Basis of preparation

NCC Group plc (the Company) is a company incorporated in the UK, with its registered office at XYZ Building, 2 Hardman Boulevard, Manchester, M3 3AQ. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as 'the Group'). The principal activity of the Group is the provision of independent advice and services to customers through the supply of escrow and cyber assurance services. The parent Company financial statements present information about the Company as a separate entity and not about the Group. These Financial Statements have been approved for issue by the Board of Directors on 24 July 2019.

Both the parent Company and the Group Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and Article 4 of the IAS regulation. The parent Company Financial Statements have also been prepared in accordance with the provisions of the Companies Act 2006. On publishing the parent Company Financial Statements here together with the Group Financial Statements, the Company is also taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual Income Statement and related notes that form a part of these approved Financial Statements.

brexit

Management has reviewed the potential impact of Brexit on the Financial Statements. As the Group's operations around the world include business entities based in continental Europe management believes the Group is structurally resilient to any disruption caused by Brexit. The main risks to the Group from Brexit are any reduction in demand from an economic slowdown and real or perceived differences in data protection standards which impact our global ways of working. On this basis, management has concluded that the impact should be limited; this includes any impact on the IFRS 9 Expected Credit Loss model. Further details have been included in note 17 to the consolidated Financial Statements. Management also notes no changes to this assessment from a post balance sheet event perspective.

APPLICATION OF SIGNIFICANT NEW EU - ENDORSED ACCOUNTING STANDARD - IFRS 9 'FINANCIAL INSTRUMENTS'

Background and adoption

The Group has adopted IFRS 9. The application of IFRS 9's impairment requirements as at 1 June 2017 resulted in a reallocation of the existing impairment provision between ageing classifications only, and additional disclosures related to the ageing of the provision, as disclosed within note 17 to the consolidated Financial Statements.

IFRS 9 introduces new requirements for the following areas:

  • the classification and measurements of financial assets and financial liabilities;
  • impairment of financial assets; and
  • general hedge accounting.

Classification and measurement of financial assets and financial liabilities

All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value on the basis of the Group's business model for managing financial assets and the contractual cash flow characteristics. The Group has not designated any debt investments that meet the amortised cost or FVTOCI criteria as measured at fair value through profit or loss (FVTPL). The Directors of the Company reviewed and assessed the Group's existing financial assets and liabilities based on the facts and circumstances upon transition and concluded that the initial application of IFRS 9 has had no impact on classification and measurement, apart from the impairment of financial assets noted below.

Impairment of financial assets

The only impact on the consolidated Financial Statements is in relation to the impairment of trade receivables within financial assets.

IFRS 9 requires an Expected Credit Loss (ECL) model as opposed to an Incurred Credit Loss (ICL) model under previous accounting policies (IAS 39 'Financial Instruments: Recognition and Measurement'). The ECL model requires the Group to account for lifetime ECL and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition of the financial assets. On this basis, it is no longer necessary for a default event to have occurred before credit losses are recognised. As a consequence of this change, credit losses are recognised earlier than under IAS 39. IFRS 9 requires the Group to assess the risk profile of its trade and other receivables.

The Group analysed the risk profile of trade and other receivables based on past experience and an analysis of the receivables current financial position, adjusted for specific factors, general economic conditions of the industry in which the receivables operate, and assessment of both the current and the forecast direction of conditions at the reporting date.

The Group has performed the calculation of ECL separately for each business unit and rebutted the assumption under IFRS 9 that all debts that are over 30 days past the due date should have a credit allowance due to the inherent credit risk on certain specific receivables.

General hedge accounting

On the basis the Group does not hedge account, there has been no impact on the Group.

APPLICATION OF SIGNIFICANT NEW EU - ENDORSED ACCOUNTING STANDARD - IFRS 15 'revenue from contracts with customers'

Background and adoption

IFRS 15 impacts the amount, timing and recognition of revenue and certain associated costs, as well as related disclosures.

The Group has implemented IFRS 15 in the current year and has applied the fully retrospective approach meaning the comparative year has been restated and there has been a one-off cumulative debit to retained earnings relating to transition at 1 June 2017 of £1.4m (net of tax).

IFRS 15 requires the Group to apportion revenue earned from contracts with customers to performance obligations the Group has with its customers.

This is done through applying a five-step model defined in the standard:

  1. Identify the contract with the customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognise revenue when (or as) the entity satisfies a performance obligation.

In addition to the changes to revenue recognition described above, IFRS 15 also provides guidance in relation to certain costs incurred obtaining a contract or fulfilling the contract with the customer, requiring such costs to be deferred over time.

The Group put in place a team to assess the impact of IFRS 15 to determine appropriate accounting policies, and implement appropriate systems and processes so as to be able to calculate opening adjustments and maintain ongoing IFRS 15 compliant financial records/disclosures. Assessment was also given to other matters, such as implications for employee remuneration, tax, forecasting and covenant compliance.

Key changes in accounting policy

The key effects of the application of IFRS 15 are as follows:

  • For Escrow, the initial set-up exercise is not considered to be a distinct service, and as a result, these fees are now recognised with the rest of the contract with revenue being recognised over time.
  • For Assurance, set-up fees charged in respect of initial work and configuration of equipment to allow customers to benefit from a monitoring contract are not considered to be a distinct service and as a result this revenue is now recognised over time with the revenue for the monitoring activity.

In both cases performance obligations are considered to be satisfied over time as the performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

The above key effects have given rise to a restatement of deferred revenue as outlined below, with no restatements to accrued income.

practical expedients

The Group has applied the following practical expedients on the application of IFRS 15:

AreaQualitative assessment of the impact
Completed contracts have not been restated that begin and end within the same annual reporting periodSignificant benefit in application due to the high number of contracts within the Group
Completed contracts that have variable consideration have used the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periodsIncident response contracts are variable in duration due to the unknown emerging cyber risk. On this basis, the expedient simplifies the application of IFRS 15
For all reporting periods before the transition date, the Group has not disclosed the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Group expects to recognise that amount of revenueSignificant benefit in application due to the high number of contracts within the Group
Cost to obtain a contract that lasts less than one year has been expensed immediatelySignificant benefit in application due to the high number of contracts within the Group
Contracts with similar terms and features have been treated on a portfolio basis as opposed to individual assessmentSignificant benefit in application due to the large range of small contracts with identical terms and conditions
Significant financing component within contractsLimited relevance due to the nature of contracts

consolidated income statement financial impact

Segmental analysis
2018
Assurance
£m
Escrow
£m
Central & Head Office £mGroup
£m
Revenue:
Revenue previously reported194.438.8233.2
Adjustment on application of IFRS 15(0.5)0.3(0.2)
Revenue restated193.939.1233.0
Adjusted operating profit:
Adjusted operating profit1 previously reported17.021.6(7.6)31.0
Adjustment on application of IFRS 15(0.5)0.3(0.2)
Adjusted operating profit1 restated16.521.9(7.6)30.8
Operating profit:
Operating profit previously reported13.7
Adjustment on application of IFRS 15(0.2)
Operating profit restated13.5
Profit before taxation:
Profit before taxation previously reported11.9
Adjustment on application of IFRS 15(0.2)
Profit before taxation restated11.7
Profit for the year attributable to the owners of the Company:
Profit for the year previously reported6.9
Adjustment on application of IFRS 15(0.2)
Profit for the year attributable to the owners of the Company restated6.7
  1. See note 1 for further details on the restatement of comparative information due to the retrospective application of IFRS 15.

consolidated statement of comprehensive income financial impact

2018
Previously reported
£m
Adjustment on application of IFRS 15
£m
Restated balance
£m
Total comprehensive income for the year (net of tax) attributable to the owners of the Company7.2(0.2)7.0

EARNINGS PER SHARE financial IMPACT

2018
Previously reportedAdjustment on application of IFRS 15Restated balance
Statutory profit from - continuing operations (£m)12.4(0.2)12.2
Statutory profit from - all operations (£m)6.9(0.2)6.7
Adjusted1 profit from continuing operations (£m)22.9(0.2)22.7
Basic weighted average number of shares in issue (m)277.0277.0
Dilutive effect of share options (m)2.32.3
Dilutive weighted average shares in issue (m)279.3279.3
2018
Previously reported
pence
Adjustment on application of IFRS 15
pence
Restated balance
pence
Basic earnings per ordinary share
Statutory - continuing operations4.5(0.1)4.4
Statutory - all operations2.5(0.1)2.4
Adjusted18.3(0.1)8.2
2018
Previously reported
pence
Adjustment on application of IFRS 15
pence
Restated balance
pence
Diluted earnings per ordinary share
Statutory - continuing operations4.44.4
Statutory - all operations2.5(0.1)2.4
Adjusted18.2(0.1)8.1

consolidated cash flow statement financial impact

2018
Previously reported
£m
Adjustment on application of IFRS 15
£m
Restated balance
£m
Profit for the year6.9(0.2)6.7
Operating cash inflow before movements in working capital40.0(0.2)39.8
Increase in trade and other receivables(5.0)0.2(4.8)
Cash generated from operating activities before interest and taxation39.539.5
  1. See note 3 for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 for a reconciliation to statutory information.

consolidated Balance Sheet financial impact

2017May 2017
(as reported)
£m
Adjustment on application of IFRS 15
£m
Restated
balance
£m
Deferred revenue(35.6)(1.4)(37.0)
Net assets212.1(1.4)210.7
Retained earnings7.11.48.5
2018May 2018
(as reported)
£m
Adjustment on application of IFRS 15
£m
Restated
balance
£m
Deferred revenue(29.0)(1.6)(30.6)
Net assets208.2(1.6)206.6
Retained earnings12.81.614.4

future accounting developments – IFRS 16 Leases

Transition approach

The Group will adopt this standard for the year ending 31 May 2020 under a modified retrospective approach.

The Group has a variety of operating leases within the consolidated financial statements. The accounting for operating leases in particular will change when IFRS 16 is implemented.

Structure and status of IFRS 16 implementation project

The Group commenced an implementation project during the year ended 31 May 2019, whereby management performed a feasibility impact of the proposed standard.

Following this feasibility review, management has implemented specific governance around the project culminating in the development of an in-house central depositary platform for leases.

The platform and its control environment will continue to be developed as the Group transitions to IFRS 16 during the year ending 31 May 2020.

Implications of IFRS 16

Following a detailed review by management of the implications of IFRS 16, the following can be noted:

  • A number of lease contracts currently disclosed within the financial statements, which currently give rise to recurring expenses within operating expenses, will be recognised on the balance sheet as a 'right of use asset' for the year ending 31 May 2020;
  • A corresponding lease liability (current and non-current), reflecting the Group's commitment to pay consideration to third parties under these contracts, will also be recognised, increasing the Group's net debt although the net cash flow profile remains the same for the Group;
  • The Group will depreciate the right of use assets through the Income Statement over the shorter of the assets' useful lives and the assessed lease term;
  • The Group will recognise interest on the liability using the rate of interest implicit in the lease or, if the interest rate implicit in the lease cannot be determined, the Group's incremental borrowing rate as adjusted for a specific risk adjustment. Interest will be charged to finance costs; and
  • The profile of the overall expense in profit and loss will change as the interest expense will be more front-loaded compared to a straight-line operating lease rental expense.

Specifically, for management to conclude on whether a contract contains a lease, the following has been considered:

  • Whether there is an identified asset that the Group has the right to obtain substantially all the economic benefits from;
  • Whether the Group has the right to direct how and for what purpose the asset is used;
  • Whether the Group has the right to operate the asset without the supplier having the right to change those operating instructions; and
  • Whether the Group has designed the asset in a way that predetermines how and for what purpose the asset will be used.

In addition, management has also considered other salient factors in the assessment of the standard such as:

  • The length of assessed lease term taking into account the non-cancellable period of the lease including periods covered by an option to extend or an option to terminate if the Group is reasonably certain to exercise either option; and
  • The applicability of interest rate implicit in the lease or the Group's incremental borrowing rate, as adjusted for a specific risk adjustment.

Following the above assessment, management has concluded that the following items that are currently classified as operating leases will be recognised in the financial statements using the new requirements:

  • Certain properties;
  • Equipment leases, including printers; and
  • Motor vehicles.

The Group does not lease any server equipment in relation to the provision of Escrow services.

Exemptions and practical expedients to be appliedand taken

Management has reviewed available exemptions contained within IFRS 16 and concluded not to apply the low value or short-life exemptions. In addition, the Group plans to offset the onerous leases under IAS 37 immediately before transition as opposed to performing an impairment review under IAS 36.

Indicative financial impact

As shown in note 28, at 31 May 2019, the Group had approximately £36m of non-cancellable operating lease commitments. It is expected that the application of this standard will have a significant impact on the Group's Financial Statements.

Indicatively, the changes can be summarised as having the following effect on the opening consolidated financial position as at 1 June 2019:

  • Assets and liabilities will increase by £29.0m to £31.0m primarily reflecting the rental property portfolio of the Group;
  • Assets will be offset by an onerous lease provision of approximately £4m; and
  • EBITDA will increase in year one by £5.0m to £7.0m reflecting the reclassification of rental payments to interest and depreciation charges. Net profit is unaffected over the lifetime of a lease.

Deferred taxation will arise on the transition adjustment at 1 June 2019 of £0.5m to £1.0m and a movement of £0.2m to £0.5m during the year ended 31 May 2020, giving rise to a net deferred tax asset of £0.7m to £1.5m as at 31 May 2020.

As discussed in note 23, the Group has recently renegotiated its banking facilities. The debt covenants on the Group's borrowing facilities will be unaffected by the application of IFRS 16 as the covenant calculations are based on the accounting principles in place prior to 1 January 2019. The IFRS 16 changes are not expected to impact the interest paid by the Group for its banking facilities. The overall net cash flow for the Group will be unaffected by IFRS 16 other than operating cash outflows (excluding interest costs) relating to leases being reclassified as financing outflows. Interest costs relating to the lease will be disclosed within interest paid.

new and amended accounting standards that have been issued but are not yet effective

At the date of authorisation of these consolidated Financial Statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective and, in some cases, had not yet been adopted by the European Union:

  • IFRS 3 'Business Combinations'
  • IFRS 11 'Joint Arrangements'
  • IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'
  • IAS 12 'Income Taxes'
  • IAS 19 'Employee Benefits'
  • IAS 28 'Investment in Associates and Joint Ventures'
  • IAS 39 'Financial Instruments: Recognition and Measurement'

These IFRSs are not expected to have a material impact on the Group's consolidated financial position or performance of the Group.

Basis of measurement

The consolidated Financial Statements have been prepared on the historical cost basis except for consideration payable on acquisitions, the revaluation of certain financial instruments and investments.

Functional and presentation currency

The Group and Company Financial Statements are presented in millions of Pounds Sterling (£m) because that is the currency of the principal economic environment in which the Group operates.

Going concern

The Directors have acknowledged the 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting', published in September 2014.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report.

The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Chief Executive Officer and Chief Financial Officer Reviews. In addition, note 24 to the Financial Statements includes the Group's policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk.

The Directors have reviewed the trading, cash flow forecasts and forecast covenants of the Group as part of their going concern assessment and have taken into account reasonable downside sensitivities (including a 'no-deal' Brexit scenario) which reflect uncertainties in the current operating environment. The possible changes in trading performance show that the Group is able to operate within the level of the banking facilities and, as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months.

Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements.

Business combinations

Business combinations are accounted for by applying the acquisition method at the acquisition date, which is the date on which control is transferred to the Group. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Acquisitions

The Group measures goodwill at the acquisition date as:

  • The fair value of the consideration transferred; plus
  • The recognised amount of any non-controlling interests in the acquiree; plus
  • If the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
  • The fair value of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognised in the Income Statement.

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.

Any deferred or contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of contingent consideration are recognised in the Income Statement. On a transaction-by-transaction basis, the Group elects to measure non-controlling interests either at its fair value or at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date.

Subsidiaries

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated Financial Statements from the date that control commences until the date that control ceases.

Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Intercompany transactions and balances between subsidiaries are eliminated on consolidation.

Intangible assets and goodwill

Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions that have occurred since 1 June 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired including identifiable intangible assets. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.

In respect of acquisitions prior to 1 June 2004, goodwill is included at its deemed cost, which represents the amount recorded under UK GAAP at 31 May 2004 which was broadly comparable, save that only separable intangibles were recognised and goodwill was amortised.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee.

Research and development

Expenditure on research activities is recognised in the Income Statement as an expense as incurred. Expenditure on development activities is capitalised as 'development costs' if the product or process is technically and commercially feasible and the Group has the technical ability and sufficient resources to complete development. In addition, that future economic benefits are probable and the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or substantially improved products or processes.

Software costs

The Group capitalises 'software costs' in accordance with the criteria of IAS 38. Software costs comprise two elements: IT licences for periods of one year or more, and the third party and internal employee time costs for internal system developments. Capitalised costs are initially measured at cost and amortised on a straight-line basis over the licence term or the period for which the developed system is expected to be in use as a business platform.

The expenditure capitalised includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use and capitalised borrowing costs. Other development expenditure is recognised in the Income Statement as an expense as incurred. Software costs are stated at cost less accumulated amortisation and less accumulated impairment losses.

Other intangible assets

Expenditure on internally generated goodwill is recognised in the Income Statement as an expense as incurred.

Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses.

Subsequent expenditure

Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill, is recognised in the Income Statement as an expense as incurred.

Amortisation

Amortisation is charged to the Income Statement on a straight-line basis over the estimated useful economic lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangibles are amortised from the date they are available for use. The estimated useful lives are as follows:

Acquired customer contracts and relationships – between three and ten years

Software– between one and seven years

Capitalised development costs– between three and five years

Financial instruments

Financial assets and financial liabilities, in respect of financial instruments, are recognised in the Group balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Classification and measurement of financial assets and liabilities

Classification of financial assets is generally based on the business model in which the financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at amortised cost if it is held with the objective of collecting the contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All other financial assets are measured at fair value through other comprehensive income or the Income Statement.

Financial assets at amortised cost

Trade and other receivables

Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as financial assets measured at amortised cost.

Under the IFRS 9 'Expected Credit Loss' model, a credit event (or impairment 'trigger') no longer needs to occur before credit losses are recognised.

The Group analyses the risk profile of trade receivables based on past experience and an analysis of the receivable's current financial position, potential for a default event to occur, adjusted for specific factors, general economic conditions of the industry in which the receivables operate and assessment of both the current and the forecast direction of conditions at the reporting date. A default event is considered to occur when information is obtained that indicates that a receivable is unlikely to be paid to the Group.

Credit risk is regularly reviewed by management to ensure the expected credit loss (ECL) model is being appropriately applied. The Group has performed the calculation of ECL separately for each business unit and rebutted the assumption under IFRS 9 that all debts that are over 30 days past the due date should have a credit allowance.

Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Financial liabilities at amortised cost

Trade payables

Trade payables are other financial liabilities initially measured at fair value and subsequently measured at amortised cost.

Impairment of non-financial assets

The carrying amounts of the Group's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the 'cash generating unit'). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash generating units, (CGUs). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.

An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in the Income Statement. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Related party transactions

Details of related party transactions are set out in note 31 to these Financial Statements.

Plant and equipment

Plant and equipment assets are carried at cost less accumulated depreciation and any recognised impairment in value. To the extent that borrowing costs relate to the acquisition, construction or production of a qualifying asset, borrowing costs are capitalised as part of the cost of that asset. Depreciation is charged to the Income Statement on a straight-line basis over the estimated useful economic lives of each part of an item of plant and equipment as follows:

Computer equipment

– between three and five years

Plant and equipment

– between three and five years

Furniture

– between three and five years

Fixtures and fittings

– term of the lease

Motor vehicles

– four years

Plant and equipment is also tested for impairment whenever there is an indication of potential impairment.

Investments

Investments in subsidiaries are carried at cost less impairment. Investments in property and unlisted shares are carried at cost less impairment, which is based on the fair value at acquisition.

Inventory

Inventory is held at the lower of cost or net realisable value.

Revenue recognition

Revenue is presented net of VAT and other sales-related taxes. Revenue is measured based on the consideration specified in a contract with a customer. The application of this policy in each of the operating segments is as follows.

Assurance

The Assurance division groups its revenue into four types of revenue streams.

i) Technical Security Consulting (TSC)

TSC, is the Group's core professional service. The contract terms range from time and materials (based upon consultants' time and expenses upon completion of work) and short-term discreet statements of work, whereby the customer benefits gradually over the period over which the work is performed, unless there is a set deliverable.

Revenue is recognised on an input basis to measure the satisfaction of performance obligations over time. This is done according to the number of days worked in comparison to the total contracted number of days by including the profit or loss earned on work completed to the balance sheet date, whether fixed price or on a time and materials basis.

Where a contract has multiple performance obligations, revenue is recognised separately as each performance obligation is satisfied.

Provisions are made for any losses on uncompleted contracts expected to be incurred after the balance sheet date.

The Group operates on certain terms and conditions which allow the Group to recover any abortive revenue from its customer in the event that a customer terminates a contract before the contract or deliverable is complete. On this basis, the Group will have recognised revenue on an input basis.

For certain services, where there are set-up activities with a higher proportion of costs incurred at that stage, and the activity creates a separate performance obligation with the customer receiving immediate benefit from the activity, then an appropriate proportion of revenue is recognised. Where there is no separate performance obligation and benefit, the costs of the set-up activities are recognised over the life of the service contract in line with the revenue on the basis that the Group has an enforceable right to payment for performance to a specific date.

ii) Risk Management Consulting

These services focus on the business risks of cyber.

Revenue is recognised on the same basis outlined for Technical Security Consulting.

iii) Managed Detection and Response (MDR)

These services provide operational cyber defence, incident response, scanning, simulation and managed security operations centres (SOCs). Services are typically for an extended delivery duration where the customer derives continual benefit over the contract length. Contract lengths vary from one to three years.

Revenue is recognised over the length of the contract as the performance obligation is satisfied over time.

Services include set-up fees which are charged in respect of initial work and configuration of equipment to allow customers to benefit from a monitoring contract over a period of time. These fees are not considered to be a distinct service, and as a result, this revenue is recognised over time with the revenue for the monitoring activity.

iv) Product sales (own manufactured and resale of third party products)

Revenue is recognised when control of the product is transferred to the customer. This occurs upon delivery under the contractual terms. On certain sales of third-party products, the control of the product is considered to pass from the vendor to the end customer and in these cases the Group acts as an agent, and hence only records a commission on sale as opposed to gross revenue and costs of sale.

Escrow

The Escrow division groups its revenue into two main types of income streams.

i) Escrow contract services

These services securely maintain in 'escrow' the long-term availability of business-critical software and applications while protecting the intellectual property rights (IPR) of technology partners.

Revenue is recognised on the provision of an escrow service over a period of time, usually at least a year and potentially up to three years. Such revenue is recognised on a straight-line basis over the life of the service delivery agreement on the basis that benefit is consumed by the customer evenly over the period. Initial set-up fees are recognised over time as they are not considered a distinct service.

ii) Verifications and other Escrow services

These services verify source code, provide a fully managed secure service and result validation.

Revenue is recognised on completion of the related services which are typically delivered over a short period of time (typically a matter of weeks). These include SAAS services and ICANN services.

ACCRUED INCOME

Accrued income represents the Group's rights to consideration for work completed but not billed at the reporting date. Remaining balances are transferred to receivables when the rights become unconditional.

deferred revenue

Deferred revenue represents advanced consideration received from customers, for which revenue is recognised over time.

Determination and presentation of operating segments

The Group determines and presents operating segments based on the information that is provided to the Board, which acts as the Group's chief operating decision-maker (CODM) in order to assess performance and to allocate resources.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. An operating segment's results are reviewed regularly by the CODM to make decisions about resources to be allocated to the segment and to assess its performance.

The Group reports its business in two key segments: the Escrow division and the Assurance division. Within the Escrow division we manage some aspects of the day-to-day business on a geographical basis and this allows us to disclose revenue and operating profit for those geographies. However, while we can manage and disclose some aspects of those as individual operating segments, they are all managed under the Escrow division's senior executive team. That team takes the decisions on resource allocation, product development, marketing and areas for focus and investment. For this reason, the Escrow division is regarded as the appropriate reporting segment with additional operating segment disclosures presented to give the user of the accounts a further level of granularity.

Within the Assurance division, all activities are under one Assurance management team for strategic and resource allocation decision-making.

Allocation of central costs

Some costs are collected and managed in one location but are actually incurred on behalf of multiple operating segments or reporting segments. These costs are then allocated to the reporting segments. The allocation is based on logical or activity driven cost algorithms. The allocation is necessary to give an accurate picture of the consumption of resources by each reporting segment.

Individually Significant Items

The Group separately identifies items as individually significant if the item is considered unusual by its nature or scale, and is of such significance that separate disclosure is relevant to understanding the Group's financial performance and therefore requires separate presentation in the Financial Statements in order to fairly present the financial performance of the Group. Such items are referred to as 'Individually Significant Items' and are described in note 6.

Foreign currencies

Transactions in foreign currencies are recorded using the appropriate monthly exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated using the exchange rate ruling at the balance sheet date and the gains or losses on translation are included in the Income Statement.

The assets and liabilities of overseas subsidiaries denominated in foreign currencies are retranslated at the exchange rate ruling at the balance sheet date. The income statements of overseas subsidiary undertakings are translated at the weighted average exchange rates for the financial year. Gains and losses arising on the retranslation of overseas subsidiary undertakings are taken to the currency translation reserve. They are released to the Income Statement upon disposal of the subsidiary to which they relate.

Operating lease payments

Operating lease rentals are charged to the Income Statement on a straight-line basis over the period of the lease. Lease incentives received are recognised in the Income Statement as an integral part of the total lease expense, over the term of the lease.

Employee benefits– defined contribution pensions

The Group operates a defined contribution pension scheme. The assets of the scheme are kept separate from those of the Group in an independently administered fund. The amount charged as an expense in the Income Statement represents the contributions payable to the scheme in respect of the accounting period.

Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Share-based payment transactions

Share-based payments in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group. They are treated as an adjusting item (see note 3).

The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted.

The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

Share-based payment transactions in which the Group receives goods or services by incurring a liability to transfer cash or other assets that is based on the price of the Group's equity instruments are accounted for as cash-settled share-based payments. The fair value of the amount payable to employees is recognised as an expense, with a corresponding increase in liabilities, over the period in which the employees become unconditionally entitled to payment. The liability is remeasured at each balance sheet date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expense within the Income Statement.

Where the Company grants options over its own shares to the employees of a subsidiary it recognises in its individual financial statements, an increase in the cost of investment in that subsidiary equivalent to the equity-settled share-based payment charge is recognised in respect of that subsidiary in its consolidated Financial Statements with the corresponding credit being recognised directly in equity.

Holiday or vacation pay

The Group recognises a liability in the balance sheet for any earned but not yet taken holiday entitlement for staff.

Earned holiday is calculated on a straight-line basis over a holiday year which can vary by business unit. Taken holiday is based on actually taken holiday. Any movement in the liability between the opening and closing balance in the year is recorded as an employee cost or a reduction in employee costs in the Income Statement in the year.

borrowings

Borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Income Statement over the period of the borrowings on an effective interest basis.

Net finance costs

Net finance costs are recognised within the Income Statement in the year in which they are incurred.

Taxation

Taxation on the profit or loss for the year comprises current and deferred taxation. Taxation is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current taxation

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred taxation

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.

Intra-group financial instruments

Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

Trade and other receivables

Trade and other receivables are stated at their nominal amount less impairment losses.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and deposits repayable on demand. Bank overdrafts that are repayable on demand form part of the Group's cash management and are included as a component of cash and cash equivalents for the purpose only of the statement of cash flows.

Treasury shares

NCC Group plc shares held by the Group are deducted from equity as 'treasury shares' and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to reserves. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of equity shares.

Non-current assets held for sale and discontinued operations

A non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year.

On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to the Income Statement. The same applies to gains and losses on subsequent remeasurement although gains are not recognised in excess of any cumulative impairment loss. Any impairment loss on a disposal group is first allocated to goodwill, and then to remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Company's accounting policies. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated.

A discontinued operation is a component of the Company's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Income Statement is restated as if the operation had been discontinued from the start of the comparative period.