POL00026973
POL00026973
Post Office Limited
POST OFFICE LIMITED
(Company Number 2154540)
Meeting of the AUDIT, RISK AND COMPLIANCE SUB-COMMITTEE.
to be held at 12.00 on 10" November in the Boardroom
GRO:
Members of the Audit, Risk & Compliance Committee (the “ARC’) will be asked to declare any interest that
could give rise to conflict in relation to any item on the agenda at the beginning of the item in question. All
interests so disclosed will be recorded in the minutes of the ARC. If the chairman of the meeting deems it
appropriate, the member shall absent himself or herself from all or part of the Committee's discussion of the
matter.
12.00 1 Interim Report review and Ernst & Young half year Chris Day/Sarah
review findings Hall/Angus Grant
13.00 2 Minutes of the last meeting and matters arising Alasdair Marnoch
e Minutes of the meeting held on 21 October
2014
e ARC status report
13.10 3 Risk Appetite Statements — Markets Chris Aujard/
David Mason
13.40 4 Internal Audit papers: Malcolm Zack
e ARC Terms of Reference, IA Charter and Self-
Assessment
e 1Astatus of agreed actions
13.50 5 Proposed dates for 2015 Alwen Lyons
PRESENT: Alasdair Marnoch (Chairman)
Neil McCausland (Non-executive director)
Tim Franklin (Non-executive director)
SECRETARY: Alwen Lyons (Company Secretary)
IN ATTENDANCE: Alice Perkins (Board Chairman)
Paula Vennells (CEO)
Chris Day (CFO)
Chris Aujard (General Counsel)
Sarah Hall (Financial Controller)
David Mason (Head of Risk Governance)
Malcolm Zack (Head of Internal Audit)
Garry Hooton (Internal Audit)
Angus Grant (Partner, Ernst & Young)
Steve Lyon (Senior Manager, Ernst & Young)
POL-0023614
Strictly Confidential
POST OFFICE LIMITED AUDIT, RISK & COMPLIANCE SUB-COMMITTEE
Interim Report and Condensed Financial Statements for 2014-15
Purpose
The purpose of this paper is to:
1.1 Invite the Post Office Limited Board Audit Risk and Compliance Sub-
Committee to review the Post Office Limited Interim Report and Condensed
Financial Statements for the 2014-15 half year and recommend their approval
to the Post Office Board.
Background
21 The Post Office prepared a full Annual Report and Financial Statements that
met most of the requirements of a listed plc for the first time for the 2012-13
year. In 2013-14 the Interim Report also met this standard for the first time.
2.2 The following documents are attached to this paper:
e Annex A - Draft Interim Report and Condensed Financial Statements
(incorporating Board and EY comments);
e Annex B - ARC briefing book to aid understanding.
Interim Report and Condensed Financial Statements approach and plan
3.1 As set out to the Board, the Interim Report is currently anticipated for
publication in the first week of December. The context is continued progress
against a backdrop of challenging market conditions, with significant
transformation milestones delivered on the path to financial sustainability.
3.2 The Condensed Financial Statements have been prepared by Finance in
accordance with IFRS, consistent with the interim reporting of listed PLCs. An
ARC briefing book is attached. This provides a more detailed analysis of the
first half results to aid understanding of the financial statements.
3.3. The current timeline is:
* 6 November — ARC papers issued incorporating board feedback on front
half and including the Condensed Financial Statements
* 6 November — share draft with the Shareholder Executive and relevant
sections with Royal Mail for comment
* 10 November — ARC review
+ 19 November - Board papers issued including final draft Interim Report
and Condensed Financial Statements
* 19 November - Royal Mail interim results announcement expected
* 26 November — Board to approve Interim Report and Condensed Financial
Statements
* Early December — Announce results
Interim Report Chris Day Page 1 of 2
November 2014
POL00026973
POL00026973
POL-0023614
Strictly Confidential
Review process
41 The comments following the first review by Board members last week have
been considered and addressed. This version of the draft will be shared with
the Shareholder Executive and relevant sections with Royal Mail for comment.
Format
5.1 We will produce an electronic copy of the Interim Report in-house and make
this available via the website. It will be similarly styled to the Annual Report.
Going Concern
6.1 The Going Concern work has been refreshed at the half year and a summary
of the analysis is included in Section 12 of the ARC Briefing Book attached to
this paper. Based on the analysis in this paper there is headroom remaining
until March 2018 and it is believed that Post Office Limited will be able to meet
its liabilities as they fall due in the foreseeable future. The funding beyond
March 2015 is still subject to State Aid clearance so downsides have been
applied to reflect a situation where the funding for NSP and transformation
post March 2015 is not available in addition to downside scenarios reflecting
that growth and savings may not be fully delivered. Subject to ceasing spend
on transformation post March 2015, there could still be sufficient headroom to
trade. It is therefore expected that the Post Office Limited directors will
consider it appropriate to continue to prepare the financial statements on a
Going Concern basis.
Audit
71 The audit work on the Interim Report and Condensed Financial Statements is
largely complete. No significant issues have arisen to date.
Recommendation
8.1 The Post Office Limited Board Audit Risk and Compliance Sub-Committee is
asked to:
e Review the Interim Report and Condensed Financial Statements and provide
final individual comments to Chris Day and Mark R Davies by noon on
Monday 17 November;
« Recommend to the Post Office Board
i. That the approach to Going Concern is approved and the Going
Concern status for Post Office Limited at the half year is agreed;
ii. That the Interim Report and Condensed Financial Statements should
be approved;
iii. That, if final amendments are required, authority is delegated for
reviewing these amendments and completing the Interim Report and
Condensed Financial Statements on behalf of Post Office Limited to a
Sub-Committee, the quorum for which to be comprised of any three of
Alice Perkins, Paula Vennells, Chris Day and Alasdair Marnoch.
e Note that the Chairman of the Audit Risk and Compliance Sub-Committee will
be asked to provide a verbal update of this meeting to the Board.
Chris Day
November 2014
Interim Report Chris Day Page 2 of 2
November 2014
POL00026973
POL00026973
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Registered Number 2154540
Post Office Limited
Unaudited interim condensed
consolidated financial statements
28 September 2014
4 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Our story in summary
Challenge, Commitment and Change
‘The first six months of the financial year showed the Post Office making further progress, in line with its strategic plan, towards
the goal of commercial sustainability. It did so in market conditions which require it to move at even greater pace to improve
customer experience across its network.
The business is making this progress while also further reducing its reliance on the Network Subsidy Payment from Government,
easing pressure on the public purse. This manifested itself in the first six months of the year with the planned £20m reduction in
the payment compared with the same period in the previous year.
At the same time, the business’ programme to transform the branch network progressed faster than ever before. By the end of
September 2014, 3,134 branches had been modernised. Of these, 1,076 were opened in the six month period from April to
September 2014, compared to 588 in the same six month period in 2013 (an 80% increase in the pace of change).
Similar progress was seen within the Crown branch network, the larger branches directly operated by Post Office Limited.
Through a combination of investment, automation, training, cost reduction and franchising, the Crown network, which as recently
as 2012/-3 was losing £37m per year, continues on a path to break even in 2015. By the end of September, 248 large
branches, the majority of the Crown network, had received significant investment to modernise their environment.
‘As a result of this progress, by the end of September there were more than 85,000 additional opening hours in post offices every
week, with almost 2,000 branches now open on a Sunday. The Post Office has also developed the network to open 150 new
access points - helping customers with their Home Shopping Returns. This addresses a key part of the market where ease and
convenience is central, where competition is strong, and where the Post Office has an opportunity to benefit from overall market
growth.
While the Post Office is therefore making progress in delivering its strategy, itis also operating in a tough trading environment.
This requires it both to accelerate the pace of change and reduce its costs to become more streamlined and agile
Overall revenue, excluding the Network Subsidy Payment, was £475m for the six months compared to £483m in the same
period last year. This performance has been impacted by market pressures, particularly in a rapidly evolving mails market.
Mails and Retail revenue in the half year was broadly flat with prior year. The Post Office continues to work closely with its long
term partners in Royal Mail, to drive revenue growth. This involves innovation as seen in the ‘Drop and Go' service now used by
over 60,000 small businesses, through continued ‘Click and Collect’ services, and through simplified products and pricing,
In Financial Services the Post Office performed strongly in the first half of the year - growing Personal Financial Services revenue
by 11% year on year. The product suite is being further developed with a current account offer and growing presence in the
mortgage market. Cash access and foreign currency businesses are also benefitting from greater convenience and enhanced
opening hours - particularly notable at a time when traditional banks are closing branches.
Government Services and Telecoms had a difficult period, with year on year revenue decline of 9.3% and 9.2% respectively - the
former impacted by increased use of digital channels as government departments seek to reduce spending and the latter by an
adjustment period through the move to a new telecoms partner.
In both cases however, progress is being made. [The recent announcement of renewal of the Post Office Card Account contract
by the Department of Work and Pensions and] the introduction of Identity Services point the way forward in Government
Services. In Telecoms, the platform developed by the business’ new partner, Fujitsu, will enable the Post Office to introduce more
swiftly new products, and promotions that will facilitate more responsive trading strategies. This will enable the Post Office to
compete effectively in the bundle Telecoms market.
To deliver the goal of commercial sustainability, there is an imperative to drive the highest levels of cost efficiency in all Post
Office operations and in central support structures. The next six months will see further developments in re-structuring and cost
control on a scale previously unseen in the business.
The Post Office is resolute in its determination to build a strong and stable future. The first half year has both demonstrated
genuine progress and underlined the challenges to be faced in ensuring this positive future is not jeopardised.
Alice Perkins Paula Vennells
Chairman Chief Executive
ARC Meeting-10/11/14 5 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
6 of 137
Post Office Limited
Business review
Key performance figures - six months ended 28 September 2014
Summary Group Profit and Loss Account
Turnover
Network Subsidy payment
POL00026973
POL00026973
Revenue
People costs
Other operating costs
Total costs
Share of profit from joint ventures and associates
Operating profit before exceptional items
Operating exceptional items
Profit on disposal of property, plant and equipment
Profit before financing and taxation
Revenue by Segment
Mails and Retail
Financial Services
Government Services
Telecoms
Other income
Turnover
Network Subsidy payment
Revenue
2014 2013 Variance. ~——Variance
£m £m £m %
475 483 @) (a7)
80 100 (20) (20.0)
555 583 (28) (48)
(125) (434) 6 (46)
(431) (422) @) 24
(556) (553) @) as
24 23 1 43
23 53 (30) (56.6)
(3) 132
- 2
20 187
2014 2013 Variance ~—Variance
£m £m £m *
183 184 @) (05)
147 1239 8 58
68 75 (7) (93)
59 65 3) (9.2)
18 20 @) (20.0)
475 483 @) (a7)
80 100 (20) (20.0)
555 583 (28) (48)
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
KEY FINANCIAL PERFORMANCE INDICATORS
[Turnover £m jperating profit before exceptional items £m
475 2013: 483 23 2013: 53
jperating loss before depreciation, amortisation, exceptional [Net cash flow £m
items and Network Subsidy Payment £m La iaflow 20%314e cation
(57) 2013: (47)
Revenue
The Post Office's revenue has declined by £28 million, including a £20 million reduction in the Network Subsidy Payment.
Turnover decreased from £483 million in the first 6 months of the prior year, to £475 million this year with growth in the
Financial Services business more than offset by decline in the Government Services and Telecoms businesses. The Mails and
Retail business remained almost flat with £1m (0.5%) decline. The Network Subsidy Payment decreased by £20 million from the
previous year to £80 million in line with the Government Funding Agreement. This will reduce further in 2015-16 as set out in
the current funding agreement with the government.
Mails and Retail
The Mails and Retail pillar includes all services provided for Royal Mail and Parcelforce as well as Lottery and retail services.
Mails and Retail revenue of £183 million decreased by £1 million (2013: £184 million). This reduction in turnover was in relation
to Royal Mail products and was driven primarily by continued lower parcel volumes through the Post Office. The overall express
mails market has declined by 5% and this has had a detrimental impact on income from all of our priority services, Special
Delivery and Parcelforce 24/48. Retail turnover and revenue derived from the sales of lottery tickets remained flat.
Financial Services
The Financial Services pillar includes Post Office branded personal financial services products, ATMs and travel services as well as
traditional services such as bill payment and over-the-counter banking transactions. It offers products that are simple, fair,
accessible and transparent, and value for money.
Financial Services revenue in the first half of the year increased by £8 million to £147 million (2013: £139 million). Personal
Financial Services revenue rose by 11%, driven by growth in insurance, savings, international money transfer and mortgage
products. Revenue from traditional financial services products, including bill payment services, National Savings and Investments
(NS&) premium bonds and Postal Orders, is generally continuing to decline but grew in the 6 month period by £1m largely due
to increased premium bond sales following the increase in the maximum limit for holdings that took effect in June 2014.
Government Services
The Government Services pillar covers service provided under contract to Government departments. Government Services
revenue of £68 million declined by £7 million (2013: £75 million) mainly due to a reduction in the number of active Post Office
Card Account (POCA) accounts. Revenue from Motoring Services (car tax) continues to decline as more customers tax their
vehicles via phone or online and it is a similar story for Passports where the launch of an improved online journey has led to a
decline in Post Office revenue.
ARC Meeting-10/11/14 7 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Telecoms
The Telecoms pillar includes the Post Office HomePhone and Boradband services as well as e-top up services and phonecards.
Telecoms revenue of £59 million decreased by £6 million (2013: £65 million), Revenue from HomePhone and Broadband
decreased driven by a reduction in custorner numbers and in the average revenue per user (ARPU). The reduction in the
customer base is largely due to increased competition from bundle providers (phone/broadband/TV/mobile). The reduced ARPU
is primarily due to changing customer behaviours as land lines are used less and remaining usage is migrating to ‘anytime’
packages which generate less revenue. Revenue from our Mobile top-up business was lower than the previous half year, as
more customers continue to migrate away from pre-pay services onto contracts. The Post Office is still a significant provider in
the top-up market, and its share of the declining retail market has been maintained at around 5%,
Operating costs
People costs of £125 million have decreased compared to the first 6 months of the prior year by £6 million. This was mainly due
to savings in the Crown network as well as wider efficiencies and the outsourcing of some IT functions.
Other operating costs have increased by £9 million to £431 million mainly due to higher IT costs during the implementation of
the transformation and for the newly outsourced elements of IT.
Joint venture
The share of profit from the joint venture, First Rate Exchange Services Holdings Limited, increased by £1 million to £24 million
Exceptional items
Operating exceptional items include the costs of delivery of major change and the impairment of non-current assets. These are
offset by Government grant funding, received towards the transformation programme and recognised to match the associated
costs. In the half year Network Transformation resulted in costs of £74 million (2013: £56 million) and Crown Transformation
costs were £10m (2013: less than £1 million). Costs of £6 million (2013: £5 million) relate to the IT transformation programme
which will create the appropriate IT infrastructure for the future. There have also been severance costs of £10 million (2013: £2
million) and other restructuring costs of £7 million (2013: £1 million). Asset impairments of £66 million (2013: £35 million) are
included within operational exceptional items. Exceptional items in the comparative half year included a gain of £102 million
which arose on the change to the terms of the Royal Mail Pension Plan.
The Government grant funding for 2014-15 of £170 million (2013: £215 million) was received on 1 April 2014 and has been
fully recognised in the half year to offset the costs as appropriate (2013: £129 million offset). Expenditure will continue on the
delivery of major change in the second half of the year.
Profit
The Post Office tracks a Key Financial Performance Indicator of operating loss before depreciation, amortisation, exceptional items
and Network Subsidy Payment which has increased by £10 million to a loss of £57 million (2013: £47 million). This increase in
the loss is driven by a combination of the decline in turnover, primarily in Government Services and Telecoms, and a net increase
in costs
The operating profit before exceptional items has decreased by £30 million to £23 million (2013: £53 million) driven mainly by
the reduction in the Network Subsidy Payment of £20 million and the increased loss above.
Profit before financing and taxation has decreased from £187 million to £20 million driven by the £30 million reduction in
operating profit before exceptional items and the change year on year in exceptional items. This was mainly due to the gain of
£102 million which arose on the change to the terms of the Royal Mail Pension Plan in the comparative half year.
Net cash flow
There has been a net cash inflow of £93 million during the period in contrast to the comparative half year which saw a net cash
outflow of £142 million. The change in cash flow is driven by the repayment of the loan in the prior year. The cash position of the
business remains strong, with cash and cash equivalents of £781 million (2013: £829 million)
8 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Interim condensed consolidated income statement
Half year to 28 Half year to 29
September 2014 September 2013
Unaudited Unaudited
Notes £m £m
Continuing operations
Turnover 475 483
Network Subsidy Payment 80 100
Revenue 3 555 583
People costs excluding restructuring costs (125) (231)
Other operating costs (431) (422)
Share of post tax profit from joint ventures and associates 24 23
Operating profit before exceptional items 23 53
Operating exceptional items 4 (3) 132
= government grant 170 129
~ Royal Mail Pension Plan amendment - 102
~ restructuring costs (107) (64)
- other (66) (35)
Operating profit 20 185
Profit on disposal of property, plant and equipment : 2
Profit before financing and taxation 20 187
Finance costs (a) @
Net pensions interest 4 2
Profit before taxation 23 188
Taxation credit 5 5 2
Profit for the period from continuing operations 28 190
ARC Meeting-10/11/14 9 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
10 of 137
Interim condensed consolidated statement of comprehensive income
Post Office Limited
POL00026973
Profit for the period from continuing operations
Other comprehensive income:
Remeasurements on defined benefit surplus
Income tax effect
Total comprehensive income for the period
POL00026973
Half year to 28 Half year to 29
September 2014 September 2013
Unaudited Unaudited
£m sm
28 190
13 (54)
(4) (2)
37 134
There are no other comprehensive income items that will be reclassified to the profit and loss in subsequent periods.
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Interim condensed consolidated statement of cash flows
Half year to 28 Half year to 29
September 2014 September 2013,
Unaudited Unaudited
Notes £m £m
Cash flows from operating activities
Operating profit before exceptional items 23 53
Adjustment for:
Depreciation and amortisation - -
Share of profit from joint ventures and associates (24) (23)
Pension operating costs 15 13
Working capital movements: 55 (6)
Increase)/decrease in trade and other receivables (1) 73)
Increase/(decrease) in trade and other payables 56 (81)
Decrease/(increase) in inventories - 1
increase in non-exceptional provisions : 1
Pension operating costs paid (11) (13)
Cash receipts in respect of operating exceptional items: 70 153
overnment grant 170 215
Restructuring costs (105) (59)
Other 5 (3)
Net cash inflow from operating activities 128 177
Income tax recovered 10 10
Cash flows from investing activities
Proceeds from sale of property, plant and equipment - 2
Purchase of non-current assets (81) (38)
Net cash (outflow) from investing acti (81) (G6)
Net cash inflow before financing activities 57 151
Cash flows from financing activities
Payments to finance lease creditors (2) (2)
Proceeds frorn/(repayment of) bank borrowings 38 (291)
Net cash inflow/(outflow) from financing activities 36 (293)
Net increase/(decrease) in cash and cash equivalents 93 (142)
Cash and cash equivalents at the beginning of the period 688 974
Cash and cash equivalents at the end of the period 7 784 829
ARC Meeting-10/11/14 11 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Interim condensed consolidated balance sheet as at:
POL00026973
POL00026973
28 September 30 March
201 2014
Unaudited Audited
Notes £m £m
Non-current assets
Intangible assets - -
Property, plant and equipment 10 10
Investments in joint ventures and associates 85 61
Retirement benefit surplus 6 163 148
Trade and other receivables 12 15
Total non-current assets 270 234
Current assets
Inventories 6 6
Trade and other receivables 296 302
Cash and cash equivalents 789 738
Total current assets 1,091 1,046
Total assets 1,364 1,280
Current liabilities
Trade and other payables (762) (767)
Financial liabilities - interest bearing loans and borrowings (38) -
- obligations under finance leases (1) (3)
Provisions (80) (70)
Total current liabilities (881) (840)
Non-current liabilities
Other payables (33) (28)
Provisions (6) (8)
Total non- current liabilities (39) (36)
Net assets bd 404
Equity
Share capital - -
Share premium 465 465
Retained earnings (26) (63)
Other Reserves 2 2
Total equity ba 404
12 of 137
ARC Meeting-10/11/14
POL-0023614
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Interim condensed consolidated statement of changes in equity
For the half year ended 28 September 2014
Retained
Share earnings Other Total
premium £m reserves equity
Notes £m £m —m
At 34 March 2014 (unaudited) 465 (63) 2 404
Profit for the period - 28 7 28
Remeasurements on defined benefit surplus 6 - 13 = 13
Income tax effect 5 - (4) = (4)
At 28 September 2014 (unaudited) 465 (26) 2 ba
For the half year ended 29 September 2013
Retained
Share earnings Other Total
premium £m reserves equity
Notes £m £m £m
At 4 April 2013 (unaudited) 465 (179) 2 288
Profit for the period - 190 = 190
Remeasurements on defined benefit surplus = (54) s (54)
Income tax effect 5 - (2) - (2)
At 23 September 2013 (unaudited) 465 (45) 2 422
ARC Meeting-10/11/14
POL00026973
POL00026973
13 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Notes to the interim condensed consolidated financial statements
1. Accounting policies
The interim condensed consolidated financial statements of Post Office Limited and its subsidiaries (collectively, the Group) for the half year
ended 28 September 2014 were authorised for issue in accordance with a resolution of the directors on XX November 2014.
The information for the year ended 30 March 2014 does not constitute statutory accounts as defined in section 434 of the Companies Act
2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies, including the auditors’ report on those
accounts. Their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under
section 498(2) or (3) of the Companies Act 2006
Basis of preparation
These interim condensed consolidated financial statements for the half year ended 28 September 2014 have been prepared in accordance
with IAS 34, ‘Interim Financial Reporting’ as adopted by the European Union. This report should be read in conjunction with the Group's
Annual Report and Accounts 2014, which have been prepared in accordance with IFRSs as adopted by the European Union.
Fundamental accounting concept - going concern
After careful consideration of the plans for the coming years, the Directors continue to believe that Post Office Limited will be able to meet its
liabilities as they fall due for the foreseeable future, Accordingly, on that basis, the Directors consider that it is appropriate that these interim
condensed consolidated financial staternents have been prepared on a going concern basis.
The Group has net assets at 28 September 2014 and is reporting a profit before and after exceptional items. A funding agreement with
Government was announced on 27 October 2010 which provided for:
Funding of £410 million for 2012-13
Funding of £415 million for 2013-14
Funding of £330 million for 2014-15
Extension of the existing working capital facility with the Department for Business, Innovation & Skills (BIS) of £1.15
billion up to 31 March 2016
State Aid approval for the funding for 2012-13 to 2014-15 was received on 28 March 2012 and it was also recognised that the working
capital facility was no longer deemed State Aid. £410 million was received on 2 April 2012 and £415 million was received on 2 April 2013.
An additional funding agreement with Government was announced on 27 November 2013 which provided for:
Funding of £280 million for 2015-16
Funding of £220 million for 2016-17
Funding of £140 million for 2017-18
Extension of the existing working capital facility with the Department for Business, Innovation & Skills (BIS) amended
with a limit of £950 million from 31 March 2015 up to 31 March 2018
State Aid approval for the funding for 2015-16 to 2017-18 has not yet been received.
This investment will take the form of a Government Grant and enable the Group to modernise the branch network and the continuation of
the Network Subsidy Payment recognises the major social value that Post Offices provide to communities. New main and local branches are
currently being rolled out across the United Kingdom. Customers are beginning to benefit from a much better retail experience including
extended opening hours. This programme is designed to make the Post Office network more self-sustaining and, over time, less dependent
on direct subsidy. This will not involve a branch closure programme
The Directors are satisfied with the continued progress made towards modernisation during the half year ended 28 September 2014 and
that the plans in place and the substantial investment secured will enable the Group to continue to modernise and to secure its future.
However, they note that the scale of change required remains significant so not without risk.
New standards, interpretations and amendments adopted by the Group
The interim condensed consolidated financial statements have been prepared in accordance with the accounting policies set out in the
Group's Annual Report and Accounts 2014. The Group has not early adopted any other standard, interpretation or amendment that has been
issued but is not yet effective.
2. Risks and uncertainties
The principal and other significant risks and uncertainties affecting the Group were identified as part of the Strategic Report, set out on page
45 of the Group's Annual Report and Financial Statements 2013-14. These risks remain relevant for the remaining six months of the current
financial year.
14 of 137 ARC Meeting-10/11/14
POL-0023614
1. Interim Report review and Emst & Young half year review findings
3. Segmental reporting
Post Office Limited
POL00026973
POL00026973
The Group's operating segments have been identified as Mails & Retail, Financial Services, Government Services, Telecoms and Other. The
performance of these segments in the half year ended 28 September 2014 has been discussed further in the Business Review on page XX.
Performance is assessed based on net revenue. This is calculated using segmental revenue less the directly attributable costs of delivering the
service or product. Assets and liabilities as recognised on the Group balance sheet are not considered to be segmental assets or liabilities but
rather are managed by the Group's central functions.
Directly
Attributable Net
Half year to 28 September 2014 Revenue Costs Revenue
£m £m £m
Mails & Retail 183 (2) 181
Financial Services 147 - 147
Government Services 68 (45) 53
Telecoms 59 (37) 22
Other income 18 : 18
Sub total 475 (54) 421
Network Subsidy Payment 80 : 80
Total 555 (54) 501
Directly
Attributable Net.
Half year to 29 September 2013 Revenue Costs Revenue
£m £m. £m
Mails & Retail 184 (2) 182
Financial Services 139 - 139
Government Services 75 (a5) 60
Telecoms 65 (40) 25
Other income 20 : 20
Sub- total 483 (57) 426
Network Subsidy Payment 100 : 100
Total 583 (57) 526
ARC Meeting-10/11/14
15 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
3. Segmental reporting continued
A reconciliation between segment net revenue and profit before taxation is provided below:
Half year to 28 Half year to 29
September 2014 September 2013
£m £m
Underlying segment net revenue 504 526
Indirect costs (502) (496)
Share of post tax profit from joint ventures and associates 24 23
Operating profit before exceptional items 23 53
Operating exceptional items @) 132
Operating profit 20 185
Profit on disposal of property, plant and equipment : 2
Profit before financing and taxation 20 187
Finance costs (a) @
Finance income - -
Net pensions interest 4 2
Profit before taxation 23 188
Seasonality of operations
POL00026973
POL00026973
Due to the seasonality of the Mails & Retail segment higher revenues are usually expected in the second half of the year. This is mainly
attributed to the effect of the Christmas period. This information is provided to allow for a better understanding of the results, however
management has concluded that this does not constitute ‘highly seasonal’ as considered by IAS 34.
16 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
4, Operating exceptional items
These are items of income and expenditure arising from the operations of the business which, due to the nature of the events giving rise to
them, require separate presentation on the face of the income statement to allow a better understanding of financial performance.
Half year to 28 Half year to 29
September 2014 September 2013
£m £m
Government grant 170 129
Royal Mail Pension Plan amendment - 102
Business transformation (a) -
Network transformation including subpostmasters compensation (74) (56)
Crown transformation (10) a
Restructuring - severance (10) (2)
~ other (2) (6)
Impairment of intangible assets (25) (18)
Impairment of property, plant and equipment (41) (47)
Total operating exceptional items (3) 132
Due to ongoing operational losses (excluding Network Subsidy Payment) the carrying value of intangible assets and all property plant and
equipment other than freehold and long leasehold property has been impaired to nil
5. Taxation
The overall taxation credit in the income statement is calculated by applying the tax rate that would be applicable to the expected total
annual earnings to the reported interim profit.
‘The major components of income tax in the interim condensed income statement are:
Half year to 28 Half year to 29
September 2014 September 2013
£m £m
Corporation tax credit for period - -
Tax over provided in previous periods 1 -
Current tax 1 -
Deferred tax credit relating to the origination and reversal of temporary differences 4 2
Income tax credit reported in the condensed consolidated income statement 5 2
ARC Meeting-10/11/14 17 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
6. Pensions
‘The Group participates in pension schemes as detailed below:
Name Eligibility
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
‘The charge in the interim condensed consolidated income statement for the defined contribution scheme and the Group contributions to this
scheme was £1m in the half year to 28 September 2014. In relation to the defined benefit schemes payments of £10m were made in
respect of future service contributions, nearly all relating to RMPP. The regular future service contributions for RMPP, expressed as a
percentage of pensionable pay, has remained at 17.1%.
The following disclosures reflect the Post Office Limited sectionalised RMPP scheme which is independently operated by the Group.
Disclosures in relation to Post Office Limited's approximately 7% share of RMSEPP (which is operated by Royal Mail Group Limited) have been
excluded as they are not considered to be significant to the interim condensed consolidated financial statements.
a) Major long-term assumptions
At 28 September 2014 At 30 March 2014
pa bpa
Rate of increase in salaries 3.0 3.2
Discount rate 4a 45
Inflation assumption (RPI) 34 33
Inflation assumption (CP!) 24 23
Demographic assumptions, for example mortality, remain unchanged from those made in March 2014.
b) Plan's assets and liabilities
The plan assets and liabilities were:
Market value
‘At 28 September 2014 At 30 March 2014
Sectionalised RMPP £m £m
Fair value of assets 297 260
Present value of liabilities (416) (90)
Surplus in plan before IFRIC 14 adjustment 184 170
Less IFRIC 14 adjustment (20) (23)
Surplus in RMPP plan after IFRIC 14 adjustment 164 147
Surplus in plan for the Post Office Limited
share (at approximately 7%) of RMSEPP after
IFRIC 14 adjustment 2 1
Total retirement benefit surplus 163 148
18 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
6. Pensions continued
©) Movement in plan’s assets and liabilities
Changes in the present value of the defined benefit pension surplus are analysed as follows:
sonal Half year ended Year ended
Henthnatoed GF 28 September 2014 30 March 2014
£m £m
Opening net retirement benefit surplus 170 99
Royal Mail Pension Plan amendment - 102
Current service cost (14) (25)
Curtailment costs (1) (a
Net financing credit 4 5
Employers contributions 14 22
Actuarial gains/(losses) a4 (32)
Closing net retirement benefit surplus before IFRIC
14 adjustment 181 170
7. Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise the following
At 28 September 2014 At 29 September 2013
£m £m
Cash equivalents 789 855
Bank overdrafts () (26)
781 829
ARC Meeting-10/11/14 19 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
8, Related party disclosures
There have been no material changes to the related parties listed in the Group’s Annual Report and Accounts 2014. All related party
transactions were in the ordinary course of business. The transactions entered into and the balances outstanding as at 28 September 2014
were as follows:
‘Amounts ‘Amounts
Sales/recharges Purchases/ owed from related owed to related
to recharges from party including party including
related party related party outstanding loans outstanding loans
2014 2013 2014 2013 2014 2013 2014 2013
Half year to September: £m £m £m £m £m £m £m £m
Royal Mail Plc 165 169 2148 26 - 340
Romec Limited - - 3 6 - - 6 4
First Rate Exchange
Services Holdings
Limited 15 16 81-80 7 8 5 5
The sales to, and purchases from, related parties are made at normal market prices. Balances outstanding at the year end are unsecured,
interest free, and settlement is made by cash
The Group trades with numerous government bodies at an arm's length basis. Transactions with these entities are not disclosed owing to the
significant volume of transactions that are conducted. Separately, the Group has certain loan facilities with government, and receives a
government grant and the Network Subsidy Payment from government. There were no material transactions or balances between the Group
and its key management personnel during the half year ended 28 September 2014
Statement of Directors’ responsibilities
The directors confirm that these condensed set of interim financial statements have been prepared in accordance with IAS 34 ‘Interim
Financial Reporting’, as adopted by the European Union.
By order of the Board
PAVennells CM Day
Chief Executive Chief Financial Officer
XK November 2014
20 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
Report on review of interim condensed financial statements
The Board of Directors to Post Office Limited
Introduction
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for
the six months ended 28 September 2014, which comprises the interim condensed consolidated balance sheet of Post Office
Limited and its subsidiaries (the Group) and the related interim condensed consolidated statements of income, comprehensive
income, changes in equity and cashflow statement for the six month period then ended and the explanatory notes. We have read
the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements
or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with guidance contained in International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the
Entity” issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for
preparing the half-yearly financial report in accordance with the accounting policies set out in note 1.
‘As disclosed in note 4, the annual financial statements of the Group are prepared in accordance with IFRS as adopted by the
European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34, “Interim Financial Reporting” as adopted by the European Union,
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Auditing Practices Board for use
in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than
an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 28 September 2014 is not prepared, in all material respects, in
accordance with the accounting policies set out in note 1, which comply with International Accounting Standard 34 as adopted by
the European Union
Ernst & Young LLP
London
[Date]
ARC Meeting-10/11/14 21 of 137
POL-0023614
POL00026973
POL00026973
Annex B
Post Office Limited
Audit, Risk and Compliance Board Sub-Committee
Briefing Book
Half Year ended 28 September 2014
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Section Page
a. Glossary a
2. Introduction 4
3s Accounting Policies 4
4. Primary Statements 5
5. Operating Profit 8
6. Revenue 9
7. Costs and People 13
8. Quality of Earnings 17
9. Pensions 18
10. — Exceptional Items and Provisions 21
11. Interest, cash, debt, funding and hedging 22
12. Going Concern 24
13. Property, plant and equipment and non-current assets held for sale 28
14. — Goodwill. Investments and Intangibles 29
15. — Working Capital 30
16. — Provisions 35
17. Litigation and claims- potential claims regarding Horizon 36
18. Taxation 37
2
ARC Meeting-10/11/14 23 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
1. Glossary
Below is a listing
of key abbreviations used throughout this document with the full meaning given:
Abbreviation
Meaning
ATM
Automated teller machine
BACS
Bankers’ Automated Clearing Services
BIS
Department for Business Innovation & Skills
Bol
Bank of Ireland
CPI
Consumer Price Index
DVLA
Driver & Vehicle Licensing Authority
DwP
Department of Work & Pensions
Eagle
Deal in August 2012 to sell POFS to the Bank of Ireland, restructure commission
rates for personal financial services and extend the contract to 2023
FOoG
Front Office of Government
FRES
First Rate Exchange Services
Gamma
A contract variation made in 2007 with POFS generating £100m cash and income
over a number of years in return for a series of commitments through to 2020
GRNI
Good Received Not Invoiced
Horizon
Horizon Next Generation- Counter system
NBV
Net Book Value
NS&l
National Savings & Investments
NSP
Network Subsidy Payment
POCA
Post Office Card Account
PFS
Personal Finance Services
POFS
Post Office Financial Services
RMPP
Royal Mail Pension Plan
RMSEPP
Royal Mail Senior Executive Pension Plan
RMDCP
Royal Mail Defined Contribution Plan
RBS
Royal Bank of Scotland
RPI
Retail Price Index
SGEI
Services of General Economic Interest
24 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
2. Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for the half year
ended 28 September 2014. It is a summary of the key data, trends and analyses to be read in
conjunction with the Interim Report which readers may find useful to further their own
understanding of the results for half year 2014-15.
Most of the analysis is based on the comparison of this year’s actual results to prior year.
Comparison against budget is discussed in the Monthly Performance Report presented to the Post
Office Limited Board on a monthly basis.
3. Accounting Policies
Post Office Limited has reported its results under International Financial Reporting Standards
(IFRS).
ARC Meeting-10/11/14 25 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
4
41
Primary Statements
Interim Condensed Consolidated Incorne Statement
POL00026973
POL00026973
Half year to 28 Half year to 29
September 2014 September 2013
Unaudited Unaudited
£m £m
Continuing operations
Turnover 475 483
Network Subsidy Payment 80 100
Revenue 555 583
People costs excluding restructuring costs (125) (134)
Other operating costs (434) (422)
Share of post tax profit from joint ventures and associates 24 23
Operating profit before exceptional items 23 53
Operating exceptional items (3) 132
= government grant 170 129
- Royal Mail Pension Plan amendment - 102
~ restructuring costs (107) (64)
= other (66) (35)
Operating profit 20 185
Profit on disposal of property, plant and equipment - 2
Profit before financing and taxation 20 187
Finance costs (a) ()
Net pensions interest 4 2
Profit before taxation 23 188
Taxation credit 5 2
Profit for the period from continuing operations 28 190
26 of 137
ARC Meeting-10/11/14
POL-0023614
1. Interim Report review and Emst & Young half year review findings
4.2
Interim Condensed consolidated statement of cash flows
Half year to 28
POL00026973
POL00026973
Half year to 29
September 2014 September 2013
Unaudited Unaudited
£m £m
Cash flows from operating activities
Operating profit before exceptional items 23 53
Adjustment for:
Depreciation and amortisation - -
Share of profit from joint ventures and associates (24) (23)
Pension operating costs 15 13
Working capital movements: 55 (6)
Increase)/decrease in trade and other receivables (1) 73
Increase/(decrease) in trade and other payables 56 (81)
[Decrease/(increase) in inventories - EB
Increase in non-exceptional provisions - 1
Pension operating costs paid (a1) (43)
Cash receipts in respect of operating exceptional items: 70 153
jovernment grant 170 245
Restructuring costs (105) (59)
ther 5 (3)
Net cash inflow from operating activities 128 177
Income tax recovered 10 10
Cash flows from investing activities
Proceeds from sale of property, plant and equipment - 2
Purchase of non-current assets (84) (38)
Net cash (outflow) from investing activities (81) (36)
Net cash inflow before financing activities 57 151
Cash flows from financing activities
Payments to finance lease creditors (2) (2)
Proceeds from/{repayment of) bank borrowings 38 (291)
Net cash inflow/(outflow) from financing activities 36 (293)
Net increase/(decrease) in cash and cash equivalents 93 (142)
Cash and cash equivalents at the beginning of the period 688 974
Cash and cash equivalents at the end of the period 784 829
ARC Meeting-10/11/14
27 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
4.3 Interim condensed consolidated balance sheet
28 September 30 March
2014
Unaudited Audited
£m £m
Non-current assets
Intangible assets - -
Property, plant and equipment 10 10
Investments in joint ventures and associates 85 61
Retirement benefit surplus 163 148
Trade and other receivables 12 15
Total non-current assets 270 234
Current assets
Inventories 6 6
Trade and other receivables 296 302
Cash and cash equivalents 789 738
Total current assets 4,094 1,046
Total assets 1,361 1,280
Current liabilities
Trade and other payables (762) (767)
Financial liabilities ~ interest bearing loans and borrowings (38) -
= obligations under finance leases (1) (3)
Provisions (80) (70)
Total current liabilities (881) (840)
Non-current liabilities
Other payables (33) (28)
Provisions (6) (8)
Total non- current li (39) (36)
Net assets 4b 404
Equity
Share capital - -
Share premium 465 465
Retained earnings (26) (63)
Other Reserves 2 2
Total equity 44d 404
7
28 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
5. Operating Profit
5.1 Operating profit bridge analysis
5
> _
(9) ey
2013 -14 Half = Revenue Other Operating Subpostmasters’ Share of JV People Costs 2014 -15 Half
Year Costs Costs Year
5.2 Explanations for key movements are as follows:
« Revenue - section 6
e People costs - section 7.2
e Subpostmasters - section 7.3.1
© Non People Costs / Other - section 7.3.2 to section 7.3.8
ARC Meeting-10/11/14 29 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
6. Revenue
28 Sept ember 29 September
2014 2013 Variance
£m £m £m
Turnover 475 483 (8)
Network Subsidy Payment 80 100 (20)
Revenue 555 583 (28)
6.1 Revenue bridge analysis.
£m
583
(20) I = I 8
o =
6) (2) (1)
2013-14 Half Network Government Telecoms Other Mails & — Financial 2014-15 Half
Year Payment Services Services Income Retail Services Year
Revenue Revenue
The decrease in year on year total revenue of £28m (4.8%) to £555m (2013 £583m) is driven
by the £20m decrease in the Network Subsidy Payment and a decrease of £8m in turnover.
The following commentary gives further detail on the revenue variances by category:
6.1.1 Mails
The £1.7m (1.1%) decrease in Mails revenue is driven by volume reductions in priority products
specifically Parcelforce (£0.6m), Special Delivery (£1.0m), International (£1.2m), lower label
income (£2.5m) and a further (£1.0m) net from the remaining Mails products. This is partially
offset by increases from Dangerous Goods income by £1.6m, increased ‘signed’ for income by
£1.7m and increased Home Shopping Returns by £0.6m.
+ Approximately £3.4m was driven by volume decreases, (mainly PFW, Special Delivery,
International, labels and stamps), partially offset by Dangerous Goods, Signed For and Home
Shopping Returns volumes.
30 of 137 ARC Meeting-10/11/14
POL-0023614
1, Interim Report review and Emst & Young half year review findings
Offset by
POL00026973
POL00026973
Approximately £1.8m increase in price related income mainly from Signed For and fixed fee.
6.1.2 Retail & Lottery
6.1.3
Retail and Lottery revenues have increased by £0.5m:
« Lottery is £0.5m higher than last year, all driven by the Health lottery. Camelot income is flat
even after the UK Lottery price increase in Oct 2013.
Mails & Retail Income is analysed in the table below:
Retail is flat with prior year.
2014 2013 Variance Volume Price
£m £m £m £m £m
PF 24 &48 47 63 (0.6) (0.7) o1
PF International 2.0 24 (0.3) (0.4) =
Royal Mail Special Delivery 24.2 25.2 (1.0) (1.3) 03
RM International 14.6 15.5 (0.9) (0.6) (0.3)
Stamps 10.3 114 (0.7) (0.7) (0.1)
Labels 42.4 44.6 (2.5) (2.5) .
Signed For 10.8 ‘91, af 08 09
Dangerous Goods 27 ella 1.6 La? =
Home Shopping Returns 4h 3.8 0.6 06 01
Other PF 33 3.2 0.2 01 =
Other RM 11.7 12.0 (0.3) (0.4) o1
Total Variable Income 131.0 133.3 (2.3) (3.4) 12
Fixed Fee 28.5 28.0 0.6 = 0.6
Total Mails 159.6 161.3 (1.7) (3.4) 18
Lottery 19.6 19.1 0.5 01 04
Retail 40 4.0 = = =
Total Mails & Retail 183.1 184.3 (1.2) (3.4) 22
Government Services
The £7.0m (9.3%) decrease in Government Services revenue is principally due to fewer POCA
customers and a move towards online services for products traditionally bought at the Post
Office. The main variances are:
£4.9m adverse from falling numbers of live POCA accounts due to natural attrition and
migration of customers to bank accounts. Approximately £2m of this decrease is due to the
identification of ‘death notified accounts’ that were billed as active accounts in prior years and
are now recognised as dormant.
£0.9m lower DVLA revenues from lower volumes.
£0.8m decrease in Check & Send revenues driven by lower volumes.
£0.4m decrease in Rod & Game Licences.
10
ARC Meeting-10/11/14
31 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
6.1.4 Telecoms
The Telecoms Services pillar includes the Post Office Homephone and Broadband services, as
well as sales of mobile top-ups and phonecards.
Telecoms Services revenue of £59.3m (2013: £64.7m) has decreased by £5.4m. Income from
the Post Office Homephone and Broadband product decreased by £4.3m, primarily due to lower
customer numbers and reduced average revenues per customer.
Income from mobile top-ups and phone cards was £0.4m below prior year, as transaction
volumes declined due to the mobile networks actively migrating customers away from pre-pay,
and also reducing their transaction fees. Despite this reduction in income, Post Office is still a
significant player in the top-up market. Our share of the retail market has been maintained at
circa 5%.
6.1.5 Financial Services
Financial Services income has increased by £7.8m year on year. Overall PFS (defined as Post
Office savings, insurance, travel, mortgages and transaction services) is up by £6.6m (11.0%)
year on year. Revenue from traditional products has declined with the exception of NS&I as
explained below. By product the main Financial Services variances are:
« £2.8m increase from Moneygram due to an improved contract, increasing volumes due to
increasing market and as Moneygram has increased its market share,
* £2.3m increase in Insurance revenues driven by the new BOI/ Junction contract and better
rates,
« £2.1m increase in NS&I revenues driven by an improved contract and increased volumes
following the increase in the maximum holding with effect from June 2014,
« £1.5m increase from mortgages due to sales increases online and as the product
awareness increases,
« £1.0m increase in ATM revenue, driven by the rollout of new machines and increased
volumes as machines reach maturity,
« £0.8m increase in credit cards due to increased marketing and resultant increased
volumes,
« £0.3m increase from Payment Services due to:
o a £1.4m increase in Postal Order income for the write back to revenue of uncashed
postal orders over 12 months old (a change from 24 months previously). (See 15.3.3),
© anet increase of £0.5m from Gift Cards and Post Office Payout, offset by
co a £1.7m decline from bill payments, as utilities and other bill payment clients continue
to migrate customers to other payment methods such as direct debit and online, and
« £0.3m increase in savings products.
The above increase was marginally offset by:
+ £1.0m decrease in travel insurance due to volumes. This is also evident in other travel
related areas such as Bureau and passports,
+ £1.3m decrease in other FS related income, and
+ £0.9m net decrease in Banking revenue from:
14
32 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
o a £1.8m decrease in business banking revenues due to rate reduction from
renegotiated contract, offset by
© anincrease of £0.9m in personal banking due to increased volumes and new clients.
12
ARC Meeting-10/11/14 33 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
7. Costs and People
This section discusses expenditure, excluding exceptionals.
7.1 Total Costs Analysis (excluding exceptionals)
The following provides a breakdown of costs for the half year ending 28 September 2014
compared to the half year ending 29 September 2013
2014 2013 Variance Variance
£m £m £m %
Expenditure - (pre- exceptional) Notes
Wages & Salaries 88 88 1 1%
Pensions 15 14 (a) (4%)
Overtime 55 5 (0) (9%)
Bonus & Productivity 4 11 7 63%
Employers NI 10 10 (0) (1%)
Temporary Resource 3 3 (a) (22%)
Staff Costs Efficiency Target [¢) Oo ie}
PEOPLE COSTS 7.24 125 131 5 4h
Subpostmasters' costs 734 221 220 ()) (1%)
Legal Costs ie} 1 1 95%
Staff & Agent Related Costs 5 5 ie) 3%
Consultancy & Advisory Services 7.3.2 ie} (1) (1) 163%
Brand & Marketing 733 16 7 (9) (132%)
Property & Facilities Management 32 33 1 3%
IT Infrastructure & IT Services 734 45 39 (6) (16%)
Finance & Losses 735 (4) 12 12 105%
Cost Of Sales 73.6 54 57 3 5%
Other Operating Costs 737 55 44 (10) (23%)
Vehicles 3 4 4 25%
Non-Staff Costs Efficiency Target ie} (e) ie)
Depreciation (0) (o} (0) (14%)
Total Other Operating Costs 73 431 422 (9) (2%)
TOTAL EXPENDITURE (Pre Exceptionals) 556 553 (3) (1%)
13
34 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
7.2 People Costs (2014 £125m vs 2013 £131m)
7.2.1 People costs (2014 £125m vs 2013 £131m)
People costs have decreased by £5.6m (4.3%) to £125.3m, representing 22.5% (2013 23.7%) of
the cost base.
The number of people employed also decreased, by 645 to 7,354 at 29 September 2014 (2013
7,999), primarily due to redundancies arising from the Crown Transformation Programme.
The people cost movement comprises:
e Wages and Salaries have decreased by £0.7m (0.8%).
«Pension costs have increased by £0.6m (4.2%), reflecting an increase in the RMPP IAS19 service
cost rate to 23.0% (2013:20.6%)
¢ Productivity costs have decreased by £6.7m (62.9%), due to a reduction in the management
bonus accrual to 50% in current year reflecting current performance levels compared to 100%
bonus booked in prior year and a catch up of an under accrual at the end of 2012-13 in the
prior year.
¢ Overtime has increased by £0.5m (9.0%).
¢ Temporary resource costs have increased by £0.6m (22.1%),
7.2.2 People Numbers
The following analysis shows the movements in the number of people employed during the year.
The People numbers were as follows:
Period end employees Average employees
28 September 2014 = 29 September 2013 2014 2013
Total employees 7,354 7,999 7,465 7,946
7.2.3. Average Cost per Employee
The average number of employees for year ending 29 September 2014 was 7,465 (2013
7,946). The average annual cost per employee (excluding exceptional costs and exceptional
heads) based on these averages has decreased by £1,108 (3.2%) to £33,977 (2013 £35,085).
This is largely due to the reduced productivity cost.
14
ARC Meeting-10/11/14 35 of 137
POL-0023614
1, Interim Report review and Emst & Young half year review findings
73
TA
7.3.2
7.3.3
7.3.4
735
Other Operating Costs (2014 £431m vs 2013 £422m)
POL00026973
POL00026973
Subpostmaster costs (2014 £221m vs 2013 £220m). Total subpostmasters costs increased by
£1.4m (0.6%) and this increase includes £0.7m for additional payments in relation to the
increased dangerous goods enquiries work and mails segregation payments of £0.8m (all paid in
the second half of the year in the prior year).
The average annual cost per subpostmaster branch (excluding VAT and NI) is £41,836 (2013
£40,549). This is a 3.0% increase on the prior year. The increase is as a result of the points
above and the small impact of franchised Crowns, which generally have higher income and so
bring the average up
2014 2013
Agency Branches (incl. Mains and Locals) 10,195 10,269
Outreach 1,095 1,076
Crown 341 372
Total Branches 11,631 11,717
Consultancy & Advisory Services have increased by £1.3m. The table below shows the
movement between a £0.8m credit last year and the £0.5m cost this year. The level of
consultancy/ contractors has reduced this year and the skills group off-charge has reduced
accordingly.
2014-15 2013-14 Variance
£m £m £m
Skills Group off- Charge (4.4) (8.6) (4.2)
Consultancy 49 78 29
0.5 (0.8) (1.3)
Brand & Marketing have increased by £9.0m (131.7%) year on year. £4.6m relates to increased
market research costs, £1.7m increase in POL website and TV. In addition £6.5m relates
creative agency fees and a net increase of £1.8m in database management and print advertising
and archiving. In the prior year brand costs were within project one- off costs,
IT Infrastructure & IT Services costs have increased by £6.3m (16.2%) mainly due to £3.1m
ATOS outsource costs and £1.4m relating to Horizon Fujitsu costs RPI increase. In addition
there was a net increase of £1.0m for software licences and BT costs.
Finance costs have decreased by £12.1m, mainly driven by £15.6m VAT rebates, offset by
Telephony provisions of £2.6m.
15
36 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
7.3.6 Cost of Sales has decreased by £2.6m (5.5%), driven by new supplier contract. The main reasons
are detailed below:
Cost of Sales
28 September 29 September Variance
2014 2013
£m £m £m
Comments
Reduction of £2.6m due to
Telecoms 37 40 3 7% new supplier contract
(Fujitsu) and volume
reduction.
Government Services 15 15 ie) 3%
Mails & Retail 2 2 0 1%
Financial Services oO i‘) 0 5%
Total 54 57 3 6%
7.3.7 Other Operating costs have increased by £10.1m is due to a provision client compensation
relating to the historical overcharges relating to ‘death notified accounts’ (DWP)
7.3.8 Project expenditure is now reported within the appropriate cost categories and has decreased by
£1.2m to £11.8m and is detailed below:
2014-15 Project Expenditure £m
Financial Services (Portfolio) 43
Telephony (Home Phone & Mobile ) 2.6
HR & Compliance 24
Customer Engagement (Brand Campaign) 0.6
Government Services 09
Mails (Initiatives) 0.7
Digital & Multi Channel 03
IT (Supplier Procurement) 0.2
Supply Chain 01
Grand Total 11.8
16
ARC Meeting-10/11/14 37 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
8.
8.1
8.2
8.3
Quality of Earnings
POL00026973
POL00026973
2014-15 2013-14 Growth
Post Office Limited (consolidated) £m £m £m %
Reported profit before other exceptional items 23 53 (30) (57%)
Network Subsidy Payment (80) (100) 20 20%
Reported profit before exceptional items and NSP (57) (47) (40) (24%)
Provision for client compensation for past overcharges 10 (2)
VAT recovery in 2013-14 re 2011-12 (received in second half year) 0 0
VAT recovery in 2014-15 re 2013-14 (a4) 5
Total adjustments (1) 3
Total (58) (44) (14) (32%)
Each item in the table is explained further below:
Network Subsidy Payment
The Network Subsidy Payment decreased from £200m for 2013-14 to £160m for 2014-15.
The Network Subsidy Payment has been accounted for as a government grant in both years.
Provision for client compensation
An error has been identified that has led to a client being overcharged for approximately 5 years
and a provision has been booked for compensation for the overcharges. £2m of the overcharge
related to the 6 month period to September 2013.
VAT recovery re earlier years
There were additional VAT recoveries relating to earlier years when the final recovery rates were
confirmed with HMRC.
17
38 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
9. Pensions
9.1 Background
The Post Office participates in pensions schemes and detailed below:
Scheme Eligibility Type
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) I UK senior executives (closed) Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
Royal Mail Pensions Trustees Limited manages the main defined benefit scheme Royal Mail Pension
Plan (RMPP) which has circa 5,000 Post Office active members.
9.2 Assumptions
IAS 19 revised requires a number of assumptions. The choice of assumptions used for the
calculations is the responsibility of the Directors, based upon advice given by an independent
actuary. The key assumptions for the half year to 28 September 2014 are set out in the table
below.
Towers Watson has confirmed that the assumptions have been determined in a manner consistent
with those used for the disclosures at 30 March 2014.
September March
2014 2014
% pa RMPP Post Office Section
Inflation (RPI) 3.1 3.3
Inflation (CPI) 24 23
Discount rate (i.e. bond rate) 44 45
Rate of increase in Pensionable salaries 3.0 3.2
Rate of pension increases - RMPP A/B 24 23
Rate of pension increases - RMPP C 3.0 23
Rate of increases in deferred pensions 24 2.3
Demographic assumptions, for example mortality, remain aligned with the assumptions used for the
actuarial valuation and unchanged from those made in March 2014.
9.8) Movements in the defined benefit surplus
The movement in the RMPP defined benefit surplus during the half year to 28 September 2014 is
detailed below. Scheme assets are assessed at fair value at the balance sheet date. For example,
quoted equities are valued at the latest ‘bid’ price. Scheme liabilities are discounted using a high
quality corporate bond rate. The IAS 19R surplus/deficit is usually therefore different to the cash
funding surplus/deficit (the “actuarial” valuation) assessed by the Trustees, for which the scheme
liabilities are discounted using the expected returns available on scheme assets.
18
ARC Meeting-10/11/14 39 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review ar ist & Young ear review fin
Half year ended Year ended
28 September 30 March
2014 2014
£m £m
Opening sectionalised RMPP net retirement benefit surplus 170 99
Royal Mail Pension Plan amendment - 102
Current service cost (14) (25)
Curtailment costs (a) (1)
Net financing credit 4 5
Employers contributions 11 22
Actuarial gains/(losses) Ey (32)
Closing RMPP net retirement benefit surplus 181 170
RMSEPP surplus 3 2
Total net retirement benefit surplus 184 172
Effect of asset ceiling (21) (24)
Closing net retirement benefit surplus 163 148
The current service cost is intended to represent the amount by which the liabilities will increase
due to employing active members for one more year. The current service cost, expressed as a
percentage of pensionable pay is 23.0% for RMPP (2013 - 20.6%). Payments of £10m were made
in respect of RMPP future service contributions at a rate of 17.1% (2013 - 17.1%) and £1m was
paid in respect of redundancies.
The net financing credit of £4m, a non-cash item, is reported under finance income and reassessed
annually.
Actuarial gains and losses are recorded directly in the statement of changes in equity (and not the
income statement). The actuarial gain of £11m during the year arose primarily due to an increase
in the value of assets as a result of changes in market conditions.
A £1m deficit contribution was paid in relation to RMSEPP and the RMSEPP surplus has increased
from £2m to £3m at 28 September 2014.
The charge in the income statement and cash contributions for the defined contribution scheme
were £1m in the half year to 28 September 2014.
9.4 Assessment of recoverability of surplus under IFRIC 14
In order to recognise a surplus it is necessary to prove that the P,
surplus either through lower future contributions or through a refund.
Towers Watson has calculated that Post Office Limited would be
able to recover £125m of the £181m surplus in RMPP through lower contributions and the
19
FS
40 of ARC Meeting-1
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
remaining £56m could therefore be recovered through a refund. The element of surplus that is
recoverable through a refund would be subject to a 35% withholding tax and therefore the overall
surplus on the balance sheet, (made up of a £181m surplus for RMPP and £3m surplus for
RMSEPP), has been reduced by £21m to £163m. The element that is recoverable through lower
contributions has resulted in a deferred tax liability of £25m, which represents an increase of £4m
from the deferred tax credit recognised up to the year to 30 March 2014.
20
ARC Meeting-10/11/14 41 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
10. Exceptional Items and Provisions
This section discusses the exceptional items on the income statement together with movements in
the related balance sheet provisions/payables.
10.1 Exceptional items summary
The following exceptional items were recognised in the consolidated income statement for the half
years ended 28 September 2014 and 29 September 2013.
2014-15 2013-14
10.2 Exceptional items —m €m
Operating Exceptionals:
Royal Mail Pension Plan amendment bad 102
Government Grants 170 129
Restructuring costs including Subpostmasters compensation (107) (64)
Impairments (66) (35)
Total operating exceptionals (3) 132
Non operating exceptionals:
Profit on disposal of property : 2
Net Exceptional gain/ (toss) (3) 134
Government Grants - In April 2014 the Post Office received grants totalling £170m from the
Government, (April 2013 £215m) to fund capital projects and transformation. The larger amounts
utilised in the half year to September 2014 are: £43m against Subpostmasters’ compensation,
£59m against capital spend, £44m Network Transformational exceptionals and £11m IT
transformational costs.
10.3 Restructuring costs - include the costs (£107m) of delivery of a major change in the network.
Network and Crown Transformation introduces new style agency offices and seeks to improve
fundamentally the profitability of the Crown network. The overall figure includes £39m (below)
Network Transformation and Crown Transformation programme costs, £45m Subpostmasters’
compensation and £8m Crown redundancy costs.
The IT Transformation programme (£6m) will create the IT infrastructure appropriate for an
independent group with ambitious growth plans. Other costs included are business separation
of £3m, redundancy of £2m, business transformation payments chiefly for Crown staff of £2m and
other items of £2m.
Network and Crown Transformation costs to September 2014:
Network Transformation £m
Programme Costs 13
Investments (e.g. enabling works) 7
Property project resource 5
Management Consultancy it}
Other (Legal, Comms, consultation, IT projects) 4
Total Network Transformation 29
Crown Transformation 10
Total 39
21
42 of 137 ARC Meeting-10/11/14
POL-0023614
1. Interim Report review and Emst & Young half year review findings
11. ‘Interest, Cash, Debt, Funding and Hedging
POL00026973
POL00026973
11.1 Net finance costs September 2014 £m vs September 2013 £1m
28 September
29 September
2014 2013
Finance costs & investment income £m £m
Interest received on investments - UK - -
Total finance income - a
Interest charged on Government borrowings = 2
Interest payable on finance leases “ “
Other finance costs (1) (1)
Total finance costs (1) (4)
Net finance cost (4) (4)
Interest payable on the BIS Loan remains low due to low draw down throughout the year, which
was also the case in the equivalent six months of 2013/14.
Other finance costs include commitment fees to BIS for the Post Office credit facility, and charges
to RBS for their note sorting facility.
11.2 Cash, cash equivalents and debt within the balance sheet
28 September 30 March
2014 2014
Net cash/debt analysis Section £m £m
Cash in the Post Office Limited network 71.3 743 708
Other cash at bank (overdraft) (8) (50)
Cash equivalent investments 46 30.
Total cash and cash equivalents 781 688
Loans, repayable on demand or less than 1 year 11.4 (38) -
Obligations under finance leases (current) 11.5 (4) (3)
Total current financial liabilities (39) (3)
Obligations under finance leases (non-current) 11.5 = =
Total 742 685
11.3 Cash within the Post Office Limited network (September 2014 £743m vs March 2014 £708m)
The increase in Post Office network cash from March 2014 levels is due to Bureau seasonality
and growth in debit card usage.
11.4 Loans and borrowings (September 2014 £38m vs March 2014 nil)
Daily borrowings from BIS are increasing as the transformational spending increases in line with
the programmes’ spend. This will continue over the next 6 months.
22
ARC Meeting-10/11/14
43 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
11.5 Obligations under finance leases (current & non-current) (September 2014 £1m vs March 2014
£3m)
The obligations under finance leases have decreased by £2m in the half year attributable to lease
repayments in 2014-15. Both remaining finance leases end this financial year.
11.6 Loan facilities
At the half year the Post Office had external borrowings of £38m and an £8m overdraft facility.
23
44 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
12. Going concern
12.1
Post Office Limited has net cash and cash equivalents of £789m, a bank overdraft of £8m and a
borrowing facility of £1,150m of which £38m was drawn down at 28 September 2014.
Background
On 24 March 2010 a funding agreement was agreed that provided up to £180m for
compensation for losses sustained in parts of the network in 2011-12, as well as providing access
to the working capital facility to 31 March 2016. These arrangements received State Aid approval
on 23 March 2011 though the working capital facility was limited until 31 March 2012.
A further funding agreement with Government was announced on 27 October 2010 which
provided for:
© Funding of £410m for 2012-13 (received 2 April 2012)
© Funding of £415m for 2013-14 (received 2 April 2013)
« Funding of £330m for 2014-15 (received 1 April 2014)
e Extension of the existing working capital facility with BIS of £1.15bn up to 31 March
2016
State Aid approval for the funding for 2012-13 to 2014-15 was received on 28 March 2012. It
was also recognised that the working capital facility was no longer deemed State Aid. However, no
drawing under the Facility may extend past the Final Maturity Date (31 March 2016).
On 27 November 2013, a funding agreement was announced providing:
e Funding of £280m for 2015-16
e Funding of £220m for 2016-17
e Funding of £140m for 2017-18
e Extension of the existing working capital facility with BIS up to 31 March 2018 but at
a reduced level of up to £950m.
State Aid approval for the funding for 2015-16 to 2017-18 is currently being sought and is
anticipated to be given during the 2014-15 financial year.
The going concern analysis is based on the 2020 strategic plan that was the basis for the
Government funding agreed.
24
ARC Meeting-10/11/14 45 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
12.2 Assessment for the Post Office
The Post Office posted an operating profit before exceptional items for the first time for a number
of years in 2008-09 and has continued to do so, but, with the exception of 2012-13 and 2013-
14, still operated with a cash outflow and expects further cash outflows in the coming years. The
2011-15 plan reversed the trend of an increasing Network Subsidy Payment (NSP) and the 2020
Strategy continues on the path to a sustainable Post Office supported by a much lower subsidy.
The 2014-15 budget and the 2020 Strategy plan financials have been shown in Table 1, and
show that Post Office has sufficient cash headroom to continue to trade. The available facility has
been defined to include network cash, ATM cash, ATM debtor, POCA debtor and SGEI cheques.
The funding beyond March 2015 is still subject to State Aid clearance so downsides have been
applied to reflect a situation where the funding for NSP and transformation post March 2015 is
not available. In addition, downside scenarios have been overlaid reflecting the possibility that the
growth and savings plans are not fully delivered. Subject to ceasing spend on transformation post
March 2015, there could still be sufficient headroom to trade. The working capital facility was
deemed not to be State Aid in 2012 so does not require further clearance and is now available (at
the reduced level of £950m) through to March 2018.
The one year funding deal for 2011-12 added the ability to borrow up to £50m from other
sources, as well as the up to £50m in finance leases previously allowed, which would improve the
headroom capacity shown if required.
Summary conclusion
Based on the analysis, there is available borrowing headroom until March 2018. Royal Mail Plc is
a key trading partner with Post Office Limited and, in arriving at the conclusion that Post Office
Limited is a going concern, the assumption is made that Royal Mail Plc is a going concern or that
an alternative mails provider would work similarly with Post Office Limited providing a similar level
of income. Post Office Ltd and Royal Mail entered into a ten year agreement (Mails Distribution
Agreement) in 2012 for the provision of mails products through post offices.
It is believed that Post Office Limited will be able to meet its liabilities as they fall due in the
foreseeable future. It is therefore expected that the directors will consider it appropriate to
prepare the accounts on a going concern basis.
25
46 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited Funding Analysis
Table 1 September 2014
£m (cumulative apart from free cash flow) 2014-15 2015-16 2016-17 2017-18
Opening Funds (24) (191) (505) (442)
Borrowing facilities 1150 950 950 950
Restriction due to level of network cash (300) (100) (100) (100)
Latest plan free cashflow before assumed non NSP grant
injection (328) (455) (68) 24
Non NSP grant injection per October 2010 plan/ April 2013
plan 170 150 140 70
Closing Funds Headroom 668 354 417 502
Downside impact of no NSP beyond March 2015 (130) (210) (280)
Downside impact of no further grant injection beyond March 2015 (150) (290) (360)
Adjusted Headroom pre risk 668 7h (83) (138)
Table 2: Risks,with management actions
£m (cumulative) 2014-15 2015-16 =. 2016-17 —- 2017-18
Headroom pre risk (as above) 668 74 (83) (138)
Risks
Financial Services growth slower than plan (10) (50) (80)
Mails revenue decline halted but not reserved (net of
agents’ cost saving) (10) (20) (30) (40)
Home Services growth does not materialise (10) (30) (60) (90)
Government Services growth does not materialise (5) (15) (30) (45)
Network Transformation benefits are not fully delivered (6) (9) (12) (12)
Crown Transformation benefits are not fully delivered (5) (10) (15) (20)
Pension contribution rates increase (4) (8) (42)
Increase in cost as a consequence of stopping transformation
post March 2015 (42) (126) (180)
Headroom post risks pre management actions 632 (66) (414) (617)
Management actions 10 410 627 754
Stop transformation post March 2015 188 319 873
Reduce capex to replacement only (£30m pa) post March 2015 202 278 338
Sell Corporation tax losses to FRES 10 20 30 40
Headroom post risk and management actions 642 344 213 134
Notes:
2014-15 shows the Quarter 2 forecast and later years are the strategic plan.
Available facility is defined as network cash, ATM cash ATM debtor, POCA debtor and SGEI cheques.
26
ARC Meeting-10/11/14 47 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Notes:
Table 1
This table shows the 2020 strategic plan projections for 2014-15 and beyond. It demonstrates
positive headroom throughout the plan period assuming funding post 2015 is agreed. If it is
not there would be a need to take management action as set out in Table 2.
Table 2
This table sets out the impact of theoretical downside scenarios if the plan does not generate
the income streams anticipated, the network programmes fail to deliver the benefits and if the
pension scheme costs increase.
The action identified to manage the lack of future funding and downside risk within the
headroom would be to cease the transformational spend and reduce capex to replacement only
at £30m pa. This adds further downside but results in positive headroom to March 2018 even
without the funding post March 2015. There are further actions that could be taken but are
not required. These include the sale of property.
27
48 of 137 ARC Meeting-10/11/14
POL-0023614
1, Interim Report review and Emst & Young half year review findings
13.
13.2
13.3
Property, plant and equipment and non-current assets held for sale
Net Book Values
POL00026973
POL00026973
The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed assets at
September 2014 was £10m (March 2014 £10m). Movements during the six months were as
follows:
Land and Vehicles, plant Intangible fixed
buildings and fixtures assets Total
Movement in NBV £m £m £m £m
NBV at 30 March 2014 10 ad - 10
Reclassification (47) v7 - “
Add capital expenditure 5 36 25 66
Less disposals 2 7 - =
Less depreciation - 7 - =
Less impairment 12 (53) (25) (66)
NBV at 28 September 2014 10 - - 10
Reclassifications mainly consisted of network and crown transformation project capitalisation
which had initially been brought to account as property spend and subsequently classified as
fixtures.
Assets held under finance leases
The value of equipment held under finance leases is Enil (March 2014: Enil) having been impaired
in the years in which it was acquired. Two finance leases are held and expire during 2014/15:
e Counter printers, capitalised and impaired in 2006-07 with an asset value of £10m, and
e Identity equipment in branches, capitalised and impaired in 2010-11, with an asset value of
£8m.
Capital expenditure
The following table summarises capital expenditure to 28 September 2014:
Vehicles,
Land & plant &
buildings fixtures Intangibles Total
Capital expenditure analysis £m £m £m £m
Technology Roadmap = - 8 8
Crown, Network Transformation 5 33 - 38
Separation (from RMG) project ; - 9 9
IT Delivery - = 4 4
Finance Roadmap - - 2 2
FOoG Front Office of Govt + - > § 4
Vehicles - 2 = 2
Other (items <£41m) a i 1 2
Total 5 36 25 66
28
ARC Meeting-10/11/14
49 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
14.
14.1
Goodwill, investments and intangibles
Investments in joint ventures and associates
28 September 30 March
2014 2014
£m £m
Investment in joint ventures 85 61
Joint ventures
Post Office Limited's joint venture investment is a 50% interest in First Rate Exchange Services
Holdings Limited, whose principal activity is the provision of Bureau de Change.
The movement during the half year is Post Office Limited’s share of 2014-15 post tax profit of
£24m.
2g
50 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
15. Working capital
15.1 Inventories (September 2014 £6m vs March 2014 £6m)
28 September 30 March
2014 2014
£m £m
Scratchcards 4 4
Retail 2 2
Total 6 6
15.1.1 Inventory written off
The provision for stock write downs and discrepancies remains at £0.5m (March 2014 £0.5m.
Shrinkage and obsolete stock written off at half year was £0.2m (March 2014 £0.3m).
15.2 Trade receivables
Receivables are tabulated below, followed by a detailed explanation of the various balances.
Receivables
28 September 30 March
2014 2014
Section £m £m
Trade receivables 15.2.4 52 54
Client receivables 15.2.2 161 158
Prepayments and accrued income 15.2.3 83 82
Other receivables 8
Total 296 302
15.2.1 Trade receivables: Current (due within one year)
Trade receivables
28 September 30 March
2014 2014
£m £m
Sales ledger 23 30
Doubtful debt provision (4) (2)
Homephone debtors 13 12
Homephone provision (7) (6)
Subpostmasters debt 14 13
Subpostmasters debtors provision (9) (8)
Property debtors 5 3
Bank of Ireland, FRES cost
recovery 47 12
Total 52 54
30
ARC Meeting-10/11/14
51 of 137
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
The decrease in sales ledger is largely explained by the Bank of Ireland opening at £14m and is
£3m at P6.
Telecoms debtors are similar to opening. Despite some difficulties in establishing a reliable billing
pattern - following POL switching provider from BT to Fujitsu - the debtor position is now stable.
Receivable balances in relation to former subpostmasters of £9m have been provided for in full in
line with previous years. The remaining £6m of subpostmaster debt which is unprovided against
relates to current subpostmasters debt which are usually settled through a deduction from
remuneration.
The Bank of Ireland cost recovery debtor relates to marketing and promotional spend incurred on
their behalf and which should be pre-funded. Agreement of both parties to the costs incurred will
enable POL to raise invoices and reduce this debtor.
A profile of the trade receivables is as follows:
Trade receivables
28 September 30 March
2014 2014
£m £m
Royal Mail 1 3
Bank of Ireland 3 11
NS&l 3
FRES 1
Partner banks 2
DwP 4
Bank of Ireland (ATM commission) 3
Bill payment partners 2 3
Subpostmasters - -
Telecoms under-billing (Fujitsu) 3 3
Others 5 4
Total 23 30
Ageing of trade receivables:
Debtors over 60 days overdue: September 2014 £0.7m (March 2014: £0.5m).
The Post Office does not have a general risk in relation to bad debts due to the agency and
business partner nature of our client base. This is fully provided for.
34
52 of 137 ARC Meeting-10/11/14
POL-0023614
1. Interim Report review and Emst & Young half year review findings
15.2.2 Client receivables
Analysis of the significant client balances at year end is as follows:
Client receivables
POL00026973
POL00026973
28 September 30 March
2014 2014
£m £m
ATM (Bank of Ireland) 101 96
Card Account (JP Morgan) 29 30
Partner banks 26 22
Others 5 10
Total 161 158
The reason for the increase in Client levels year on year is due to ATM withdrawals due from
Bank of Ireland which opened at £96m, but at P6 was £101m, reflecting greater customer use.
15.2.3 Prepayments and accrued income September 2014 £83m (March 2014 £82m)
15.3
Accrued income represents the majority of this amount (September 2014: £74m, March 2014:
£65m), The main reason for the difference is the Bank of Ireland balance has increased by 8m
this is due to commission accrued for that is due to be billed at the end of P7. Otherwise year on
year the product components and values are similar.
The “one-year” prepayment of telephony take-on costs with Fujitsu is £6m at September 2014
(March 2014: £6m). The total Fujitsu telephony prepayment at September 2014 was £17.5m
(March 2014: £21m), with £11.5m representing the element that will be amortised beyond one
year until the contract end date in September 2016.
Payables: amounts due within one year
A summary of payables categories is:
28 September 30 March
2014 2014
Section £m £m
Trade payables 15.3.1 26 55
Accruals and deferred income 15.34 182 133
Client payables 15.3.2 444 438
Advance customer payments 27 37
Capital payables 16 31
Social security 10 14
Business transformation 2 10
Government grant deferred
income (NSP) 80 =
Bank Overdraft 8 50
Total 762 767
32
ARC Meeting-10/11/14
53 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
15.3.1 Trade payables and accruals
Trade payables and accruals
28 September 30 March
2014 2014
£m £m
Trade payables 26 55
Accruals, GRNI 106 98
Subpostmaster, employee pay
balances 64 14
Productivity. bonus schemes 9 14
Others 3 7
Total 208 188
Manual accruals and GRNIs represent the material trade liabilities at any point. High levels of
project activity commensurate with the Transformational programmes currently underway are
driving this liability, being Crown, Network, Separation and Finance Roadmap programmes.
Trade payables chiefly comprises supplier invoices awaiting payment (Accounts payable, AP). At
March this totalled £44m and was £19m at September. The balance at March was high and
included some one-off Royal Mail invoices, RM was then £12m and was £2m at September.
Separately, the take-on of AP functionality into POL during September encountered some initial
teething problems with some invoices not processed in time and had to be manually accrued.
Subpostmaster and employee balances include £51m pay due for September. The equivalent pay
creditor at March, also £51m, was disclosed as bank overdraft for reason of proximity to year end
and calendar month end.
15.3.2 Client payables
28 September 30 March
2014 2014
£m £m
Santander 132 135
NS&l 20 49,
DVLA 34 56
Utility companies 8 18
Bank of Ireland 12 5
BACS 59 45
Royal Mail 24 36
Others 122 124
Total 414 438
The DVLA balance is sensitive to proximity of accounting month end to calendar month end. March
2014 was one day before month end which drove the balance higher. Royal Mail was subject to a tariff
increase from end-March and this increased stamp sales beforehand. NS&I has benefitted from an
33
54 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
increase in the premium bond allowance per head in 2014. Otherwise, no material fluctuations during
2014/15.
15.3.3 Client advances
This category also includes specific, non-client, creditors as follows:
Client advances
28 September 30 March
2014 2014
£m £m
Client advances, deferred income 5 1
Postal order liability 12 15
Homephone line rental advance
payments 10 a4,
Total 27 37
Movement in deferred income attributable to six-month’s amortisation of DVLA and DWP pre-paid
contractual income settlements.
The Postal order liability reflects a creditor for uncashed Postal orders. Postal orders are valid for 6
months but the liability was retained for 24 months reflecting that they would normally be honoured up
to this date. At September 2014 the liability was reduced to 12 months. Postal orders presented for
encashment after 12 months will normally be declined in future. The liability reduced as a result of this
change.
15.4 Payables: amounts due after one year
Payables due after one year
28 September 30 March
2014 2014
£m £m
Bank of Ireland deferred income
(Gamma) 33 28
Total 33 28
Bank of Ireland deferred income concludes in financial year 2022-23 and is recognised in line
with an agreed amortisation schedule. The final two receipts are £5m in 2014/15 (received) and
£2m in 2015-16.
34
ARC Meeting-10/11/14 55 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
16. Provisions
Provisions (September 2014 £86m vs March 2014 £78m)
Crown
Conversions Network
Project ‘Transformation Other Total
£m £m £m £m
At 30 March 2014 2 51 25 78
Charged/ (released) in operating
exceptional items (a) 45 12 56
Charged in operating costs ~ 14 14
Utilisation = (39) (23) (62)
At 28 September 2014 1 57 28 86
Disclosed as: Current. 80
Disclosed as: Non current 6
The Network Transformation provision relates to compensation payments due to subpostmasters
who have signed up to the new contract terms or for a termination payment at September 2014.
The programme is further advanced than a year ago hence the liability is increased.
Crown conversions relates to the contract with WH Smith for the original tranche of Crown outlets
franchised (2008-9). This provision concludes in 2014-15.
Included within Other provisions is the current tranche of onerous lease provisions in relation to
Crown office franchises of £5m, and a severance provision of £4m, Bank of Ireland sales capability
investment (Eagle provision) £2m and the ATM business rate provision £2m. Also included is a
provision of £11m that has been made in relation to the overcharge that has been made to the
DWP under the POCA contract, dating back to 2009. This provision represents the potential
repayment that will need to be made at some point in the future.
35
56 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1, Interim Report review and Emst & Young half year review findings
17. Litigation and Claims- Potential Claims regarding Horizon
17.1 Post Office Limited has received various claims from subpostmasters (SPMs) alleging defects in
the Horizon system and Post Office Limited's internal processes.
These allegations were initially made in 5 claims brought through solicitors Shoosmiths. Similar
allegations have been made through:
— SPMs’ MPs;
* the “Justice for Subpostmasters Alliance” FSA);
e defences to court proceedings brought by Post Office Limited to recover debts from
SPMs; and
¢ — direct contact with Post Office Limited.
17.2 Following discussions with James Arbuthnot MP and JFSA, in July 2012 independent
investigator Second Sight Support Services Ltd (Second Sight) was appointed to carry out a
review into these allegations.
17.3 On 8 July 2013, Second Sight published a Report finding shortcomings in Post Office Limited's
internal training and support to SPMs on the Horizon system, but no systemic problems with
Horizon itself.
17.4 Following Second Sight’s July 2013 Report, on 27 August 2013 Post Office Limited launched an
Investigation and Mediation Scheme aimed at resolving individual complaints made about
Horizon.
17.5 The Scheme has received 150 applications. These are being progressed through the Scheme
under the direction of a Working Group chaired by retired Court of Appeal Judge Sir Anthony
Hooper, and comprising representatives from POL, Second Sight, and JFSA.
17.6 Currently, 131 cases are still being progressed through the Scheme or are being scheduled for
mediation. Mediations have been held for the first 3 applications, with a further 9 mediations
currently being scheduled. The POL project team continue to handle the applications in line with
the direction received from POL's Board.
17.7 POL has also reviewed its approach to the criminal prosecutions it brings against SPMs which
use Horizon data and generally, and is developing a new policy for prosecutions with assistance
from former First Senior Treasury Counsel Brian Altman QC.
17.8 To date, no claim has been made against POL in the civil courts, and no appeal has been made
to the Court of Appeal against any conviction obtained in the criminal courts, arising out of the
matters raised in Second Sight’s July 2013 Report or through the Scheme.
36
ARC Meeting-10/11/14 57 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
18.
18.1
18.2
Taxation
Income statement
A breakdown of the tax credit for the half years to September is shown in the table below:
Half year to 28 Half year to 29
September 2014 September 2013
£m £m
Corporation tax credit for the period = -
Tax under provided in previous periods 1
Current tax a -
Deferred tax credit relating to the origin and reversal of temporary
differences 4 2
Income tax credit reported in the consolidated income statement 5 2
Factors affecting tax credits
A deferred tax credit of £21m was recognised in the year to March 2014 in relation to the
retirement benefit surplus as a proportion of this surplus was considered to be recoverable
through future contributions. An equal and opposite entry was recognised through equity. In the
half year to September 2014 the proportion of the surplus recoverable through future
contributions increased and therefore a deferred tax credit of £4m has been recognised to
account for the deferred tax effect of this.
The Group (POL and subsidiaries) has significant tax losses that are available for offset against
future taxable profits. It also has unrecognised deferred tax assets relating to fixed asset timing
differences. These tax losses/deferred tax assets could be recognised in the future should
suitable taxable profits arise. The tax losses/unrecognised deferred tax assets means that the
Group should not incur any tax charges for the foreseeable future.
37
58 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Post Office Limited
2014/15 Audit Planning Report
For the period ended 29 March 2015
10 November 2014
EY
Building a better
working world
ARC Meeting-10/11/14 59 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Emst & Young LLP Tel: + 44 20 7951 2000 ia ~y
1 More London Place Fax: + 44 20 7951 1345 g ¥
London excom Vd
‘SE1 2AF —
Building a better VESTOR IN PEOPLE
working world
Private and confidential 6 November 2014
Audit and Risk Committee
Post Office Limited
148 Old Street
London
EC1V 9HQ
Dear Members of the Audit and Risk Committee
Audit Planning Report - FY2014/15
We are pleased to attach our audit planning board report for the forthcoming meeting of the Audit and Risk
Committee. The purpose of this report is not only to provide the Audit and Risk Committee with a basis to review
our proposed audit approach and scope for the 2014/15 audit, but also to align our audit with your service
expectations.
This report summarises our assessment of the key issues which drive the development of an effective audit for
Post Office Limited (‘POL’), considering the relevant emerging market forces coupled with the operational,
finance, and business risks which drive POL's financial statement risks. We have aligned our audit approach and
scope with these.
We have also been engaged to perform a review on the interim condensed financial statements of POL in
accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland)
'Review of Interim Financial Information Performed by the Independent Auditor of the Entity’, issued by the
Auditing Practices Board, this planning report will also outline the review procedures that we have performed and
the conclusions we have reached.
This report is intended solely for the information and use of the Audit and Risk Committee, Board of Directors and
management, and is not intended to be and should not be used by anyone other than these specified parties.
We welcome the opportunity to discuss this report with you on 10 November 2014, as well as understand whether
there are other matters which you consider may influence our audit.
Yours faithfully
Angus Grant
Engagement Partner
For and on behalf of Ernst & Young LLP
‘The UK firm Emnst & Young LLP i a limited liabity
partnership registered in England and Wales wah
registered number 0C300001 and is a member
firm of Est & Young Global Limited. Ais of
members’ names is available for inspection at 1
More London Place, London SE1 2AF, the firm's
principal place of business and registered office
60 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
and cendiiens ef our appeintn
milled in ac r o eb work has been jnderta
falter e ato chem in and fo
purpose. To he fulles: exten
anyon ¢ than the Budi:
POL-0023614
POL00026973
POL00026973
Executive summary
Risk based approach
Areas of audit emphasis
Controls based audit
Audit scope and execution
Service delivery
Appendices
1AS34 half year review
Management representation letter for half year review
Audit fees
Independence report
Required communications with the audit and risk committee
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
mary
ARC Meeting-10/11/14 63 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
64 of 137
Executive summary
Ba Introduction
The Post Office continues with its significant projects such as the Network and Crown Transformation, having
transformed a total of 3,134 branches at 28 September 2014; 1,076 of those were completed in the last 6
months, and the Post Office is aiming to complete an additional 574 branch conversions by the end of this
financial year.
POL achieved a milestone this half year by implementing the POL-CFS accounting system which went live on
the 1 September. Fiscal 2015 continues to promise many more operational challenges such as the continued
roll out of the IT and Network Transformation projects.
In light of these major changes, we have continued to challenge our aucit strategy for the coming 2014-15
financial year to meet the needs of a changing business.
In order to identify the key drivers of audit risk, we analyse the risks inherent in the public, mails and retail
sectors, the markets in which POL operates, the key strategic, operational and finance risks for POL you have
identified through your own risk assessments and our knowledge of other internal and external factors that
may impact POL's financial statements.
By considering these inputs, we focus our audit on the areas that matter to POL, so that our assurance
procedures and feedback are more relevant to your business.
Key financial statement risks
> Revenue recognition across diverse range of
revenue streams”
Market Business > Classification of exceptional items relating to
Network Transformation*
> Risk of management override around estimates and
judgements"
Pension valuation and accounting
VAT
Horizon Subpostmasters claim
SAP CFS accounting system implementation
Risk assessment
Operational Finance
“Significant risk as defined by auditing standards and
professional judgment
Our audit approach is designed to appropriately respond to these risks. We will continue to focus on the key
areas where we believe there is higher inherent risk to the integrity of the financial statements due to the
nature and level of judgement involved. We will also consider changes in financial reporting standards and
regulations and their impact on the presentation and disclosures in the financial statements.
wetter Post Office Limited 5
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Executive Summary (cont'd)
B Controls based audit
> We will continue to adopt a controls-based
approach, being the most efficient approach
to a business with a high volume of low value
transactions.
Layers of ar > We will seek to place reliance on entity level
control we controls and IT general controls.
rely on Risk management » POL was using SAP ESFS for the first 5
functions months of FY14-15 and then SAP CFS for the
remainder. This means that both systems will
Business and IT controls need to be reviewed as part of the FY14-15
audit.
> We aim to continue to place reliance on the
ISAE 3402 report, which opines on the design
and operating effectiveness of POL's third
Underpinning our entire approach is a We will test controls for POL's payroll, party IT provider Fujitsu's controls, for the
controls-based audit. itis the most efficient purchasing, cash settlement, revenue and duration of POL's contract with Fujitsu during
approach for a business that has a very _fixed assets processes. the year and subject to the opinion expressed
high volume of low value transactions. > IT systems and applications: we will inthe report,
In adopting an efficient controls based review the IT general controls built in to 7
approach we consider the various layers of POL's core IT applications, together > We may need to perform additional
assurance and leverage where there is. with IT application controls over your independent testing procedures on POL's new
potential to do so. This informs our basis of __critical business processes.
third party IT provider, Atos if reliance cannot
> Entity level controls: we will maximise
efficiency by seeking to rely on entity be placed on the ISAE 3402 report.
level controls and processes, such as
your budgeting process.
working with management.
Ey Service delivery
Your audit team Insights and value
>» The POL engagement team is led by Angus Grant » We will use our knowledge of your business and
from our London office, who has been the Lead our experience of working with you to bring you
Engagement Partner for the six years and is insights and ideas in areas that matter most.
ultimately responsible for all audit-related services
provided to POL by EY. As a Senior Partner in the
Banking and Capital Markets, Angus’ insight and
expertise challenge us to adapt our audit approach
to the latest industry and business issues,
particularly focusing on financial services
activities. Angus is supported by Steve Lyon as
Senior Manager who has very relevant and
diverse experience from auditing many clients
across the EY network.
At the end of the audit, we will issue a ‘Controls
Themes & Observation’ report’ to share insights
picked up from the audit.
>» We have established our engagement team with
the principle of providing the right blend of
industry and technical experience to execute the
audit and deliver on our commitments to you. Our
audit team continues to be supported by
specialists Partners covering areas such as
pensions, VAT and tax.
> In addition, we recognise how important continuity
of key EY team members is to your organisation.
Office Limite 6
ARC Meeting-10/11/14 65 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Risk baSed approach
66 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Risk based approach
Controls based Audit scope and
- 4 Service deliver’
audit execution y
Through our risk assessment approach, we analyse the risks inherent in a government funded entity, the
markets in which you operate, the key strategic, financial and operational risks for the Company you have
identified through your risk assessments, and our knowledge of other factors that may impact the Company's
financial statements. We then map these risks to financial statement risks. This risk assessment process
informs where we will focus our audit work for 2014-15.
Risk assessment
Economic People
> UK Government austerity measures, > Build and maintain talent pipeline
impacting future funding & assistance in > Develop entrepreneurial culture
GW SINEIUISLY SUPREMUS > Relationship with the Communication Workers
» The UK economy Wren
» Rate of e-substitution in mailing services Growth
He ce aC TN > Continue to develop revenue streams capable
Cele of sustainable growth, including development
> Product offering does not meet market needs of financial services business.
» Changes in the financial services sector » Monitor profit margins on key revenue lines
Environmental and social to ensure the ‘right’ price is charged
» Post Office as a ‘brand’ in its own right, with a > Go through successful Network
distinct corporate identity Transformation to develop the 21st century
> Corporate responsibility Post Office.
> Ethical and reputational
Operational excellence rocess & Governance
> Achieve benefits of transformation » Managing stakeholder/public expectations
> Pace & impact of transformation > Commercial finance and business intelligence
» Industrial action » Cash flow forecasting and cash optimisation
> Supply chain management > Cost of transformation and restructuring
> Quality of service
Technology
» IT transformation project
> CFS implementation
> Transition of IT service provider Fujitsu
wera Post Office Limited 8
ARC Meeting-10/11/14 67 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
68 of 137
Risk based approach (cont'd)
Significant risks
Of the financial statement risks identified, we consider some of them to be significant to our audit. Auditing
standards define significant risks as those with a high likelinood of occurrence and, if they were to occur,
could result in a material misstatement of the consolidated financial statements.
‘Once identified we are required by Auditing Standards to perform specific procedures over significant risks,
including the identification and testing of the effectiveness of key controls designed to address the risks.
The identified financial statement risks for POL are as follows:
Revenue recognition across diverse > The incentive to deliver expected revenue targets
range of revenue streams: > The accounting for deferred revenue and specific commissions within complex or new
legal agreements across a variety of revenue lines.
Classification of exceptional items » Assessing the classification of exceptional costs arising from the Network
relating to Network Transformation & Transformation programme, and the utilisation of government grants against such costs
utilisation of government grant* and in accordance with terms agreed with the Government.
Risk of management override around» We have identified management override of controls as a significant risk, particularly in
estimates and judgements* relation to the identification of exceptional items and provisions. The classification of
income statement items as exceptional is highly judgemental, and the high volume of
transactions in relation to the Network Transformation programme gives rise to the risk
that some transactions may be inappropriately classified as exceptional rather than
operating costs to deliver expected operating profit targets.
* indicates that the financial statement risk has been considered by our audit team as a significant risk and a fraud risk by auditing standards for the purposes
of this audit
Risk of misstatement due to fraud and error
The risk of fraud exists in any business. However, frauds involving the manipulation of results to achieve
performance targets are particularly harmful to stakeholder value and the current economic environment has
increased their likelihood of occurrence
Management has the primary responsibility to prevent and detect fraud. It is important that management,
with the oversight of those charged with governance, has put in place a culture of ethical behaviour and a
strong control environment that both deters and prevents fraud.
Our responsibility is to plan and perform audits to obtain reasonable assurance about whether the financial
statements as a whole are free of material misstatements whether caused by error or fraud. As auditors, we
approach each engagement with a questioning mind that accepts the possibility that a material misstatement
due to fraud could occur, and design the appropriate procedures to consider such risk.
Based on the requirements of auditing standards our approach will focus on:
» Identifying fraud risks during the planning stages.
» Inquiry of management about risks of fraud and the controls put in place to address those risks.
» Understanding the oversight given by those charged with governance of management's processes over
fraud.
>» Consideration of the effectiveness of management's controls designed to address the risk of fraud.
» Determining an appropriate strategy to address those identified risks of fraud.
» Performing mandatory procedures regardless of specifically identified fraud risks.
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
of it emphasis
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Areas of audit emphasis
Accounts with significant risks
Significant risks are risks with both a higher likelihood of occurrence and a higher magnitude of effect that
require special audit considerations. The risks we have identified as significant risks are detailed below, along
with how we propose to address those risks.
Revenue recognition across diverse range of revenue streams
POL sells a large variety of products/services across a number of distribution
channels, from providing ATM services through the Bank of Ireland
arrangements, to providing telephony broadband services under POL's
Homephone brand. Most of these revenue streams will have their own specific
rates, commissions and calculations for allocating the amount of revenue owing
to Post Office, which are dependent on their underlying contracts.
Whilst we note that most of the revenue lines are not overly complex in their
revenue calculations, the main risk associated with the diverse range of revenue
streams is in the correct contractual terms being applied to the revenue lines.
We also note that reward and incentive schemes based on achieving profit
targets may also place undue pressure on management to achieve revenue
forecasts, which makes us identify revenue recognition as a fraud risk.
Classification of exceptional items relating to Network Transformation,
utilisation of government grant
POL has been executing a Network Transformation on all of its existing branches
in order to modernise them as part of the overall strategy to make the Post
Office competitive for the future, a one-off programme which is expected to
continue until FY2017-18.
Management note that the costs of network transformation are exceptional in
nature given that a branch modernisation programme of this scale has not been
carried out before. As such, management believe this requires separate
presentation on the face of the income statement to allow a better understanding
of financial performance in the year.
In addition, the Department of Business, Innovation & Skills (‘BIS’) also awards
grants of POL to be offset chiefly against network transformation expenditure
and related capital expenditure, subject to terms set out in their designation
letter. POL offsets this government grant against the related expenses in the
exceptionals section of their P&L, in line with IAS 20 Government Grants.
Network Transformation related costs make up the largest element of
exceptional costs in the income statement.
Risks include:
> Costs are provided for before or after they have been committed and are
recognised in the incorrect period; and
> Other costs not associated with the Network Transformation are
inappropriately included within this category and reported outside trading
profit.
We will perform detailed controls work on
revenue during interim, which will include
testing whether the revenue lines selected are
using the correct contractual rates and volumes
in their calculations.
We will perform a detailed analytical review to
analyse and evaluate the movements in the key
revenue lines across the business.
For significant new products or revenue
streams, we will review the accounting
treatment in line with the revenue recognition
accounting standard and relevant contractual
terms.
We will perform cut-off testing procedures to
give further comfort that revenue has been
recorded in the correct period and we will
carry out substantive testing of accrued and
deferred income that involves investigating
any estimates made and comparing this to
the actual amounts received subsequent to
period-end for any material differences.
We will assess the risks around Managements
use of third party data and Managements
oversight of this data and carry out additional
testing where appropriate.
We will confirm receipt of the government
grant and review any updates to the terms
and conditions of the funding agreement.
We will revisit the appropriateness of
classifying such costs as exceptional, and
make inquiries of management to understand
how these costs are distinguished from,
normal operating costs, and the nature of the
costs classified as exceptional costs.
We will review management's monitoring
process for being able to differentiate
between Network Transformation costs and
normal operating costs, and assess whether it
captures the appropriate information and
detail to track these costs.
We will review the detail of the costs provided
and establish when the committed obligation
arose to assess whether the cost has been
recorded in the appropriate period.
The costs included will be reviewed to
understand whether they are directly linked
to the Network Transformation and
appropriately included within this category
and reported outside trading profit projects
and meet with the requirement under IAS 1 to
be presented as exceptional costs in the
financial statements. We will review and
challenge whether the costs should be
recognised within exceptional items or not.
we Post Office Limited
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Areas of audit emphasis (cont'd)
Accounts with significant risks (cont'd)
Risk of management override around estimates and judgements* > We will perform testing on the appropriateness
of journal entries and other adjust ments made
We have identified management override of controls as a significant risk, Da
particularly in relation to the identification of exceptional items and provisions. > We will review accounting estimates used in
The classification of income statement items as exceptional is highly Provisions for evidence of management bias.
judgemental, and the high volume of transactions in relation to the Network > For all significant new provisions and
Transformation programme gives rise to the risk that some transactions may be exceptionals we will review whether they have.
inappropriately classified as exceptional. been appropriately identified and meet the
requirement of JAS 37 and IAS 1 respectively.
> In addition to the above we will focus on
evaluating the business rationale for
significant unusual transactions around
estimates and judgements.
web Post Office Limited 12
ARC Meeting-10/11/14 71 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
POL00026973
POL00026973
Areas of audit emphasis (cont'd)
Other areas of audit emphasis
The other areas of audit emphasis are set out below:
Pension valuation and accounting
Following the implementation of the Pension Solution and the accounting of the
transfer of the RMPP in the prior year, we no longer assess pensions valuation to
be a significant risk. However, given that the pension related disclosures may
continue to be politically sensitive due to the number of stakeholders involved,
including the Government and the Communications Workers Union, we assess
pensions as an inherent risk area during the current year audit.
Management will satisfy themselves that the assumptions used in calculating the
ition at the year end are reasonable and the appropriate disclosures
are made in consultation with its actuaries.
Horizon Subpostmasters claim
In the prior year there were a number of legal claims made against POL in
relation to Horizon from Subpostmasters, who claimed they had suffered losses
due to systemic problems within the HNGX system. In response, POL have sought
legal advice from Linklaters to ascertain whether Post Office has a legal or
constructive obligation in relation to these claims.
Management have received written legal advice from Linklaters’ which indicate
that POL have no financial liability for any consequential losses suffered by the
subpostmasters subject to there being no evidence to support systematic failing
of Horizon, of which there is none based on management's interpretation to date.
As such, no provision was recognised nor any contingent liability disclosed in
prior year. We reviewed POL's legal advice and agreed with management's
approach to not recognise any liability for the purposes of the FY2013/14
financial statements. As we continue to monitor any developments in this matter
in FY2014/15 we assess this to be an inherent risk area during the current audit.
web Post Office Limited
ARC Meeting-10/11/14
We will audit the accounting treatment in line
with JAS 19(R) and IAS 1.
Reviewing the significant assumptions used.
This includes meeting with the Companies’
actuaries and reviewing their key inputs and
understanding the methodologies utilised to
arrive at key assumptions, such as discount
rates, inflation rates and expected rate of
return on plan assets. We will involve our own
actuarial specialists who are established
members of our audit team.
Benchmark POL assumptions against peers.
We will assess and provide insight into the
relevant position of the treatment adopted.
Involving our technical specialists to review
the note disclosure and communicate best
practice to the finance team.
Review changes in terms of pension schemes
and the related accounting treatment.
Obtain evidence and support for the valuation
of pension assets.
Review the pension disclosures provided in
the financial statements
We will discuss the Horizon subpostmaster
claim with POL's legal counsel and financial
controller.
We will review any updates on the legal advice
from Linklaters to ensure that the financial
impact of POL's position is correctly accounted
for and disclosed in the financial statements.
POL-0023614
1. Interim Report review and Emst & Young half year review findings
POL00026973
POL00026973
Areas of audit emphasis (cont'd)
Other areas of audit emphasis
VAT Accounting
The POL VAT recovery (“partial exemption”) method is a key area which could
carry a material level of VAT risk. The business has agreed a new “special”
partial exemption method which is relatively complex. Although the method itself
is approved by HMRC, it is important that the calculation of the recoverable VAT
is done in accordance with the agreed method. This can be a complex process.
In addition, any errors in the calculation of the VAT recovery would carry the risk
of significant penalties.
It will also be important to ensure that the new financial system CFS (core finance
system) which went live on 1 September is providing management with the
correct information to fulfil its VAT accounting and reporting obligations. In
particular, it will be important to ensure that the VAT is accounted for correctly
during the transitional period.
Implementation of SAP CFS (core finance system)
Following the migration of the finance system SAP ESFS to SAP CFS which went
live on the 1September 2014, it will also be important to ensure that the transfer
of financial information from one system to another has happened correctly to
ensure management is able to fulfil its accounting and reporting obligations. In
particular, it will be important to ensure the integrity and completeness of the
information during the transitional period.
web Post Office Limited
ARC Meeting-10/11/14
We will examine the VAT records, including
the VAT return submissions and backing
documentation to check the calculations are
accurate.
We will review the operation of the VAT
partial exemption calculation to check if it is
consistent with the method agreed with
HMRC.
We will discuss with the POL VAT team to
understand the status of any significant VAT
issues, and consider any VAT provisions
which have been or should be made by POL.
We will review the calculation of any
provisions made to check whether they are
robust, performing audit procedures
wherever necessary.
We will review any other special VAT
agreements with HMRC, including any
agreement in relation to alternative evidence
for input tax recovery on standard rated
supplies from Royal Mail, to check that they
have been implemented correctly.
Our ITRA team will perform a post
implementation review with a view of
obtaining reasonable assurance that the
transition from SAP ESFS to SAP CFS
occurred without any significant deviations
identified.
We will obtain an understanding of the CFS
with an emphasis on changes in key controls
where we have planned a controls testing
strategy for the related significant classes of
transactions and significant disclosures.
We will continue to consider where these
activities will have an impact on the control
environment, modifying our approach and
conducting walkthroughs to understand the
new environment as and when applicable.
We will perform opening balances check to
ensure that all audited closing balances in
SAP ESFS have been correctly transferred to
SAP CFS.
We will be performing detailed testing on the
new processes, working closely with
management and building on the knowledge
that the Royal Mail Group team had when the
these processes were partially prepared and
audited at RMG level.
73 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Areas of audit emphasis
Summary
In determining our approach to the 2014/15 audit, we consider how the risks faced by POL might impact the
financial statements. From our experience of working with a number of companies in the government and
financial services sector, our understanding of the key risk areas focused upon by management and from our
prior knowledge of the Company, we identified a number of key financial statement risks, outlined below.
These do not represent all risks but do include those items that in our opinion are the most significant for POL
in 2014/15. The risks are largely consistent with the prior year.
> Revenue recognition across diverse range
No change from prior year; still considered a significant risk in the current audit.
of revenue streams
» Classification of exceptional items relating
to Network Transformation & utilisation of No change from prior year: still considered a significant risk in the current audit.
government grant.”
IS Rieermanacerenhoverideercnnd In prior year we had associated the risk of management override with the classification of
a tasteceeliieeceun® exceptional items; in the current year we have associated this risk against provisions as this
eg is more aligned to estimates and judgments.
> Pension valuation and accounting No change from prior year; still considered an inherent risk in the current audit.
> VAT Accounting No change from prior year; still considered an inherent risk in the current year.
> Horizon Subpostmasters claim No change from prior year; still considered an inherent risk in the current year.
New inherent risk in the current year. The CFS (Core finance system) went live at the end of
August 2014 , replacing ESFS, which was previously managed by RMG. Since migration to
CFS, POL now has full control over the Fixed Assets, AP and AR processes which were
previously managed by RM. In addition, POL now has full control over the postings of all
journals.
The likelihood of the risk reduced _as the Bank of Ireland has incorporated and is fully
» Counterparty risk regulated in the UK, is in better financial health and counterparty credit risk is more
closely monitored and managed by POL. We no longer consider this to be inherent risk.
> Implementation of SAP CFS (Core Finance
System)
In all past years involvement in auditing POL we have never found or assessed that any
known or reported fraud and/or burglary arising from the logistics process and the cash
centre network would have materially misstated the cash balance and the financial
statements, nor do we expect that if such an incident was to occur it would be material in the
current year audit. This is because all of the network cash is spread across over 11,600
branches and cash centres cross the country and it is unusual and unlikely that fraud or
burglary at any one of the branches will cause a significant financial impact. For this reason
we no longer consider this to be inherent risk.
> Risk of fraud/burglary arising from the
logistics process and the cash center
network
This will be the second year that POL has complete responsibility for accounting for tax
charges and related disclosures. Prior year this was seen as an inherent risk due to
complexities in transitioning. In the current year we no longer consider this to be an inherent
risk,
> Corporate Tax Accounting
web Post Office Limited 1
T4 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
ased audit
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Controls based audit
Gaining assurance through the control environment
Risk based Audit scope and
A Service delivery
approach execution
POL's Control Processes
A key consideration in our audit planning process is the extent to which POL assesses risk and implements
controls in order to minimise risk.
We intend to continue to adopt a controls based approach in respect of IT, which is discussed in detail on
pages 17 and 18.
We also intend to continue to adopt a controls based approach in respect of the identified significant
processes of revenue, purchasing, cash settlements, payroll and additionally fixed assets in the current year.
Our controls testing approach focuses on the controls implemented across the entire POL business, including
the London head office, Bolton (payroll), Chesterfield (shared services), branches and cash centres.
As noted in last year’s planning report to you, we are aware that the POL finance systems and control
environment will continue to change. POL's new finance system, SAP CFS went live on 1 September 2014 and
POL now has taken over all accounting processes and activities previously undertaken at Royal Mail Group
level.
Although our audit is not designed to express an opinion on the effectiveness of internal control, we are
required to communicate to you any significant deficiencies in internal control. We will also provide you a
detailed letter at the end of the audit incorporating certain recommendations for process improvements
noted by us in the performance of this year’s audit.
76 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Controls based audit (cont'd)
Gaining assurance through the control environment
Risk based Audit scope and
A Service delivery
approach execution
IT Control Testwork Planning - Background
IT underpins a significant proportion of POL’s transactions. Our audit plan is designed around reliance on
certain IT applications and the use of electronic audit evidence.
The following IT applications are in scope for our audit: HNGX, POLSAP, SAP HRP, SAP ESFS ( 31 March 2014
to 31 August 2014) and SAP CFS (1 September 2014 to 29 March 2015).
As part of POL's separation from Royal Mail Group (RMG) , SAP ESFS has been replaced by SAP CFS with
effect from 1 September 2014. In addition, the IT support arrangements for SAP HRP are in transition from
RMG to POL and we understand this will be completed in February 2015.
2014-15 IT Audit Strategy - key considerations
Separation from RMG
> One of the key considerations for the IT audit this year is POL's separation from RMG, which-directly
affects the audit approach for two key systems operated by RMG that support POL's financially significant
processes. These systems are SAP ESFS, which supports the processing of branch returns, fixed assets,
purchasing and general ledger transactions, and SAP HRP, which supports the payroll for POL employees.
The existing audit approach adopted for these two systems is based on the audit efficiencies gained from
assessing the controls managed by third party provider CSC, which are common across RMG's key financial
systems.
> As part of the separation, POL has implemented a new system - ‘Core Financial System (SAP CFS)’ - to
replace SAP ESFS, which went live on 1 September 2014. Between April and August 2014, RMG
provided support for SAP ESFS, over which we anticipate requesting comfort from RMG's audit team.
For September 2014 onwards, we plan to perform a review of CFS controls as part of the POL audit,
working with third party service providers CGI, Atos and Steria. We anticipate performing independent
audit procedures on key IT controls supported by the third parties given the lack of available ISAE 3402
reports.
» Given the criticality of SAP CFS and its major impact on the FY14-15 audit, we have performed a pre-
implementation review of the SAP CFS project. This included a review of the programme governance,
solution integrity, data integrity, business and support readiness. Please refer to the SAP CFS.
implementation review section below for more details.
ARC Meeting-10/11/14 77 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Controls based audit (cont'd)
Gaining assurance in the IT environment sphere
Risk based Audit scope and
A Service delivery
approach execution
2013-14 Audit Strategy - key considerations (cont'd)
> POL also transferred SAP HRP from an RMG supported environment to a POL owned and supported
delivery model, under the ‘Safe Haven’ project. SAP HRP will continue to be supported by third party
CSC through direct contractual agreements with POL. We understand the transition from RMG/CSC
support arrangements to a POL/CSC support model will happen between October 2014 and February
2015. Our approach for SAP HRP between April and October 2014 is to continue to leverage the IT
audit procedures for RMG's systems. We then intend to perform independent audit procedures in
relation to the transition, including review of the controls over the new hardware platform. From
February 2015, we envisage being able to continue to rely on CSC's ISAE 3402 subject to the report.
having appropriate coverage of the new POL owned SAP HRP environment. We may need to perform
additional procedures if this is not the case.
HNGX and POLSAP
> Our understanding is that Fujitsu will again be commissioning an ISAE 3402 report.
> We plan to continue to place reliance on the ISAE 3402 report to reduce our independent testing.
> The extent of our reliance will be dependent on the opinion expressed in the ISAE 3402 report. We may
need to perform additional procedures if the report notes any significant exceptions.
> To support this approach we plan to follow the protocols agreed last year by the POL, Fujitsu, EY IT
audit and EY ISAE 3402 teams to keep the parties updated with the progress of ISAE 3402 testing.
IT transformation
> POL continues to execute its IT transformation programme, and has already begun to implement the new
IT service delivery model; we have been working with POL management to assess its impact on the audit.
> We understand that a new supplier, Atos, provides the overall service integration support to POL and
this impacts the applications in-scope for the IT audit this year. Therefore, we envisage relying if an
ISAE 3402 report from Atos if this is available. We may need to perform independent audit procedures
if there is no such report or if the services provided to POL are not covered by the report.
» Whilst there are additional IT support services contracts being awarded to new suppliers during 2014,
the transition will not be completed until after March 2015, and therefore we do not anticipate these to
have a major impact on the FY 14-15 audit strategy.
78 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Controls based audit (cont'd)
Gaining assurance in the IT environment sphere
Risk based Audit scope and
A Service delivery
approach execution
SAP CFS Implementation Review
>
Given the nature of the SAP CFS implementation and the significance of the system to the audit, we have
performed a pre-implementation review to review the design of some of the key controls we intend to test
for the FY14-15 audit. This approach will enable POL to address any potential key design or
implementation issues and correct them as soon as possible. This in turn will allow us to place as much
reliance as possible on the system once SAP CFS is live and potentially avoid significant remediation
procedures during the audit. Our EY IT audit team has been working closely with POL's Internal Audit team
in reviewing the CFS implementation to identify areas where we can place reliance on their work and
reduce our independent testing.
We have completed the majority of the review procedures as of October 2014, however some remain in
relation to data migration, design of the IT general controls, interfaces and the go-live decision. We intend
to complete these remaining procedures in November 2014.
Below is a summary of the key findings of our work to date. These points have been discussed with the
SAP CFS project team and we understand they are in the process of performing their investigation and that
detailed management responses and action plans have been recorded for each point to remediate and
mitigate these :
>» Anumber of users have been granted the highly privileged SAP_ALL profile in the live which gives users
unrestricted access to SAP, including the capability to process and approve any financial transactions
within CFS. We do not consider it to be appropriate for users to have permanent access to this profile. It
should be noted that our preliminary investigation disclosed that SAP_ALL has been assigned to CGI
development and support users and not to POL end users which minimises the risk.
» There are a number of generic user accounts belonging to CGI with powerful access rights in the live
environment. Whilst we acknowledge CGI will require access to SAP CFS to support the system, we do
not believe they should be granted unsupervised powerful access to POL's live data.
» Finally, using EY's proprietary tool to analyse users’ access, we identified a significant number of
potential segregation of duties conflicts within SAP CFS. We understand from discussion with the CFS
implementation team that the SOD violations are being investigated, risk assessed and appropriate
actions are being considered to mitigate the risks.
ARC Meeting-10/11/14 79 of 137
POL-0023614
POL00026973
POL00026973
scope and
execution
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Audit scope and execution
Risk based Controls based
approach audit Service delivery
2014-15 EY services
There are no changes in the scope of services from 2013-14. Post Office Management Services Limited
(“POMS”) is a fully owned subsidiary of POL. POMS was incorporated on 25 March 2013, and has been
dormant since. Management intends to commence trading on 1 December 2014. If this entity commences
trading it will be subject to a full-scope audit in the current year audit.
Financial reporting > Express opinions on, and report to the Audit and Risk Committee the results of, our audits o
» The consolidated financial statements of Post Office Limited (IFRS) and parent company financial
statements (FRS101) for the period ending 29 March 2015.
> We are required by the primary audit team of Postal Services Holdings Company (‘PSH', formerly known as
Royal Mail Holdings) to perform a full scope audit of POL for the period ended 29 March 2015 in accordance
with International Financial Reporting Standards (IFRS) and Clarified ISAs (UK and Ireland) as required in the
engagement instructions received by us from them,
> The following procedures are required by UK company law:
> Opining on whether the information contained in the Directors’ Report is consistent with the financial
statements
» Auditing the disclosures that unquoted companies are required to make with respect to directors’
remuneration
> Perform a review in accordance with ISRE 2410 “Review of Interim Financial Information Performed by the
Independent Auditor of the Entity”, on the consolidated half year financial statements of Post Office
Limited, prepared in compliance with IAS34 Interim Financial Reporting.
Internal control » Express our views on control themes and observations, including recommendations for improvements in
‘communications controls and procedures.
> We will issue a written communication at year end to management and the Audit and Risk Committee
describing significant deficiencies and material weaknesses identified during our audit, if any
> Following the year end audit board results report, we will separately issue a Controls Themes &
Observations Report to management describing all deficiencies (not previously communicated to
management in writing) in internal control over financial reporting identified during our audit that are of
a lesser magnitude than significant deficiencies
Regulatory audit and > _Inaddition to the statutory audit requirements, we are required, as auditors of POL, to perform certain
other assurancerelated procedures on a number of reports required by postal regulation and related matters, including:
SENT > Procedures in connection with the Post Office Limited credit facilities from BIS and DVLA motor vehicle
license transactions.
» Procedures in connection with the Bank of England Note Circularisation Scheme, which includes an ISAE
3000 Report delivered to POL management and the Bank of England
web Post Office Limited 22
ARC Meeting-10/11/14 81 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
82 of 137
Audit scope and execution (cont'd)
Materiality
For the purposes of determining whether the accounts are free from material error, we define materiality as
the magnitude of an omission or misstatement that, individually or in the aggregate, in light of the
surrounding circumstances, could reasonably be expected to influence the economic decisions of the users of
the financial statements. Our evaluation of it requires professional judgement and necessarily takes into
account qualitative as well as quantitative considerations implicit in the definition. We would be happy to
discuss with you your expectations regarding our detection of misstatements in the financial statements.
We will continue to use revenue as a basis for materiality, the amount we consider material at the end of the
audit may differ from our initial determination. At this stage, however, it is not feasible to anticipate all of the
circumstances that may ultimately influence our judgement about materiality. At the end of the audit we will
form our final opinion by reference to all matters that could be significant to users of the accounts, including
the total effect of the audit misstatements we identify, and our evaluation of materiality at that date.
Scope of audit procedures
Consolidation considerations
Our objective is to form an opinion on the group's consolidated financial statements under International
Standards on Auditing (UK and Ireland).
POL's consolidation is expected to be made up of two reporting units; the Post Office Limited parent entity
(which contains the majority of transactions) and the POL joint venture First Rate Exchange Services (‘FRES')
which will also form part of the consolidated POL financial statements.
The vast majority of the audit work is carried out by the EY team from London, except for the POL joint
venture First Rate Exchange Services (FRES') which is audited by PricewaterhouseCoopers. FRES is deemed
significant reporting unit based on size and will be subject to a full scope audit, covering all significant
accounts and processes using materiality levels assigned by EY's POL group team for purposes of the
consolidated audit. Procedures are full-scope in nature, but may not be sufficient to issue a stand-alone audit
opinion on the local statutory financial statements (as materiality thresholds support to the consolidated
audit).
ISA 600 (UK and Ireland) requires that we provide you with an overview of the nature of our planned
involvement in the work to be performed by the component auditors of significant reporting units.
Our involvement can be summarised as follows:
> We will instruct PricewaterhouseCoopers to report the results of their full scope aucit to us, in line with our
reporting timetable;
> Attend the planning event and closing meetings by conference call; and
> We will review their work papers relating to the significant audit areas through a site visit from the Group
audit team at year end; and
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
»
Audit scope and execution (cont'd)
Regulatory Considerations
As POL is not a company with shares listed and traded on a public exchange, it is not formally required to
report on its compliance with the UK Corporate Governance Code (‘the Code’). Nevertheless in light of
regulatory changes in the prior year the Post Office set principles for good governance which followed the
provisions of the Code, so far as they can apply to a government-owned entity which has no private or
institutional external Shareholders.
Since the year end the Financial Reporting Council issued an updated version of the Code in September 2014.
The new code confirmed the proposal for boards to include a “viability” statement in the strategic report to
investors. This statement is expected to improve the broader assessment of long-term solvency and liquidity.
The code was also changed in relation to remuneration, whereby listed companies will need to ensure that
executive remuneration is designed to promote the long-term success of the company and demonstrate the
achievement of that in a clear manner to shareholders. These changes to the code will apply to for year
ending 27 March 2016.
As POL remains committed to conducting its business ethically and in accordance with high standards of
Corporate Governance we will continue to update management and the Audit Committee on evolving market
practice in this area.
The following diagram summarises the Governance considerations to ensure full compliance with the Code
and the required process and communication flows between key stakeholders.
» Directors are required to state » Report from audit committee to
that they consider the Annual boardon how audit committee has
Report and Accounts, taken as discharged its res pons bilities
whole, is fair, balanced and » May be requested to report to the
understandable, and provides the board on whether annual report is
information necessary for fair, balanced and understandable
shareholders to assess the
company’s performance, business
model and strategy
Audit committee section of the
annuslreport and accounts must
disclose significant issues the
committee considered and how
they were addressed
—.»
» Communication from auditor
to Audit Committee on
findings from the audit
There are certain practical implementation aspects that would need to be considered by POL with regard to:
>» Communication protocols between management, boards, audit committees, auditors and others within the
company, e.g., internal audit and risk functions;
» Reporting processes and timetables; and
> The audit committee's report within the Annual Report and Accounts.
ARC Meeting-10/11/14 83 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
84 of 137
Audit scope and execution (cont'd)
Cyber security
As indicated in the letter from the Department for Business, Innovation & Skills to Chairs and Audit Committee
Chairs in the UK, the UK Government has launched an initiative, focused initially on the FTSE 350, in the form
of a Cyber Governance Health Check, facilitated through client audit relationships, with the aim of helping to
make the UK one of the most secure places in the world to do business. This initiative requires the completion
of a Cyber Security Tracker and the undertaking of a Cyber Diagnostic to Cyber Security Healthcheck. We
would be happy to support POL if you took the decision to voluntarily participate in this initiative in the
current year.
web Post Office Limited 25
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Audit scope and execution (cont'd)
Timetable of communication, insight and deliverables
We set out below a timetable showing the key stages of the audit and the deliverables we have agreed to
provide to you through the 2014-15 ausit cycle.
We will provide formal reports to the Audit and Risk Committee at the planning stage and at year end for the
consolidated POL accounts. These reports will incorporate the outputs from our planning review and our year
end audit procedures respectively. From time to time matters may arise that require immediate
communication with the Audit and Risk Committee and we will discuss them with the Audit and Risk
Committee Chairman as appropriate.
Following the conclusion of our audit we will prepare a Control Themes and Observations report for Post
Office Limited, outlining our comments on areas where we believe the Company exposes itself to risk, where
control matters exist or where we believe improvements can be made. This will be circulated to senior
management and to the Audit and Risk Committee in 2015, following the end of the audit. We will also provide
you with real-time control themes and observations as identified throughout the year as appropriate, as well
as practical business insights, updates on corporate governance and regulatory matters through our reporting
to the Audit and Risk Committee.
Agree audit scope/planning
> Agree service commitments
> Develop audit strategy 8
> Agree audit fees
Interim reviews
> Half year @
Process reviews
» Review of key processes
> Controls testing
Year end substantive testing
>» Hard close procedures ;
> Year end procedures a
> Results report to the audit je
committee
> Control themes and I
observation report
Deliverables:
(@) 2014-15 Audit Planning & HY Results Review Report
(2014-15 Year-end Results report
@ 2014-15 Control Themes & Observations Report
web Post Office Limited 26
ARC Meeting-10/11/14 85 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Service delivery
86 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Service Delivery
Risk based Controls based Audit scope and
approach audit execution
Your POL audit team
The POL engagement team is led by Angus Grant from our London office, who as the Lead Engagement
Partner is ultimately responsible for all audit-related services provided to POL by EY, signing the consolidated
and parent company Post Office Limited audit opinions and oversight of all other statutory and related work.
This will be Angus’ sixth year on the engagement.
Angus is supported by Steve Lyon as Senior Manager and Mounia Mukina as Assistant Manager. We have
established our engagement team with the principle of providing the right blend of industry and technical
experience to execute the audit and deliver on our commitments to you. This engagement team has been set
up to mirror your organisational structure. In addition, we recognise how important continuity of key EY team
members is to your organisation.
Specialists & Advisory Partners
As you are aware from experience in prior years, our audit strategy relies significantly on testing IT systems
and controls. Denise Fabb (Executive IT Director) will continue to oversee delivery of the IT element of the
audit. Our Pension specialists, who have assisted us both at the prior year end and during the current half
year, will continue to be headed by Christopher Bown (Pensions Partner). Claire Evans also continues to take
responsibility for the audit of POL tax, supported by Peter Whiting. Our audit team will also be supported by
the EY VAT specialists, headed by Audrey Fearing and supported by Steve Henshaw.
Tax
Claire Evans
Executive Director
Steve Lyon Peter Whiting
Audit Senior Manager Manager
Mounia Mukina
Audit Assistant Manager
Information Systems
Denise Fabb
Pensions VAT i Manager
Christopher Bown ‘Audrey Fearing
Partner
Stephen Henshaw
ior Manager
ARC Meeting-10/11/14 87 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
88 of 137
Appendix A
Appendix.B
Appendix C
Appendix-D
Appendix E
1AS34 Half year review
Management representation letter for half year review
Audit fees
Independence report
Required communications with the Audit and Risk Committee
ARC Meeting-10/11/14
POL00026973
POL00026973
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix A
IAS 34 Half year review
Introduction
Post Office Limited (‘POL’) intends to issue interim consolidated financial statements for the period ended 28
September 2014, in compliance with IAS 34 Interim Financial Reporting. We have been engaged to perform a
review under ISRE 2410, the standard that covers interim reporting procedures.
Objective of our review
The objective of our review is to provide comfort to the Audit & Risk Committee whether, on the basis of the
procedures performed, anything has come to our attention that causes us to believe that the interim
consolidated financial statements have not been prepared in all material respects in accordance with IAS 34
Interim Financial Reporting, as adopted by the European Union.
Review process
Our review of the Group's financial information for the 6 months ended 28 September 2014 was performed in
accordance with ISRE 2410 (UK and Ireland) ‘Review of Interim Information performed by the Independent
Auditor of the Entity’, as adopted by the Auditing Practices Board (APB) in the United Kingdom.
A review is substantially less in scope than an audit, because it does not include:
» Tests of accounting records by inspection, observation, or confirmation
» Obtaining corroborative evidence in response to enquiries
» Application of certain other procedures normally performed during an audit, such as tests of controls
and verification of assets and liabilities.
> Our work therefore consisted primarily of making enquiries of POL's accounting and finance staff,
executive management and applying analytical review and other review procedures.
Management anticipates that the half year results will be announced in early December 2014.
Status of review
At the time of issuing this report, our review of the Interim Results is on-going with the following items
outstanding:
» Review of final interim report including Directors narrative.
» Receipt of the Letter of Representation from the Directors.
» Subsequent events procedures, to be completed through the date of us concluding our review (matters to be
updated include: management enquiries, review of latest management accounts, and board minute review to
date of signing).
We continue to work with management in order to complete these procedures and will provide a verbal update
at the Audit & Risk Committee meeting.
In the following pages, we set out a summary of the Half Year procedures performed and the results of our
review.
ARC Meeting-10/11/14 89 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
90 of 137
Appendix A
IAS 34 Half year review (cont'd)
Half year review results
Interim materiality and
evaluation of misstatements
Review of primary
statements numbers and
support
‘Summary of review
adjustments
Conclusion
We calculated an interim review in order to:
>
Determine the extent of analytical and other review procedures to perform and evaluate the results.
Evaluate errors of misstatement or judgmental differences.
Come to a conclusion that the interim financial information is prepared, in all material respects in
accordance with IAS 34 ‘Interim Financial Reporting’.
Determine what matters of governance interest should be brought to your attention.
Our determination of interim materiality requires professional judgement and takes into account
qualitative as well as quantitative considerations implicit in the definition.
We performed an overall analytical review on both the Balance Sheet and Profit & Loss account (on profit
before interest, tax and exceptional items).
We noted that operating profit before exceptionals was £23m, down by £30m on the same time last year.
Operating profit for the period was £20m (29 September 2013: £185m, which included the gain of
£102m arising on the change to the terms of the Royal Mail Pension Plan, which was reported under
exceptional items).
Based on our discussions with management, including the financial controller, the fluctuations and
variances experienced during the period are consistent with our understanding of the entity and of its
financial position as of 28 September 2014. As a result of our procedures, we have not identified any
previously unidentified risks of material misstatement due to fraud.
We identified two review differences netting to £1m, which reclassifies debit balance from trade payables
to trade receivables. We also identified a review difference of £738k to decrease Homephone revenue in
line with the billing provided by Fujitsu, the net impact of this adjustment to profit is nil because it was
fully provided for.
There were no other amounts that we identified that are individually or in aggregate material to the
presentation and disclosures of the interim consolidated financial statements for the six months ended
28 September 2014.
Based on work carried out to date, no adjustments have come to our attention that are individually or
in aggregate material to the presentation or disclosures of the interim consolidated financial,
statements for the six months ended 28 September 2014.
Post Office Limited 31
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix A
IAS 34 Half year review (cont'd)
Half year review results (cont'd)
Revenue recognition
Classification of exceptional
costs
‘As part of our half year review procedures, we held meetings with management review and made enquires in
relation to managements detailed revenue schedule, which splits out the performance for every individual sub-
revenue line. We carried out a detailed analytical review on POL’s revenue lines, whilst also completing analytical
reviews on POL's deferred and accrued revenues as disclosed in the Balance Sheet.
During our review of contracts, we noted that a provision had been made in respect of an error in the charging for
revenue under the DWP PoCa contract. POL charges the DWP based on the number of active PoCa accounts, for
which the source data is provided by JPMorgan (POL banking partner for running the PoCa accounts). When an
account holder dies and POL is notified of the death, the account should be moved from active status to Death
Notified Account (DNA) status. In such instances, POL should cease to charge for these accounts as active accounts
but should charge them as dormant. However, the information provided by JPMorgan has included DNAs within the
active accounts (as JPMorgan billing includes DNA accounts). The result is that POL has been overcharging the
DWP since 2009, estimated to be £11m in total. POL management has provided for this amount as it has an
obligation as a result of a past event and therefore has a liability to DWP. We note that the contract is currently
being negotiated and therefore a commercial settlement may be reached. We agree with managements conclusions
at the half year.
During the half year to 28 September 2014, POL continued to work with Fujitsu to resolve revenue recognition
issues in respect of Telephony products. Since year end Fujitsu has carried out a review and issued a report to POL
in relation to the dispute and has identified total under-billing of £302k. Management continues to take the view
that the billing data provided by Fujitsu is incomplete and although the report has some merit, POL still continue to
work with Fujitsu to resolve the dispute. Management fully wrote down the receivable due from Fujitsu as at 28
September 2014 being the recoverable amount offered in the report of £302k.
We have proposed an adjustment, which has been adjusted for in the financial statements, to decrease revenue for
the 6 months to 28 September 2014, in line with the billing provided by Fujitsu. For Revenue to be recorded under
IAS 18, it has to be probable the economic benefits will flow to POL. Therefore management have recognised the
ret impact within the Revenue line item in the income statement (Decrease in Revenue of £738K). This adjustment
has a net nil impact to the profit of POL during the period as this revenue was fully provided for.
No other issues were noted during the course of our review.
Continuing the trend from the previous year, POL continues to have increasing and significant exceptional items
relating to network transformation & restructuring (£107m in the current year to date) and impairments (£66m in
the year to date). These were offset by the utilisation of the full government grant for the year of £170m, which
management has treated as an offsetting exceptional gain.
We recognise that management have recognised the grant on a consistent basis with the prior year, being matched
to the direct costs attributed to the Transformation. We note that achieving the appropriate matching of Grants to
cost is a subjective , however POLs accounting falls in line with the accounting standard.
As a result of the substantial transformation spend, the full grant has be utilised and offset cost in the first half of
the year, therefore resulting in a net impact of £3m expense being recorded in exceptional items. We noted that
there is still significant spend anticipated during the second half of the year for which POL has no grant available to
offset, the result of which will be a negative impact on the second half year results.
We do not take exception to the accounting treatment however we have highlighted to management that prorating
the grant across the anticipated spend for the year, would remove significant volatility in the half year reported
earnings.
We would encourage management to ensure there is transparency in the front and back half of the accounts and
that the users of the half year financial statements are able to form a view of the company’s first half year
performance and performance against targets and objectives for the full year
The items included within network transformation costs and restructuring costs are consistent with those reported
as exceptional in prior years and continue to meet the Group's definition of exceptional costs and guidance from the
accounting standards. The only new type of addition to exceptional costs during the year to date is the Business
Transformation Programme (BTP) (£1m), relating to a wide reaching programme which is tasked with delivering
£300m of cost savings and as such is expected to radically transform the structure of the business. The BTP has
begun its work and has already identified medium term costs saving opportunities of £100m. which, owing to the
one-off nature of the events giving rise to them, were deemed appropriate by management to include as an
exceptional item.
POL also has a number of exposures that are reflected in the financial statements at each year end. Total provisions
have increased from £78m to £86m in the half year ended. We reviewed the breakdown of provisions as at the
current half year end, including movements since the prior year. From our discussions with management, we
noted that the assumptions used remained appropriate for the half year accounts, noting no issues.
Post Office Limited 3
ARC Meeting-10/11/14 91 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix A
IAS 34 Half year review (cont'd)
Half year review results (cont'd)
SAP Core Financial System POL’s accounting system, ESFS, was replaced by CFS at the end of August 2014. Transactions data for the 12
(CFS) implementation months in FY2013/14, as well as the 5 months from March to August 2014, were transferred to CFS. We
have checked that all balances have been correctly transferred from ESFS to CFS.
The implementation of CFS was complementary to POL gaining ownership over the fixed assets, purchasing
and accounts receivable processes, which were previously managed by Royal Mail. We also noted that CFS is
now able to perform a three-way match for projects expenditure, although a two-way match is still performed
for all other expenditure. We have performed walkthroughs over these processes and noted the changes and
key controls in place. We will be performing full tests of controls over these processes for our annual audit of
the financial statements, including tests of the ITGCs.
We have further noted that the implementation of CFS has not resulted in a change in controls over the
classification of exceptional items and the associated risk of management override, valuations of provisions,
and revenue recognition.
Review of Corporation Tax _ In the half year to 28 September 2014, POL recorded a deferred tax credit of £4m in the income statement
and a deferred tax charge of £5m in OCI, both relating to movements on the element of the RMPP pension
surplus expected to be recovered through a reduction in future contributions.
POL does not expect to be in a tax paying position for the full year. Consistent with the position at 30 March
2014, POL has only recognised deferred tax assets up to the value of the deferred tax liability in respect of
pensions, leaving a net deferred tax balance of nil. The remaining potential deferred tax asset balances are
not recognised due to uncertainty around the availability of future taxable profits.
We have reviewed the full year forecast tax calculations and the allocation of the deferred tax figures in
respect of pensions, and made enquiries of management and Wilkins Kennedy, who assisted the POL finance
team in the preparation of the figures.
Pensions For the purposes of preparing their half year IAS 34 financial statements, management have obtained an IAS
19R valuation of the pension fund surplus for their RMPP scheme, for the period ended 28 September 2014.
This valuation indicated a net pension surplus of £161m for the RMPP scheme, which is net of £20m
withholding tax of 35% on the element of the surplus which is recoverable through a refund from the plans.
POL also recognised a £2m net surplus relating to their RMSEPP at half year.
Our review during half-year has included us involving our own actuarial specialists, who have been established
members of our audit team since last year’s audit. We reviewed the key assumptions that underpin the value
of the pension obligation at 28 September 2014, and note that the discount rate of 4.1% (4.5% in March
2014), RPI 3.1% (3.3% in March 2014), CPI 2.1% (2.3% in March 2014) and the expected rate of non-
promotional salary increases 3% (3.3% in March 2014) are within the range of assumptions that we would
deem reasonable based on our experience
Provisions We reviewed material movements in provisions as part of our half year review procedures. Material
movements within provisions related mainly to utilisation of severance and agents’ compensation provisions,
a well as current year provisions in these two accounts for redundancies and agents’ termination agreements
made during the half year ended 28 September 2014. We further noted an £11.3m provision in respect of
overcharges for the DWP PoCa contracts, as noted above.
The material movements highlighted are in line with our expectations based on our knowledge of the business
and discussions with management. We have discussed with management the current status in relation to
fraud, legal matters, entity level controls, and the financial statements close process.
web Post Office Limited 33
92 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix A
IAS 34 Half year review (cont'd)
Half year review results (cont'd)
Review all board meeting
minutes in the half-year
Review of current material
litigation & regulatory
fines, compensation and
accruals.
>
We have reviewed the meeting minutes for all board meetings up to the latest date at time of issuance of
this Planning Report, being the Board meeting on 25 September 2014. No further issues to note. We will
obtain meeting minutes for all board meetings up to date of releasing our review opinion for the half year
financial statements.
The POL finance team provided us an update on all material provisions and exceptional costs in the
business incurred during the half-year. We noted that no material provisions or exceptional costs were
incurred or booked in relation to litigation and regulatory fines.
We made enquiries of POL's legal counsel to gain an update of POL's litigation and compliance with laws
and regulations since year-end, with no issues noted.
We discussed the Horizon subpostmaster claim with POL's legal counsel and financial controller. POL’s
position has not changed since the prior year. It was noted that management has not been found legally
liable to pay out any claims related to the Horizon subpostmaster claim post 31 March 2014 to date.
Based on our discussion with management, we agree that their view remains reasonable and no reserve is
required in respect of this claim.
We also discussed the progress on the legal situation concerning POL potentially having to pay a separate
business tariff on its ATMs in retail premises. A provision had been made in the March 2014 financial
statements for £2m. Management and legal counsel continue to believe the likelihood of paying these
backdated business tariffs is highly probable, and this provision remains at half year. Based on discussion
with management, we agree that their view appears to be reasonable.
We will continue to revisit and gain updates from management on the situation through the audit.
We also reviewed the minutes of all board meetings and sub-committees and noted there were no other
material litigation claims or regulatory claims that management should consider providing for.
Post Office Limited 34
ARC Meeting-10/11/14 93 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix B
Management representation letter for IAS34
half year review
Angus Grant
Ernst & Young LLP
1 More London Place
London
SE1 2AF
Dear Sirs
Post Office Limited
This representation letter is provided in connection with your review of the condensed consolidated balance
sheet of Post Office Limited as of 28 September 2014 and the related condensed consolidated statements
of income, changes in equity and cash flows for the six-month period then ended for the purposes of
expressing a conclusion whether anything has come to your attention that causes you to believe that the
interim financial information is not prepared, in all material respects, in accordance with International
Financial Reporting Standards as adopted by the EU.
We acknowledge our responsibility for the preparation and presentation of the interim financial information
in accordance with International Financial Reporting Standards as adopted by the EU.
We confirm, to the best of our knowledge and belief, the following representations:
a) The interim financial information referred to above has been prepared and presented in accordance
with International Financial Reporting Standards as adopted by the EU.
b) We have made available to you all books of account and supporting documentation, and all minutes of
meetings of shareholders and the board of directors.
c) There are no material transactions that have not been properly recorded in the accounting records
underlying the interim financial information.
d) There has been no known actual or possible noncompliance with laws and regulations that could have a
material effect on the interim financial information in the event of noncompliance.
e) We acknowledge responsibility for the design and implementation of internal control to prevent and
detect fraud and error.
f) We have disclosed to you all significant facts relating to any known frauds or suspected frauds that may
have affected the entity.
g) We have disclosed to you the results of our assessment of the risk that the interim financial information
may be materially misstated as the result of fraud.
h) We believe that the effects of any unadjusted review differences, summarised in the accompanying
schedule, accumulated by you during the current audit and pertaining to the latest period presented are
immaterial, both individually and in the aggregate, to the financial statements taken as a whole.
i) We confirm the completeness of the information provided to you regarding the identification of related
parties.
94 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
Appendix B
Management representation letter for [AS34
half year review (cont'd)
j) The following have been properly recorded and, when appropriate, adequately disclosed in the interim
financial information:
* Related party transactions, including sales, purchases, loans, transfers, leasing arrangements and
guarantees, and amounts receivable from or payable to related parties;
. Guarantees, whether written or oral, under which the entity is contingently liable; and
° Agreements and options to buy back assets previously sold.
k) The presentation and disclosure of the fair value measurements of assets and liabilities are in
accordance with International Financial Reporting Standards as adopted by the EU. The assumptions
used reflect our intent and ability to carry out specific courses of action on behalf of the entity, where
relevant to the fair value measurements or disclosure.
Dy We have no plans or intentions that may materially affect the carrying value or classification of assets
and liabilities reflected in the interim financial information.
m) We have no plans to abandon lines of product or other plans or intentions that will result in any excess
or obsolete inventory, and no inventory is stated at an amount in excess of realizable value.
n) The entity has satisfactory title to all assets and there are no liens or encumbrances on the entity's
assets.
0) We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent.
To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet date and
through the date of this letter that may require adjustment to or disclosure in the aforementioned interim
financial information.
Chris Day
Chief Financial Officer
POL-0023614
POL00026973
POL00026973
Appendix C
Audit fees
A fair fee reflecting a changing business
A summary of EY's proposed fees for the period ending 29 March 2015 is set out on the following page.
The fees below have been discussed with management to give transparency to our cost base, and we continue
to work proactively with management to identify additional efficiencies.
It is important to note that the fee provided represents a ‘best case’ scenario. Given that this work is ongoing
it is not possible to predict the level of remediation work, if any which will be required. In this respect, the
following are the key assumptions underpinning the cost element of the audit:
> With respect to the cost of the IT audit, the cost assumes no significant exceptions requiring mitigation
work. Any additional time required to mitigate exceptions will be flagged and agreed in advance prior to
carrying out the mitigating procedures.
The fee has been calculated on the assumption that the level of client assistance relative to the prior year is
consistent.
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix C
Audit fees (cont'd)
A fair fee reflecting a changing business
Standard Cost (£) e (£) One off fee(£)
FY13/14 audit costs 784,363 313,745,
FY13/14 1AS34 consolidated accounts (Half Year Review) 100,000 40,000
Total FY13/14 Audit Fee (including IAS34 accounts) 884,363 353,745
Changes in scope
Additional process work for main audit for the CFS implementation 30,000 12,000 12,000
Review of the implementation of the CFS froma VAT perspective 15,780 6,312 6,312
CFS known issues from IT pre-implementation review 10,419 4,168 4,168
Increase time on reviaw of ISA 3402 reports (from 1 prior year - 15,600 6.248
Fujitsu, to an additional 2 this year - Atos and CSC)
Unremediated and/or late remediation of 2014 IT issues 38,205 15,282 15,282
SAP HRP re platforming 12,198 4,879 4,879
Total One off Fee 42,641
Recurring changes in scope
CFS ITGC testing (ISAE 3402 review) 7,000 2,800
Market factors
Inflation * 44,218 17,687
Total Audit Fee (including IAS34 accounts) 1,057,803 423,121 42,641
less - continued ef iencies to partially offset inflation (22,574) (9,030)
Total 2014/15 audit costs** 1,035,694 414,278 (42,641
Additional recurring cost If no ISAE 3402 report can be
obtained from CGI
Independent testing audit procedures for CFS ITGC testing 64,650 25,860
Total 2014/15 audit costs*** 1,100,344 440,138 42,641
* Inflation calculated as like-for-like cost base to prior year, uplifted by 5% (£884,363 )x 5%)).
“Total audit fee assumes that we will be relying on an ISAE 3402 report from Atos (if report is not available, we will perform independent testing)
"** Total audit costs/fee assuming no reliance in an ISAE 3402 from Atos.
web Post Office Limited 38
ARC Meeting-10/11/14 97 of 137
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix C
Audit fees (cont'd)
Non audit services
The following table is a summary of all non-audit fees for the FY14-15 year. None of these fees
have contingent fee arrangements.
Standard Cost (£) Fee(£) One off fee(£)
Note Circulation Scheme ISAE 3000 Report* 195,000 78,000
BIS Agreed Upon Procedures Report* 30,000 12,000
DVLA Agreed Upon Procedures Report* 32,500 13,000
Total non audit services 2013/14 fee 257,500 103,000
One off scope change
CFS implementation review 175,500 70,200 70,200
Market factors
Add - Inflation ** 12,875 5,150
less - continued efficiencies to fully offset inflation (12,875) (5,150)
Total 2014/15 non audit services fee 433,000 173,200
+ ** Inflation calculated as like-for-like cost base to prior year, uplifted by 5% (£257,500) x 5%).
wwe Post Office Limited 39
98 of 137 ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix D
Independence report
Introduction
In order to carry out our duties and responsibilities as auditor, EY are required to consider our independence
and objectivity within the context of the regulatory and professional framework in which we operate.
UK APB Ethical Standards, International Standard on Auditing (UK and Ireland) 260, Communication of audit
matters to those charged with governance, and Rule 3526 Communication with Audit Committees Concerning
Independence of the Public Company Accounting Oversight Board (PCAOB) require us to communicate on a
timely basis and at least annually on all significant facts and matters that bear upon our independence and
objectivity since our last letter. The Ethical Standards, as revised in December 2010, require that we
communicate formally both at the planning stage and at the conclusion of the audit, as well as during the
course of the audit if appropriate. The aim of these communications is to enable us in giving you full and fair
disclosure to you on matters in which you have an interest.
Planning stage
» The principal threats, if any, to objectivity and independence
identified by EY including consideration of all relationships
between the you, your affiliates and directors and us;
The safeguards adopted and the reasons why they are
considered to be effective, including any Engagement Quality
Review;
The overall assessment of threats and safeguards;
Information about the general policies and process within EY
Final stage
> Awritten disclosure of relationships (including the provision
of non-audit services) that bear on our objectivity and
independence, the threats to our independence that these
create, any safeguards that we have put in place and why
they address such threats, together with any other
information necessary to enable our objectivity and
independence to be assessed;
Details of non-audit services provided and the fees charged
in relation thereto;
Written confirmation that we are independent;
Details of any inconsistencies between APB Ethical
Standards and your policy for the supply of non-audit
services by EY and any apparent breach of that policy; and
An opportunity to discuss auditor independence issues.
to maintain objectivity and independence.
In addition, during the course of the audit, we are required to communicate with you whenever any significant
judgements are made about threats to objectivity and independence and the appropriateness of safeguards
put in place, for example, when accepting an engagement to provide non-audit services.
We also provide information on the amounts of any future services that have been contracted, and details of
any written proposal to provide non-audit services that has been submitted.
We will also make sure that the total amount of fees that EY and our network firms have charged to you for
the provision of services during the reporting period, analysed in appropriate categories, are disclosed.
ARC Meeting-10/11/14 99 of 137
POL-0023614
POL00026973
POL00026973
Appendix D
independence report (cont'd)
Relationships, services and related safeguards
We are not aware of any relationships between EY and the Company that may reasonably be thought to bear
on our independence as of the date of this report. As part of our considerations for any non-audit
engagement, we review potential threats in respect of self-interest, self-review, acting as management and
advocacy. We establish appropriate safeguards, which we communicate to the Audit and Risk Committee in
respect of any potential threat.
Other required communications related to independence matters
The APB Ethical Standards require total fees you have paid us in the period ending 29 March 2015 to be
communicated to you. Details of all fees are provided to the Audit and Risk Committee as part of our year-end
results board report.
Listed on the following page are EY's key firm-wide policies and processes to maintain independence and
objectivity which are required to be communicated to you by APB Ethical Standards.
Confirmations
We are not aware of any inconsistencies between the company's policy for the supply of non-audit services
and APB Ethical Standards. We are not aware of any apparent breach of that policy.
Relating to our audit of the financial statements of Post Office Limited for the year ending 29 March 2015,
for the year to date we are independent with respect to the Company within the meaning of regulatory and
professional requirements, including the requirements of International Standard on Auditing (UK and Ireland)
260 Communication of audit matters to those charged with governance; UK APB Ethical Standards; the
independence and Rule 3520 of the PCAOB. We will provide a further update as part of our year end
reporting.
We consider that our independence in this context is a matter that should be reviewed by both you and
ourselves. It is therefore important that you consider the facts of which you are aware and come to a view. We
look forward to discussing these matters with you at our upcoming meeting later in November 2014.
This report is intended solely for the information and use of the Audit and Risk Committee of the Board of
Directors, management, and others within the Company and should not be used for any other purpose.
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
Appendix D
Independence report (cont'd)
Firmwide policies
EY has policies and procedures that instil professional values as part of firm culture and ensure that the
highest standards of objectivity, independence and integrity are maintained. Listed below are some of the key
policies and processes in place within EY for maintaining objectivity and independence:
Financial interests Our partners and client facing (technical) staff are prohibited from investing in any audit client around the
World.
All partners and staff are required to confirm their compliance each year with the firm’s independence
policies. Monitoring of compliance in respect of all partners and professional managers takes place through
a worldwide investment tracking system.
New starters are required to confirm their compliance with the firm's independence policies on
commencement of their employment.
Training All partners and professional staff are required to undergo regular mandatory training on our Independence
and Ethical policies and processes.
Partner rotation The firm has detailed policies on the rotation of the audit partner, and in the case of listed clients key audit
partners, the independent partner and ‘other partners and staff in senior positions’.
Consultation The firm requires consultation outside the audit team on complex accounting, auditing and ethical matters.
Major issues of principle arising on all audits are referred to a panel of independent experienced audit
partners.
Independent partner Before listed company audit opinions are issued, an audit partner independent of the audit team reviews the
reviews nature of the relationship with the client, aspects of the accounts that are subject to significant estimates
and judgements, and the adequacy of the presentation of information in the accounts.
Quality reviews The firm operates a worldwide programme under the direction of senior partners that annually assesses the
quality of our work. Over a three year period, a proportion of the work of all audit partners is reviewed. The
results of the programme help us to evaluate the firm's quality controls and personnel performance and
identify areas for improvement.
As with other firms, EY's audit practice is subject to annual review by the Audit Inspection Unit (AIU) and
the Quality Assurance Directorate (QAD) of the Institute of Chartered Accountants in England and Wales
(ICAEW) for compliance with Audit Regulations. As part of its visits, the AIU/QAD evaluate the system of
quality control operated by the firm for its audit practice.
Business relationships EY has implemented a centralised process for the review and pre-approval, by our quality and risk
management team, of all new business relationships. A submission must be made and approved for each
new business relationship before committing the firm.
In addition, all new business relationships must be notified and approved by the lead audit or client service
partner before committing the firm.
Ethics Our Global Code of Conduct provides an ethical framework on which we base our decisions and our actions—
as individuals and as members of our global organisation. EY has also established the EY/Ethics hotline
which will allow any person, inside or outside of EY, to confidentially and anonymously report an activity
that they believe may involve conduct that is unethical, illegal, in breach of professional standards, or is
otherwise inconsistent with EY's established policies and Code of Conduct.
Non-audit services Our audit engagement partners must approve any non-audit services offered to their clients. This allows
them to:
> Ensure the objectives of the proposed engagement are not inconsistent with the objectives of the audit
of the financial statement;
» Identify and assess any related threats to our objectivity; and
> Assess the effectiveness of available safeguards to eliminate such threats or reduce them to an
acceptable level.
Where no satisfactory safeguards exist we do not carry out the non-audit service.
web Post Office Limited 42
ARC Meeting-10/11/14 101 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
Appendix E
POL00026973
POL00026973
Required communications with the Audit
and Risk Committee
There are certain communications that we must provide to the Audit Committees of UK clients. We have
detailed these here together with a reference of where and when they were covered:
Communications required on all audits
Overview of planned scope and timing of the au
Other information in documents containing audited financial
statements
Significant audit adjustments
Unrecorded misstatements considered by management to be
immaterial
Expected modifications to the audit report
Our judgements/views about qualitative aspects of the
Company's accounting practices and financial reporting
Disagreements with management
Consultations with other accountants
dealing with management
when performing the audit
The adoption of, or a change in, an accounting policy
Discussed within this report,
We will review the other information
included in annual financial statements
and report to you in the Audit and
Committee report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
If applicable, this will be included, as
necessary, within our 2014-15 year end
audit report.
This will be included within our year end
2014-15 Audit and Risk Committee
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
web Post Office Limited
ARC Meeting-10/11/14
43
POL-0023614
1. Interim Report review and Emst & Young half year review findings
Appendix E
POL00026973
POL00026973
Required communications with the Audit
and Risk Committee (cont'd)
Communications required on all audits (cont'd)
Methods of accounting for significant unusual transactions
and for controversial or emerging areas
Events or conditions that cause us to conclude that there is
substantial doubt about the entity's ability to continue as a
going concern
Sensitive accounting estimates
Consideration of laws and regulations
Fraud and illegal acts involving senior management and fraud
and illegal acts that cause a material misstatement of the
financial statements
Significant matters arising during the audit in connection with
the entity's related parties
Management's refusal for us to request external
confirmations or our inability to obtain relevant and reliable
audit evidence from other procedures
Representations that the auditor is requesting from
management
Significant deficiencies and material weaknesses in internal
control over financial reporting
Group audits
> An overview of the type of work to be performed on the
financial information of the components
> An overview of the nature of the Group audit team's
planned involvement in the work to be performed by the
component auditors on the financial information of
significant components
» Instances where the Group audit team's evaluation of the
work of a component auditor gave rise to a concern about
the quality of that auditor's work
Any limitations on the Group audit, for example, where the
Group engagement team's access to information may have
been restricted
Fraud or suspected fraud involving Group management,
component management, employees who have significant
roles in Group-wide controls or others where the fraud
resulted in a material misstatement of the Group financial
statements.
v
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
We will provide the management letters
of representation as part of our year
end report.
This will be included, as necessary,
within our Controls, Themes and
Observations Report which will be
shared with you after the conclusion of
our audit.
‘An overview of the planned approach
for the audit is included within this
report.
We will report on any further items with
our year end audit report.
This will be included, as necessary,
within our 2014-15 year end audit
reports.
“ Post Office Limited
ARC Meeting-10/11/14
44
103 of 137
POL-0023614
1. Interim Report review and Emst & Young half year review findings
104 of 137
Appendix E
POL00026973
POL00026973
Required communications with the Audit
and Risk Committee (cont'd)
Audit and Risk Committee pre-approval of services, including
specific pre-approval of internal control-related services and
non-prohibited tax services
Critical accounting policies and practices. ISA 260 (UK and
Ireland) requires the auditor to communicate the auditor’s
views on the qualitative aspects of the Company's accounting
practices and financial reporting
All material alternative accounting treatments discussed with
management
Fees
Other material written communications with management
Communication of independence matters
Other findings or issues regarding the oversight of the
financial reporting process
This will be included, as necessary,
within our 2014-15 year end audit
reports
This will be included in our 2014-15
year end audit report.
This will be included in our 2014-15
year end audit report.
Discussed within this report and within
our 2014-15 year end audit report.
We will provide our 2014-15 year end
audit report.
This will be included in our 2014-15,
year end audit report.
This will be included, as necessary,
within our 2014-15 year end audit
report.
Additional communications required on audits that are subject to (or that voluntarily apply) the UK Corporate Governance code
Any information that we believe will be relevant to the Audit
Committee and the Board of Directors to enable them to fulfil
their responsibilities in relation to specific provisions of the
2012 UKCG Code ie C11; C2.1; C3.2 and C3.4
This will be included, as necessary, in
the 2014-15 year end audit results
board report.
“ Post Office Limited
ARC Meeting-10/11/14
45
POL-0023614
POL00026973
POL00026973
1 Interim Re}
jew and Emst & Young haif year review fi
105 of 197
POL-0023614
POL00026973
POL00026973
1 Interim Re}
jew and Emst & Young haif year review fi
106 of 137
POL-0023614
POL00026973
POL00026973
POL-0023614
POL00026973
POL00026973
1. Interim Report review and Emst & Young half year review findings
EY I Assurance I Tax I Transactions I Advisory
‘About EY
EY is a global leader in assurance, tax, transaction
and advisory services. The insights and quality
services we deliver help build trust and confidence
in the capital markets and in economies the world
over. We develop outstanding leaders who team to
deliver on our promises to all of our stakeholders.
In so doing, we play a critical role in building a better
working world for our people, for our clients and for
our communities.
EY refers to the global organization and may refer
to one or more of the member firms of Ernst & Young
Global Limited, each of which is a separate legal entity.
Ernst & Young Global Limited, a UK company limited
by guarantee, does not provide services to clients.
For more information about our organization, please
visit ey.com.
Ernst & Young LLP
‘The UK firm Ernst & Young LLP is a limite lability partnership
registered in England ard Wales with registered number 0C300001
{and isa member firm of Ernst & Young Global Limited.
Ernst & Young LLP, 1 More London Place, London, SE1 2AF.
©2013 Ernst & Young LLP. Published in the UK.
All Rights Reserved.
ED NONE
1373427 (UK) 07/13. Creative Services Group.
OD, Inline with EY's commitment to minimise its
(ES Inpaet on the environment, this document has
been printed on paper with'a high recycled content.
Information in this publication is intended to provide only a general
outline of the subjects covered. It should neither be regarded as
comprehensive nor sufficient for making decisions, nor should it be
sed in place of professional advice. Ernst & Young LLP accepts no
responsibility for any loss arising from any action taken oF not taken
by anyone using this material.
ey.com/uk
108 of 137 ARC Meeting-10/11/14
POL-0023614
POLARC14 (4")
14131 - 14/36
POL00026973
POL00026973
Strictly Confidential
POST OFFICE LIMITED
(Company no. 2154540)
(the Company)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE SUB-COMMITTEE held
Present:
Alasdair Marnoch
Neil McCausland
Tim Franklin
In attendance:
Alwen Lyons
Chris Aujard
Chris Day
David Mason
Malcolm Zack
Gavin Lambert
POLARC
14/31
POLARC
14/32
POLARC
14/33
(a)
(b)
(a)
(b)
(c)
on 21 October 2014 by conference call.
Chairman of Committee
Senior Independent Director
Non-Executive Director
Company Secretary
General Counsel (GC)
CFO
Head of Risk Governance
Head of Internal Audit
Chief of Staff
INTRODUCTION
A quorum being present, the Chairman of the Committee opened the
meeting and welcomed all those present.
MINUTES OF THE LAST MEETINGS AND MATTERS ARISING
The Committee approved the minutes of the meetings held on 15 May
2014 and 16 September 2014 for signature by the Chairman of the
Committee.
The Committee noted the actions list dated 17 October 2014.
RISK APPETITE STATEMENTS
The GC introduced the risk appetite statement and explained that the
Business intended to have the necessary systems in place before the end
of the financial year to enable it to comply with the UK Code of Corporate
Governance as it applies to risk management and report this in next
year’s Report & Accounts. The enterprise wide risk management system
incorporating the risk appetite would be used to understand and highlight
risks as the Business moved in business transformation.
The GC noted the importance of providing metrics and tolerance ranges
for each element of the risk appetite statement as a practical guide for the
Business, and recognising that the statement provided was only the first
draft, asked the committee members for their input.
The ARC was encouraged by the developing risk management
framework, but still had concerns about the time taken to get all the
components established in Post Office.
Page 1 of 4
POL-0023614
POL00026973
POL00026973
Strictly Confidential
(d) Specifically around the risk appetite statement the business was asked to:
1. Focus on more actionable statements with clear
metrics behind each element.
2. Ensure the overall framework was established before
populating each individual dimension
Reconsider the ratings used as ‘Receptive’ was
considered too neutral for the 4” rating, and ‘cautious’ and
‘minimal’ were too similar to enable clear differentiation .
(e) The Committee members considered the risk categories in the statement
and suggested ‘customer’, ‘commercial partners’ and ‘change’ could also
warrant consideration as separate categories. They proposed that the
high level general statement of appetite needed to be supplemented by
more detail.
(f) The Committee gave the following specific feedback for each area:
Markets: They suggested that ‘markets’ should be differentiated to show
more detail for the different markets in which the Business operates as
well as any proposed new markets. The Business should be keen to take
‘on risk in the markets in which it is established (either ‘receptive’ or
‘hungry’) but it should be much more cautious when entering new
markets. They agreed that the Business should focus on their existing
markets rather than committing investment to diversify. Lower profits
would be acceptable to maintain revenue in mature markets, but not to the
extent that this would be loss-making. The Committee understood why the
Business would be neutral about Government contracts, given the recent
history, but still felt enthusiastic about this market if conditions were right.
Financial: The Committee agreed that the sub categories were too narrow
and that the Business should consider wider financial risk. It suggested
highlighting appetite for asset/liability management; cost reduction;
efficiency; and anything which might drive profitability through financial
constraints or measures. It was thought that this was an area where the
Business could be much more specific. All three members were ‘hungry’
to be free of subsidies.
Legal/regulatory: There was general support for this area although
simpler language would be helpful when describing high profile matters.
People: The Committee recommended inverting the statements. For
example ‘hungry’ for getting the right people with the right skills. They also
asked the Business to consider including a specific reference to unions
within the people section of the risk appetite.
Technology: There was general support for this area but the Committee
though that as a business incorporating financial services, the risk
appetite for any data inaccuracies should be ‘averse’.
Operations: no comments.
Stakeholder: Impressed by statement around the potential to ‘lose
engagement of a key stakeholder’ and considered this one of the best
statements in the paper.
Page 2 of 4
POL-0023614
ACTION:
DM/GC
ACTION:
Gc
POLARC
14134
ACTION:
GC
(h)
(i)
()
(b)
(c)
(a)
(e)
(f)
POL00026973
POL00026973
Strictly Confidential
Corporate affairs: they acknowledged the importance of this dimension
over the coming months and had no concerns with the wording.
The Committee agreed that the draft appetite statement was a good
starting point and directionally correct. The Chairman suggested that the
Business take the specific feedback from the Committee, but to focus on
a detailed redraft of the Market dimension for presentation at the
November ARC meeting.
The Committee agreed to bring the risk appetite statement to the January
Post Office Board Meeting.
The GC reminded the Committee that PwC were undertaking a review of
the risk framework and business change management capability. Their
report would be tabled at the Business’ Risk and Compliance Committee
in November. The change management assurance would be incorporated
into the Business Transformation work for the November Board.
GC also reported that the Business would review its top risks again in
January.
INTERNAL AUDIT UPDATE
The Committee received an update on the Post Office Internal Audit
activity and key outcomes from June to September 2014.
Malcolm Zack reported that there were no major issues with the
implementation of the new finance system which went live in September.
The remaining written assurance report on IT General Controls would be
provided at the final programme board. He stated that the programme
aimed to formally close down in the next week, although internal audit
would continue to monitor.
Malcolm Zack reported that the audit of Benefits Realisation had found no
serious issues, but had highlighted a number of process points
specifically around tracking financial and non-financial benefits through to
conducting PIRs. The CFO agreed that the report raised valid concerns
around the culture of the business and accountability. He assured the
committee that the Business was working to tag benefits to programmes
and ensuring the right people were accountable
Malcolm Zack reported on the audit of the Business Continuity planning
and noted that the overall plan was not yet complete. He explained that
work was on-going and needed the business continuity manager to brief
the ExCo and SLT, so that they were aware of the key steps to take in an
emergency. The business aimed to address this by the end of the
calendar year. The GC would bring an updated on the major
incident/disaster recovery timetable to the ARC in January. It was agreed
that the ARC would continue to monitor.
The Committee noted the outcomes of the recent audits and reviews and
the current and upcoming work.
The Committee noted the amended Internal Audit 2014/15 plan.
Page 3 of 4
POL-0023614
ACTION:
MZ
ACTION:
GC
POLARC
14/35
POLARC
14/36
(9)
(h)
(i)
(k)
POL00026973
POL00026973
Strictly Confidential
The Committee noted the status of audit recommendations and actions
and requested that where actions were rebased that the new timeline be
included to show a more accurate RAG status.
The Committee asked if internal audit were considering a value for money
audit of Network Transformation. Malcolm Zack stated that this was not
currently in the plan. The CFO assured the Committee that he was in on-
going discussion with the NAO to ascertain if they were likely to audit BiS,
which they are not, and how the Business could best evidence value for
money.
The Committee was given assurance that the Internal Audit resource with
the addition of PwC support was adequate providing the financial level of
PwC support was maintained as per the co-source arrangement.
David Mason and Malcolm Zack left the meeting.
The GC explained that Malcolm Zack had handed in his notice and would
be leaving the Business on the 31° December. It was agreed that the
possible interim replacement be invited to attend the next ARC. It was
agreed that when a new candidate is identified that they would meet the
Chairman of the ARC as part of the interview process.
DATE OF NEXT MEETING
The date of the next meeting is 10 November 2014.
CLOSE
There being no further business, the meeting was declared closed.
Page 4 of 4
POL-0023614
Strictly Confidential
POL00026973
POL00026973
POST OFFICE LIMITED
AUDIT, RISK AND COMPLIANCE COMMITTEE
STATUS REPORT AS AT 4 November 2014
No. I REFERENCE ACTION BY WHOM STATUS
Al 15" May 2014 Provide an update on the forensic audit on the Homephone revenue I CFO Update due in January
POLARC 14/21(d) I data, completed with Fujitsu
A2 15” May 2014 Provide a short summary of the July Board explaining the proposed I Chris Aujard Update to follow
POLARC 14/22(f) management actions following the data centre procurement.
AB I 15" May 2014 The Business was asked to consider identifying a ‘response team’ to I Chris Aujard Update to follow
POLARC 14/23(e) I deal with crisis management (in the event of another Sparrow)
Aa I 18" May 2014 Provide an update on the Video Mystery Shopping for Life Insurance Nick Kennett Update attached.
POLARC 14/25(d)
AS 21 October 2014 Focus on a detailed redraft of the Market dimension for presentation at I Dave November ARC
POLARC 14/33(g) I the November ARC meeting. Mason/General
Counsel
AG I 21 October 2014 Bring the risk appetite statement to the January Post Office Board I General Counsel January Board
POLARC 14/33(h) I Meeting.
AT 21 October 2014 The GC to bring an update on the major incident/disaster recovery I General Counsel January
POLARC 14/34(d) I timetable to the ARC in January.
A8 I 21 October 2014 Where actions are rebased in the IA status of agreed actions report the I Malcolm Zack Incorporated into the status of
POLARC 14/34(g) I new timeline should be included to show a more accurate RAG status. agreed actions,
ARC Status Report 4 November 2014 Alwen Lyons Page 1 of 1
POL-0023614
POL00026973
POL00026973
2. Minutes of the last meeting and matters arising
Strictly Confidential
POST OFFICE LTD AUDIT & RISK COMMITTEE
Video Mystery Shopping
1. Purpose
The purpose of this paper is to:
1.1
Complete the ARC action from 15" May 2014 and provide an update on the
performance of Video Mystery Shopping (VMS) for Life Insurance.
2. Background
21
2.2
2.3
2.2
2.4
In 2013 we implemented VMS as a core business tool to demonstrate our ability
to deliver on customer outcomes and sales process.
Following the introduction of VMS and it was evident that we were not completely
our sales process compliantly, as was demonstrated through the volume of red
VMS. Red mystery shops represented circa 50-80% of all VMS.
In Q1 2014 an action plan was implemented by Post Office Financial Services to
improve Video Mystery Shopping results.
A target of achieving 24% of Video Mystery Shops graded red with a tolerance
up to 34% as long as performance demonstrated significant month on month
improvements. Results need to be achieved by 30" September 2014.
Targets were set across Savings, Credit Cards and Term Life products.
3 Current Situation
3.1 We have now assessed performance against these targets, with the following
results:
. Savings target has been achieved, result is 23%
SAVINGS - LAST 40 SHOPS
Red I Amber I Green I Total Red Amber I Green
Aug 2 3 9 14 I Aug 14% 21% 64%
Sept 7 9 10 26 I Sept) 27% 35% 38%
Total I 9 12 19 40 23% 30% 48%
. Credit Cards target has been achieved, result is 10%
CREDIT CARDS.
Red I Amber I Green I Total Red Amber I Green
Oct 3 11 16 30 I Oct) 10% 37% 53%
Total I 3 1 16 30 10% 37% 53%
Video Mystery Shop results Jeremy Law Page 1 of 3
03/11/2014
114 of 137
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
2. Minutes of the last meeting and matters arising
Strictly Confidential
. Term Life target has not been achieved, result is 42%
Red I Amber I Green I Total Red I Amber I Green
June 11 3 7 21 I June I 52% I 14% I 33%
July 6 ) 11 17 I July I 35% I 0% I 65%
Aug 1 1 1 3 I Aug 33% I 33% I 33%
Sept 3 1 5 Q I Sept I 33% I 11% I 56%
Total 21 5 24 50 42% I 10% I 48%
3.1 We have therefore demonstrated a significant improvement in VMS performance
and met targets for both Savings and Credit Cards. For Life Insurance we have
demonstrated a significant improvement albeit we have not achieved the target.
4 Proposal/Next Steps
41 Given that we have not achieved the targets with respect of Life VMS we are
taking a number of further actions.
4.2 We are re-training and re-accreditation a number of Specialists in the following
area:
. Specialists with red VMS results for Term Life in the last 2 quarters,
unless they had a subsequent green/amber Term Life result;
. Specialists with no life sales in the quarter July - September.
4.3 In addition to this we will be re-training all Financial Services Area Managers and
re-training/re-accrediting any further Specialists who receive a red VMS for Life
from October.
5 Commercial Impact/Costs
5.1 Potential loss of sales may impact the overall growth and income strategy.
5.2 Costs will be incurred for the re-training and reaccreditation program.
6 Key Risks/Mitigation
6.1 If further improvements are not made to the VMS performance for term life Bol
may ask us to withdraw the accreditation/licences for all Specialists. This risk will
be mitigated by the training and accreditation program and further validation
through VMS.
7 Conclusion
71 Video Mystery Shopping is a fundamental key performance indicator of the
Specialists and Supervisors competence and therefore will continue to be a
focus of our attention. Further goals have been set to help us achieve the final
target of an overall result of 24% of shops graded red by 31° December 2014.
8 Recommendations
Video Mystery Shop results Jeremy Law Page 2 of 3
03/11/2014
ARC Meeting-10/11/14
115 of 137
POL-0023614
The Board/ExCo is asked to:
POL00026973
POL00026973
Strictly Confidential
8.41 Note the update and actions set out above.
Video Mystery Shop results
03/11/2014
Jeremy Law
Head of Sales — Financial Services
3 November 2014
Jeremy Law Page 3 of 3
POL-0023614
POST OFFICE LIMITED AUDIT, RISK & COMPLIANCE COMMITTEE
RISK SESSION (Risk Appetite)
Purpose
The purpose of this paper is to invite the Audit & Risk Committee (ARC) to consider,
and approve for inclusion in the Company's inaugural risk appetite statement (as and
when it is formally approved), the following:
e A modified risk appetite rating based on a 4 points scale, not a 5 point scale;
and
e An updated, more granular, narrative relating to market’ risk appetite
statement.
Background
The committee will recall that at its meeting on 21% October a detailed discussion on
risk appetite took place during which the committee provided feedback on both the risk
appetite model and the detail of the content under each of the risk headings. The ARC
requested, amongst other things, that the ExCo further develop the ‘market’ risk
statement and table this for review at the meeting of the ARC on 10" November.
By way of context it might be helpful to recall that this discussion at the ARC was the
outcome of a process of development beginning in August 2014 when ExCo received
a presentation setting out the purpose of defining risk appetite and outlining a high
level plan for the development of a risk appetite statement. Working with the risk
function ExCo developed a first draft set of risk appetite statements, covering a
number of dimensions of risk which was presented for discussion to the ARC last
month.
Development
The feedback from ARC relating to market risk and the rating scale was considered
last week by the Commercial Committee, the sub-group of the ExCo responsible for
managing the revenue and associated risks of the business. After a detailed
discussion, the Commercial Committee agreed that the five point scale set out in the
original paper could be improved. The risk function have reviewed common practice
across a range of organisations and provided specialist input to the Commercial
Committee with the result that the scale has been recalibrated as a four point scale
with a stronger focus on recognised risk terminology. This revised scale is set out in
some detail at appendix A.
With respect to the content of those aspects of the risk appetite that relate to market
tisk, the direction given by ARC was to provide specific statements for each product
pillar, alongside more generic statements about pricing and diversification of the
business. This feedback was also considered by the Commercial Committee and
revised wording agreed, which have been incorporated into the revised statements,
also set out at Appendix A.
Recommendation
The ARC is invited to agree the revised risk appetite rating score and the updated risk
appetite statements pertaining to ‘market’ risk.
POL00026973
POL00026973
POL-0023614
POL00026973
POL00026973
5. Next steps
The risk function is working with the ExCo to finalise all the risk statements on the
basis of the feedback provided by ARC and is liaising with CoSec to bring the
updated statements through the appropriate committees in a timely manner.
David Mason
Head of Risk Governance
POL-0023614
PL/LL/OL-Buneew ON
ZEL IO BLL
Draft Risk Appetite Statements:
POL00026973
POL00026973
neddy sry “€
2
a
g
3
S
a
1
=
a
a
Category of Risk Risk Appetite Statement Potential Proposed
metrics/indicators Owner
Market POL has: Martin
Exposure to market I « Risk tolerant attitude to pricing to drive revenue growth, but not to the point at Market share data George
changes, competitor I which it becomes non profitable © Nick
activity, reputational Kennett
Ss id in dati Kevil
or brand damage © Risk seeking attitude in the mails market where we will take on competitors in pread/margin data ° Gilitand
markets and accept reduced margin to defend market share
Competitive price position
© Risk neutral attitude in government services and telephony market where we will
price competitively to retain market share
Proportion of investment
© Risk seeking attitude in financial services cases rejected/approved
© Risk averse attitude when it comes to diversifying Post Office’s product portfolio or
for business initiatives that may have adverse reputational or brand impact.
Risk Appetite Risk seeking Risk tolerant Risk neutral Risk averse
Approach
Risk taking vs. Post Office actively encourages Post Office is willing to take Post Office takes a balanced Post Office actively discourages
reward risk taking greater than normal risks approach to risk taking risk taking
Objective/negative I Willing to accept a significant Willing to accept some negative _I Potential negative impact and Not willing to accept any
impact negative impact in order to impact in order to pursue objective given equal negative impact
relationship pursue objective objective considerations
POL-0023614
POL00026973
POL00026973
Confidential
POST OFFICE LTD AUDIT, RISK AND COMPLIANCE COMMITTEE
Annual Self Assessment and Terms of reference review — Noting paper
1. Purpose
The purpose of this paper is to:
11 Establish the committee’s annual self assessment of its performance
1.2 Commence the annual review and approval of the committee’s terms of
reference and the annual review and approval of the Internal Audit Charter.
2. Annual Requirement
2.1 Section 2.4 of the terms of reference states that the committee;
« Review and update its terms of reference annually.
* Conduct a self-assessment of the performance of its duties and
responsibilities annually, and to discuss the results with the Board of
Directors.
2.2 Internal Audit aligns its activities with the International Professional Practices
Framework of the Global Institute of Internal Auditors.
e One of the requirements is that the function should have a charter that
outlines its responsibilities and mode of operation and that this should be
annually reviewed and approved by the organisation's audit committee.
2.3. The terms of reference and internal audit charter will be circulated to
committee members incorporating proposed changes and comments from
management, E&Y and those arising from the recent risk review conducted by
PwC. These will be circulated during November.
2.4 The self assessment questionnaire will follow a similar format to the one used
in 2013. This will be despatched shortly after the November 10th committee
meeting.
2.5 The results of the self-assessment and the feedback on the terms of
reference and the Internal Audit Charter will be formally be considered at the
next ARC meeting in 2015.
3. Action Requested
3.1 The committee is asked to note the above requirements and to complete the
assessments and reviews accordingly.
Malcolm Zack
Head of Internal Audit
November 10" 2014
Annual Self Assessment/Review Malcolm Zack November 2014
POL-0023614
POL00026973
POL00026973
Confidential
POST OFFICE LTD AUDIT, RISK AND COMPLIANCE COMMITTEE
Internal Audit — Status of Agreed Actions — Noting Paper
1. Purpose
The purpose of this paper is to:
1.1
1.2
Update the committee on the status of agreed actions arising from formal audit
and advisory activity
The committee is requested to note and provide directions as necessary.
2. Process and Summary
21
2.2
2.3
As outlined in previous ARC papers, the actions arising from IA activity are
tracked and reported. The report highlights period movements since the last
ARC (or since July 2014, since the previous Board), analyses overdue items and
highlights any high risk items for attention.
The original agreed target dates are set by management. These are retained in
the log even though it may be agreed between management and internal audit to
subsequently re-set the target date. It is important for the business to remain
aware that risks identified from audit work have yet to be addressed if an action
date is changed.
As requested at the October 21% 2014 ARC, the long standing items that have
been rebased are reported in a separate analysis below
3. Overall position as at 31° October 2014
ARC members are directed to the standard one page report that is now issued bi-
monthly to the board.
3.1 Implementations
Including items brought forward from the transition from Royal Mail at June 30th
2013, the current log holds 197 agreed actions, of which 134 have been
implemented since then. This is POL’s second year under the revised internal
audit tracking approach.
Overall Implementation rate has gradually increased from 54% (February 2014)
to 66% by April 2014 and 75% by end of June. (70% and above deemed
acceptable levels).
A slight decrease was reported at end of August of 73% and 68% as at end of
October 2014. This is due to the timing of new actions agreed with
management, twenty of which are not due as at 31st October and the known
rescheduling of IT actions.
Opinion: - Overall Implementation performance by management is generally satisfactory
expect for known issues within IT, and some minor items in HR. The decline in pace
Recommendations Status Malcolm Zack — Head of Internal Audit Page 1
10" November 2014
POL-0023614
4. Internal Audit papers_
POL00026973
POL00026973
Confidential
should reverse in the New Year as recent new items are implemented but this needs to
be monitored.
Implementations since July 2013
200
180
180
140
120
‘Number implemented 100
~
60
40
2
2 Red rated Amber Rated Green rated Total to date
[Bimpiemenied 24 co 6 134
in log Eq ior et 197
am 3% om TA Eo
Rating of action at time of auait
40
35
30
25
20
15
10
5
0
y-Aog 13
Reported Implementations - total per reporting period
=Total
Red
Amber
Green
—Trend (mth mov
avg)
Sepl.oet 13” Nov 13-Feb 14
Mar-Apri4 May-June 14 uly-Augt4 Sept-Oct 14
Month implemented
3.2 Activity through the period from September through to October 2014:
* 37 Actions were brought forward from 31° August 2014,
« 25 agreed actions were added to the log through a mix of audit and advisory
work that took place in that period.
* 8 actions were implemented by management or agreed as closed which brings
the total to 134 risk and control improvements since the transition in June 2013.
Recommendations Status Malcolm Zack — Head of Internal Audit Page 2
122 of 137
10" November 2014
ARC Meeting-10/11/14
POL-0023614
POL00026973
POL00026973
4. Internal Audit papers_
Confidential
3.3 Items awaiting implementation.
Status as at October 31st_2014
Total Red Amber Green
Total actions outstanding bfwd as at 31st August 2014 37 9 17 1
Implemented by Mgt - Sept- October 2014 (8) (1) (1) (6)
Actions added (audits and advisory) 25 3 13 9
Superceeded/amended 3 1 2
Carried Forward as at October 31st [ 57 whi 30 16)
Analysis of Carried forward
Overdue - yet to start 0
Overdue - Work in progress 37 9 18 10
Not yet due 20 2 12 6
[ 57 11 30 16
3.3 Analysis of items carried forward as at 31° October 2014.
« Of the 57 items carried forward, 37 are overdue from original target dates but are
in progress. 20 of these are in IT and are outlined in a further section below. 20
items are not yet due having target dates after October 31°. The overdue items
reported as end of each of the last 3 reports have been steady at 37-38 which
reflects the IT issue. Other areas of the business have generally addressed
actions within target or shortly after target date.
Audit Actions - Overdues - Trending by month
« aa
7 —
[_ ee —
40 as
Green
30
Trend (3mth mov
20 avg)
10 re A ———s
t)
Aug-13 Oct13. Dec 13.— Feb-1d.—Apr-t4 Jun-14Aug-14 Oct-14
Recommendations Status Malcolm Zack — Head of Internal Audit Page 3
10" November 2014
ARC Meeting-10/11/14 123 of 137
POL-0023614
4. Internal Audit papers_
Confidential
POL00026973
POL00026973
4. Review of recent implementations and key outstanding items
41
Area
Benefits Realisation (4)
Actions implemented
Changes to the Investment
Business Case template to
in show the phasing of expected
benefits to be clear.
Audit report
October 2014.
Most actions not yet due,
but 4 addressed during
October by management.
issued
Tolerance added for benefits
to trigger revision of business
cases in the guidance on
completing the business case
template
Scheduled review of
investment business case
template.
PIR Date agreement added to
gating processes for Finance
purposes.
HR SAP -
processes (3)
supporting HR processes compliant with
Data Protection requirements.
New forms on My HR site to
capture information. These
were significantly overdue
from late but not of high risk.
Business Continuity Supplier and colleague
Planning (1) (Report issued information added to Finance
The 8 actions implemented in the period are summarised below.
Risks addressed/Benefits
Reporting and clarity of
proposed benefits to aid
approval/non approval of
business case.
Keep the business case
updated to reflect changes as
project progresses.
Enables revised benefits to be
considered or where
necessary to reassess the
case for continued
investment.
Keep model up to date to
reflect business changes.
Help ensure that PIRs are
scheduled in at an appropriate
date and undertaken
Compliance risks for
information gathering.
Ability to contact key staff or
third parties quickly as
in September 2014) BCP. This was addressed possible after invocation of
shortly after raised in the plans resulting from a major
audit. incident.
42 Significantly overdue items
As reported in the March and May 2014 ARCs and in Board updates, a number of items
that were outstanding were within IT. IT rebased a number of these with agreement of
Internal Audit to reflect changing requirements and timelines of the SISD/Tower model.
« At the October 21% ARC, the committee requested an analysis of the rebased IT audit
actions so that the current targets and pace could be assessed.
Internal Audit will
continue to monitor progress and will provide regular updates to the ARC members
Appendix 1 tabulates the status.
Recommendations Status
10" November 2014
ARC Meeting-10/11/14
Malcolm Zack — Head of Internal Audit
Page 4
POL-0023614
POL00026973
POL00026973
4. Internal Audit papers_
5
Confidential
« The IT Governance and Controls manager, who was appointed in January 2014, left the
business in the summer and the role was not replaced. The ownership of the
coordination of eventually passed to a more senior member of the ClO team (Roger
Middleton) who monitors progress on behalf of the ClO.
« Remaining items were originally agreed in 2013 from the software licence and Identity
Access Management audits but were partly dependent on the implementation of the
towers. At that time the ClO anticipated the tower deployment to be much earlier than is
now the case.
e The target dates for tower deployment have continued to change and the impact of the
Business Transformation Programme is currently unknown. Therefore a number of the
actions have been rebased more than once.
« Some items however are within the IT team’s more direct remit and are significantly
overdue and past their revised dates. We have noticed that changes in ownership for
some of these items which have contributed to the delay. As at 30" of October, Internal
Audit was notified that ownership of the EUC tower related actions had been passed to
Roger Middleton.
Summary of overdue IT actions status
Risk rating at time I Past original date I Past revised I Note
of audit. target date
Red 8 5 2 items have a second
revised date, 2 items
waiting revised target date.
Amber 1 4 1 item has a_ second
revised date, 3 items
awaiting revised dates.
Total 19 8
Opinion.
« Whilst the towers procurement have been the main cause of rebase of target
dates, the slow progress on some other items within more direct IT control needs
focus.
«Internal Audit has reiterated that progress in these areas needs firmer ownership
and oversight by the senior ClO team.
* It is recommended that the CIO is invited to the ARC before the end of the
financial year to provide a further update.
Action for ARC members
« The committee is requested to note the status and to provide direction as necessary.
Malcolm Zack
Head of Internal Audit
10th November 2014
Appendix — Table of IT outstanding agreed actions. (P 6-15)
Recommendations Status Malcolm Zack — Head of Internal Audit Page 5
10" November 2014
ARC Meeting-10/11/14
125 of 137
POL-0023614
21 30 921
PL/LL/oL-Bunsew ONY
APPENDIX 1
IT - Outstanding Actions - Summary.
Confidential
POL00026973
POL00026973
The table highlights the issues and actions that management are undertaking as part of the response. A comments and history column is provided for
context. The original and current target dates are shown. Red if date passed, Green if yet to pass.
D
>
z
ES
5
8
@
Issues and Agreed Action
Risk
Rating
Revised
Date (s)
Action
added to log
Owner Original
Date
Comments and history
Identity Access Management on the Local
Area Network. - Issued and cleared October 2013
1. Management does not have an overall view of all
users’ access rights across the network. Therefore
risks remain over inappropriate access, access
higher than needed, potential conflicts and
segregation of duties issues.
Management Response and Action
The risk of having no overview of all users' access
rights is accepted by the management for the current
transition period, until IT & Change will adopt the
Future Operating model (tower based).
After the SISD and EUC tower is established, a
feasibility study will be conducted into an appropriate
solution; an appropriate decision will be made.
RED
Recommendations Status
Dave 30/10/2013 31-Jul-14 I 31-Dec-14
Hulbert/
SISD
(Atos)/
EUC tower
Roger
Middleton
(from
November
2014)
Malcolm Zack — Head of Internal Audit
10" November 2014
May 2014 — Requirements fed into EUC
contract but action for completion could
not be confirmed until the bidder was
awarded and on board and contract
signed. EUC contract expected
completion by August.
The overall governance of the [AM
process and the definition of the roles
and responsibilities between PO, Atos
and EUC/application tower, is dependent
also on towers implementation.
June 2014 - EUC Contract is expected
to be awarded mid September 2014.
Date for action cannot be confirmed until
Supplier has been awarded contract. So
reforecast to 31% December 2014.
August — no further progress
October - Action reassigned to R
Middleton.
Page 1
POL-0023614
PL/LL/OL-BuneeW ON
2130 LZL
POL00026973
POL00026973
FS
g
Confidential a
>
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history g
Rating added to log I Date Date (s) $s
!
2. The wide use of Executive PAs sharing User IDs AMBER I Dave 30/10/2013 31-Jul-14 I 31-Dec-14 May 2014 -update
and passwords is counter to POL company Hulbert Fed into EUC bid requirements but
information security policy, and accepted practice cannot be actioned until contract signed.
Transferred
PAs to senior / executive management are aware of toR The governance of the IAM process and
their managers’ passwords (e.g. MS passwords, Middleton — the definition of the roles and
Orbit passwords) and in certain situations they use it Nov 2014 responsibilities between PO, Atos and
to perform activities on the request of the manager. EUC/application tower, is dependent
The ‘back-up’ PA knows the passwords for all the also on towers implementation. As the
PAs whom she is replacing. Sharing passwords is in EUC tower is still to be awarded
breach with the Information Security policies. (expected date August), Action
retargeted for December 2014
Management Comment and Action
June 2014 update
Due to increased cost associated with creating new EUC Contract is expected to be awarded
accounts with CSC and the move to a EUC tower in mid September 2014. Date for action
the coming year the risk (PAs using SM accounts cannot be confirmed until Supplier has
and passwords) is accepted by management for the been awarded contract.
moment, until the new IT Operating model is
effective. 1A Update as at 31/08/14.
No progress since last updates
Once the EUC tower is in place, unique PA’s 24/06/14. However as noted, activity for
accounts with same access rights as for mangers; this action will commence after the EUC
where required, can be created and these options will Contract has been awarded.
be evaluated for the new Ops model and future [AM
process. Additionally it will be evaluated if the
activities of these accounts can be logged and
monitored.
3. Remote access to POL intranet is granted, toend I AWSER I Julie 30/10/2013 30-Apr-14 I TBA Original April target not met.
users, via a VPN Client connection using the George
Microsoft account and password (same as used for JA Follow up in June 2014 indicated it
logging on to the PC). had not been discussed within IT. IT
Governance manager was to follow up
No additional security (code or RSA token) credential but left the company.
is used for remote logging on. This would normally
be used to reduce the risk of unauthorised access August - no progress. Issue sent to J
from a remote location. George on September 5” R Middleton
Recommendations Status Malcolm Zack — Head of Internal Audit Page 2
10" November 2014
POL-0023614
21 30 8ZL
PL/LL/OL-BuneeW ON
Confidential
POL00026973
POL00026973
Issues and Agreed Action
Management Response and Action
Management (C/O) have accepted the risk, of limited
remote access security, taking in consideration the IT
changes on going at the present time. (October
2013)
ISAG will perform a risks-cost-benefits analysis,
based on industry remote access trends. Based on
the analysis, appropriate actions will be discussed
and agreed.
4. POL does not currently have its own fully defined
and approved process for managing access to the
local area network. It uses the Royal Mail (RM)
processes.
POL does not possess an end to end overview of the
IAM process steps, roles and responsibilities of the
different parts involved in the process (e.g. POL HR,
line managers, CSC). Due to the Separation and IT
Transformation POL needs to have its own defined
policies and processes. Therefore the Information
Security team defined an IAM policy which provides
overall guidelines on identity and access
management. An IAM process is expected to be
defined once the SISD and EUC tower are in place in
2014.
Management Response and action
The governance of the IAM process will be defined
for the Future Operating Model, and it will include
clear roles and responsibilities for the SISD, towers
(e.g. EUC) and POL.
Risk
Rating
AMBER
Owner
Dave
Hulbert
R Middleton
Nov 2014
Action
added to log
30/10/2013
Original
Date
30-Apr-14
Revised
Date (s)
31-Dec-14
Comments and history
‘suaded yipny jewequy “py
chasing.
Same as items 1 and 2
Recommendations Status
Malcolm Zack — Head of Internal Audit
10" November 2014
Page 3
POL-0023614
PL/LL/OL-BuneeW ON
21 30 6ZL
POL00026973
POL00026973
FS
g
Confidential a
>
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history 8B
Rating added to log I Date Date (s) $s
!
5. Governance over the process for IAM for the SISD I AWSER I Dave 30/10/2013 30-Jun-14 I 31-Dec-14 May - IT Governance manager
and each tower is needed. Hulbert suggested that the target date be moved
to 31" December because the EUC
POL needs to deploy the IAM process governance tower was to be awarded by August
and control to get adequate assurance that the [IAM 2014
risks are managed across all levels of the SISD and
the towers. The governance of the IAM process and
the definition of the roles and
responsibilities between PO, Atos and
EUC/application tower, is dependent
also on towers implementation.
June. Management requested that the
original recommendation be split into 4,
one for each tower to aid tracking. This
recommendation was split into 4; one
for each of the Towers to allow for
relevant tracking of progress
according to anticipated Contract
Award dates for each Tower.
6. POL needs to deploy the IAM process AMBER I Dave 30/10/2013 30-Jun-14 I 31 Dec 2014 I June:
governance and control to get adequate assurance Hulbert EUC Contract is expected to be awarded
that the IAM risks are managed across the EUC mid to late September 2014.
tower. R Middleton
October update
EUC Contract Award date has been
pushed to end of October 2014.
7. POL needs to deploy the IAM process AMBER I Dave 30/10/2013 30-Jun-14 I 31 Dec 2014 I IA Update 24/06/14.
governance and control to get adequate assurance Hulbert Networks Contract is expected to be
that the IAM risks are managed across the Networks awarded by end November 2014.
tower. R Middleton
Recommendations Status Malcolm Zack — Head of Internal Audit Page 4
10" November 2014
POL-0023614
21 30081
PL/LL/OL-BuneeW ON
POL00026973
POL00026973
FS
Confidential a
>
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history 8B
Rating added to log I Date Date (s) $s
- !
8. POL needs to deploy the IAM process AMBER I Dave 30/10/2013 30-Jun-14 I 31/12/2014 June —
governance and control to get adequate assurance Hulbert 31/01/2015 Back Office Contract is expected to be
that the IAM risks are managed across the Back awarded by mid January 2015.so target
Office tower. R Middleton date changed from December 2014 to
Jan 2015
9. POL needs to deploy the IAM process governance I AVIBER I Dave 30/10/2013 30-Jun-14 I 31/12/2014 June -
and control to get adequate assurance that the IAM Hulbert Front Office Contract is expected to be
risks are managed across the Front Office tower. 31/03/2015 awarded by mid March 2015.So target
RM date moved from December 31" to
March 31° 2015.
10. Controls will be implemented to ensure that new RED Dave 30/10/2013 30-Apr-14 I 31-Dec-14 As action number 1.
accounts are granted access based on job Hulbert
description access requirements and appropriate RM
authorisation.
11. A review of access rights granted and amended RED Dave 30/10/2013 30-Jun-14 I 30/09/2014 August
needs to be implemented. Hulbert Ownership residing with Stephen Hayes.
The access rights review control will be deployed by Service design to confirm tools for the
Service and Support function. The access rights job for individuals or various user
review shall be performed by information owners, or communities. The process should
line managers. include tools for the job and also cover
ad hoc requests that are not included in
the standard tools requirement.
Policy to also be defined.
Revised Completion Date suggested as
30/09/2014
Still not completed as at 31° October
2014.
Recommendations Status Malcolm Zack — Head of Internal Audit Page 5
10" November 2014
POL-0023614
PL/LL/OL-BuneeW ON
2€1 30 LEL
POL00026973
POL00026973
FS
g
Confidential a
>
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history 8B
Rating added to log I Date Date (s) $s
12. The Service and Support team (Dave Hulbert’s RED Dave 30/10/2013 I 28-Feb-14 I 31-Dec-14 May
area) will make sure that a mover's access review Hulbert HR and IT Services began work on
control is part of the ‘to be’ IAM defined and providing/obtaining information regarding
implemented process. Staff who have moved roles
Date revised top 31" December to
reflect EUC tower datelines.
August
Action reassigned to Andy Holt in IT.
HR yet to have the process for movers
and leavers developed. Andy to work
with service design to get this process
developed.
13. Longer term action: RED Dave 30/10/2013 30-Jun-14 I 31/03/2015 August 2014
POL IAM process owner will perform a monitoring Hulbert
control (e.g. compare the HR leavers list with the New nominated owner to be lan
EUC disabled accounts list) to ensure accounts have Thomas.
been disabled timely and to eventually spot the ones Revised Completion Date suggested as
who have been missed. 31/03/2015
Recommendations Status Malcolm Zack — Head of Internal Audit Page 6
10" November 2014
POL-0023614
2€1 30ZEL
PL/LL/OL-BuneeW ON
POL00026973
POL00026973
FS
g
Confidential a
>
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history 8B
Rating added to log I Date Date (s) $s
!
Software licensing audit — Issued and Cleared October 2013
RED Dave 30/10/2013 31-Dec- 28/02/2014 December 2013
14. POL does not have its own software licensing Hulbert 13 Actions are overdue. New amended due
management policy. 31/05/2014 date for 28th February, with ClO
approval.
POL will define a Software Licensing management
policy, which will: May 14
An SLM policy has been drafted by ISAG
- define clear roles and responsibilities for POL, SISD and is now under final internal review by
and towers involved in the SLM. procurement. New amended due date
- identify how POL will get adequate assurance that set for end May
SLM process is managed effectively by SISD and the 1A comment: pending receipt of PO SLM
towers. policy
- Define that the license procurement decision
making process stays with POL. June 14
- define that all purchasers of licenses for POL go A Draft Policy was provided by Brian
through POL procurement. Harrison in ISAG which required input
from ProcuremenvtiT for the
development of supporting standards or
procedure...
August 2014 - Action reassigned to
Antonio Jamasb in Service Design.
Revised Completion Date suggested as
31/05/2015.
October — Still awaiting policy. IA now
liaising with R Middleton.
Recommendations Status Malcolm Zack — Head of Internal Audit Page 7
10" November 2014
POL-0023614
PL/LL/OL-BuneeW ON
2ELJOEEL
Confidential
POL00026973
POL00026973
Issues and Agreed Action
Risk
Rating
Owner
Action
added to log
Original
Date
Revised
Date (s)
Comments and history
15. The SISD will be required to manage software
licenses on behalf of POL. The SISD is expected to
defined the SLM process and discuss it with POL.
RED
Dave
Hulbert
30/10/2013
28-Feb-14
30 June
2014
May 2014
The Atos Ops Manual, Section 6
Service Transition, 6.1 Service Asset
configuration management refers to the
SLM process that Atos will manage
Process has been drafted and signed off
within Atos and is included within the
operations manual. But yet to be
activated.as there was a dependency on
the separation project.
June — Text reviewed did not have all
relevant information included so IA did
not accept closure
August 2014 — further discussions with
Roger Middleton in September 2014.
16. POL will define its assurance and governance
process around the SISD SLM process. Clear key
performance measurements on SLM process needs
to be defined.
RED
Dave
Hulbert
30/10/2013
30-Apr-14
30” June 14
May 2014.
As above in 15.
Recommendations Status
Malcolm Zack — Head of Internal Audit
10" November 2014
Page 8
sieded yipny lewelul “p
POL-0023614
2E1 30 VEL
PL/LL/OL-BuneeW ON
POL00026973
POL00026973
FS
2
s
Confidential 3
4
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history 8
Rating added to log I Date Date (s) 3
!
AMBER I Dave 30/10/2013 30-Apr-14 I 30/06/2014 May.
17. Assurance processes needed to be built in Hulbert
around SLM Action on hold to await Atos to manage
the process which has been reviewed.
As part of POL’s assurance and governance process Assurance needs to wait until after full
around the SISD SLM, POL will need to be informed separation.
and have an overview of the SLM risks and ensure
the adequate controls are in place to mitigate risks. Linked to the Separation programme.
Once POL licences are separated then
Atos will take ownership for
management. The separation team
suggest a due date for this would be
April 2015 due to the time required to
complete and then embed the new
process.
October 2014 No progress.
18 A software licences management tool needs to be I ABER I SISD (Atos) I 30/10/2013 30-Jun-14 I TBC May 2014 - Atos has a SLM tool, but it is
in place and to be kept up to date by all towers (transferred not switched on yet for operational
involved. from Dave management.
Hulbert)
August 2014
No progress.
October 2014 No progress.
Recommendations Status Malcolm Zack — Head of Internal Audit Page 9
10" November 2014
POL-0023614
PL/LL/OL-BuneeW ON
2eLJOSEL
POL00026973
POL00026973
FS
g
Confidential a
4
a
Issues and Agreed Action Risk Owner Action Original I Revised Comments and history 8B
Rating added to log I Date Date (s) $s
- !
AMBER I Alistair 20/12/2013 31-Jan-14 I TBC February 2014. All critical processes
Review the current IT processes and controls Menzies required for 1st April (23 processes)
covered by the IT& Change organisation, and an
assessment of how those activities and processes
will be covered by the new organisation, are carried
out at the moment.
The aim is to give an overview, independent of the
Job Descriptions, of processes, controls and
accountabilities and who is doing what within the new
IT organisation.
Once this first step is achieved a benchmark shall be
done with the defined new JD (and eventually with
Atos contractual requirements which need to be
Satisfied by PO) to identify if there are any gaps.
have been agreed and will be completed
by mid-March. IT Services owners for
these processes will be agreed.
October 2014 — action still outstanding.
Recommendations Status
Malcolm Zack — Head of Internal Audit
10" November 2014
Page 10
POL-0023614
POL00026973
POL00026973
4. Internal Audit papers_
AAU Acton Sat Repo Surmary a8 at Octobe 312016
Status as at October 31st_2014
Ter Rad Anbar Green
‘Total actions outstanding biwd as at 31st August 2014 37 7
Implemented by Mgt ~Sept- October 2074 oo 0% @
‘Actons added (audits and advs0ry) 3 3 38
Superceececlanencee S + 2
‘Caried Forword es at October 31st
‘vals ot Cate oar
Overdue yeti sat °
‘Overcue - Wark npremess v8 6
Nat yet ue a 2 2 6 ew
Crs
Trends
Reported Implementations -total per reporting period Rapa ——
Jasrnan 1 ‘2 “ol
Ista 3 2 ‘
40 fea: 1 s 8
35 rage 3 ch al
PI rn 3 2 4
hn Es soon
25 fee os te ° +4
20
be Jeune ey noo 4
10
7 Inplre:acndown np ait bec newer et
akg OED hn eH Me te aA SOs ‘Tera yet duet inordinate
Month implemented
Tot Red Amber
Audit Actions - Overdues - Trending by month. 4 H 3 3
mB of a 4
rr #
8 8 & “
* *
Es s °
Note IT ‘Th Arcane esi eta ORGINAL rae
dhcose ha buns fl ser ne one fis
Stoneman I Menthedi themed tonto wipe
wr NeW
7 Aebaaing fdas for sme clos de toate dan planed
‘over npleeaon. Seems howe Mery and
PL tee
Sore ‘Sispin roger acho or changes in cure
= ‘he IT Govmnace an Cetlsmanaperpestion vase in
implemen ished Repent psd
mpementatons ance ay 2013
136 of 137
‘rere ofthe CO tenn
Implementation ved te within denis Rsison,
Bars Coy ed ier issn
Implementations achieved (rom June 2013)
Taal
Imgenertes nig
Redrates 3 on
ber ates so ee
even ts Ces
‘ott date or ome
‘leg tal acon arod wh he bine and racks
Ingerenaions ane the nal
‘tanto Rye Mal i hae 2023
‘he ttl inpemeeaton ate ws shove 70% ding the sues,
‘however heist dp below enging are evel de the
ower mplerentzcn ae September ad the aon of
eat acre a recat ses. Anuerr of these however (2)
“enot ye dhe So trphretaon ates rear above
{anger he atethe new ya
ARC Meeting-10/11/14
POL-0023614
Location: _
Post Office Ltd
ARC Meeting
10 November 2014
ATTENDANCE LIST
ATTENDEES
SIGNATURE
Alasdair, Marnoch
Neil, McCausland
Tim, Franklin
Also in attendance
Alwen, Lyons
Alice, Perkins
Aujard, Chris
Chris, Day
Paula, Vennells
Additional access
MacLeod, Jane
POL00026973
POL00026973
POL-0023614