplier feedback on improvements to the procurement process, improvement plans and innovation opportunities, and improved adherence to the Supplier Charter. |
Key Metrics |
Percentage of supplier payments within agreed terms, supplier relationship management feedback score, SME spend allocation; and supplier diversity profile. |
Investors |
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Why they are important? |
They own the business and provide essential capital; and their input and feedback is considered when making decisions. |
What matters to them? |
Reporting on strategic, operational and ESG factors; financial performance; access to the Board and senior management; and regular communication. |
How we engaged? |
Financial and other reports and trading updates, regular investor programme with Board and feedback throughout the year, discussions around AGM on resolutions and governance topics, dedicated investor relations contacts and email inbox and regular Board reports from investor relations function and external advisers. |
Topics of Engagement |
Transformation progress, balance sheet and liquidity, ongoing impact of Covid-19 and governance. |
Outcomes and actions |
More frequent market communication; and increased level of engagement with largest shareholders. |
Risks to stakeholder relationship |
Changes to outsourcing market, eg government policy, delivery on strategic and financial objectives, key aspects of governance. eg remuneration |
Key metrics |
Revenue; profit; free cash flow; net debt and gearing; and AGM voting |
Society |
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Why they are important? |
Capita is a provider of key services to government impacting a large proportion of the population. |
What matters to them? |
Social mobility, youth skills and jobs; digital inclusion; diversity and inclusion; climate change; business ethics and accreditations and benchmarking. |
How we engaged? |
Memberships of non-governmental organisations, charitable and community partnerships, external accreditations and benchmarking and working with clients, suppliers and the Cabinet Office. |
Topics of Engagement |
Youth employment, tackling digital exclusion, workplace inequalities, and climate change.
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Outcomes and actions |
Publication of net zero plan; real living wage accreditation; youth and employability programme; and commitments to tackle racism and enhance ethnic diversity. |
Risks to stakeholder relationship |
Lack of understanding of the issues important to them and insufficient communication or involvement in shaping and influencing strategies and plans. |
Key Metrics |
Net zero by 2035; community investment; workforce diversity and ethnicity data, including pay gaps. |
On behalf of the Board
The Directors present their Directors' report and financial statements for the year ended 31 December 2021.
The results for the year are set out on page 13.
No dividend was paid during the year (2020 : £nil).
The Directors who held office during the year and up to the date of signature of the financial statements were as follows:
KPMG LLP, having indicated its willingness to continue in office, will be deemed to be reappointed as auditor under section 487(2) of the Companies Act 2006.
We have audited the financial statements of Western Mortgage Services Limited (“the Company”) for the year ended 31 December 2021 which comprise the Income Statement, Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Equity, and related notes, including the accounting policies in note 1.
Material uncertainty related to going concern
We draw attention to note 1.1 to the financial statements which indicates that the company is reliant on its ultimate parent undertaking, Capita plc, with regards to its ability to continue as a going concern. The most recent financial statements of Capita plc include material uncertainties that may cast significant doubt on its ability to continue as a going concern. The reliance of the Company on Capita plc accordingly means that these events and conditions constitute a material uncertainty that may cast significant doubt on the Group’s and in turn, the Company’s ability to continue as a going concern.
Our opinion is not modified in respect of this matter.
Going concern basis of preparation
The directors have prepared the financial statements on the going concern basis. As stated above, they have concluded that a material uncertainty related to going concern exists.
Based on our financial statements audit work, we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Fraud and breaches of laws and regulations – ability to detect
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:
Enquiring of directors, internal audit and inspection of policy documentation as to the Company’s high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Company’s channel for “whistleblowing”, as well as whether they have knowledge of any actual, suspected or alleged fraud.
Reading Board Meeting minutes.
Considering the remuneration incentive schemes and performance targets for management and directors including the short-term incentive plan and long-term incentive plan for management remuneration.
Using analytical procedures to identify any unusual or unexpected relationships.
Fraud and breaches of laws and regulations – ability to detect (continued)
We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit.
As required by auditing standards and taking into account possible pressures to meet profit and revenue targets, we perform procedures to address the risk of management override of controls and risk of fraudulent revenue recognition. In particular, the risk that management may be in a position to make inappropriate accounting entries for long-term contracts, and the risk of bias in accounting estimates and judgements such as contract modifications and terminations.
We also identified a fraud risk related to inappropriate capitalisation, recognition and measurement of contract fulfilment assets in response to meeting profit targets.
We performed procedures including:
Identifying journal entries and other adjustments to test, based on risk criteria and comparing the identified entries to supporting documentation. These included those posted by senior finance management, those posted and approved by the same user and those posted to unusual accounts.
Challenging whether the revenue recognised is appropriate based on the underlying contractual terms and evidence obtained.
Reviewing management’s contract profitability forecasts and challenging the key assumptions in order to assess whether any impairment should be recorded against the carrying value of the contract fulfilment assets
Selecting samples from additions to contract fulfilment assets during the year, which we agreed back to supporting calculations and source documentation to assess whether the capitalisation was appropriate
Assessing significant accounting estimates for bias.
Identifying and responding to risks of material misstatement related to compliance with laws and regulations
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations.
As the Company is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s procedures for complying with regulatory requirements.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Company is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation and taxation legislation, and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Secondly, the Company is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: data protection laws, anti-bribery, employment law, and certain aspects of company legislation recognising the nature of the Company’s activities and its legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach.
The directors are responsible for the strategic report and the directors’ report. Our opinion on the financial statements does not cover those reports and we do not express an audit opinion thereon.
Our responsibility is to read the strategic report and the directors’ report and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work:
we have not identified material misstatements in the strategic report and the directors’ report;
in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities .
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Share capital – The balance classified as share capital is the nominal proceeds on issue of the Company’s equity share capital, comprising 37,550,000 ordinary shares.
Retained earnings - Represents accumulated profits of the Company kept to accumulate in the Company after dividends are paid and retained in the business as working capital.
Western Mortgage Services Limited is a C ompany incorporated and domiciled in the U nited K ingdom .
The financial statements are prepared under the historical cost basis except where stated otherwise and in accordance with applicable accounting standards.
In determining the appropriate basis of preparation for the annual report and financial statements for the year ended 31 December 2021, the Company’s Directors (“the Directors”) are required to consider whether the Company can continue in operational existence for the foreseeable future, being a period of at least 12 months following the approval of these financial statements. The Directors have concluded that it is appropriate to adopt the going concern basis, having undertaken a rigorous assessment of the financial forecasts, key uncertainties, and sensitivities, as set out below.
Board Assessment
Base case scenario
The financial forecasts used for the going concern assessment are derived from the 2022-2023 business plans (‘BP’) for the Company which have been subject to review and challenge by management and the Directors. The Directors have approved the projections. Under the base case scenario, completion of Capita plc’s group wide transformation programme has simplified and strengthened the business and facilitates further efficiency savings enabling sustainable growth in revenue, profit, and cash flow over the medium term.
Severe but plausible downside
In addition to the base case, the Directors have also considered severe but plausible downside scenarios. The Directors have taken account of trading downside risks, which assume the Company is not successful in delivering the anticipated levels of revenue, profit, and cash flow growth. The downside scenario used for the going concern assessment also includes potential adverse financial impacts due to additional inflationary pressure which cannot be passed on the customers, not achieving targeted margins on new or major contracts, unforeseen operational issues leading the contract losses and cash outflows, and unexpected potential fines and losses linked to incidents such as data breaches and/or cyber-attacks.
Offsetting these risks the Directors have considered available mitigations within the direct control of the Company, including reductions to variable pay rises, setting aside any bonus payments and limiting discretionary spend.
Reliance on Capita Plc ('the Group')
The Director’s assessment of going concern has considered the extent to which the Company is reliant on the Group. The Company is reliant on the Group in respect of the following:
provision of administrative support services and should the Group be unable to deliver these services, the Company would have difficulty in continuing to trade.
participation in the Group’s notional cash pooling arrangements, of which £ 57,163,146 (an additional £1,000,000 is restricted and as such not included in the cash pool amount) was held as of 31 March 202 2 . In the event of a default by the Group, the Company may not be able to access its cash balance within the pooling arrangement.
recovery of receivables of £41, 345 , 073 from fellow Group undertakings as of 31 March 202 2 . If these receivables are not able to be recovered when forecast by the Company, then the Company may have difficulty in continuing to trade.
additional funding that may be required if the Company suffers potential future losses .
Given the reliance the Company has on the Group, the Directors have considered the financial position of the ultimate parent undertaking as disclosed in its most recent financial statements, being for the year ended 31 December 202 1 .
Ultimate parent undertaking – Capita plc
The Capita plc Board (‘the Board’) concluded that it was appropriate to adopt the going concern basis, having undertaken a rigorous assessment of the financial forecasts, key uncertainties, and sensitivities, when preparing the Group’s consolidated financial statements to 31 December 2021. These financial statements were approved by the Board on 9 March 2022 and are available on the Group’s website ( www.capita.com/investors ). Below is a summary of the position at 9 March 2022:
Accounting standards require that ‘the foreseeable future’ for going concern assessment covers a period of at least twelve months from the date of approval of these financial statements, although those standards do not specify how far beyond twelve months a Board should consider. In its going concern assessment, the Board has considered the period from the date of approval of these financial statements to 31 August 2023, which is just less than eighteen months from the date of approval of the Group financial statements ('the going concern period') and which aligns with the expiry of the revolving credit facility (RCF). The Board has also considered any material committed outflows beyond this period in forming their assessment, including the extension of the RCF which is a key consideration.
The base case financial forecasts demonstrate liquidity headroom and compliance with all covenant measures throughout the going concern period to 31 August 2023.
The principal mitigation to the possibility of insufficient liquidity in the severe but plausible downside scenario is the continuation of the Board approved disposal programme which covers businesses that do not align with the Group’s longer-term strategy. The Group has a strong track record of executing major disposals. In 2021, the Board targeted to achieve £700m of disposal proceeds by 30 June 2022 and will exceed this target on the completion of the announced disposal of Trustmarque and Speciality Insurance businesses. The disposal programme continues, with further disposal processes launched in early 2022. The Board is confident that the disposal programme will be delivered, thereby introducing substantial net cash proceeds to the Group, albeit with a corresponding removal of consolidated profits and cash flows associated with the disposal businesses.
In addition to the ongoing disposal programme, the Group may seek to mitigate the liquidity risks which might arise in the downside scenario by seeking further sources of financing beyond its existing committed funding facilities. The Board has been successful in obtaining new and extended financing facilities in recent years and an immediate mitigating action includes the extension of the current RCF which currently expires on 31 August 2023.
Material uncertainties related to the group
The Board recognises that the disposal programme requires agreement from third parties and that major disposals may be subject to shareholder and, potentially, lender approval. Similarly, any new refinancing, including the extension of the RCF, requires agreement with lenders. Such agreements and approvals are outside the direct control of the Group. Therefore, given that some of the mitigating actions which might be taken to strengthen the Group's liquidity position in the severe but plausible downside scenario are outside the control of the Group, this gives rise to material uncertainties, as defined in accounting standards, relating to events and circumstances which may cast significant doubt about the Group’s ability to continue as a going concern and to continue in operation and discharge its liabilities in the normal course of business.
Reflecting the Board’s confidence in the benefits expected from the completion of the transformation programme and execution of the approved disposal programme coupled with the potential to obtain further financing beyond its existing committed funding facilities, the Group continues to adopt the going concern basis in preparing these financial statements. The Board has concluded that the Group will be able to continue in operation and meet their liabilities as they fall due over the period to 31 August 2023. Consequently, these financial statements do not include any adjustments that would be required if the going concern basis of preparation were to be inappropriate.
Conclusion
Although the Company has a reliance on the Group as detailed above, even in a severe but plausible downside for both the Company and the Group, the Directors are confident the Company will continue to have adequate financial resources to continue in operation and discharge its liabilities as they fall due over the period to 31 August 2023 (the “going concern period”). Consequently, the annual report and financial statements have been prepared on the going concern basis.
However, as the Group’s financial statements have identified material uncertainties giving rise to significant doubt over the Group’s ability to continue as a going concern, given the Company’s reliance on the Group as set out above, this in turn gives rise to a material uncertainty relating to events and circumstances which may cast significant doubt about the Company’s ability to continue as a going concern and, therefore, that the Company may be unable to continue in operation and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments which would be required if the going concern basis of preparation were to be deemed inappropriate.
The Company has applied FRS101 – Reduced Disclosure Framework in the preparation of its financial statements. The Company has prepared and presented these financial statements by applying the recognition, measurement and disclosure requirements of international accounting standards in conformity with the requirements of the Companies Act 2006.
The Company's ultimate parent undertaking, Capita plc, includes the Company in its consolidated statements. The consolidated financial statements are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and with UK-adopted International Financial Reporting Standards (IFRSs) and the Disclosure and Transparency Rules of the UK's Financial Conduct Authority. These are available to the public and may be obtained from Capita plc’s website on https://www.capita.com/investors .
In these financial statements, the Company has applied the disclosure exemptions available under FRS 101 in respect of the following disclosures:
A cash flow statement and related notes;
Comparative period reconciliations for share capital, tangible fixed assets and intangible assets;
Disclosures in respect of capital management;
The effects of new but not yet effective IFRSs except amendments to IAS 37 ;
Ce r tain disclosures as required by IFRS 15 Revenue from Contracts with Customers ;
Ce r tain disclosures as required by IFRS 1 6 Leases ; and
Disclosures in respect of the compensation of key management personnel.
As the consolidated financial statements of Capita plc include equivalent disclosures, the Company has also taken the disclosure exemptions under FRS 101 available in respect of the following disclosure:
Certain disclosures required by IFRS 2 Share Based Payments in respect of Group settled share based payments;
Certain disclosures required by IAS 36 Impairments of assets in respect of the impairment of indefinite life intangible assets; and
Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures .
The IASB has issued the following standards, amendments, and interpretations, with an effective date after the date of these consolidated financial statements. These are effective for annual reporting periods beginning on or after the date indicated:
New amendments |
Effective date |
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37) |
1 January 2022 |
Annual Improvements to IFRS Standards 2018–2020 |
1 January 2022 |
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) |
1 January 2022 |
Reference to the Conceptual Framework (Amendments to IFRS 3) |
1 January 2022 |
Classification of Liabilities as Current or Non-current (Amendments to IAS 1) |
1 January 2023 |
IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance Contracts |
1 January 2023 |
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) |
1 January 2023 |
Definition of Accounting Estimates (Amendments to IAS 8) |
1 January 2023 |
Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) |
1 January 2023 |
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37)
The amendments specify which costs an entity includes in determining the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous. The amendments apply for annual reporting periods beginning on or after 1 January 2022 to contracts existing at the date when the amendments are first applied. At the date of initial application, the cumulative effect of applying the amendments is recognised as an opening balance adjustment to retained earnings or other components of equity, as appropriate. The comparatives are not restated.
The Company is in the advanced stages of the assessment of the amended standard and based on its current assessment, it is not expected to have any material impact to the Company’s financial statements.
Revenue is earned within the United Kingdom.
Revenue recognition is based on the principles set out in IFRS 15.
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 Company incurs to deliver the contractual commitments and whether such costs should be expensed as incurred or capitalised.
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.
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.
The Company has multiple components to be delivered such as transformation and the delivery of outsourced services, and management has applied judgement in accounting for these as separate performance obligations.
At contract inception, the total transaction price is estimated as being the amount to which the Company expects to be entitled and has rights to under the present contract. This includes an assessment of any variable consideration where the Company'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 Company 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 Company sells a customer bespoke solution, and in these cases the Company typically uses the expected cost-plus margin or a contractually stated price approach to estimate the standalone selling price of each performance obligation.
For each performance obligation, the Company determines if revenue will be recognised over time or at a point in time. Where the Company recognises revenue over time for long term contracts, this is in general due to the Company 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 Company applies a revenue recognition method that faithfully depicts the Company’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 Company has promised to transfer to the customer.
The Company 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 using a method of time elapsed which requires minimal estimation.
If performance obligations in a contract do not meet the overtime criteria, the Company recognises revenue at a point in time (see below for further details).
Transactional (Point in time) contracts
The Company delivers a range of goods or services 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 performance obligations categorised within this revenue type includes fees received in relation to delivery of professional services .
Long term contractual - greater than 2 years
The Company provides a range of services in various 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 Company 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 Company 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.
The Company recognises revenue using the output method as it best reflects the nature in which the Company is transferring control of the goods or services to the customer.
Contract modifications
The Company’s contracts can be 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 Company’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:
a. prospectively as an additional separate contract;
b. prospectively as a termination of the existing contract and creation of a new contract;
c. as part of the original contract using a cumulative catch up; or
d. as a combination of (b) and (c).
For contracts for which the Company 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.
Contract related assets and liabilities
As a result of the contracts which the Company enters into with its customers, a number of different assets and liabilities are recognised on the Company’s balance sheet. These include but are not limited to:
Property, plant and equipment
Intangible assets
Contract fulfilment assets
Trade receivables
Accrued income
Deferred income
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 Company 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 Company 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.
Utilisation: The utilisation charge is included within cost of sales. The Company utilises contract fulfilment assets over the expected contract period using a systematic basis that mirrors the pattern in which the Company transfers control of the service to the customer. Judgement is applied to determine this period.
Derecognition: A contract fulfilment asset is derecognised either when it is disposed of or when no further economic benefits are expected to flow from its use or disposal.
Impairment: At each reporting date, the Company determines whether or not the contract fulfilment assets are impaired by comparing the carrying amount of the asset to the remaining amount of consideration that the Company expects to receive less the costs that relate to providing services under the relevant contract. In determining the estimated amount of consideration, the Company 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.
These costs may include process mapping and design, system development, project management, hardware (generally in scope of the Company’s accounting policy for property, plant and equipment), and software licence costs (generally in scope of the Company’s accounting policy for intangible 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 Company expects to recover them. The Company 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 Company 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 Company 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 Company has determined that the following costs may be capitalised as contract assets
legal fees to draft a contract (once the Company has been selected as a preferred supplier for a bid); and
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 Company 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 Company 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.
Management is required to determine the recoverability of contract related assets within property, plant and equipment, intangible assets as well as contract fulfilment assets, accrued income and trade receivables. At each reporting date, the Company determines whether or not the contract fulfilment assets are impaired by comparing the carrying amount of the asset to the remaining amount of consideration that the Company expects to receive less the costs that relate to providing services under the relevant contract. In determining the estimated amount of consideration, the Company 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.
Onerous contracts
The Group reviews its long-term contracts to ensure that the expected economic benefits to be received are in excess of the unavoidable costs of meeting the obligations under the contract. The unavoidable costs are the lower of the net costs of termination or the costs of fulfilment of the contractual obligations. The Group recognises the excess of the unavoidable costs over economic benefits due to be received as an onerous contract provision.
Deferred and accrued income
The Company has a range of payment schedules dependent upon the nature and type of services being provided. Payments for these 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 Company recognises a deferred income contract liability for this difference. Where payments made are less than the revenue recognised at the period end date, the Company recognises an accrued income contract asset for this difference .
Depreciation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:
The Company has taken land and buildings on lease.
The determination whether an arrangement is, or contains, a lease is based on whether the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.
The following sets out the Company’s lease accounting policy for all leases with the exception of leases with low value and term of 12 months or less which are expensed to the consolidated income statement.
The Company as a lessee – Right-of-use assets and lease liabilities
At the inception of the lease, the Company recognises a right-of-use asset at cost, which comprises the present value of minimum lease payments determined at the inception of the lease. Right-of-use assets are depreciated using the straight-line method over the shorter of estimated life or the lease term. Depreciation is included within administrative expenses in the consolidated income statement. Amendment to lease terms resulting in a change in payments or the length of the lease results in an adjustment to the right-of-use asset and liability. Right-of-use assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be fully recoverable.
The Company recognises lease liabilities where a lease contract exists and right-of-use assets representing the right to use the underlying leased assets.At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of the lease payments to be made over the lease term.
In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Incremental borrowing rates are determined monthly and depend on the term, country, currency and start date of the lease. The incremental borrowing rate is determined based on a series of inputs including: the risk-free rate based on swap market data; a country-specific risk adjustment; a credit risk adjustment; and an entity-specific adjustment where the entity risk profile is different to that of the Group.
The lease liability is subsequently remeasured (with a corresponding adjustment to the related right-of-use asset) when there is a change in future lease payments due to a renegotiation or market rent review, a change of an index or rate or a reassessment of the lease term.
Lease payments are apportioned between a finance charge and a reduction of the lease liability based on the constant interest rate applied to the remaining balance of the liability. Interest expense is included within net finance costs in the consolidated income statement. Lease payments comprise fixed payments, including in-substance fixed payments such as service charges and variable lease payments that depend on an index or a rate, initially measured using the minimum index or rate at inception date. The payments also include any lease incentives and any penalty payments for terminating the lease, if the lease term reflects the lessee exercising that option. The lease term determined comprises the non-cancellable period of the lease contract. Periods covered by an option to extend the lease are included if the Company has reasonable certainty that the option will be exercised, and periods covered by an option to terminate are included if it is reasonably certain that this will not be exercised. The Company has elected to apply the practical expedient in IFRS 16 paragraph 15 not to separate non-lease components such as service charges from lease rental charges.
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised, except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Investments and other financial assets
Classification
The Company classifies its financial assets in the following measurement categories:
those to be measured subsequently at fair value (either through OCI or through profit or loss); and
those to be measured at amortised cost.
The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.
Recognition and derecognition
Regular way purchases and sales of financial assets are recognised on trade date (that is, the date on which the Company commits to purchase or sell the asset). Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.
Measurement
At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their cashflows are solely payment of principal and interest.
Impairment
The Company assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, resulting in trade receivables recognised and carried at original invoice amount less an allowance for any uncollectible amounts based on expected credit losses.
Trade and other receivables
The Company assesses on a forward looking basis the expected credit losses associated with its receivables carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, resulting in trade receivables recognised and carried at original invoice amount less an allowance for any uncollectible amounts based on expected credit losses.
Trade and other payables
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Cash and cash equivalents
Cash in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of 3 months or less. For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
The preparation of financial statements in conformity with generally accepted accounting principles requires the Directors to make judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported income and expense during the reported periods. Although these judgements and assumptions are based on the Directors' best knowledge of the amount, events or actions, actual results may differ from these estimates.
Due to the size and complexity of some of the Company’s contracts, there are significant judgements to be applied, such as recognition of contract fulfilment assets that result from the performance of the contract.
The total revenue of the C ompany for the year has been derived from its principal activity wholly undertaken in the United Kingdom.
Audit fees are borne by the ultimate parent undertaking, Capita plc. The audit fee for the current period was £36,000 (2020: £ 25,000) . The Company has taken advantage of the exemption provided by regulations 6(2)(b) of The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 not to provide information in respect of fees for other (non-audit) services as this information is required to be given in the group accounts of the ultimate parent undertaking, which it is required to prepare in accordance with the Companies Act 2006.
The reconciliation between tax charge and the accounting profit multiplied by the UK corporation tax rate for the years ended 31 December 2021 and 2020 is as follows:
A change to the main UK corporation tax rate was substantively enacted on 24 May 2021. The rate applicable from 1 April 2023 increases from 19% to 25%. The deferred tax asset at 31 December 2021 has been calculated based on this rate, resulting in a £99,000 tax credit to the income statement in 2021.
The Company is required to perform repairs on leased properties prior to the properties being vacated at the end of their lease term. Dilapidations for such costs are made where legal obligation is identified and the liability can be reasonably quantified. As the lease end date is February 2023, the provision will not be released until 2023 and has hence been classified as non-current.
Other provisions of £1,583k pertains to IT costs for securitised mortgages administered by the entity and £60k in respect of complaint remediation. These are likely to unwind over a period of 12 months.
The average monthly number of employees (including non-executive D irectors) w ere :
Their aggregate remuneration comprised:
The Company's immediate parent undertaking is Capita Life & Pensions Regulated Services Limited , a company incorporated in England and Wales. The Company's ultimate parent undertaking is Capita plc, a company incorporated in England and Wales. The accounts of Capita plc are available from the registered office 65 Gresham Street, London, England, EC2V 7NQ.
Until 2020, costs that were directly attributable to revenue from operations were disclosed as administrative expenses. The Directors believe the nature of such costs are directly related to providing mortgage administration services and should be classified as 'Cost of Sales' in 2021 as it more appropriately reflects the nature of such costs and provides a better understanding of the Company's performance and operations.
The above implementation of voluntary change in accounting policy as permitted by IAS 8.14(b) is to improve the presentation of net results from operations and provides more relevant information about the effects of such transactions on the entity's financial performance and financial position. Accordingly, the comparative information for 2020 has been re-presented to reflect an increase in cost of sales by £4,932k and a reduction of administration expenses by the same amount. There is no impact on the total profit for the year or retained earnings as a result of this change in presentation.
There are no significant events which have occurred after the reporting period.