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Post Office Limited
Audit, Risk and Compliance Board Sub-
Committee
Briefing Book
Half Year ended 29 September 2013
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Section
1. Glossary
2. Introduction
3. Accounting Policies
4. Primary Statements
5. Operating profit
6. Revenue
7. Costs and people
8. Quality of earnings
9. Pensions
10. — Exceptional items and provisions
11. Interest, cash, debt, funding and hedging
12. Going Concern
13. Property, plant and equipment and non-current assets held for sale
14. — Goodwill. Investments and intangibles
15. Working Capital
16. Provisions
17. Litigation and claims- potential claims regarding Horizon
18. Taxation
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Page
12
17
18
21
22
24
27
28
29
34
35
37
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1
Glossary review
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Below is a listing of key abbreviations used throughout this document with the full meaning
given:
Abbreviation Meaning
AEI Application Enrolment Identity
ATM Automated teller machine
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
Horizon Horizon Next Generation- Counter system
LTIP Long Term Incentive Programme
NBV Net Book Value
NS&l National Savings & Investments
NSP Network Subsidy Payment
NTP Network Transformation Programme
POCA Post Office Card Account
PFS Personal Finance Services
POFS Post Office Financial Services
POOC Project One Off Costs
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
UKBA United Kingdom Borders Agency
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Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for the half
year ended 29 September 2013. It is a summary of the key data, trends and analyses to be
read in conjunction with the Interim Condensed Consolidated Financial Statements, which
readers may find useful to further their own understanding of the results for half year 2013-
14.
Most of the analyses are 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.
Accounting policies
Post Office Limited has reported its results under International Financial Reporting Standards
(IFRS).
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4. Primary Statements
4.1 Post Office Limited Interim Consolidated Income Statement.
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Post Office Limited Interim consolidated income statement for the six months to 29 September 2013 and 23
September 2012
Half year to 29 Half year to 23
September 2013 September 2012
Unaudited Unaudited
Notes £m &m
Continuing operations
Turnover 483 501
Network Subsidy Payment 81 100 103
Revenue 6 583 604
People costs excluding restructuring costs 72 (434) (128)
Other operating costs 73 (422) (437)
Share of post tax profit from joint ventures and associates 23 22
Operating profit before exceptional items 5 53 61
Operating exceptional items 10.1 132 (10)
= government grant 129 35
- Royal Mail Pension Plan amendment 102 -
- restructuring costs (64) (24)
~ other (35) (21)
Operating profit 185 54
Profit on disposal of property, plant and equipment 101 2 2
Loss on sale of associate — le __0)_
Profit before financing and taxation 187 23
Finance costs 114 (4) (2)
Finance income - 1
Net pensions interest 2 1
Profit before taxation 188 23
Taxation credit 18.1 2 18
Profit for the period from continuing operations 190 4a
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4.2
Post Office Limited Interim Consolidated Cashflow Statement
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Post Office Limited Interim consolidated cashflow statement for the six months to 29 September 2013
29 September
23 September
2013 2012
Unaudited — Unaudited
Notes £m £m
Cash flows from operating activities
Operating profit before exceptional items 53 61
Adjustment for:
Depreciation and amortisation - -
Share of profit from joint ventures and associates (23) (22)
Pension operating costs 13 13
Working capital movements: (6) 131
Decrease/(increase) in trade and other receivables 73 (10)
Decrease)/increase in trade and other payables (81) 143
Decrease/(increase) in inventories 1 (3)
Increase in non-exceptional provisions 1 1
Pension operating costs paid (13) (a3)
Cash receipts in respect of operating exceptional items: 153 178
overnment grant 215 200
Restructuring costs (59) (47)
[ther (3) (5)
Net cash inflow from operating activities 177 348
Income tax recovered 10 11
Cash flows from investing activities
Investment in associate - (a4)
Dividends received from joint ventures and associates - -
Finance income received - -
Proceeds from sale of property, plant and equipment 3 2
Proceeds from disposal of associate - 2
Purchase of non-current assets (38) (20)
Net cash (outflow) from investing activities (35) (27)
Net cash inflow before financing activities 152 332
Cash flows from financing activities
Finance costs paid (a) (2)
Payments to finance lease creditors (2) (2)
Repayment of bank borrowings (291) (250)
Net cash (outflow) from financing activities (294) (254)
Net (decrease)/increase in cash and cash equivalents (142) 78
Effect of exchange rates on cash and cash equivalents - -
Cash and cash equivalents at the beginning of the period 971 820
Cash and cash equivalents at the end of the period 11.2 829 898
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4.3 Post Office Limited Interim Consolidated Balance Sheet
Post Office Limited Interim consolidated balance sheet as at:
29 September 31 March
2013 2013
Unaudited Audited
Notes £m £m
Non-current assets
Intangible assets - -
Property, plant and equipment 131 a1 11
Investments in joint ventures and associates 141 83 60
Retirement benefit surplus 145 97
Trade and other receivables 10 10
Total non-current assets 249 178
Current assets
Inventories 151 7 8
Trade and other receivables 15.2 269 352
Cash and cash equivalents 855 971
Financial assets - derivatives - 1
Total current assets 1,131 1,332
Total assets 1,380 1,510
Current liabilities
Trade and other payables 15.3 (899) (874)
Financial liabilities - interest bearing loans and borrowings 112 - (291)
- obligations under finance leases 112 (1) (3)
Provisions 16 (25) (49)
Total current liabilities (925) (4,187)
Non-current liabilities
Financial liabilities - obligations under finance leases 112 (4) (4)
Other payables (24) (24)
Provisions 16 (5) (7)
Total non- current liabilities (33) (35)
Net assets 422 288
Equity
Share capital - -
Share premium 465 465
Retained earnings (45) (179)
Other Reserves 2 2
Total equity 422 288
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5. Operating profit
541 Operating profit bridge analysis
Va
£m
1
1 :
[ee I EI
(21) (3)
2012 Revenue People Costs Subpostmasters’ Non People 2013
Costs Costs/Other
x
5.2 Explanations for key movements are as follows:
e Revenue - section 6.
e People costs - section 7.2
e Subpostmasters - section 7.3.1
e Non People Costs / Other - section 7.3.2 to section 7.3.11
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6. Revenue
29 September 23 September
2013 2012 Variance
£m £m £m
Turnover 483 501 (18)
Network Subsidy Payment 100 103 (3)
Total Revenue 583 604 (21)
61 Post Office Limited - Revenue analysis
Post Office Limited Revenue Bridge £m
604 (12)
583
2012 Mails & Retail Government Network Subsidy Financial Services Telecoms 2013
Services Payment
The decrease in year on year total revenue of £21m (3.6%) to £583m (2012 £604m) is
driven by the £3m decrease in the Network Subsidy Payment, and a decrease of £18m in
like for like income.
The following commentary gives further detail on the revenue variances by category:
6.1.1 Mails
The £10.2m (6.0%) decrease in Mails Revenue is driven by volume reductions following the
Royal Mail price changes implemented this year and the unusually high comparative prior
year figure due to the buy forward of stamps before the May 2012 price increase.
«Approximately £9.6m was driven by volume decreases, (mainly stamps, labels and
parcels) and the remainder by price increases.
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« The new Mails Distribution Agreement resulted in an on-going reduction of the fixed fee
with a £0.4m impact in the first half of this year.
Mails & Retail Income is analysed in the table below:
2013-14 2012-13 Variance Volume Price
£m £m £m £m £m
Special Delivery 25.2 25.7 (0.4) (0.2) (0.2)
Parcelforce 24/48 53 3.6 17 4.2 (2.5)
Labels 44.6 47.9 (3.3) (5.5) 2.2
Stamps 12.1 17.4 (4.9) (4.7) (0.2)
Royal Mail Parcels 0.0 28 (2.8) (2.8) -
International Priority & Standard 15.5 15.9 (0.3) (1.1) 0.7
Other Parcel Force 3.8 3.6 0.2 01 0.4
Other Royal Mail 18.5 17.8 0.6 0.3 0.3
Total Variable Income 125.0 134.2 (9.2) (9.6) 0.4
Fixed Fee 36.2 36.6 (0.4) : (0.4)
Total Mails 161.3 170.8 (9.6) (9.6) 0.0
Lottery 19.1 19.8 (0.7) (0.7) -
Retail 4.0 5.4 (1.4) (1.4) =
Total Mails & Retail 184.3 196.0 (11.7) (14.7) 0.0
6.1.2 Retail & Lottery
Retail and Lottery revenues have decreased by £2.1m:
« Lottery is £0.7m lower than last year, driven by fewer rollovers.
« Retail is down by £1.4m due to lower sales than last half year as the prior year included
revenue from collectibles from the Olympic and Paralympic games, as well as the
Diamond Jubilee.
6.1.3. Government Services
The £9.2m (11%) decrease in Government Services revenue is principally due to:
« £6.8m lower DVLA revenues due to new contract related lower price and lower volumes.
« £3.6m adverse from falling numbers of POCA accounts, through natural attrition,
migration of customers to bank accounts.
This was offset by
6.1.4 Telecoms
The Telecoms Services pillar includes the Post Office Homephone and Broadband services,
as well as mobile top-up services and phonecards.
Telecoms Services revenue of £65m (2012: £63m) has increased by £2.3m. Income from
the Post Office Homephone and Broadband product rose by £3.5m, primarily due to higher
average revenue per user.
More attractive packages were introduced in May 2012 to attract and retain higher value
customers. Income from mobile top-ups was £1m below prior year, as transaction volumes
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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 around 5%.
6.1.5 Financial Services
Financial Services income has increased by £1.0m year on year. This continues the trend
of increases in new products offsetting the decline of traditional products. Overall PFS
(defined as Post Office savings, insurance, travel, mortgages and transaction services) is up
by £11.0m (23%) year on year. By product the main variances are:
« a £8m increase in savings products mainly Growth Bonds £3.1m, Reward Saver
£2.8m, ISA £2.1m. These increases follow the completion of the ‘Eagle’ deal in
September 2012.
¢ a£1.3m increase in Mortgages as this a new product,
« a £1.1m increase in Insurance revenues driven by the new BOI contract and better
rates,
« a£0.8m increase in MoneyGram driven by higher volumes, and
« a £0.7m increase in ATM revenue, driven by increased volumes as machines reach
maturity.
This was offset by
« a £4.5m decline in NS&l revenues driven by the new contract. Revenue is from
Premium Bonds only as NS&I look to provide most of their products through their own
direct channel,
« a£4.5m net decrease in Banking revenue from:
o a £2.7m decrease in business banking revenues due to rate reduction from
renegotiated contract,
o a £2.2m fall from the DWP exceptions (cash cheques and green giros). This work
has now ceased, offset by
o an increase of £0.5m in personal banking.
« A£1.8m decrease from Payment Services due to:
o a£1.1m decrease in Postal Order income as the product is in decline, and
o a £0.7m 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.
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7. Costs and People
This section discusses expenditure, excluding exceptionals.
7.1 Total Costs Analysis (excluding exceptionals)
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The following provides a breakdown of costs for the half year ending 29 September 2013
compared to the half year ending 23 September 2012
2013-14 2012-13 Variance
£m £m £m
Expenditure - (pre- exceptional) Notes
Wages & Salaries 838 89 1 1%
Overtime 5 (0) (3%)
Productivity/Bonus 11 (4) (51%)
Employers NI 10 (a) (7%)
Pensions 14 13 (y) (9%)
Projects (temp people resource) 1 1 ie) Th
Temporary Resource 2 4 2 45%
PEOPLE COSTS 7.2.1 131 128 (3) (2%)
Subpostmasters’ costs 7.31 220 235 15 7%
Collection, Delivery & Conveyance Charges 7.3.2 0 ie) ie) 100%
Compensation 73.3 1 1 (0) (9%)
Property Facilities 73.4 3 3 (0) (11%)
Property Maintenance 73.5 4 3 (1) (25%)
Vehicles 73.6 1 1 0 12%
Computers & Telephones 73.7 38 36 (2) (5%)
Consultancy, Marketing & Legal Fees 73.8 15 12 (3) (29%)
Staff & Agent Related Costs & Consumables 73.9 ) i) (0) 36%
Finance 7.3.10 12 9 (3) (30%)
Cost of Sales 7.311 57 58 1 2h
Other Operating Costs 7.3.12 9 10 1 5%
Depreciation 7.3.13 0 ie) 0 60%
Interbusiness Expenditure 73.14 40 41 1 3%
Group Overheads 7.3.45 7 7 0 6%
Projects (excluding temp people resource & IB) 7.3.16 13 21 7 36%
Projects Interbusiness 2 0 (2) -
Total Other Operating Costs 73 422 437 15 4h
TOTAL EXPENDITURE (Pre Exceptionals) 553 565 12 2%
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7.2 People Costs (2013 £131m vs 2012 £128m)
7.2.1 People costs (2013 £131m vs 2012 £128m)
People costs have increased in total by £3.3m (2.6%) to £103.9m, representing 23.7% (2012
22.5%) of the cost base.
The number of people employed increased by 87 to 7.999 at 29 Sept 2013 (2012 7,912),
primarily due to the Network Transformation Programme. NTP people costs are included
within exceptional costs. The transfer to exceptional costs is done by a move of the ‘fully
loaded’ staff cost (including NI and pensions) from the wages and salaries line. This
maintains the integrity of pensions and NI for disclosure purposes but means that variances
across the categories need to be viewed in aggregate.
The people cost movement comprises:
e Wages and Salaries have decreased by £1.1m (1.3%), but as noted above, must be viewed
in conjunction with the increase in NI of £0.6m (6.8%) and an element of the pension costs
increase as the movement of Network Transformation staff costs to exceptionals
encapsulates all 3. When viewed in this way, the variance is broadly flat year on year.
e Pension costs have increased by £1.2m (9.1%), driven primarily by the increase in the IAS19
pension rate from 18.2% to 20.6%.
e Productivity costs have increased by £3.6m (51%), and are predominantly due to
productivity costs under accrual of £1.5m in 2012-13 and a £1.1m increase in the LTIP
accrual as none was booked in 2012-13 following an over provision in 2011-12.
¢ Overtime has increased by £0.1m (2.7%).
Temporary resource costs have decreased by £0.8m (22%), as a result of reduced
recruitment and lower agency labour in Network.
7.2.2 People Numbers
The following analysis shows the movements in the number of people employed during the
half year.
The People numbers were as follows:
Period end employees Average employees
29 Sept 2013 23 Sept 2012 2013 2012
Total employees 7,999 7.912 7,946 7.867
7.2.3. Average Cost Per Employee
The 2013 average number of employees for the half year ending 29 Sept 2013 was 7,946
(2012 7,867). The average annual cost per employee (excluding exceptional costs and
exceptional heads) based on these averages has increased by £1,730 (5.2%) to £35,085
(2012 £33,355), but this is distorted by the increase in productivity costs. Excluding the
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73
734
7.3.2
7.3.3
73.4
73.5
7.3.6
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productivity impact, the averages has increased by only £632 (2.0%) to £32,217 (2012
£31,584) due to pay awards (Supply Chain) and the pension rate.
Other Operating Costs (2013 £422m vs 2012 £437m)
Subpostmasters costs (2013 £220m vs 2012 £235m). Total subpostmasters costs
decreased by £15.0m (7%). £9.3m of this was due to lower sales, including the impact of
Mails buy forward last year pre the May price increase. £2.2m due to lower fixed pay from
unfreezing the Core Tier Payment and roll out of Locals and £2.7m relating to the DVLA
rate reduction accrual impact.
The average annual cost per subpostmaster branch (excluding VAT and NI) is £40,549
(2012 £42,892). This is a 5.5% decrease on the prior year and reflects the higher income
last year relating to stamps buy forward.
2013-14 2012-13
(P6) (P6)
Agency Branches (incl. Mains and Locals) 10,269 10,389
MAIN 610 33
LOCAL 463 233
Outreach 1,076 1,037
Crown 372 373
Total Branches 11,717 11,799
Collection, Delivery & Conveyance costs have decreased by £0.5m due to ATM
replenishment costs, which were paid to an external company, now being fulfilled by internal
Supply Chain staff.
Property Facilities costs have increased by £0.3m, due to an increase in the provision for the
extension of business rates to ATM's.
Property Maintenance costs has increased by £0.7m, due to the Network Transformation
Programme.
Computers and Telephones costs have increased by £1.9m, mainly due to Horizon Fujitsu
Costs of £1.2m and software licences of £0.6m.
Consultancy, Marketing & Legal Fees have increased by £3.5m year on year. £1.1m of this is
offset with the staff and agent related costs line below for Skills group off charges for project
activity. £1.6m relates to increased marketing costs, prior year rebranding was within
project one- off costs, £0.6m relates to increased consultancy costs for SPMO Operating
model and mutualisation and £0.5m increased legal costs relating primarily to separation.
The remainder relates to decrease in database management and Estate fees.
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7.3.7. Finance costs have increased by £2.7m, driven by the ceasing of the Bureau rebate of
£2.2m (ceased October 2012) and increased bank charges of £0.4m. The remainder is
losses related.
7.3.8 Cost of Sales has decreased by £1.4m (2.4%), driven by lower Retail costs due to Olympic
and Jubilee collectables. The main reasons are detailed below:
Cost of Sales
29 September 23 September
2013 2012-13 Variance
&m £m £m
Comments
Telecoms 40 40 0
Government Services 15 15 0
Decreased Sales due to collectable
Mails & Retail 2 3 145% oducts for Jubilee and the Olympics
Financial Services 1 1 oe
Total 57 58 1 2%
Other Operating costs have decreased by £0.5m (5.4%) primarily due to reduced cheque processing
costs.
7.3.9 Interbusiness expenditure have decreased by £0.8m due to reduced property costs and is
detailed below:
Interbusiness 2013-14 2012-13 Variance
£m £m £m
Offical Mail 8 8 ie)
Call Centres 2 2 0
Facilities Management 7 7 ie}
Vehicle Services 3 3 0
Romec 3 4 1
Property 16 16 0
Other 0 ie) 0
Total Interbusiness 40 41 1
Projects Interbusiness 2 0 (2)
Total Interbusiness including projects 42 41 (1)
7.3.10 Group overhead expenditure has decreased by £0.4m due to separation as work transfers.
over to the Post Office.
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7.3.11 Project expenditure (excluding temporary people resource and IB) has decreased by £7.4m
to £13m. The £13m spent on projects is analysed below:
2013-14 Project Expenditure £m
Customer Engagement (Brand Campaign) 5
Financial Services (Portfolio) 0.5
FOoG (DVLA Enhancements & Home Office Development) 13
Telephony (Fixed Line Tender, Contract negotiations and Migration) 15
Mails (Collections & Returns, Small, Medium Business Proposition) 08
Finance (Road Map) 03
HR & Compliance (Recruitment, Training & Data Protection & Freedom of Information) 07
IT Delivery (Saleforce Licences & RMG Small App Migration (UEX Phase 2) 0.5
Property (Crown Network) 0.2
Supply Chain (North West Cash Centre & Swindon Barcode Scanners & Printer) 04
Security (Fraud Software Analysis) 08
Digital (Digital & Multi-Channel) 04
Network 01
Total Projects (excluding temp people resource & IB) 13
Projects (IB) 2
Projects (temporary resource) 1
Grand Total 16
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Quality of Earnings
2013-14 2012-13 Growth
Post Office Limited (consolidated) Notes £m Em £m x
Operating profit _before other exceptional iterns 53 61 (3) (13%)
Network Subsidy Payment (100) (103) 3 3%
Project one off costs 7341 16 22 (6) 27%
Operating (oss) before project one off costs, exceptional items and NSP (31) (20) (14) (55%)
8.1
8.2
Each item in the table is explained further below:
Network Subsidy Payment
The Network Subsidy Payment decreased from £210m for 2012-13 to £200m for 2013-
14. The Network Subsidy Payment has been accounted for as a government grant in both
years and has been recognised evenly through the year.
Project one off costs
Project one off costs are non exceptional costs of project activity in the year. They
increased in 2012-13 as the pace of implementation towards the new plan continued but
have decreased in 2013-14. These costs do not form part of the underlying business as
usual performance of the company.
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Pensions
91 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) I Defined benefit
Royal Mail Defined Contribution Plan (RMDCP) UK employees Defined contribution
On 1 April 2012 almost all of the assets and liabilities of the Royal Mail Pension Plan (RMPP)
were transferred to HM Government. On this date the RMPP was also sectionalised with Royal
Mail Group Limited and Post Office Limited responsible for their own sections. Royal Mail Group
Limited is the principal employer in the Royal Mail Senior Executive Pension Plan (RMSEPP)
and the Royal Mail Defined Contribution Plan (RMDCP). Post Office Limited became a
participating employer in both with effect from 1 April 2012. Royal Mail Pensions Trustees
Limited manages the main defined benefit scheme Royal Mail Pension Plan (RMPP) which has
around 5,200 Post Office active members.
At the September 2013 half year the emphasis has been on the RMPP plan, as the movements
in the 7% share of RMSEPP are considered not to be significant to the Interim Report.
However, the RMSEPP has been reviewed and Post Office 7% share of the RMSEPP surplus has
increased by £1m to £2m driven by an improvement in asset values. An actuarial gain of £1m
has therefore been recognised in the period.
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 29 September 2013 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 31 March 2013, and any relevant adjustments
to 29 September 2013 have been made. Conversations with Royal Mail management confirm
that it is their intention to adopt the same assumptions. The rate of increase in pensionable
salaries has been adjusted from RPI +1% to RPI to reflect the impact of the change to terms
arising from Project Robin as explained in paragraph 9.3.
September March
2013 2013
% pa Nominal (for comparison)
Inflation (RPI) 3.3 33
Inflation (CPI) 2.3 23
Rate of increase in Pensionable salaries 3.3 43
Discount rate (i.e. bond rate) 4.6 48
Demographic assumptions, for example mortality, remain unchanged from those made in
March 2013.
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Movements in the defined benefit surplus
The movement in the RMPP defined benefit surplus during the six months to 29 September
2012 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.
Sectionalised RMPP iy cesenber ear ended
2013 2013
£m £m
Opening net retirement benefit surplus/(deficit) 9 (205)
Royal Mail Pension Plan amendment 102 -
Transfer of pension deficit to government - 286
Current service cost (13) (24)
Curtailment costs - (2)
Net financing credit 2 2
Employers contributions Fey 25
Actuarial (losses)/gains (7) v7
Closing net retirement benefit surplus before IFRIC
14 adjustment 164 99
During the period there was a consultation exercise with members of the defined benefit Royal
Mail Pension Plan on proposed changes to the terms (Project Robin). These changes were
agreed and implemented on 15 October 2013. The key change was to the definition of
pensionable pay which broadly will increase in line with RPI (capped at 5%) in future regardless
of actual pay growth. The changes have resulted in a one-off exceptional gain of £102 million.
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 20.6% for RMPP (2012 18.2%). The charge in
the income statement for the defined contribution scheme was £1m in the half year to 29
September 2013, and payments of £11m were made in respect of RMPP future service
contributions at a rate of 17.1% (2012 17.1%).
The net financing credit of £2m, 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 loss of £37m during the half year arose primarily due to a
greater than expected decrease in assets as a result of changes in market conditions.
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9.4 Assessment of recoverability of surplus under IFRIC 14
In order to recognise a surplus it is necessary to prove that the Post Office could recover the
surplus either through lower future contributions or through a refund.
Towers Watson has calculated
e able to recover million of the £164 million surplus in
RMPP through lower contributions and the remaining £61 million 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 has
been reduced by £21 million to £143 million. The element that is recoverable through lower
contributions has resulted in a deferred tax liability of £21m, which is consistent with the
deferred tax credit recognised in the year to 31 March 2013 and therefore no further tax
consequence has been recognised in the half year to 29 September 2013.
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10.
10.1
10.2
10.3
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Exceptional Items and Provisions
This section discusses the exceptional items on the income statement together with
movements in the related balance sheet provisions/payables.
Exceptional items summary
The following exceptional items were recognised in the consolidated income statement for the
half years ended 29 September 2013 and 23 September 2012
2013-14 2012-13
Exceptional items Notes £m £m
Operating Exceptionals:
Royal Mail Pension Plan amendment 102 -
Government Grants 10.2 129 35
Restructuring costs including Subpostmasters compensation 103 (64) (24)
Impairments (35) (24)
Total operating exceptionals 132 (10)
Non operating exceptionals:
Profit on disposal of property 2 2
Net Exceptional gain/ (costs) 134 (8)
Government Grants - In April 2013 the Post Office received grants totalling £215m from the
Government, (April 2012 £200m) to fund capital projects and transformation.
Amounts utilised in the respective half years are as shown with the 2013/14 utilisation
including £31m relating to network and IT transformational costs incurred in 2012/13 for
which there was insufficient grant in that year.
Restructuring costs - include the costs (£55m) of delivery of a major change in the network.
Network Transformation introduces new style agency offices and seeks to improve
fundamentally the profitability of the Crown network. The IT Transformation programme will
create the IT infrastructure appropriate for an independent group with ambitious growth plans
and incurred a further £5m. Other costs included are business separation of £2m and
redundancy of £2m.
Network Transformation comprises costs of £15m for Subpostmasters’ compensation and
£40m programme costs. The £40m spent on Network Transformation is analysed below:
Network Transformation
Branch Fit Out (Inc. Signage /Scales etc)
Horizon Implementation
Legal-New Operating Model Contracts
Management Consultancy
Marketing
Crown Transformation: pilot design/scoping
Professional Fees -Site Survey
Staff
Skills Group Internal Consultancy Resource
Project Management (Roll Out)
Total
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roy
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11. ‘Interest, Cash, Debt, Funding and Hedging
11.1 Net finance costs Sept 2013 £1m vs Sept 2012 £1m
29 September 23 September
2013 2012
Finance costs & investment income £m £m
Interest received on investments - UK = 1
Total finance income = 1
Interest charged on Government borrowings - -
Interest payable on finance leases - (4)
Other finance costs (4) (a)
Total finance costs (1) (2)
Net finance cost (1) ()
Interest payable on the BIS Loan fell last year as the average borrowing volume significantly
decreased due to funding receipts attributable to transformational programmes. This position
continued with £200m received in 2012-13 and £215m in 2013-14.
Finance leases are nearing conclusion and both arrangements covering counter printers and
the AEl equipment finish in 2014-15 - accordingly interest is reducing.
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
29 September 31 March
2013 2013
Net cash/debt analysis Section £m £m
Cash in the Post Office Limited network 113 825 870
Other cash at bank (overdraft)/deposits 7 9
Cash equivalent investments 30 92
Total cash and cash equivalents 855 971
Loans, repayable on demand or less than 1 year 11.4 - (291)
Obligations under finance leases (current) 11.5 (4) (3)
Total current financial liabilities (4) (294)
Obligations under finance leases (non-current) 41.5 (4) (4)
Total 824 673
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11.3
11.4
11.5
11.6
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Cash within the Post Office Limited network (Sept 2013 £825m vs March 2013 £870m)
The reduction in Post Office network cash from March 2013 levels is due to the year-end
coinciding with Easter necessitating increased branch and cash centre holdings.
Loans and borrowings (Sept 2013 £nil vs March 2013 £291m)
Daily borrowing requirements in the first half of 2013/14 are significantly lower than the year
end loan position on account of advanced government funding of both the £215m
transformational funding and £200m Network Subsidy.
Obligations under finance leases (current & non-current) (Sept 2013 £5m vs March 2013
£7m)
The obligations under finance leases have decreased by £2m in the half year attributable to
lease repayments in 2013-14. Lease types are shown in section 13.2.
Loan facilities
At half year the Post Office had no external (non Government) borrowing facilities in place.
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12. Going concern
Post Office Limited has net cash and cash equivalents of £855m (section 11.2) and a
borrowing facility of £1,150m of which none (section 11.4) was drawn down at 29 September
2013.
12.1. 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 through 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
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).
The going concern analysis is based on the latest draft 2020 strategic plan financials
presented to the Post Office Board in April 2013 and forming part of Government funding
discussions.
12.2 Assessment for the Post Office
Post Office has finished implementing its 2005-11 strategic plan and has completed its
closure programme. It 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 still operates with a cash
outflow with the exception of 2012-13. The 2011-15 plan is intended to reverse the trend of
an increasing Network Subsidy Payment (NSP) with the draft strategic plan beyond 2014-15
continuing that reducing trend.
The 2011-15 strategic plan updated for latest views has been shown in Table 11 of this
section, and shows 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. Downsides have been applied that the funding for NSP and
transformation post March 2015 is not available and 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. It should be noted that there is a dependency on the
working capital loan being extended beyond its current end date of 31 March 2016.
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.
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12.3. Summary conclusion
Based on the analysis there is available borrowing headroom until March 2016 and until
March 2017 if it is assumed that the working capital loan can be extended for another year.
Royal Mail Group Limited 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 Group Limited is a going concern or that an alternative mails provider would work
similarly with Post Office Limited providing a similar level of income.
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.
Post Office Limited Funding Analysis
Table 1 September 2013
£m (cumulative apart from free cash flow) 2012-13 2013-14 2014-15 2015-16 2016-17
Opening Funds (336) (204) (220) (316) (559)
Borrowing facilities 4150 1150 1,150 1,150 1,150
Restriction due to level of network cash (98) (350) (350) (350) (350)
Borrowing from other sources - finance leases, bank 44 9 4
overdraft etc
Latest plan free cashflow before assumed non NSP grant (68) (231) (266) (323) 1)
injection
Non NSP grant injection per October 2010 plan/ April 2013
plan 200 215 170 80 80
Closing Funds Headroom 862 589 488 241 310
Downside impact of no NSP beyond March 2015 (130) (210)
Downside impact of no further grant injection beyond March 2015 (80) (160)
Adjusted Headroom pre risk 862 589 488 31 (60)
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Table 2: Risks,with management actions
£m (cumulative) 2012-13 2013-14 2014-15 2015-16 2016-17
Headroom pre risk (as above) 862 589 488 31 (60)
Risks
Financial Services growth slower than plan (3) (8) (18) (60)
Mails revenue decline halted but not reserved (net of agents’ cost (20) (20) (30) (40)
saving)
Network Transformation benefits are not fully delivered (2) (6) (9) (a2)
Crown Transformation benefits are not fully delivered (5) (20) (25) (40)
Pension contribution rates increase (4) (3) (12) (16)
Increase in cost as a consequence of stopping transformation post (50) (150)
March 2015
Headroom post risks pre management actions 862 565 436 (113) (378)
Management actions 309 524
Stop transformation post March 2015 145 263
Reduce capex to replacement only (£30m pa) post March 2015, 164 261
Headroom post risk and management actions 862 565 436 196 146
Notes:
2012-13 shows the year end outturn and last years are the latest view of the strategic plan.
Available facilities are defined as network cash, ATM cash, ATM debtor, POCA debtor and SGEI
cheques.
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.
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.
Management actions have been identified to manage the lack of future funding and downside risk
within the headroom. There are further actions that could be taken but are not required. These
include the sale of property and/ or tax losses.
However, it is required to assume that the loan is extended beyond March 2016.
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13.
13.1
13.2
13.3
Property, plant and equipment and non-current assets held for sale
Net Book Values
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The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed assets
at September 2013 was £11m (March 2013 £11m). Movements in the six months were as
follows:
Landand Vehicles, plant Intangible fixed
buildings and fixtures assets Total
Movement in NBV £m £m £m £m
NBV at 31 March 2013 11 - - 11
Add capital expenditure 2 15 18 35
Less disposals - - - -
Less depreciation - - - -
Less impairment (2) (45) (18) (35)
NBV at 29 September 2013 11 - - 11
Assets held under finance leases
The value of equipment held under finance leases is £nil (March 2013: £nil) having been
impaired in the years in which it was acquired. The two finance leases held are:
e Counter printers, capitalised and impaired in 2006-7 with an asset value of £10m, expires
2014-15;
e Identity equipment in branches, capitalised and impaired in 2010-11, with an asset value
of £8m, expires 2014-15.
Capital expenditure
The following table summarises capital expenditure to 29 September 2013:
Vehicles,
Land & plant &
buildings fixtures Intangibles Total
Capital expenditure analysis £m £m £m £m
Technology Roadmap - - 10 10
Network Transformation - 14 - 11
Separation (from RMG) project - - 2 2
Finance Roadmap - - 4 1
FOoG Front Office of Govt - - 2 2
Vehicles - 2 - 2
Property 2 - - 2
Other (items <£1m) - 2 3 5
Total 2 15 18 35
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Goodwill, investments and intangibles
Investments in joint ventures and associates
29 September 34 March
2013 2013
£m £m
Investment in joint ventures 83 60
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
from the year end is £23m representing the share of post tax profit.
A dividend is anticipated from FRES during October 2013 - value not confirmed at time of
writing - which will reduce the carrying value of the joint venture.
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15 Working capital
15.1 Inventories (September 2013 vs March 2013 £8m )
29 September 31 March
2013 2013
£m £m
Scratchcards 5 5
Retail 2 3
Total 7 8
15.1.1 Inventory written off
The provision for stock write downs and discrepancies has decreased to £0.4m in
September 2013 from £0.5m in March 2013. Shrinkage and obsolete stock written off in
September 2013 was £0.3m (March 2013 £0.4m).
15.2 Trade receivables
Receivables are tabulated below, followed by a detailed explanation of the various balances.
Receivables
29 September 31. March
2013 2013
Trade receivables 56 32
Client receivables 156 240
Prepayments and accrued income 58 71
Other receivables (taxation) (a) 9
Total 269 352
15.2.1 Trade receivables: Current (due within one year)
Trade receivables
29 September 31. March
2013 2013
Sales ledger 27 18
Doubtful debt provision (a) ()
Homephone debtors 22 14
Homephone provision (6) (6)
Subpostmasters debt 13 14
Subpostmasters debtors provision (8) (9)
POFS, FRES cost recovery 9 2
Total 56 32
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The increase in sales ledger is largely explained by the £5m debtor at September 2013 for
OWP card account income (March 2013 DWP debtor: £nil). Mainly the DWP adhere to agreed
terms and pay the month following invoice receipt though there are instances when the DWP
settle in-month.
The increase in homephone debt is due to POL switching provider from BT to Fujitsu. Fujitsu
are currently experiencing difficulties and have not invoiced customers for September 2013,
increasing customer debt levels. Other variances largely net off,
Receivable balances in relation to former subpostmasters of £8m have been provided for in
full in line with previous years. This is due to the difficulty in recovering these amounts. The
remaining £5m of subpostmaster debt which is unprovided against relates to current
subpostmasters debt which are usually settled through a deduction from remuneration. The
balances are provided for when they reach 60 days old for single subpostmasters or 90 days
for multiples.
A profile of the trade receivables is as follows:
Trade receivables
29 September 31 March
2013 2013
DWP 5 -
Bank of Ireland (2012: POFS) 12 1
FRES 2 -
Partner banks 1 -
Bank of Ireland (ATM commission) 3 2
Bill payment partners 2 1
Subpostmasters - 1
Others 2 3
Total 27 18
Ageing of trade receivables:
Debtors over 60 days overdue: September 2013 £4.6m (March 2013: £0.4m).
The Post Office does not have a general risk in relation to bad debts due to the agency nature
of our client base. The main debt ageing at September 2013 is £4.5m Bank of Ireland.
Client receivables
Analysis of the significant client balances at year end is as follows:
Client receivables
29 September 31 March
2013 2013
ATM (Bank of Ireland) 92 123
Card Account (JP Morgan) 30 7%
Partner banks 22 29
Others 12 12
Total 156 240
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15.2.3 Prepayments and accrued income September 2013 £58m (March 2013 £71m)
15.3
Payables: amounts due within one year
A summary of payables categories is:
29 September 31 March
Section 2013 2013
Trade payables 15.3.1 25 43
Accruals and deferred income 15.3.1 99 110
Client payables 15.3.2 375 528
Advance customer payments 47 50
Capital payables 15 18
Social security 9 10
Business transformation 6 7
Amounts due to group companies 10 6
Government grant deferred
income 10.2 188 102
NSP 100 -
Bank Overdraft 25 -
Total 899 874
15.3.1 Trade payables and accruals
Trade payables and accruals
29 September 31 March
2013 2013
Trade payables 25 43
Accruals, GRNI 59 55
Agent, employee pay balances 10 24
Productivity, bonus schemes 10 16
Deferred income (Gamma) 12 7
Others 8 8
Total 124 153
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The reason for the significant difference in Client levels between September 2013 and March
13 is due to the coinciding of the March 2013 year end with Easter, which increased
transactional activity and also temporarily extended settlements into 2013-14 because of the
bank holiday.
Accrued income represents the majority of this amount (September 2013: £39m, March
2013: £34m), and year on year the product components are similar. The larger accruals at
September 2013 are: DWP card account income for September £7m, Homephone £6m and
Bank of Ireland commissions £7m.
Additionally there are prepayments of £20m at September 2013 (March 2013 £36m). There
are two main elements: a £12m (March 2013 £28m) advance payment to Fujitsu in respect
of the 2013-14 managed service, and £4m (March 2013 £12m) - also to Fujitsu - for 2013-
14 set-up costs for their take-on of the Telephony contract.
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15.3.2
15.3.3
Manual accruals and GRNIs represent the material trade liabilities at any point and are
consistent year on year, reflecting high levels of project activity commensurate with the
Network Transformation programme.
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Trade payables at March 2013 included a one-off entry for Clydesdale Bank of £7m. The
remaining reduction in trade payables balances relates to the purchase ledger and Fujitsu and
BT in particular where y/e invoice levels were high.
Within agent pay balances at March 2013 is a £3m one-off accrual for DVLA payments to
agents and £7m product pay due on account of March being a five week period. (September
2013 equivalents: £nil)
Client payables
29 September 31 March
2013 2013
Santander 139 183
NS&l 21 28
DVLA 53 107
Utility companies 9 24
Bank of Ireland 13 8
BACS 43 59
Others 97 119
Total 375 528
March balances were impacted by the Easter bank holiday coinciding with the Post Office's
year end, having the effect of increasing the settlement timescale temporarily. The DVLA
balance was most affected by the coinciding of year end with calendar month end.
During 2013/14 a new DVLA contract provides for changed settlement terms which has the
effect of increasing the balance on hand and is cashflow positive for Post Office Ltd.
Client advances
This category also includes specific, non-client, creditors as follows:
Client advances
29 September 31 March
2013 2013
Client advances, deferred income 21 23
Postal order liability 16 v7
Homephone line rental advance
payments 10 10
Total 47 50
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15.4 Payables: amounts due after one year
Payables due after one year
29 September 31 March
2013 2013
Amounts due under finance
leases 4 4
Bank of Ireland deferred income
(Gamma) 24 24
Total 28 28
Bank of Ireland deferred income concludes in financial year 2022-23 and is recognised in line
with an amortisation schedule. In addition to the above sum, there is £12m in current year
trade payables and a further £7m remains to be invoiced in future years.
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16.
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Provisions
Provisions (September 2013 £30m vs March 2013 £26m)
Crown
Conversions Network
Project Transformation Other Total
£m £m £m £m
At 31 March 2013 7 10 9 26
Charged/ (released) in operating
exceptional items (4) 15 3 17
Charged in operating costs ~ 3 3
Utilisation (4) (44) (4) (16)
At 29 September 2013 5 14 14 30
Included within current liabilities 25
Included within non current liabilities 5
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 2013.
Crown conversions relates to the contract with WH Smith for the original tranche of Crown
outlets franchised. The new contract relating to these branches is not considered onerous and
future income growth assumptions have been overlayed onto the existing provision,
prompting the exceptional release of £1m. This provision effectively concludes in 2014/15.
Other provisions at September include onerous property lease obligations £3m, personal
injury claims £1m, redundancy £2m, Bank of Ireland sales capability investment (Eagle
provision) £3m and the ATM business rate provision £2m.
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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:
e SPMs’ MPs;
e the “Justice for Subpostmasters Alliance” (JFSA);
e defences to court proceedings brought by Post Office Limited to recover debts from
SPMs; and
e direct contact with Post Office Limited.
17.2 On 8 July 2013, Second Sight published an Interim 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.
17.3. Following the Second Sight Interim Report, on 27 August 2013 Post Office Limited launched
a Mediation Scheme aimed at finally resolving individual complaints made about Horizon.
17.4 Sir Anthony Hooper has been appointed as Chair of the Working Group overseeing the
Mediation Scheme. He will chair his first meeting on 25 October 2013.
17.5 The Mediation Scheme has received 64 applications from sub-postmasters since it was
opened at the end of August, of which 44 have been formally accepted onto the scheme to
date. Only 1 case has been excluded at this stage, on the grounds that it is subject to an
ongoing legal process: all the other cases are either still being reviewed, are awaiting further
information or need to go through Post Office Limited’s normal investigation processes
before they would be referred to mediation. The application closure date is the 18
November 2013. SPMs will then have a month to complete their full applications before
Post Office Limited review the cases in detail. The aim is to get some cases into the
mediation process before the end of 2013 with the majority happening between January
and March.
17.6 Post Office Limited is also reviewing past and present criminal prosecutions brought against
SPMs to ensure they continue to satisfy the evidential, public interest, and disclosure
standards required for prosecutions. This review should be completed by the end of October
2013.
17.7. Post Office Limited’s external firm of criminal solicitors, Cartwright King (CK), has now
completed a review of 301 cases subject to past prosecution to identify whether Post Office
Limited has a duty to disclose the findings of the Second Sight report and associated issues.
CK has concluded that disclosure is appropriate in 10 of these cases, and a short letter has
therefore been sent to each of the defence teams to bring their attention to the report. It is
now a matter for the defence in each case to determine what action, if any, they might take
in light of this additional information. Post Office Limited is also awaiting an unknown
number of further historical prosecution files from Royal Mail, although at this stage Post
Office Limited has no reason to believe these will substantially increase the number of actual
disclosures. In view of the potential interest from the Criminal Cases Review Commission,
Post Office Limited commissioned a review by Brian Altman QC of the prosecution
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procedures it has followed. He concluded that Post Office Limited is complying with its duties
and that the approach adopted by the prosecution team was “fundamentally sound”.
17.8 Post Office Limited is not issuing any new criminal summons pending the instruction of a
new, independent expert who can give evidence to support the Horizon system. The process
of identifying this expert is under way.
17.9 To date, no claim has been made against Post Office Limited in the civil courts, and no
appeal has been made to the Court of Appeal against any conviction obtained in the criminal
courts.
17.10 Post Office Limited has instructed Brian Altman QC to undertake a second review, which will
look at Post Office Limited’s prosecutions approach in the context of its wider business
needs.
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18.
18.1
18.2
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Taxation
Income statement
A breakdown of the tax credit is shown in the table below:
Half year to Half year to
29September 23 September
2013 2012
£m ém
Corporation tax credit for period - 7
Tax under provided in previous periods : -
Current tax - 7
Deferred tax credit relating to the origin and reversal of temporary differences 2 11
Income tax credit reported in the condensed consolidated income statement 2 18
Factors affecting tax credits
An additional deferred tax credit has been recognised in relation to the retirement benefit
surplus on the balance sheet as the proportion of this surplus which is considered to be
recoverable through future contributions moved in the half year to 29 September 2013. An
equal and opposite entry has been recognised through equity.
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.
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