The directors present the strategic report for the year ended 30 June 2020.
Azets Holdings Limited (formerly Baldwins Holdings Limited) (the "company") heads the UK sub-group of the Azets (the "Azets group") and provides accountancy, advisory and taxation services in the UK.
Prior to 30 June 2017, the company acted as a holding company. From 1 July 2017, all Azets UK acquisitions were undertaken directly by the company via either trade and assets acquisitions or post completion hive up.
Hive up of subsidiaries and change in basis of preparation of the financial statements
On 1 July 2019, the trade and assets of the majority of the company's subsidiaries were transferred to the company via hive up arrangements, and the company became the main trading entity for the Azets UK group of companies, with the results of all of the company’s former trading subsidiaries now reported by the company. This involved the company acquiring the trade and assets of its subsidiaries for consideration based on either net book value or fair value and settled in the form of an intercompany balance. The subsidiaries of the company then proceeded to distribute the intercompany balance to the company where possible. The company recorded the net assets transferred based on amounts recorded in the consolidated financial statements of Azets Topco Limited and as a result recognised goodwill of £58 million and a merger reserve of £5m within equity as a result of these transactions.
The company has elected to reflect the results of the businesses hived up through this process prospectively from 1 July 2019 the effective date of the underlying agreements such that the comparative information reported is unchanged as a result. Details are included in note 12 to the financial statements.
Following the hive up of the trade and assets of the subsidiaries, and in order to align the results and financial position of the company more closely to those reported in the Azets consolidated accounts, the company has changed the basis of preparation of its financial statements from FRS102 to FRS1 01 and the comparative information reported in these accounts has been restated accordingly. Details are included in note 31 to the financial statements.
Overall Azets group strategy
Th e year ended 30 June 2020 marked the completion of Phase I of the Azets group’s strategy of building scale in the UK and the Nordics via a targeted acquisitions programme. As the g roup moved into Phase II of its strategy during the year, a group-wide transformation programme was launched and a new management team was appointed as a part of this. More details of Phase II of the g roup’s strategy and it's impact on the Company are included in the future developments section below.
Impact of Covid-19
On 22 March 2020, the World Health Organisation declared the outbreak of COVID-19 to be an international pandemic. As the UK entered lockdown the company diverted to home working with minimal disruption, focused on supporting clients and took immediate and decisive action to manage its cash position.
The company continued to trade well through the pandemic and maintained a strong cash balance. The directors took advantage of the various Government assistance programmes available in the UK, including the deferral of payroll taxes and VAT and use of the UK’s Job Retention Scheme. During the year, the company received income of £2.5 million from the UK Job Retention Scheme. Subsequent to the year end, the company repaid £3.6m to the UK Government, being the total assistance received including amounts received in FY20 and FY21.
Performance during the year
Revenue for the year at £183.7 million was £116.4 million higher than prior year (2019: £67.3 million) reflecting the results of the companies hived up on 1 July 2019 and the impact of acquisitions made during the current and prior years.
The main measure of the c ompany’s profit performance is operating profit from continuing operations before depreciation, interest, taxation, intangible asset amortisation and exceptional items (“EBITDAE”). EBITDAE for the year was £ 18.5 million (2019: £3.5 million). EBITDAE for the year was impacted by the hive up of the trade
of the subsidiaries during the year and the impact of adoption of IFRS 16 "Leases".
After the non-cash depreciation (£ 8 . 4 million) and amortisation charges (£1 3 . 2 million) and exceptional items of £ 45.7 m , there was an operating loss for the year of £4 8 . 8 million (2019: £4.0 million).
Exceptional items included within operating loss of £ 45.7 million (2019: £2.5 million) include impairment charges related to goodwill, intangible and lease assets of £38. 6 million and other exceptional costs of £7.1 million. Other e xceptional costs principally relate to costs associated with the ongoing transformation programme, professional and other advisory fees related to acquisitions made during the year along with post-acquisition integration costs.
Following the trade and assets hive ups, the c ompany received dividends of £29.2 million from its subsidiaries and recorded associated impairment charges to the cost of investment of £15.9m.
There was a net interest charge of £12.3 million (2019: £6. 5 million) and a tax credit of £ 4.2 million (2019: £0.8 million) resulting in a loss after tax for the year of £4 3 . 5 million (2019: £9.5 million).
The balance sheet shows the c ompany’s financial position at the year end. Net current liabilities of £136. 6 million reflect the financing structure of the c ompany whereby previous acquisitions have been funded via repayable on demand intercompany loans totalling £183.3 million at 30 June 2020. Subsequent to the year-end, the company has obtained agreement that these loans will not be repayable before 31 December 2022. Excluding these loans, the Company has net current assets of £46.7 million as at 30 June 2020.
Cash at 30 June 2020 of £29.1 million reflects the actions taken to preserve cash during the early months of the Covid-19 pandemic and improved working capital management during the year.
The c ompany’s financial position is considered satisfactory in terms of working capital and cash, and the directors believe the c ompany to be well positioned for future growth.
Principal risks and uncertainties
Following the hive up of trade and assets from the subsidiaries, the risk to the company related to changes in value of investments in subsidiaries is no longer considered to be significant.
The company is exposed to market risk and price pressure from competitors which could significantly impact the valuation of goodwill or other intangible assets as well as impacting trading performance.
The company monitors all aspects of risk including economic risk, competition and changes in market conditions, financial risk and customer dependencies. The company has a large number of clients that reduces the risk that it is overly dependent on a single customer.
The company does not expect to be significantly impacted by the potential economic issues associated with the UK exit of the European Union, given all its operations are in the UK.
Credit risk
The company has implemented policies that require appropriate credit checks on potential customers before sales are made. Credit risk is managed by close attention to credit control procedures.
Liquidity risk
The company is reliant upon its immediate parent for funding of acquisitions and other financing requirements. The company actively manages its working capital requirements to ensure it has sufficient funds for its operations.
Covid-19
The Covid-19 pandemic has brought, and continues to bring, significant uncertainty to the business environment. The pandemic is impacting many of the company’s clients as well as the manner in which the company and its staff are able to work. This creates additional risk for the company both in terms of its ongoing ability to secure new clients and its ongoing ability to service new and existing clients. It also has implications for the company should clients face challenges in respect of their own ongoing ability to operate or to require, and be able to pay for, the company’s services.
The company acted quickly to enable staff to work from home wherever possible and this continues to be the case, whilst carefully managing plans for staff to return to working in offices when that is appropriate.
The directors are actively monitoring the risks associated with the virus. They took early, decisive action at the start of the pandemic to manage the cost base of the business. This included a voluntary 20% salary reduction for the senior leaders for a three month period. Other staff moved to a voluntary four day working week with associated reduced remuneration. Whilst the Directors took advantage of Government assistance programmes including the use of the Job Retention Scheme along with deferral of payroll taxes and VAT as well as other measures to control the cash flows of the company, it has subsequent to the yearend paid back the assistance provided by the UK Government under the Job Retention Scheme.
As the pandemic has progressed, the company has maintained a strong cash flow and while the focus on cash management and cost reduction has continued, staff have reverted back to their original terms and conditions.
Acquisitions
The company acquired the trade and certain assets of a number of accountancy practices during the year as set out below:
• Kelsall Steel on 5 July 2019 for consideration of £1.0 million
• Treasury Accountants on 26 July 2019 for consideration of £0.7 million
• Rothmans on 26 July 2019 for consideration of £6.4 million
• Williamson & Dunn on 2 August 2019 for consideration of £4.6 million
• Gale & Co on 30 September 2019 for consideration of £0.5 million
The company also acquired the shares of the following companies, with an immediate transfer of the trade and assets to the company:
• Perrins Limited on 5 July 2019 for consideration of £1.0 million
• Gardners Accountants Limited on 13 September 2019 for consideration of £1.8 million
• WK Financial Planning Limited on 8 November 2019 for consideration of £0.2 million
All acquisitions are businesses who provide accountancy, advisory and taxation services in the UK. The total consideration for the above acquisitions amounted to £16.2 million and resulted in the recognition of intangible assets in respect of goodwill of £ 4.6 million and customer relationships of £ 9.5 million .
The hive up of the businesses on 1 July 2019 was for a total consideration of £ 49.0 million and resulted in the recognition of intangible assets in respect of goodwill of £ 58.4 million, customer relationships of £ 42.4 million and brands of £0.3 million .
In addition, during the year, the c ompany acquired customer lists from three businesses at a cost of £0.4 million .
Further details are set out in note 12 to the financial statements.
Future developments
The Azets group of companies continue to acquire businesses that contribute to the group’s strategic goal to become a leading international financial services group. Acquisitions completed by the company subsequent to the year-end are set out in the directors' report.
As part of t he Azets group, the Board has plans to grow the business, both in terms of revenue and profitability through organic growth within its existing core markets and through acquisition in adjacent market sectors and other geographies, which have similar market characteristics and will allow the c ompany to apply its differentiated business model.
The recent rebranding of the g roup to Azets marks the transition from Phase I to Phase II of the Azets group's strategy. Phase I was all about building scale to the business, primarily by completing a number of acquisitions. In Phase II, the objective is to b uild Azets group into a more aligned business and driving value creation with a new leadership team; a Transformation Program to optimise operational practices across the business; and by restarting our acquisitions engine with a focus on high quality accountancy businesses and complimentary business services providers.
The Wates Corporate Governance Principles for Large Private Companies serves as the framework to demonstrate how directors have had regard for the matters set out in section 172(1)(a) to (f) of the Act when performing their duties. Reporting against the Wates Principles is included in the Statement below.
Statement of Corporate Governance
For the year ended 30 June 2020, the company applied the Wates Corporate Governance Principles for Large Private Companies which can be found at www.wates.co.uk/who-we-are/corporate-governance .
As noted above, the company is a wholly owned subsidiary within the Azets group (the “group”). Prior to June 2017, the company operated solely as a holding company. From July 2017, the company started to make acquisitions directly and started to trade in its own right, albeit a significant amount of trade was still conducted through its subsidiaries. On 1 July 2019, the trade and assets of the majority of the subsidiaries were hived up into the company and the company is now the main trading vehicle for the group in the UK.
Historically, the company has been subject to the governance framework of the group. As the volume of trade being conducted through the company has increased so has the level of governance required at the company level. The directors are in the process of establishing an appropriate governance structure for the company, that is complimentary with the group, However, as would be expected for a wholly-owned group of companies, once the appropriate governance has been established and embedded at company level, certain aspects of governance will continue to be subject to arrangements at group level.
Set out below is an explanation of how the Wates Principles have been applied during the year ended 30 June 2020 (“FY20”) and any changes that have been implemented subsequent to the year end.
Principle 1 – Purpose and leadership
Purpose
The company is part of the Azets group of companies (the “group”, “Azets”), an international accounting, tax, audit, advisory and business services group. The Azets client experience is based on delivering a highly personalised service, through its local office network and its proprietary digital workplace technology, “Azets CoZone”. A unique cloud-based portal, Azets CoZone offers SMEs a market leading digital solution, with instant access to information about their business that simplifies workflows, increases operational productivity, and supports a more productive client relationship. With over 6,500 staff across the office network, the group aims to provide individuals and organisations of all sizes with the business support they require to save time, work smart and achieve their goals.
The company itself, operates across 80 locations in the UK providing a range of professional accounting, advisory, compliance and audit and assurance services to individuals and small to medium sized companies.
Both the group and the company have grown through multiple acquisitions since the inception of the group in 2016. On 1 July 2019, there was a legal entity rationalisation of the company whereby the trade and assets of the majority of its subsidiaries were hived up into the company.
In March 2020, a group-wide transformation programme was launched. This commenced during the year under review and continued through the year ended 30 June 2021 (“FY21”) and aims to builds Azets into a more aligned business; driving value creation with a new leadership team; a transformation program to standardise operational practices across the group; realize the synergy benefits from the acquisitions completed to date and creating the platform for further growth from both organic and M&A activity.
Values and Culture
The values of the company are aligned with those of the group in being Collaborative, Authentic, Respectful and Dynamic.
In addition, the company abides by the ICAEW Code of Ethics which guide members’ behaviour: Integrity, Objectivity, Professional Competence and due care, Confidentiality and Professional behaviour.
These values permeate through the way that we undertake our work and work with each other. The company operates policies and procedures designed to support staff in applying those values throughout their career. These include regular updates and webinars along with mandatory training.
Strategy
The year under review and the period up to the date of signing these financial statements has been a period of significant change. At the start of the year under review, the board comprised five directors, four of whom resigned prior to 30 June 2020. Carol Warburton was appointed to the board in June 2020, with Paul Clifford and David Owens being appointed in April 2021.
In March 2020, the World Health Organisation declared the outbreak of COVID-19 to be an international pandemic. As the UK went into lockdown, the strategy was to ensure that the business was not unduly affected by changes to the way we work, how we interacted with clients and how we kept the business operational. The company diverted to homeworking with minimal disruption and supported its clients through its “Survive, Revive, Thrive” programme. This has been the backdrop to a continuing evolution of intent to be the provider of choice for good quality professional services provided to non-Public Interest Entities in the UK. This will be achieved via organic growth and targeted acquisitions in high quality regional practices in targeted regions.
Part of the transformation programme has been to consider the path that our staff take during their time with the company, including their professional development, but equally importantly their wellbeing, especially while working from home. People are at the heart of the business and we want our staff to feel that they are integral to the success of the business and that the business considers them in all that it does.
The Board recognises that it is important employees feel able to raise concerns about conduct or ethical practices in a manner which they feel is safe and secure, a process which is aligned to the ICAEW regulated status of the company. A new policy in this respect is under review and is expected to be issued later in 2021.
Any conflicts between staff and clients are managed via an internal self reporting process ratified by an annual ‘fit and proper’ process and are also covered for directors as part of the standard board agenda.
Further work on strengthening the strategy and purpose are expected to take place during the year ending 30 June 2022 (“FY22”).
Principle 2 – Board Composition
The company is subject to oversight by the group board and as such during the year ended 30 June 2020, the company was not undertaking regular board meetings, as oversight was at a higher level within the group. The group board includes the Chairman, investor directors, non-executive and executive directors.
The board of directors of the company (the “Board”) comprises executive directors only, the company has not appointed a Chairman or non-executive directors. It is envisaged that non-executive oversight will continue to be exercised at group level.
The Board is collectively responsible for establishing the framework and procedures to govern their work and to ensure the appropriate discharge of their legal and regulatory obligations associated with the company being a regulated entity.
As noted above, the Board in its current form was constituted during the year ended FY21. There was a restructuring of the business into four regions during that year with a CEO being appointed for each. While the Board retains overall responsibility for the management of the affairs of the company, it has now delegated operational and financial control to the regional CEOs, three of whom are now Board directors.
Balance and Diversity & Size and Structure
As previously noted, a number of directors resigned from the board during the period under review. At 30 June 2020, the Board comprised two directors with an equal number of male and female directors. In April 2021, two further male directors were appointed. The current board members have a diverse range of skills, expertise and experience, including experience in the fields of management, accountancy and audit.
The directors have equal voting rights when making decisions. Directors have access to the advice and services of the General Counsel of the group and may, if required, take professional advice at the company’s expense.
As the governance structure of the company develops, it is intended that the duties of the Board will be met partially through committees. There are plans to expand Board membership during FY22 and to establish appropriate audit and risk and remuneration committees.
The company promotes diversity in its approach to hiring new staff and will, along with the group and shareholder, apply the same considerations when making appointments to the Board. There is an equal opportunities policy in place. A formal diversity policy is currently being drafted and will be adopted during FY22.
Effectiveness
Directors keep their skills, knowledge and familiarity with the company up to date by meeting with senior management, and by attending company events and appropriate external seminars and training courses. Induction briefing sessions are provided to new directors which are tailored to their specific experience and knowledge and which provides access to all parts of the business. Continuous professional development (CPD) is a pre-requisite for accountancy professionals, and this includes training in relation to director responsibilities.
The directors are required to act in the interests of the company but will have regards to the interests of the wider group in discharging their responsibilities.
As the Board members are relatively new, a board effectiveness review has not yet been carried out.
Principle 3 – Directors Responsibilities
Accountability
There are areas of responsibility amongst the directors. As the composition of the Board changes, there will be further clarity as the business leaders of each region are expected to be appointed to the Board.
The Board has a clearly documented terms of reference adopted during FY21. This is aligned to the group’s governance arrangements but has also been designed to meet the company´s requirements on a standalone basis.
The newly established Board met twice during FY20. Under the governance arrangements established in FY21, the Board operates a programme of four scheduled meetings a year, with ad hoc meetings held as and when required.
The group continues to develop its governance framework which will encompass the company, providing policies and delegations of authorities.
Committees
The group board operates using various committees, including Audit and Risk and Remuneration and has delegated certain governance responsibilities to those committees which also have oversight of matters for the company. During the year ended 30 June 2020, no committees were established but as the governance at company level develops, there may be separate Audit and Risk and Remuneration committees established.
The Board and its committees will review terms of reference to ensure that they remain fit for purpose, are adapted to promote good governance and meet the requirements of the company.
The members of the Board are encouraged to challenge each other and the business to ensure there is constructive problem solving.
Integrity of Information
During FY20, the Board received ad-hoc reports on the business and financial performance. During FY22, the Board will start to receive quarterly reports on business and financial performance, key risks and opportunities, strategy, operational matters, market conditions, human resources, legal, compliance, and regulatory matters.
Key financial information is collated by the company’s centralised finance function from its various accounting systems. The group’s finance function has the appropriate independence, expertise and qualifications to ensure the integrity of this information and is provided with the necessary training to keep up to date with regulatory changes. Financial information is externally audited by Ernst & Young LLP on an annual basis, who report their findings to the Board at the conclusion of the audit and to the group via attendance at its Audit and Risk Committee. Other key information is prepared by the relevant business and internal functions, which are subject to periodic reviews by the internal audit function.
The group’s Audit and Risk Committee which is a subcommittee of the group board is responsible monitoring the effectiveness of internal financial control systems that identify, assess, manage and monitor financial risks, and the effectiveness of other operational and regulatory controls within the group, this includes oversight of the company. Reporting to the Audit and Risk Committee is designed to separately identify issues related to the company versus issues related to other areas in the group, with issues related to the company being followed up with the Board for resolution.
The Group Chief Risk and Compliance Officer and members of the group's Internal Audit function are attendees at each Audit and Risk Committee meeting and have unfettered access to meet with the Committee Chairman outside of the formal meeting programme, throughout the year.
Principle 4 - Opportunity and Risk
Opportunity
The Board will discuss its strategic plan with group management on a regular basis. Short term opportunities to improve business performance and achieve operational efficiencies are considered with group management on a monthly basis. Longer term growth will be considered within the strategy. An Innovation group has been established during FY2021. This will consider new ideas for sources of value to the group, including the company. Oversight of innovation opportunities will be fed to the Delivery Committee and ultimately approved by the group Board, where appropriate.
Risk
The group Audit and Risk committee currently has oversight of the company. The group’s risk register is updated on a regular basis for review by the Committee; this includes commentary on emerging risks.
The Audit and Risk Committee of the company will, once established, assist the Board in fulfilling its responsibility for determining the company´s risk appetite and for ensuring that sound risk management and internal control systems are maintained.
Each meeting will be attended by the Group Chief Risk and Compliance Officer or their delegate and the Chief Executive Officer for the regions. The Group Chief Risk and Compliance Officer reports on an aggregate basis to the Group Audit and Risk Committee and will report back to the company’s Audit and Risk Committee at their regular meetings.
The risk management systems are under review with the intention of formalising the approach during FY22.
Principle 5 - Remuneration
The company has a detailed remuneration approach drafted for approval. The principles in relation to remuneration are laid out by the group, but the Board will be accountable for the decisions taken in relation to the company and its staff.
The remuneration principles allow each region to determine the remuneration for their region, with oversight provided by the Group Remuneration Committee. The company is responsible for ensuring that remuneration is consistent with business strategy, objectives, values and the long-term interests of the company, encourages fair treatment of clients and fair treatment of staff, and include measures to avoid conflicts of interest.
Appropriate remuneration structures assist the company in securing and retaining high quality staff. This is part of the group wide transformation programme; remuneration policies will be reviewed and formalised.
Gender pay gap reporting is not yet required but will be in future years. Data is being gathered in readiness for reporting to government timescales.
Principle 6 – Stakeholder Relationships and Engagement
The Board is responsible for managing the business and the strategic success of the company and its subsidiaries. The Board adopts the behavioural standards of the group in relation to all its stakeholders.
External impacts
The company inevitably impacts the areas in which it works, both economically, bringing work to the region, and environmentally. Within this report is a separate update in relation to the environmental impact.
Stakeholders
As part of the group, the Board considers the views of its ultimate parent and the interests of the group as part of any major decisions made by the company. There is an ongoing dialogue with the stakeholders, both internally and externally on a range of subjects.
Clients
The company is committed to ensuring that all clients are treated fairly and that any conflicts of interest are highlighted and mitigated.
Employees
The Board recognises that employees have a major part to play in the success of the company and the Board are keen to ensure high levels of employee engagement. In December 2020, the group launched “Your Voice” employee survey. This is a series of short surveys with a variety of questions which takes place every two months. The surveys are open to employees throughout the group, but the results are filtered and made available to the directors of the company
Engagement with staff, including two way dialogue within the business is fundamental and is helped by requesting feedback from staff following employee engagement surveys and also following the on-line weekly newsletter “Pulse” which launched in May 2020.
Community
The company, as part of the wider group takes its responsibility for environmental and social matters seriously. We have a number of informal working groups set up across the group, looking at Charities, ‘Green’ issues and Diversity & Inclusion. ESG reporting takes place at group level. Further work on this will take place during FY22.
Suppliers
The company carries out regular due diligence with new suppliers and existing ones, checking that slavery and human trafficking is not taking place in any of its supply chains or any part of its business. Suppliers are required to comply with the Modern Slavery Act.
During FY21, a centralised procurement function has been established as part of the group transformation. However, offices will continue to use local businesses to supply goods and services, where this is appropriate.
On behalf of the board
The directors present their annual report and financial statements for the year ended 30 June 2020.
The results for the year are set out on page 17.
No interim ordinary dividends were paid. The directors do not recommend payment of a final dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company's current policy concerning the payment of trade creditors is to follow the CBI's Prompt Payers Code (copies are available from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU).
The company's current policy concerning the payment of trade creditors is to:
settle the terms of payment with suppliers when agreeing the terms of each transaction;
ensure that suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and
pay in accordance with the company's contractual and other legal obligations.
Trade creditors of the company at the year end were equivalent to 59 day's purchases, based on the average daily amount invoiced by suppliers during the year.
On 7 September 2020, the company changed its name from Baldwins Holdings Limited to Azets Holdings Limited.
On 28 February 2021, the company completed the acquisition of Roffe Swayne, one of the largest independent chartered accountants in the South East of England. Due to the proximity of the acquisition to the finalisation of these financial statements, management has not completed its assessment of the fair values of the assets and liability acquired. However, neither the fair values of the assets and liabilities including the associated goodwill nor the forecast contribution to profit before tax are material relative to the company's current financial positions, results of operations or cash flows.
In accordance with the company's articles, a resolution proposing that Ernst & Young LLP be reappointed as auditor of the company will be put at a General Meeting.
The energy consumption for the company during the year was as follows:
Activity Scope Volume Conv Factor kgCO2e % of total
Electricity (All Sites) 2 3,694,439kWh 0.23314 861,322 64.02%
Gas (All Sites) 2 2,037,893kWh 0.18387 374,707 27.85%
Heating Oil (Portobello) 2 2250L 2.54039 5,716 0.43%
Transport 1 378,232miles 0.27382 103,567 7.70%
Total kg CO2e 1,345,312
Reporting Methodology
Energy data has been collected from the invoices issued by energy suppliers, based on either actual or estimated readings. This methodology was used as, in line with the advice of the UK Government, most offices remain closed during the Covid-19 pandemic. Half hourly energy data have been supplied directly by the relevant energy supplier.
In regard to business transport, each business journey is recorded in the company’s expense control system and this information has been used to identify the total mileage travelled.
The conversion factor for kWh of energy to kgCO2e and miles travelled to kgCO2e have been taken from the government published data for ‘Greenhouse gas reporting: conversion factors 2020’ at the Internet web address https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/ 891105/Conversion_Factors_2020_-_Condensed_set__for_most_users_.xlsx
Intensity Measurement
The c ompany’s employees are either office based, or in travelling sales or consultant roles. It has been decided that the number of employees would be the most consistent year on year measure for annual energy comparisons. As at 30 June 2020 there were 2,987 employees. The employee intensity ratio is therefore :
Total kgCO2e 1,345,312 divided by 2,987 employees = 450 kgCO2e per employee
Activities to Reduce Emissions
The c ompany is in the process of moving to a paperless environment and a large project is underway to remove all paper files from sites, scanning them for storage and initiating a principle of only printing absolutely essential documents. This will not only see a huge reduction in the amount of paper and printer ink consumed by the organisation, but there will be a considerable amount of energy saved from not using printers unless absolutely necessary.
In addition to the above initiative, there is a move to a much more agile working environment, thus reducing the need for unnecessary travel. The c ompany envisages a reduction on travel to and from offices by approximately 30% which will have a large impact on the carbon footprint of the company.
The financial statements have been prepared on a going concern basis which the d irectors consider to be appropriate.
Funding is provided to the company through intercompany borrowings from other companies within the Azets group. As at 30 June 2020, there were outstanding loans of £183. 3 million which were repayable at any time after 31 December 2021. Should these become repayable, there is a risk that the c ompany may not be able to repay these borrowings or meet its other liabilities as they fall due. Subsequent to the balance sheet date, the terms of these borrowings were amended such that they are not repayable before December 2022.
In making their assessment of going concern, the d irectors have considered the company's cash flows, liquidity and likely business activities over the period to September 2022, these forecasts assume no repayments in respect of the intercompany borrowings.
The results of both the base case and a reasonably possible downside scenario show that the c ompany will have adequate resources to continue in operational existence for the next 12 months. The d irectors have also considered a more severe downside scenario, should this arise, the c ompany would face liquidity issues in Autumn 2021 and would be reliant on further funding from the Azets group.
In making their assessment of going concern, the d irectors have obtained written confirmation from Azets Topco Limited that it has the ability to and will provide financial support to the c ompany for a period of 12 months from the date of approval of these financial statements to assist the c ompany in meeting its liabilities as and when they fall due to the extent that it is not otherwise able to do so from its existing resources.
The d irectors consider Azets Topco Limited is the most appropriate company to provide this support. Based on the enquiries made in relation to the Azets Topco Limited g roup’s liquidity forecast the d irectors have concluded that Azets Topco Limited will be able to provide financial support to the company, for a period of 12 months as stated in the letter of support.
As such, the d irectors continue to adopt the going concern basis of preparation for these financial statements.
We have audited the financial statements of Azets Holdings Limited (formerly Baldwins Holdings Limited) (the ‘company’) for the year ended 30 June 2020 which comprise the Statement of total comprehensive income, Statement of financial position, the Statement of changes in equity and the related notes 1 to 31, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards including FRS 101 “The reduced disclosure framework” (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of twelve months from the date when the financial statements are authorised for issue .
Other information
The other information comprises the information included in the annual report other than the financial statements and our auditor's report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit :
the information given in the strategic report and the directors' r eport for the financial year for which the financial statements are prepared is consistent with the financial statements ; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
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.
All operations are continuing operations. Comparative amounts have been restated following transition to FRS101 as explained in note 31.
Azets Holdings Limited is a private company limited by shares incorporated in England and Wales. The registered office is Churchill House, 59 Lichfield Street, Walsall, West Midlands, United Kingdom, WS4 2BX. The company's principal activities and nature of its operations are disclosed in the directors' report.
The financial statements of Azets Holdings Limited (the “company”) for the year ended 30 June 2020 were authorised for issue by the board of directors on 30 September 2021 and the balance sheet was signed on the board’s behalf by Mrs Carol Warburton.
The financial statements are prepared in sterling , which is the functional currency of the company and are presented in £'s unless indicated otherwise .
These are the company's first financial statements prepared under FRS101 and IFRS 1 "First time adoption of International Financial Reporting Standards" has been applied. Details of how the company's results and financial position are affected by the change to FRS 101 are set out in note 31.
As permitted by FRS 101, the company has taken advantage of the following disclosure exemptions from the requirements of IFRS:
inclusion of an explicit and unreserved statement of compliance with IFRS;
presentation of a statement of cash flows and related notes;
disclosure of the objectives, policies and processes for managing capital;
disclosure of key management personnel compensation;
disclosure of the categories of financial instrument and the nature and extent of risks arising on these financial instruments;
the effect of financial instruments on the statement of comprehensive income;
comparative period reconciliations for the number of shares outstanding and the carrying amounts of property, plant and equipment and intangible assets;
disclosure of the future impact of new International Financial Reporting Standards in issue but not yet effective at the reporting date;
comparative narrative information; and
related party disclosures for transactions with the parent or wholly owned members of the group.
Where required, equivalent disclosures are given in the group accounts of Azets Topco Limited (formerly Cogital Topco Limited).
The company has taken advantage of the exemption under section 400 of the Companies Act 2006 not to prepare consolidated accounts. The financial statements present information about the company as an individual entity and not about its group .
Azets Holdings Limited is a wholly owned subsidiary of Azets Bidco Limited (formerly Baldwins Bidco Limited), a company incorporated in Jersey, and the results of Azets Holdings Limited are included in the consolidated financial statements of Azets Topco Limited, a company incorporated in Jersey, which are available from Companies House, Crown Way, Cardiff, CF14 3UZ.
The cost of a business combination is the fair value at the acquisition date of the assets given, equity instruments issued and liabilities incurred or assumed. The excess of the cost of a business combination over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognised as goodwill.
The cost of the combination includes the estimated amount of contingent consideration that is probable and can be measured reliably.
Provisional fair values recognised for business combinations in previous periods are adjusted retrospectively for final fair values determined in the 12 months following the acquisition date.
Intangible assets acquired separately are initially measured at cost and subsequently measured at cost less accumulated amortisation and accumulated impairment losses . Operating intangible assets are acquired in the ordinary course of business and typically include computer software. Non-operating intangible assets acquired in a business combination such as brands, patents and customer relationships with cost deemed to be their fair value at the date of acquisition. Following initial recognition, they are carried at cost less any accumulated amortisation and accumulated impairment losses.
Goodwill is not amortised. Other intangible assets are amortised over their estimated useful economic lives. Estimated useful economic lives and amortisation rates are as follows:
Brand - 5 years straight-line
Patents - 5 years straight-line
Customer relationships - 10 years straight-line
Computer software - 3 - 5 years straight-line
Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Cash generating unit
A cash-generating unit (“CGU”) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. In identifying whether cash inflows from an asset (or a group of assets) are largely independent of the cash inflows from other assets (or groups of assets), management considers various factors including how management monitors the entity’s operations (such as by product or service lines businesses geographical areas).
Depreciation is recognised so as to write off the cost of assets less their residual values over their useful lives on the following bases:
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is recognised in the income statement.
Interests in subsidiaries, associates and jointly controlled entities are initially measured at cost and subsequently measured at cost less any accumulated impairment losses. The investments are assessed for impairment at each reporting date and any impairment losses or reversals of impairment losses are recognised immediately in profit or loss.
The recoverable amount of assets is the greater of their fair value less costs to sell and their value in use. In assessing value in use, estimated future cash flows are discounted to present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership to another entity.
Basic financial liabilities, including trade and other payables, bank loans and loans from fellow group companies are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Other financial liabilities, including borrowings , t rade payables and other short-term monetary liabilities, are initially measured at fair value net of transaction costs directly attributable to the issuance of the financial liability. They are subsequently measured at amortised cost using the effective interest method . For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.
Financial liabilities are derecognised when, and only when, the company’s obligations are discharged, cancelled, or they expire.
Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
Income tax on profit or loss for the year comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly taken to equity.
The company assesses at contract inception whether a contract is, or contains, a lease. A lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Company as a lessee
The company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The company recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
i) Right-of-use assets
The company recognises right of use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows:
Leasehold improvements Over the term of the lease
Fixtures and fittings 3 – 8 years
Motor vehicles and equipment 3 – 5 years
If ownership of the leased asset transfers to the company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
The right-of-use assets are also subject to impairment. See the note 5 for further details.
ii) Lease liabilities
At the commencement date of the lease, the company recognises a lease liability measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the company and payments of penalties for terminating the lease, if the lease term reflects the company exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs.
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. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The company’s lease liabilities are presented separately on the face of the balance sheet.
iii) Short-term leases and leases of low-value assets
The company applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
Under IAS 17
In the comparative period, a lease was classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the company was a finance lease.
Finance leases were capitalised at the commencement of the lease at the inception date fair value of the leased asset, or if lower, the present value of the minimum future lease payments. Lease payments were apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges were recognised in finance costs in the income statement.
A leased asset was depreciated over the useful life of the asset.
Operating lease costs, including incentives received, were charged to the income statement on a straight-line basis over the period of the lease.
Trade and other receivables
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less expected credit loss. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified.
The collective loss allowance is determined based on historical data of payment statistics for similar financial assets adjusted for expected future losses.
Work-in-progress
Work-in-progress (“WIP”) is worked performed, and not yet billed. The carrying values includes outlays incurred on behalf of clients. Revenue not billed to clients is included in amounts recoverable on contracts, within trade and other receivables. Payments on account in excess of the relevant amount of revenue are included in excess payments received on account within trade and other payables.
Revenue is generally recognised as contract activity progresses and in determining the amount of revenue to be recognised on incomplete contracts, it is necessary to estimate their stage of completion, the remaining time and cost to be incurred and the amount that will be paid for the services provided. These estimates are made on an assignment and office wide basis and a different assessment of any these factors would result in a change to the amount of revenue recognised. Revenue related to contingent fee arrangements is recognised when the appropriate milestones as set out in the contracts are met.
Finance income and costs
Finance income and costs are recognised using the effective interest method. Finance costs are recognised in the income statement simultaneously with the recognition of an increase in a liability or the reduction in an asset.
The c ompany has adopted IFRS 16 ‘Leases’ from 1 July 2019. Due to the transition method chosen in applying this standard, comparative information throughout the financial statements has not been restated to reflect the requirements of the new standard.
IFRS 16 supersedes IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an arrangement contains a Lease’, SIC-15 ‘Operating Leases-Incentives’ and SIC-27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the balance sheet.
Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the c ompany is the lessor.
The effect of the adoption of IFRS 16 as at 1 July 2019 (increase/(decrease)) is as follows:
£ ' 00 0
Right of use assets recognised 32,648
Trade receivables (924)
PPE in respect of assets held under finance lease (note) ( 524 )
_____
Total assets 31,200
Lease liabilities recognised 31,894
Trade and other payables and accruals (694)
_____
Total liabilities 31,200
Opening reduction to retained earnings -
Note: PPE in respect of asset held under finance leases relate to asset held by subsidiaries hived up into the company on 1 July 2019, and are reflected within the Right of Use asset within the hive-up summary as set out in note 12.
The c ompany has lease contracts for various items of property, vehicles and equipment. Before the adoption of IFRS 16, the c ompany classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease.
Upon adoption of IFRS 16, the c ompany applied a single recognition and measurement approach for all leases except for short-term leases and leases of low-value assets. The standard provides specific transition requirements, which have been applied by the c ompany.
Leases previously accounted for as operating leases
The c ompany recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.
The c ompany used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
the c ompany applied a single discount rate to a portfolio of leases with reasonably similar characteristics
the c ompany relied on its assessment of whether leases are onerous immediately before the date of initial application
the c ompany has applied the exemptions not to recognise right of use assets and lease liabilities for long term operating leases with a remaining lease term of 12 months or less at the date of initial application
the c ompany has applied the exemption not to recognise right of use assets and lease liabilities for low value assets
the c ompany has excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application
the c ompany has used hindsight in determining the lease term where the contract contained options to extend or terminate the lease
Based on the above, as at 1 July 2019:
Right of use assets of £32.6 million were recognised and presented separately in the statement of financial position.
Lease assets of £0.5 million recognised previously under finance leases, which were included in property, plant and equipment, were derecognised such that leased assets have been recategorised as right of use assets .
Additional lease liabilities of £31.9 million (included in borrowings) were recognised.
Prepayments of £0.9 million and trade and other payables of £0.7 million related to previous operating leases were derecognised.
The lease liabilities as at 1 July 2019 can be reconciled to the operating lease commitments of the company and its hived up subsidiaries as of 30 June 2019, as follows:
£000
Operating lease commitments as at 30 June 2019 37,941
Less:
Commitments relating to short-term leases (1,054)
Add:
Lease payments relating to renewal periods not included
in operating lease commitments as at 30 June 2019 1,637
38,524
Weighted average incremental borrowing rate as at 1 July 2019 5.35%
Lease liabilities at 1 July 2019 before finance lease reclassification 31, 498
Lease previously classified as finance lease (note) 396
Lease liabilities as at 1 July 2019 31,894
The operating lease commitments as at 30 June 2019 included £12.3 million of obligation recorded in the company's subsidiaries that existed at 30 June 2019 and that were hived up on 1 July 2019.
Note: Leases previously classified as finance leases are in respect of assets held under finance leases held by subsidiaries hived up into the company on 1 July 2019, and are reflected within the lease liability amount within the hive-up summary set out in note 12.
In applying the c ompany’s accounting policies, management are required to make judgements, estimates and assumptions about the carrying value of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or future periods if the revision affects future periods.
Information about these judgements and estimates is included in relevant note that are specific to a component of the financial statements, the most significant being:
In considering whether there are any indicators of impairment, the directors have made the judgement that the activities of the company represent a single cash generating unit ("CGU"). Goodwill is tested for impairment annually, or more often if indicators of impairment exist. There are two key areas of estimation in relation to goodwill impairment.
The first is the appropriateness of the cash-generating units (“CGUs”) for the purpose of impairment testing. In the year ended 30 June 2020, management determined that the business comprised a single CGU. A cash-generating unit (“CGU”) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. In identifying whether cash inflows from an asset (or a group of assets) are largely independent of the cash inflows from other assets (or groups of assets), management considers various factors including how management monitors the entity’s operations (such as by product, service lines or businesses geographical areas).
The other key area of estimation relates to the assumptions applied in calculating value in use of the CGUs being tested for impairment. The key assumptions applied in the calculation relate to the future performance expectations of the business – primarily, the company’s 5-year forecasts and long-term growth rates - are disclosed in note 12. Assessment for impairment involves comparing the book value of an asset with its recoverable amount (being the higher of value in use and fair value less costs to sell). Value in use is determined with reference to projected future cash flows discounted at an appropriate rate. Both the cash flows and the discount rate involve a significant degree of estimation uncertainty.
Valuation of acquired intangible assets in a business combination
As at 30 June 2020, the carrying value of acquired intangible assets, including those arising on the hive-up, was £97.6 million. The company’s intangible assets are initially measured at fair value in accordance with IFRS 3, Business Combinations. Management has determined the appropriate valuation techniques and inputs for fair value measurements. In estimating the fair value of the intangible assets, the company uses market-observable data to the extent it is available. For material carrying values, management have engaged external providers for valuation analysis, and these are based on the prevailing market, economic and other conditions at the date of the business combination. Valuation methodologies adopted in determining the fair value of intangibles include:
• Income method in determining the fair value of customer relationship and contracts;
• Relief from Royalty method in determining the fair value of patents and trade names; and
• Cost approach in determining the fair value of software.
Information on the carrying values of intangibles assets are disclosed in note 12.
The c ompany determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The c ompany has several lease contracts that include extension and termination options. The c ompany applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the c ompany reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customisation to the leased asset).
The c ompany included the renewal period as part of the lease term for leases of property. Furthermore, the periods covered by termination options are included as part of the lease term only when they are reasonably certain not to be exercised.
Refer to note 21 for information on potential future rental payments relating to periods following the exercise date of extension and termination options that are not included in the lease term.
The c ompany cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the c ompany 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. The IBR therefore reflects what the c ompany ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The c ompany estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).
An analysis of the company's revenue by class and geographic region is as follows:
The company’s revenue is largely derived from the provision of services over time, however there was revenue recognised of £8,973,000 (2019: £399,000) that related to engagements carried out on a contingent fee basis and where the revenue was recognised on completion.
Contract assets and liabilities
The following table provides a summary of contract asset and liabilities arising from the company’s contracts with customers:
The contract asset balances include amounts the c ompany has invoiced to customers (trade receivables) as well as amounts where the c ompany has the right to receive consideration for work completed which has not been billed at the reporting date (unbilled receivables and work-in-progress). Unbilled receivables and work-in-progress are transferred to trade receivables when the rights become unconditional which usually occurs when the customer is invoiced.
Trade receivables and unbilled receivables and work-in-progress are included within the ‘Trade and other receivables’ heading in the balance sheet.
The average debtor days during the year are 50 days (2019: 50 days).
The information required by IFRS 15 paragraph 120 is not disclosed as the contracts with customers are expected to be less than one year in duration.
Exceptional items analysed by income statement headings are as follows:-
Transformation costs
As discussed in the Strategic Report, as the Group enters Phase II of its development, a group-wide transformation has been initiated. This will cover, amongst other things, new systems and increased use of technology, more targeted marketing, property rationalisation and a move to smarter working. Costs of £1.4m were incurred in the year ended 30 June 2020. This predominantly relates to severance and other exit costs.
Acquisition costs
Acquisition costs include legal and professional and other transactions costs related to acquisition and potential acquisitions, along with certain costs related to investment in staff in new business areas.
Restructuring and integration costs
Restructuring and integration costs includes post acquisition integration costs such as dual management costs, rebranding and cessation of pre-acquisition contractual obligations and post-acquisition restructuring such as redundancy, IT and property costs.
There are also legal and professional fees of £0.2 million related to a legal restructuring of the business.
In 2018, the employment contacts of all employees within the Azets Holdings Limited group of companies were transferred to the Azets Holdings Limited. From that date, the company recharged to each subsidiary, the costs of the employees providing services to that subsidiary.
On 1 July 2019, the trade and assets of the majority of the subsidiaries were transferred to the company and consequently the majority of the employees are now providing services to the company.
The comparative information in the table presents information related to those employees who provided services to the company in that year.
The total number of employees of the Azets Holdings Limited group of companies at the year-end was 2,885 (2019: 2,333).
The note below relates solely to the employees who worked directly for the company during the year.
Their aggregate remuneration (including directors' remuneration) comprised:
The highest paid director also received £230,769 compensation for loss of office during the year.
Total interest income for financial assets that are not held at fair value through profit or loss is £62,675 (2019 - £50,847).
The charge for the year can be reconciled to the loss per the income statement as follows:
The Finance (No.2) Act 2015 reduced the main rate of UK corporation tax to 19%, effective from 1 April 2017. A further reduction in the UK corporation tax rate to 17% was expected to come into effect from 1 April 2020 (as enacted by Finance Act 2016 on 15 September 2016). However, legislation introduced in the Finance Act 2020 (enacted on 22 July 2020) repealed the reduction of the corporation tax, thereby maintaining the current rate of 19%. Deferred taxes on the balance sheet have been measured at 19% (2019 : 17%) which represents the future corporation tax rate that was enacted at the balance sheet date.
The UK Budget 2021 announcements on 3 March 2021 included measures to support economic recovery as a result of the ongoing COVID-19 pandemic. These included an increase to the UK’s main corporation tax rate to 25%, which is due to be effective from 1 April 2023. These changes were not substantively enacted at the balance sheet date and hence have not been reflected in the measurement of deferred tax balances at the period end. If the company’s/group’s deferred tax balances at the period end were remeasured at 25% this would result in a deferred tax charge of £ 5.1 million.
Closing deferred tax balances have been calculated using at the rates that are expected to apply in the periods when the underlying temporary differences reverse.
The deferred tax liability of £16,010,725 (2019: £10,104,265) relates to deferred tax on intangible assets for customer contracts of £18,528,317 (2019: £9,798,947) and property, plant and equipment of £78,541 (2019: £305,318) offset by tax losses carried forward of £2,596,133.
There is an unrecognised deferred tax assets amounting to £975,000 (2019: £872,000) relating to the corporate interest restriction which are not probable of being realised.
The £430,000 additions for customer contracts relates to the acquisition of customers from third parties.
As at 30 June 2020, the balance sheet included goodwill of £ 58.1 million (2019: £ 29.9 million). The c ompany is required to test its goodwill and intangible assets for impairment at least annually, or more frequently if indicators of impairment exist. The review of goodwill impairment by management is performed at the lowest level of cash generating unit (‘CGU’) monitored for goodwill purposes, management have determined that the c ompany represents a single CGU.
The recoverable amount of the CGUs has been based on a value in use calculation. This uses cash flow projections included in the most recent budget for 2021 and the 5-year plan, which has been approved by the Board and reflects management’s expectations of revenue growth and operating costs and margin for the core business in place at 30 June 2020, based on all information available to it. Where long-term growth rates for periods are not covered by the annual budget, management has used assumption relating to the services, industries and countries in which the relevant CGU operates.
The growth rates to perpetuity beyond the initial budgeted cash flows, applied in the value in use calculations for goodwill allocated to the CGU was 3.0%.
The carrying value of the CGU has been reduced to its recoverable amount through recognition of an impairment loss of £35.1 million against goodwill. This has been presented separately in the income statement. Any adverse changes in the key assumptions would increase this impairment loss.
This impairment has arisen from a reduction in the expected future growth from the business in its current state. As discussed in the strategic report, the UK Regional business was rebranded in September 2020 and a significant restructuring exercise is currently underway which is expected to result in significant cost savings. However, as this restructuring was not completed at the balance sheet date, the associated cash flows and associated benefits to the business did not meet the criteria for inclusion in the value in use calculation as set out in IAS 36.
Intangible assets
During the year, the c ompany acquired customer lists from three businesses at a cost of £0.4 million
Following the rebrand of the UK Regional business on 7 September 2020, a number of the brands that had been recognised as part of the accounting for the original acquisitions ceased to be used on that date. As these brands will have no value going forward, they have been written down in the income statement for the year ended 30 June 2020 and an impairment charge of £1. 3 million has been recognised in exceptional items.
On 5 July 2019, the company acquired the trade, ongoing client engagements and certain assets of Kelsall Steele for consideration of £1,048,514 giving rise to goodwill of £558,447.
On 5 July 2019, the company acquired Perrins Limited for consideration of £960,974 giving rise to goodwill of £627,589.
On 26 July 2019, the company acquired the trade, ongoing client engagements and certain assets of Treasury Accounting for consideration of £731,722 giving rise to goodwill of £239,114.
On 26 July 2019, the company acquired the trade, ongoing client engagements and certain assets of Rothmans for consideration of £6,397,200 giving rise to goodwill of £2,253,122.
On 2 August 2019, the company acquired the trade, ongoing client engagements and certain assets of Williamson & Dunn for consideration of £4,594,515 giving rise to goodwill of £870,739.
On 13 September, the company acquired Gardners Accountants Limited for consideration of £1,776,450 giving rise to goodwill of £487,749.
On 30 September 2019, the company acquired the trade, ongoing client engagements and certain assets of Gale & Co for consideration of £489,604 giving rise to goodwill of £25,672.
On 8 November 2019, the company acquired WK Financial Planning Limited for consideration of £238,000 which did not give rise to any goodwill on acquisition.
Hive-up
On 1 July 2019, the trade and assets of the majority of the company's subsidiaries were transferred to the company via hive up arrangements, and the company became the main trading entity for the Azets UK group of companies, with the results of all of the company’s subsidiaries now reported by the company. This involved the company acquiring the trade and assets of its subsidiaries at either net book value or fair value for consideration in the form of an intercompany balance. The subsidiaries of the company then proceeded to distribute the intercompany balance to the company. The company recorded a net goodwill amount of £58 million as a result of this transaction.
As permitted under FRS101 the company has elected to record the carrying value of the underlying assets and liabilities acquired via the hive up at amounts equal to those stated in the consolidated accounts of the parent entity, Azets Topco Limited, in respect of the same assets and liabilities. The difference between the amounts recorded and the consideration paid has been accounted for as a merger reserve within equity.
The directors consider that the carrying amounts of financial assets carried at amortised cost in the financial statements approximate to their fair values.
On 5 July 2019, the company acquired the whole of Perrins Limited share capital of 50 Ordinary shares of £1 each for consideration of £960,974.
On 13 September 2019, the company acquired the whole of Gardners Accountants Limited share capital of 11,100 A Ordinary shares of 1p each, 24 B Ordinary shares of £1 each and 200 C Ordinary shares of £1 each for consideration of £1,776,450.
On 8 November 2019, the company acquired the whole of WK Financial Planning Limited share capital of 100 Ordinary shares of £1 each for consideration of £238,000.
On the date of acquisition, the company transferred the trade and assets of Perrins Limited and Gardners Accountants Limited to the company and accordingly the company reclassified the cost of investment as goodwill and is included in the table of acquisitions set out in note 12.
As part of the acquisitions set out in Note 12, the company acquired the share capital of a number of companies, the trade and assets of which were immediately hived up into Azets Holdings and the investment balance formed part of the goodwill calculation as set out in Note 12. The remaining additional amount relates to capital contributions to subsidiaries. The impairment of investments in the year arose from the hive-up transaction and subsequent distribution of the subsidiaries assets. The remaining net book value of the investments relates to the net assets of subsidiaries.
Details are included in the table on the following page.
The principal activity of the companies which were hived up on 1 July 2019 has been set as non-trading, refer to the prior year financial statement for their former principal activities. Details of the company's subsidiaries at 30 June 2020 are as follows:
* represents investments that are held indirectly.
The registered office of subsidiaries incorporated in England and Wales is Churchill House, 59 Lichfield Street, Walsall, WS4 2BX. The registered office of subsidiaries incorporated in Scotland is Titanium 1 Kings inch Place, Renfrew, PA4 8WF.
Effective 1 July 2019, the activities of the Azets Holdings Limited group of companies were restructured with the trade and assets of the subsidiaries other than, Azets (Ashby) Limited, Azets Corporate Finance Limited, Azets Technology Solutions Limited and Azets Debt Solutions Limited, being transferred to the company and the subsidiary companies ceased trading.
Subsequent to the year-end, the company acquired the 10% minority interest in its subsidiary, Azets (Ashby) Limited.
Details of the company's associates at 30 June 2020 are as follows:
The registered office of the associates is Churchill House, 59 Lichfield Street, Walsall, WS4 2BX.
Included within other receivables are insurance receivables in respect of litigation and claims (refer to note 22) amounting to £5,271,000 (2019: £4,518,000).
Loans from group undertakings represent amounts due to other companies within the Azets Group. At 30 June 2020, these loans are repayable on demand and incur interest at an average rate of 6% (2019: 6%).
In July 2020, prior to signing the financial statements for the year ended 30 June 2019, the counterparties
to the loans agreed to vary the terms such that there would be no repayment of capital or interest before December 2021. In June 2021, the counterparties of the loans agreed to vary the terms such that there would be no repayment of capital or interest before December 2022.
The company has several lease contracts that include extension and termination options. These options are negotiated by management to provide flexibility in managing the leased asset portfolio and align with the company's business needs. Management exercises significant judgement in determining whether these extension and termination options are reasonably certain to be exercised (see section "Critical accounting estimates and judgements").
Lease liabilities are classified based on the amounts that are expected to be settled within the next 12 months and after more than 12 months from the reporting date, as follows:
Dilapidations
Relates to the dilapidation provision on property leases. The expected timing of any resulting outflow of economic benefit for most properties is not expected within the next 5 years and dependent on the timing of lease agreement termination. The increase in provision for dilapidations during the year arose from the impact of the hive-up of trade from the company's subsidiaries to the company and the company's acquisitions.
Legal claims
From time to time, the company will provide business advisory services on a number of matters which exposes the company to risks of future investigation and potential claims. Provisions have been recognised for certain known or reasonably likely legal claims or actions against the company, these are expected to settle within the next 12 months. The Directors do not expect known and reasonably likely legal claims or actions for which a provision has not been established to have a material impact on the company’s financial position, results of operations or cash flows.
In many cases, the known claims are covered by the company’s professional indemnity insurance. Once the insurer has accepted liability and panel solicitors have been appointed, an insurance receivable is recognised and reported within other receivables on the balance sheet.
The total costs charged to income in respect of defined contribution plans is £3,777,868 (2019 - £1,157,028).
On 1 July 2019, as part of a group-wide restructuring within the Azets Holdings Limited group of companies, the trade and assets of certain of the company's subsidiaries were transferred to the company for consideration based on either book values or fair values.
The company adopted the pooling-of-interest method under which the net assets acquired were recorded at amounts equal to those used for the same net assets in Azets Topco Limited consolidated financial statements. As set out in note 12, this gives rise to a difference compared to the consideration paid of £5,387,505 which has been recognised in the merger reserve.
In the normal course of business, the company has a number of transactions with companies that are part of the Azets group of companies and are exempt from disclosing transactions or balances with wholly owned group companies. This includes inter-company recharges, management recharges and sales and purchases between these related parties made at market prices. Outstanding balances are unsecured, interest free and cash settlement is expected in line with normal trading terms.
The company has the following debtor/(creditor) balances with companies that are not wholly owned by the company.
Azets (Ashby) Limited (formerly Baldwins (Ashby) Limited: £1,271,655 (2019: £347,145)
Azets Audit Services Limited (formerly Group Audit Services Limited): £8,472,683 (2019: £(2,167,462)
Azets Probate Services Limited (formerly Group Probate Services Limited): £183,947 (2019: £(46,555)
During the year, the company made sales to group companies as follows:-
Azets Audit Services Limited: £34,196,381 (2019: £12,037,500)
Azets Probate Services Limited: £308,144 (2019: £95,800)
During the year, the company charged Azets (Ashby) Limited payroll and related expenses of £1,062,357 (2019: £977,526).
During the year, the company was charged rent from Bridge House Friendly Society, with a certain director in common, of £484,550 (2019: £423,110). There was no outstanding balance at the year end.
During the year, the company was charged rent from Baldwins Property Holdings Limited, a company owned by certain former directors, of £351,792. In the prior year, certain of the company's subsidiaries, the trade and assets of which were hived up to the company on 1 July 2019, were charged rent from Baldwins Property Holdings limited amounting to £347,225.
For all periods up to and including the year ended 30 June 2019, the company prepared its financial statements in accordance with FRS102 The Financial Reporting Standard applicable in the UK and Ireland, as permitted under UK generally accepted accounting practice (UK GAAP).
These financial statements, for the year ended 30 June 2020, are the first the company has prepared in accordance with FRS 101.
Accordingly, the company has prepared individual financial statements which comply with FRS 101 applicable for periods beginning on or after 1 July 2018 and the significant accounting policies meeting those requirements are described in note 1.
In preparing these financial statements, the company has started from an opening balance sheet as at 1 July 2018, the company’s date of transition to FRS101, and made those changes in accounting policies and other restatements required for the adoption of FRS 101. As such, this note explains the principal adjustments made by the company in restating its balance sheet as at 1 July 2018 prepared under FRS102 and its previously published financial statements for the year ended 30 June 2019 also prepared under FRS102.
On transition to FRS 101, the company has applied the requirements of paragraphs 6-33 of IFRS 1 “First time adoption of International Financial Reporting Standards”.
IFRS 1 allows first-time adopters certain exemptions from the general requirements to apply IFRSs as effective 30 June 2020 year ends retrospectively. The company elected not to apply the exemption which would permit IFRS 3 Business Combinations to only be applied from the date of transition, 1 July 2018, but has instead applied IFRS 3 to all business combinations completed since November 2016, the date of acquisition by its current parent company.
The adoption of IFRS 3 gives rise directly or indirectly to all of the adjustments arising on transition, reflecting the fact that in all other respects the company’s accounting policies under FRS102 were already compliant with FRS 101. Applying IFRS 3 to the company’s business combinations results in:
the recognition of separate intangible assets in respect of customer relationships and brands, both of which are subject to annual amortisation charges;
the recognition of deferred tax liabilities in respect of the separate intangibles assets;
acquisition related costs being expensed as incurred; and
any residual goodwill being recorded at cost, less provision for impairment, but not being amortised.
The tables and notes below provide additional information in respect of how adjustments to reflect the above have impacted amounts recorded in the statement of financial position at 1 July 2018 and 30 June 2019 and the statement of comprehensive income for the year ended 30 June 2019.
Notes to the transition reconciliations
Under FRS 102, goodwill arising on acquisitions was capitalised and amortised, on a straight line basis over its useful economic life. Under FRS 101 (IFRS 3), positive goodwill is considered to have an indefinite life and consequently is not amortised, but instead is subject to impairment testing both annually and when there are indicators that the carrying value may not be recoverable in full. Adjustments have therefore been made to reverse the amortisation of goodwill previously recorded amounting to £478,298 at 1 July 2018 and increasing by £5,841,355 during the year ended 30 June 2019 to £6,319,653 at 30 June 2019.
Under FRS 101, separately identifiable intangibles that give rise to probable cash flows are only recognised on acquisitions if the value of the intangible asset can be reliably measured whereas under FRS 101 separately identifiable assets are always considered to be capable of being reliably measured. As a result, under FRS 102 the company had not ascribed a value to any separate intangible assets whereas under FRS 101 (IFRS 3) the company is able to ascribe a value to both customer relationships and certain brands acquired in business combinations. Adjustments have therefore been made to recognise separate intangible assets with a total cost of £8,352,761 at 1 July 2018 increasing to £64,283,240 at 30 June 2019. Having recognised these assets, the company is required under FRS 101 (IFRS 3) to also recognise a deferred tax liability in respect of the temporary differences which arises as a result, such that a deferred tax liability of £1,419,969 has been recognised at 1 July 2018, increasing to £10,928,149 at 30 June 2019.
Under FRS 102, acquisition costs related to business combination was capitalised and therefore formed part of the assessment of the goodwill arising on acquisition. Under FRS 101 (IFRS 3) acquisition costs are expensed. Adjustments have therefore been made to reduce goodwill and expense acquisition costs previously capitalised amounting to £231,492 at 1 July 2018 and increasing by £1,447,376 during the year ended 30 June 2019 to £1,678,868 at 30 June 2019.
Having recognised separate intangible assets as described under 2. above, the company is required under FRS 101 to amortise these assets over their expected useful lives. This results in cumulative amortisation at 1 July 2018 of £329,013, increasing during the year ended 30 June 2019 by £4,517,362 to £4,846,375 at 30 June 2019. As deferred tax has been recognised in respect of the intangible assets, the amortisation charges give rise to a deferred tax credit at 1 July 2018 of £55,932, increasing during the year ended 30 June 2019 by £767,952 to £823,884 at 30 June 2019.