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Post Office Board Agenda
_ Date _ Present inAtendance Apologies
24% May 2016 * Tim Parker (Chairman) + Alwen Lyons + Neil Hayward * Ken McCall
— ———— + Richard Callard + Mark Davies + Natasha Wilson
Stent tine Finish Time + Tim Franklin + Jane MacLeod
11.30hrs 15.00hrs * Virginia Holmes + Jane Hill
* Carla Stent * POAC Guest
+ Paula Vennells * Nick Kennett
Room 1.16 Wakefield + Alisdair Cameron * Steve Ashton
* Kevin Gilliland
1. Minutes of previous Board and Decision Minutes formally agreed Alwen Lyons
Committee meetings including Status
Report
2. CEO Report CEO report noted CEO to update the Board on the report. CEO
‘luding IR update
Annual Report and accounts approved as recommended by the
ARC
3. Annual Report & Accounts Decision
Approval of STIP performance Decision Approval of STIP performance conditions for recommendation
conditions to UKGI (Paper to be walked in)
5. Items for noting :
5.1 Sparrow Noting Board aware of the litigation and response to the Letter of
Claim. General Counsel to join the meeting and update.
5.2 Sealings Board aware of the affixing of the seal;
5.3 Ratifications Board Decisions ratified: Paddington;
5.4 Modern Slavery Board note paper on Modern Slavery.
LUNCH /
6. POAC Update on POAC from the Chairman and a member of the
council
Mark Davies/ CFO
Chairman
General Counsel
Company Secretary
General Counsel
General Counsel
Tim Franklin/ Jane Hill
Post Office Board Agenda
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Peregrine Phase 1
Progress noted
Update the Board on Phase 1 of Peregrine, negotiation with the
Bank of Ireland
Nick Kennett
POMS — Steve Ashton POMS Chairman
Crown and Network Strategy
Any Other Business
Progress noted
Presentation of POMS strategy, milestones and risks by the
POMS Chairman & CEO
Steve Ashton/
Nick Kennett
Discussion
To update the Board on the Crown & Network strategy
Kevin Gilliland
CLOSE
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POLB 16(2™)
POLB 16/13 - 16/15
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 12.00 noon on 09 February 2016
at 20 Finsbury Street, London EC2Y 9AQ and by telephone conference
Present:
Tim Parker Chairman
Richard Callard Non-Executive Director (by telephone)
Alisdair Cameron Chief Financial Officer
Virginia Holmes Non-Executive Director
Ken McCall Senior Independent Director
Carla Stent Non-Executive Director
Paula Vennells Chief Executive (by telephone)
In Attendance:
Alwen Lyons Company Secretary
Jane MacLeod General Counsel (GC)
Piero D'Agostino Head of Legal Commercial
Alison Jaap Head of Design
Apologies:
Tim Franklin Non-Executive Director
POLB 16/13 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting.
(b) The directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the
Company's articles of association
POLB 16/14 PROJECT TRINITY
(a) The CEO thanked the team for the work undertaken on project
Trinity and acknowledged the complexity involved in addressing the
issues arising from the Front Office IT plans.
(b) The CFO explained that four key questions had been considered
before recommending the Trinity changes to the Board:
1. Would this be the right option commercially and operationally
for Post Office?
2. Would the extension of the Fujitsu (FJ) contract on the terms
described be in the best interests of Post Office?
3. Could the change be made in a legally compliant way?
4. Would it deliver a long term cost effective relationship with FJ?
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(c) The Board discussed the options available and asked for more
detail on the termination of the IBM contract.
(d) The GC explained that the IBM contract specifically permitted
termination for convenience and set out a formulaic calculation of
amounts payable in the case of exercise. In the current
circumstances this resulted in a payment of c£13 million to IBM
plus the cost of the work already completed. The Board asked if the
£13m could be reduced and the GC advised that this would be
difficult to achieve, although the amounts payable for work
undertaken to date would need to be negotiated.
(e) The Board asked which companies might challenge the
procurement process. The CFO advised that both Accenture or
CSC would be aggrieved by the decision and that they represented
the greatest risk. The numbers contained in the business case
included provision for a challenge.
(f) I The Board discussed the length of the proposed contract with FJ.
The GC explained that Post Office had proposed an extension to
the FJ contract of 4 years with 2 further one year extensions...
However FJ had suggested a 6 year term, with the ability to
terminate after 4 years. The GC explained that the risk of a
successful challenge would increase if there was a material
extension to the term, as a longer term may not be considered a
‘modification’ of the existing contract, but rather the award of a new
contract, in which case the Regulation 72 exemption would not
apply. The CEO noted that this risk needed to be considered in
light of the benefits that would be obtained from a longer contract.
ACTION: (g) The GC was asked to test the impact of a longer term contract
6c period on regulation 72 of the Public Contract Regulations
2015.
ACTION: (h) The Board asked the CFO to consider whether, and if so, how
CFO the termination costs would be disclosed in the Accounts.
ACTION: (i) I The GC was asked to consider whether the termination costs
Gc would need to be disclosed under an FIO request.
(j) I The Chairman requested the GC to provide an update on the risk of
an action for misfeasance in public office. The GC explained that a
complainant, who has suffered a loss, could bring an action for the
tort of misfeasance in public office. However there were a number
of elements of the tort which would need to be established, one of
which was to establish that the Company and/or the Board had
acted with malice or bad faith, causing deliberate injury to the
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ACTION:
CFO/GC
ACTION:
CFO
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(k)
complainant. Accordingly, the GC noted that if the Board believed
in good faith that a change of contractor was not possible for the
economic and technical reasons set out in the Board papers, and
that a change would cause significant inconvenience and/or
substantial duplication of costs, then it would be more difficult to
establish that Post Office or the Board had acted with malice or in
bad faith.
The Board considered the decision to terminate the IBM contract
and agreed that it was in the best interests of the Company and
although the £13m termination cost was high, it was a contractual
obligation and could be defended if required.
The CEO proposed that a review would be undertaken of the
initial procurement processes leading up to the decision to
award the contract to IBM, to ensure that any lessons from
that review were captured. The findings from that review
would be reported at the ARC.
The CFO stressed that Trinity enabled the Business to remain
within its funding plan to March 2018, explaining that the funding
post 2018 was still to be agreed
The Board asked, as part of the presentation of the 3 year plan
in March, to be provided with a list of projects, their value and
the committed spend.
After careful consideration, the Board:
Noted the proposal for the termination of the IBM contract and the
extension of the Fujitsu contract for Horizon.
Noted the risks and issues arising around delivery and legal and
procurement.
Approved the termination of the IBM contract.
Approved the extension of the Horizon contract with Fujitsu on the
terms set out in the paper.
Approved the on-off costs of £39.1m and the operating costs of
£107.3m for the committed minimum contract of 4 years.
Authorised each of the Group Chief Executive Officer (CEO) and
the Chief Financial Officer (CFO) to:
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¢ finalise the necessary contractual documentation (including the
Notice to Terminate and all ancillary documentation) to
terminate the IBM contract;
¢ finalise the necessary contractual documentation to extend the
Fujitsu Horizon contract and any ancillary documentation; and
« — authorise the execution of all such documentation.
POLB 16/15 CLOSE
(a) There being no further business, the Chairman declared the meeting
close.
Chairman Date
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POLB 16(3")
POLB 16/16 - 16/25
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 9.00am on 21 March 2016
at 20 Finsbury Street, London EC2Y 9AQ.
Present:
Tim Parker Chairman (Minutes POLB 16/19-16/25)
Richard Callard Non-Executive Director
Alisdair Cameron Chief Financial Officer
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Ken McCall Senior Independent Director
Carla Stent Non-Executive Director
Paula Vennells Chief Executive
In Attendance:
Alwen Lyons Company Secretary
Martin Edwards Director of Strategy (Minute POLB 16/19 only)
Dave Carter Group Financial Controller (Minute POLB 16/19 only)
Mark Ellis Supply Chain Director (Minute POLB 16/20 only)
Nick Kennett Financial Services Director (Minute POLB 16/22 only)
POLB 16/16 INTRODUCTION
(a) In the absence of the Chairman Ken McCall, Senior
Independent Director took the Chair, noted that a quorum
was present and opened the meeting.
(b) Each Director confirmed that they had no conflicts of
interest in relation to the business to be considered at the
meeting.
POLB 16/17 MINUTES OF THE PREVIOUS BOARD AND COMMITTEE
MEETINGS INCLUDING STATUS REPORT
Minutes
(a) The minutes of the meeting of the Board held on 22™
January 2015 were approved as accurate records and the
Chairman was authorised to sign them.
(b) The minutes of the Audit, Risk and Compliance Committee
meeting held on 10'* November 2015 were noted.
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Status Report
(C) POLB 16/10 (c) - The Board noted the options set out in
the Prosecutions Policy paper and endorsed the publication
of the policy on the Post Office’s website.
(d) POLB 15/102 (d) - The Board noted the paper provided.
The CFO said that the approach to suppliers covered cyber
security as a whole and not purely Distributed Denial of
Service (DDoS) risk.
ACTION: CFO Provide a list of the Top 20 suppliers to the ARC
The CEO proposed that a supplier strategy be
presented at a future ARC covering the Top 20
ACTION: CFO Supplier relationships and Supplier compliance.
(e) The Board noted the Status Report dated 14/03/2016.
POLB 16/18 CEO REPORT
CEO Report
(a) The CEO introduced the CEO Report, focusing on the
following key points:
Scorecard performance
(b) The CEO believed that the Business was now well placed to
hit the financial target for the year and that the 6000"
transformed branch would be opened before the Easter
break.
ACTION: CEO The Board asked the CEO to pass on their
congratulations to Kevin Gilliland and the Network
Transformation team for the excellent result.
Project Paddington
(c) The CEO explained that Project Paddinaton.. the proposal to,
continue the witl IRRELEVANT i
(d)
-more_time from individuals affected; the timing o
L...IRRELEVANT __} and to enable a considered view on thé
effect of ANY jew? aNNOUNCement.
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(e) The CFO clarified that th
ACTION: NH
Ministerial Meeting.
(f) Richard Callard reported that the Minister had recently met
Brian Scott, Unite, and that they had discussed both
franchising and pensions. The Minister had taken the line
that these were commercial decisions for the Board and the
Executive.
(g) Transformation Report
The CEO explained that the transformation plans were being
rebased after the Trinity project. It was agreed that the IT
strategy would be presented at the July Board.
ACTION: CFO The IT Strategy would be a topic for discussion at the
July Board meeting.
(f) The Board noted the CEO report.
POLB 16/19 APPROVAL OF ONE YEAR OPERATING PLAN AND BUDGET
2016/17, THREE YEAR PLAN AND APPROVAL OF RELEASE
OF BUDGET INFORMATION TO SHEX FOR FUNDING
OBLIGATION
(a) The Chairman welcomed Martin Edwards, Director of
Strategy, and Dave Carter, Group Financial Controller, to
the meeting.
Period 11 Financial Results
(b) The CFO introduced the Period 11 Financial Results. The
Board acknowledged the EBITDAS performance for
2015/16, recognised that this had been driven by cost
reduction and asked whether this delivered the necessary
growth and run rate for 2016/17. The CFO explained that
over the next two years he expected slight income decline
during a period of right sizing the cost base, but that the
year-end run rate for 2015/16 was consistent with the
budget for 2016/17.
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(c) The Board noted the Period 11 Financial Results.
2016/17 Bi in Year Plan
(d) The CFO introduced the 2016/17 budget and 3 year plan.
(e) The proposed budget and year 2 of the three year plan were
aligned with the rebased funding targets agreed with ShEx,
being an EBITDAS targets of -£10m in 2016/17 and +£28m
in 2017/18. Year 3 of the plan was outside of the existing
funding agreement.
(f) Tim Parker joined the meeting.
(g) The Board questioned the shape of the income in the 3 year
plan which remained flat for 2 years and then showed
significant Financial Services (FS) growth. Martin Edwards
explained that year 3 of the plan included £15m FS income
from the buyout of Junction.
(h) The CFO explained that the next 2 years were the main
focus of the plan as these years aligned to the current
Government funding agreement. The Executive and ShEx
would start to consider the next funding agreement in the
summer after the Board strategy day.
(i) The CFO noted that there was considerable risk in achieving
the -£10m target in 2016/17 and therefore the Group
Executive was in the final stage of agreeing more stretching
cost targets to mitigate that risk.
(i) The Board approved the 2016/17 budget.
(k) I The Board approved the 3 year plan and noted that the plan
would be overlaid by the new Strategic Plan.
(1) The Board discussed the 2016/17 scorecard and the
proposal to have EBITDAS as the only target aligned to the
STIP (Short Term Incentive Payment). The CFO explained
that the GE had discussed this proposal and agreed that it
should be recommended to the Board as a 1 year proposal
to support the rightsizing of the cost base.
(m) The CEO assured the Board that she and the Executive
recognised the need for a balanced scorecard including
customer, people and operations targets and that GE
personal objectives for 2016/17 would also include
attestation for the areas of risk for which they are
accountable.
(n) Richard Callard reminded the Board that the Government
had to approve STIP measures and targets and that they
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may prefer to continue with a Network Transformation
element as this related directly to the funding.
(0) The Board approved the 2016/17 scorecard and noted that
the bonus structure, thresholds and targets would be
discussed at the Remuneration Committee on 12" April.
Release of Budget information to ShEx to fulfil the
fundin ligation
(p) The Board approved the release of the 2016/17 budget
information submission to ShEx in order to release the
Government funding.
(q) Martin Edwards and Dave Carter left the meeting.
(r) Tim Parker took over the role of Chair.
POLB 16/20
IRRELEVANT
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POLB 16/21 ITEMS FOR NOTING
Cash and Working Capital
(a) The CFO introduced the Cash, Working Capital and
Headroom paper. The Board discussed the paper and
agreed that more focus would be required on cash in the
future with the possibility of it becoming a bonus worthy
objective as headroom tightened.
(b) The Board noted the paper.
Trinity Contract
(c) The CFO introduced the project Trinity paper and updated
the Board on a FOI request received from a legal firm. The
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GC would lead on the response to the request ensuring any
commercial information was redacted.
(d) The Board noted the progress made.
Sealings
(e) The Board resolved that the affixing of the Common Seal of
the Company to the documents set out against items
numbered 1379 to 1399 inclusive in the seal register is
hereby confirmed.
POLB 16/22 ITEMS FOR RATIFICATION
explained the rationale ‘behind extending th a
for two years.
(b) The Board approved the award_of a two year contract
i nesiever Contract
“11e"Board approved a new contract yutb.a-maximum term
of five years and a maximum cost ojireetevanti and delegated
authority to the CEO and CFO to sign a" ‘COritract within these
parameters.
IRRELEVANT
(c)
‘Col ntra ict
negotiated with the IRRELEVANT jwhich is targeting
to generate an additions Corie to Post Office in
(f) I The agreement also included an extension from two to four
years of the run-off processes in the ierevevant contract if Post
Office were to advisi from 202i” that, it_is exiting,
Financial Services. This extension supports I IRRELEVANT:
manage the risks associated with Post Office éxiting, with”
the impact on Post Office being negligible as it pre-supposes
that Post Office had made the strategic decision to exit the
personal financial services market. Post Office would
receive income over four, rather than two, years.
(g) Nick Kennett also assured the Board that this agreement
did not affect any negotiation regarding: or the wider
he confirmed that the core exit/termination
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POLB 16/23
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provisions, were Post Office to remain in Financial Services,
are unchanged.
(h) The Board approved the proposed agreement wi
authorised the CFO and Director of Financial
finalise the terms of the arrangement with!
approve the form of legal agreement to give effect to the
arrangement and sign any such agreement(s) in accordance
with Post Office’s usual procedures.
(j) Nick Kennett left the meeting
(k) ~The Board approved the specified amendments to the
articles as set out in Appendix A of the paper.
VERBAL UPDATES FROM BOARD COMMITTEE CHAIRS
Remuneration Committee (RemCo) Update
(a) Ken McCall gave a verbal update from the RemCo meeting
held on the 9" February 2016.
The main areas the meeting covered were:
e The letter to the Minister regarding bonus claw-back
for the Postmaster Compensation provision error.
e Directors’ remuneration report and key trends in the
market.
e LTIP trends in the market place and design
principles.
« The need to recalibrate the LTIP to provide
meaningful incentives.
The Board noted the update.
Nomination Committee (NomCo) Update
(b) The Chairman gave a verbal update from the NomCo
meetings of 25'" November 2015 and 9" February 2016.
The main areas the meetings covered were:
e Appointment of two new NEDs.
e Confirmation of Board Committee membership.
« Recruitment of a Digital Director and Sales Director.
e Changes to the senior leadership population and
introduction of the L300 group.
The Board noted the update.
Audit, Risk and Compliance Committee (ARC) Update
(c) Carla Stent gave a verbal update from the ARC meeting held
on the 17" March 2016.
The main areas the meeting covered were:
e Update from the POMS ARC Chair and the
relationship with POMS.
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e Risk & Controls framework update. Two new risks
were included; Health & Safely and Pensions.
¢ Report & Accounts corporate governance statement
agreed.
« Approved the internal audit plan including a cyber-
security audit.
e Year end audit discussed with Ernst & Young (EY) and
the audit partner challenged to explain how the audit
would be more effective this year.
The Board asked what Health & Safety issues had moved
the risk to Amber on the risk register. The CFO explained
that the new Director of Property was putting new processes
in place to manage 3% parties, the issues raised by these
processes had been included on the agenda of the Executive
Health & Safety Committee. Until this was complete the risk
should remain as Amber.
The Board noted the update.
Post Office Advisory Council (POAC) Update
(d) Tim Franklin gave a verbal update from the POAC meeting
help on the 17" March 2016.
The main areas the meeting covered were:
e The network branch proposition was debated with
input from the Business, Onestop and an
independent postmaster.
e Input from the Council on customer and retailer
proposition.
e Review of Council membership - everyone has asked
to stay on the Council — they are invaluable source of
feedback.
ACTION: CoSec Circulate the POAC minutes to the Board
The Board noted the update and that POAC is an agenda
item at the next Board meeting.
POLB 16/24 ANY OTHER BUSINESS
Sale of} 4
(a) The Cl opportunity to se!
Offic IRRELEVANT _: which would generat
incomé: This Was the limit which could be sold und
POLB 16/25 CLOSE
(a) I There being no further business, the Chairman declared the
meeting close.
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POLARC 16(1*)
POL ARC 16/01 - 16/09
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
held at 9.30am on 22 January 2016
at 20 Finsbury Street, London EC2Y 9AQ
Present:
Carla Stent Chairman (Chair)
Tim Franklin Non-Executive Director (TF)
Ken McCall Non-Executive Director (KM)
Richard Callard Non-Executive Director (RC)
In Attendance:
Paula Vennells Chief Executive (CEO)
Alisdair Cameron Chief Financial Officer (CFO)
Garry Hooton Audit Manager (GH)
Alwen Lyons Company Secretary (AL)
Jane MacLeod General Counsel (GC)
Mike Morley-Fletcher Head of Risk and Assurance, Corporate Services, (MMF)
Angus Grant Ernst & Young, (AG)
Mounia Mukina Ernst & Young, (MM)
Amanda Bowe Post Office Management Services Limited Non-Executive
Director & Chair of ARC (AB) (Minute 16/07 only by phone)
POLARC 16/01 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting.
(b) Each Director confirmed that they had no conflict of interest in
relation to the business to be considered at the meeting.
POLARC 16/02 MINUTES OF THE MEETING HELD ON 10 NOVEMBER 2015, STATUS
REPORT AND MATTERS ARISING
(a) The minutes of the meeting held on 10 November 2015 were
approved as presented and the attendant Committee member was
authorised to sign them as a true record.
(b) IThe Committee noted the action list dated 1°* December 2015.
(c) The CFO explained that Audit fee for 2015/16 had yet to be
finalised as the focus had been on completion of the
subpostmasters’ compensation issue.
ACTION: CFO Report back on the on the finalisation of the Audit fees.
(d) The Committee asked how the Executive were dealing with the
issue of inappropriate expenses claims. The GC explained that the
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ACTION: GC
ACTION: GC
ACTION:GC
POLARC 16/03
ACTION: MMF
ACTION:MMF
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issue, relating to confusion over LIW/Homebase categorisation,
was being addressed by the introduction of an annual
reconciliation. The ARC asked for an update on the implementation
of the recommendations from the Financial Crime audit at the
March meeting.
Report back on the implementation of the recommendations
from the Financial Crime audit at the March ARC.
(e) IThe Committee noted that at the last meeting the CEO had
requested a review to give assurance regarding the security of
customer data (minute POLARC 15/44 (e)). The GC was asked to
circulate the outcome of the review to the Committee
Circulate the report on security of customer data to the ARC.
The Chair asked the GC to review the Internal Audit timetable
to include cyber risks.
RISK UPDATE
(a) MMF introduced the Risk Update and undated the Committee with
the progress made to date on the Risk Management Project Plan.
(b) MMF explained the new Group Risk Profile which identified and
evaluated the (GE) Group Executive's proposed top risks for the
Business. The Committee discussed the Risk Profile and
challenged whether Industrial Relations was the highest risk. They
asked the Business to consider whether:
@ failure to-achiave.costracuuction tacnats:
IRRELEVANT ind
¢ ‘cybersecunty”aitacks wmicrr uisraprsystemrs = Torexample,
those affecting payments to POCA customers;
should be identified as higher risks.
Reconsider the Top Risks and whether thev.should. include
IRRELEVANT
to POCA customers.
(C) The Chair asked that the Risk Profile be amended to clearly show
GE accountability for managing each risk. KM suggested that the
sign off by the GE owner should be included in any year end
attestation process.
Ensure the Risk Profile shows clearly which GE member is
accountable for managing each risk. Include GE signoff, for
the individual risks for which they are accountable, as part of
the new yearend attestation process for year ending March
2017.
(4) MMF explained that general controls had been identified and
collected into a “Framework”, so that the GE could ensure that the
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controls in place were at the right standard, and have the right
effect enabling them to be evidenced for yearend attestation (year
ending March 2017). The Committee asked if the Group Executive
would have personal objectives aligned to the Framework. The
CEO assured the Committee that personal objectives for GE
members would be aligned to the General Control Framework.
The CEO agreed to ensure that all areas in the General Control
ACTION: CEO Framework were assigned to Group Executive members as
part of their personal objectives
(e) The Committee discussed the ‘Tone from the Top’ and agreed it
needed more clarity as the project progressed. It was agreed that
this would be the key messages, behaviours and communication
that the CEO and GE demonstrated at all times. These needed to
be aligned and to exemplify the values of the Post Office.
(f) IThe CFO explained the alignment with the Financial Controls
project which was building systems to enable attestation that
financial controls were working. He noted that this was work in
progress.
(g) The Committee discussed the frequency of attestation and
reporting and AG explained that in the Financial Services industry
quarterly reporting would be expected. The CFO proposed the
introduction of six monthly reporting to align with the external
reporting calendar. The Chair noted that it took time to embed
attestations and recommended that the Executive have “dry runs”
prior to the year end attestation (year end March 2017).
The CFO/GC to ensure that the areas in the General Controls
Framework are understood and that the Group Executive
ACTION: GC/CFO recognised their accountabilities to attest to the controls
being in place in time to support the Directors’ statement in
the 2016/17 Report & Accounts.
(h) IThe Committee asked for an update on the Control Framework at
the next ARC with more details of controls, GE owners and subject
matter experts, plus a timetable for when the ARC will receive
assurance.
Produce a statement including more details of controls, GE
ACTION: MMF owners and subject matter experts, plus a timetable for when
the ARC will receive assurance.
(i) I MMF updated the Committee on the progress in the Policy
Framework project, explaining that the ‘strawman’ included in the
paper was likely to change, and that the approach was being tested
using the policies owned by the GC. The Committee asked for
dates and timelines for establishing the succinct set of Key Policies,
setting out what can be expected over the next quarters.
ACTION:MMF Include dates and timelines in the Policy Framework
document, with detail as to what the amalgamated policies
include.
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(j) The CFO highlighted the challenge in articulating a pricing policy
across the wide range of products sold by the Business. The
complexity was acknowledged and it was accepted that the policy,
if required, may need to be restricted to a set of principles.
(k) The Committee asked Ernst & Young (EY) to provide a list of the
key policies which they would expect to see in a market median
company, to act as a benchmark.
(1) MMF introduced the Business Continuity project and explained the
aim of the Business to benchmark against the measurable
IS022301 business continuity standard.
(m) The Committee were perturbed by the findings to date. The CEO
was disappointed by the language in the report and challenged the
extent to which the ‘business continuity & crisis management is
deficient, unpractised and not embedded within the organisation's
culture’. The CEO gave examples of the recent flood crisis where
offices had been given support and reopened because people were
very aware of how to manage the network in a crisis. The CEO
believed that, since separation from RMG, more could have been
done to document and test the procedures in place.
(n) The Committee asked the GE sponsor of the paper to update the
ARC on the progress being made. Including a list of top suppliers
and whether they have contingencies in place; specifically before
the next meeting.
Continue to update the ARC on the progress being made to
improve Business Continuity. Including a list of top suppliers
ACTION:GC and whether they have Business Continuity contingencies
plans in place before the next meeting.
(0) MMF gave a progress update on Incident Reporting processes.
The Committee asked for an explanation as to what constitutes a
P1, P2 or P3 incidents how they are monitored and the SLA in
place to report and deal with them. The Committee also asked how
the Executive remediate the root cause of problems and challenge
suppliers to change processes.
At the next update, provide a report to define P1, P2 or P3
ACTION:MMF incidents and the SLA in place to report and deal with them. .
Include how the Executive remediate the root cause of
problems and challenge suppliers to change processes.
(p) The Committee discussed the statement made in the Annual
Report & Accounts that the Business complied with the ‘spirit’ of the
UK Corporate Governance Code (Code) and the implications of
changes in the Code. AG recognised that the Business was not
legally caught by the Code and that significant work would need to
be done to continue to state a compliance with the ‘spirit’ of the
code. The key areas where the Business does not comply with the
Code are those concerned with reporting and risk management
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ACTION: GC
(1)
(s)
ACTION: GC/CFO
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maturity, particularly providing evidence of the review of the internal
controls.
The Committee agreed that the Executive should focus on
improving risk management before any public benchmarking
statement. The Committee asked the Executive to work with the
external auditors to set out what a three year roadmap to
benchmark against the Code would look like.
The Executive to work with the external auditors to set out
what a three year roadmap to benchmark against the UK
Corporate Governance Code would look like.
The GC supported the decision to withdraw from making a
statement in the Report & Accounts but recognised the importance
of benchmarking against the best practice of the Code albeit
designed for public companies.
The Committee agreed that the Business should pull back from a
reference to the Code in the Report & Accounts but agreed that a
statement was necessary to explain the Business was still
maintaining high standards.
The Executive would discuss how it would reference the
Corporate Governance Code in the Report & Accounts, and
revert to the Committee by email before discussing with the
Board Chairman
After providing feedback on its elements, the Committee noted the
Risk Update.
POLARC 16/04 INTERNAL AUDIT UPDATE
(a)
POL ARC, 22" January 2016
GH introduced the Internal Audit Update focussing on the following
key points:
Contract Management. Significant progress has been made with
50% of actions now complete and the other 50% on track for
completion by the end of March. A further report would be provided
at the March ARC.
Property and Health & Safety compliance. Good progress with a new
Head of Property Compliance now in place and although there are
still actions to complete GH believed the controls were improving.
Open Actions. A detailed revised report would be provided for the
March ARC. The Committee recognised the number of internal
audits and reports due in the last quarter and asked for assurance
that the internal audit team had enough resource to complete the
work. GH gave assurance that the plan would be delivered. The
Chair asked for reports to include feedback on closure of high rated
actions.
Included post audit assurance in the ARC report in relation to
audit actions rated as high.
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ACTION: GH GH circulated a paper detailing the Internal Audit Planning Process
(b) and the Draft Audit plan proposed for 2016/17. The Committee were
asked to feedback any comments to GH who would collate and share
with the Chair in February before returning to the Committee with a
final proposal
ACTION: Committee members to feedback to GH on the audit plan
Committee proposal
members
Committee members agreed that all audit reports with a red report
(c) rating would be circulated in full the Committee as soon as the report
was available. Audit reports with an amber or green report rating
would be summarised and reported at the subsequent ARC meeting.
GH to ensure that all reports with a red rating are circulated to
the Committee and to the Chair of the POL Board.
ACTION:
GH Having taken all the discussion points into consideration, the
Committee noted the outcomes of the recent audits and reviews and
(d) further noted the current and upcoming work.
POLARC 16/05 FINANCIAL CONTROLS PROGRESS REPORT
(a) The CFO introduced the Financial Controls Progress Report and
recognised the importance of the work to give the Executive and the
Board the confidence to sign the 2015/16 Accounts. He explained
that the project had started by testing its methodology by checking
the fixed assets, as this was a relatively easy task. The next
reconciliation would be the income numbers, as this was the most
complex area and material to the accounts. The CFO explained the
interfaces between the systems involved which complicated the
reporting process. He did not believe that systematic errors existed
as these would lead to complaints from customers and clients, but
could not yet prove this was the case.
(b) The Chair asked the CFO to focus on ensuring the systems were
secure and providing the correct information, with a plan to automate
as soon as possible.
(c) The Chair asked for progress reports at every ARC and for Financial
Reporting to be flagged in the risk reports.
ACTION:CFO Provide Financial Reporting progress reports at every ARC and
include in the risk reports.
(d) Having taken all the discussion points into consideration, the
Committee noted the Financial Controls Progress Report.
POLARC 16/06 POSTMASTER COMPENSATION ISSUE / SIGNING OF INTERIM
ACCOUNTS
Postmaster compensation
(a)
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The CFO introduced the Provisions for Compensation paper and
explained the background to the understatement of the provision.
The error had arisen because agreements with subpostmasters had
not been captured accurately, and the provisions based on this
information had been wrongly calculated. After significant work the
provisions had been increased by £67m in September 2014 and
£87m in March 2015. Adjustments to both accounts were supported
by EY.
(b)
The CFO stressed that there were no implications for payments to
subpostmasters or adjustments to the EBITDAS in the reports.
(c)
The Post Office Interim Reports and Accounts for September 2015
and the Post Office Holdings Company Report & Accounts could now
be signed and published.
(d)
The Chair asked why the mistake had not been discovered sooner
by the Business or EY, and if both the CFO and AG were now
absolutely sure of the accuracy.
The CFO stressed that the compensation provision would always by
its nature be an estimate as individual branch details change, but
that he was now comfortable that the provision was prudent and
would cover the right level of compensation. AG agreed and
emphasised that the provision was an estimate as individual
contracts changed during the process. The Chair pointed out that the
recording and aggregating of information had been completed
incorrectly and asked for assurance from AG that the provision was
now accurate. AG explained that the auditors had checked the last
nine months of actual payments and that a lot of work had been done
to check the manual processes with a branch by branch analysis,
and that they were now comfortable with the provision as restated.
(f) The Committee asked why EY had not identified the problem during
the original External Audit. AG explained that they had done limited
testing and with hindsight should have focussed more on the manual
processes. This was being addressed in this year’s external audit
plan.
(g) The Committee asked what other provisions were made in the
Balance sheet and how they were tested.
ACTION: CFO The CFO was asked to provide the next meeting with an
analysis and assurance of the provisions on the balance sheet.
The CFO to agree with EY the audit approach for each financial
ACTION: CFO/JAG statement area.
Having taken all the discussion points into consideration, the
(h) Committee noted the progress and the next steps.
Interim Report
The Interim Report for the six months ended 27 September 2015,
(i) had been circulated to the Committee.
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The Committee challenged whether the provision was a true ‘timing
(j) error’ as reported in the narrative to the interim report. The CEO
promised to check the narrative before the accounts were signed on
Monday 25" January.
The CEO promised to provide a briefing pack including; the
ACTION: interim report; the press statement; and Qs & As to the Board
CEO before publication of the interim accounts.
The Committee asked for clarification about a second restatement in
(k) the accounts concerning cash and debtors. The CFO explained that
this was a technical classification which EY had requested at the end
of 2014/15, and was not a new issue. The Committee asked for this
issue to be included in the Qs & As circulated as it would be easy to
conflate the two issues.
Richard Callard explained that the mistake had knocked the
(Il) Minister's confidence in the Business and its reporting.
Having taken all the discussion points into consideration, the
(m) Committee noted the Interim Report.
POLARC 16/07 REPORT FROM POMS ARC
(a) The Chair welcomed Amanda Bowe, Post Office Management
Services Limited Non-Executive Director and Chair of ARC, to the
meeting by conference call.
(b) AB introduced the Report from Post Office Management Services
ARC and explained that work was underway to establish a risk
framework and risk appetite for POMS.
(c) AB highlighted two key risks:
« the role of Post Office as the Appointed Representative of
POMS, and
e¢ POMS oversight of branch compliance.
(d) AB stressed the importance and risks to both Post Office and POMS
of poor branch compliance and its mitigation through 1° and 2" line
oversight arrangements.
(€) AB acknowledged that POMS was at an evolutionary stage in its
development and had resource and capacity risk especially in its
Risk and Compliance function.
(f) AB explained that she was meeting the External Auditors in February
and currently waiting to agree the POMS audit plan.
It was agreed that the POL and POMS audit plans should be
ACTION: GH aligned.
(g) The Committee thanked AB for the POMS ARC report, which
contained the right level of detail from the wholly owned subsidiary
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(h) The Committee noted the report.
(i) AB left the meeting.
POLARC 16/08 ANY OTHER BUSINESS
(a) There being no further business the meeting was closed.
POLARC 16/09 DATE OF THE NEXT MEETING
(a) It was noted that the next meeting of the Committee would be 17"
March 2016.
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Post Office Limited Board
Status Report as at: 16/05/2016
REFERENCE [ACTION Action Owner [Due Date [STATUS Open/Closed
(GE Member)
January 2016 [CEO Report and Transformation Update CEO September Open’
POLB 16/2 (c) IHow should the Business recognise exceptional Board Meeting
contribution by individuals. Consideration to be
given to Chairman's awards or best Post Office
awards.
anuary 2016 [Project Trinity General Duly Board Open
POLB 16/14 (I) ITo undertake a review of the initial procurement —_ICounsel
process leading up to the decision to award the
contract to IBM, to ensure that any lessons from
that review were captured. The findings of the
review are to be reported to the ARC.
January 2016 ICEO Report and Transformation Update Neil Hayward IMay Board — [Action point closed, noting paper [Closed
POLB 16/2 (g) ITo provide a paper explaining the rationale behind provided and appended to status
ithe NFSP funding and the move to a trade report.
association to assist new Board members.
March 2016 [Status Report CFO July This should be covered as part of [Open
POLB 16/17 (d)IThe CEO proposed that a supplier strategy be the IT Strategy.
presented at a future ARC covering the Top 20
Supplier relationships and Supplier compliance.
March 2016 [Post Office Advisory Council (POAC Update) Company Ongoing Closed
POLB 16/23 (d)ITo circulate the POAC minutes to the Board Secretary
March 2016 [Project Iris : Mark Ellis re Closed
16/20 (i) [To include the! IRRELEVANT} in the Iris stakeholder jIRRELEVANT lundertaken by Mark
plan. F ENis aiid Chris Doutney.
March 2016 [CEO Report CEO May Board [Completed Closed
POLB 16/18 (b)IThe Board asked the CEO to pass on their Meeting
congratulations to Kevin Gililland and the Network
Transformation team for the excellent result.
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March 2016 [CEO Report CFO July Board IT strategy on July Board. (Open
POLB 16/18 (g)IThe IT Strategy would be presented as a topic for
discussion at the July Board meeting.
March 2016 CEO Report Neil Hayward 1VH and Natasha Wilson caught up IClosed
POLB 16/18 (e INeil Hayward to consult Virginia Holmes on and NW explained process and
) Pathfinder in light of Iris, and to opine on how the rationale.
[Trustee is likely to respond.
March 2016 ‘Status Report ‘CFO Done. Closed
POLB 16/17 (d)
Provide a list of the Top 20 suppliers to the ARC
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POST OFFICE BOARD UPDATE PAPER
NFSP Grant Agreement update
Author: Nick Beal Sponsor: Neil Hayward Meeting date: 24 May 2016
Executive Summary
Context
The Grant Agreement with NFSP, which funds the NFSP’s day to day operation, grants
for support projects (value p.a. £1.5m +£1m) and their transition to a Trade
Association, was approved by the board in June 2015. In advance of the end of the
first year of the agreement, this paper is an update on how the agreement is working,
key areas that have benefitted from NFSP support and a summary of the background
to the agreement.
Questions addressed in this report
1. What progress NFSP have made in their transition to a Trade Association?
2. What activity in Post Office has benefited from NFSP support?
3. What was the rationale in establishing the agreement?
Conclusion
Progress since establishing the agreement has been good but there have inevitably
been occasional tensions that have meant that NFSP have been challenged to
reconcile the reality of being funded by Post Office vs their traditional role that they
have yet to fully move away from.
But the agreement is a strong basis for both organisations working together and we
will expect an approach over the next 12 months that will reinforce this opportunity
and see some very different initiatives between us.
Strictly Confide
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The Report
What progress NFSP have made in their transition to a Trade Association?
What activity in Post Office has benefited from NFSP support?
Looking Back
1. NFSP have transitioned to a company limited by guarantee and therefore
legally adopted the framework of a Trade Association.
2. All postmasters are entitled to free membership and subscriptions have ceased
— NFSP are therefore fully dependent upon the funding from Post Office
3. NFSP have widened their focus on supporting postmasters’ retail business
— NFSP are having to (and are beginning to) improve their expertise in this area
and the structure of the recent annual conference was much more weighted
towards retail than in previous years — both in terms of the content of the
conference sessions and the seminars run by Post Office teams
4. As well as the retail focus, the NFSP conference (8"" to 11°" May) demonstrated
good progress in their transition.
— Overall conference format
— Small but growing number of younger & newer postmasters attending
— Presence of external retail industry experts
— Overall messaging that a Post Office is a great asset to a retail business and
that, when retail and post office is run well together, can be very successful
5. There have been a number of key initiatives in Post Office that have benefited
from the support of NFSP
— the successful deployment of the final phase of NT
— the increased response rate to the engagement survey
— internalisation of challenges made relating to remuneration reductions (i.e. we
have kept our differences out of the public domain)
— development of the Apprenticeship Programme
6. The leadership still occasionally displays behaviours which reflect the historical
role
— This has given rise to some tensions between the organisations where
decisions and changes made by Post Office eae ay related to
0
remuneration) have not been accepted (but challenge to this has been had
behind closed doors rather than in the public domain)
7. Linked to above, NFSP continue to face challenges from some members (and
external agitators e.g. CWU) relating to their future direction whereby they
have been challenged to reconcile the reality of being funded by Post Office vs
their traditional role that they have yet to fully move away from
— There remains an attitude that occasionally they need to “win” something
from the Post Office
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Looking Ahead
8. Supported by the grant project funding, NFSP will continue to develop their role
in supporting postmasters’ retail
— This should improve the viability of branches and make them less dependent
upon revenue from the Post Office
9. NFSP can support Post Office in improving our engagement with postmasters
— Postmasters will perform better
10.We will work closely on developing other initiatives e.g. using our resource to
support retail development (funded by the project grants), developing a wider
range of support services to improve other areas of the postmaster lifecycle
e.g. business planning
— Outcomes will have a better chance of buy in by postmasters and our
investment challenges can be supported by the grant funding
11.The sensitivity of very difficult future changes e.g. remuneration/network re-
structuring, will challenge NFSP’s ability to accept change within the framework
of the agreement
— NFSP reaction causes the agreement to be breached and terminated
12.New/young/retail orientated members fail to exert enough influence to rapidly
change the organisation further
> NFSP’s focus remains weighted disproportionality to Post Office “issues” rather
than growth and retail
In Conclusion
13.My confidence in the plan overall is 14. I will be looking to develop the
medium. I remain convinced that relationship further, funded by the
restructured NFSP have a role to project grants, supported by
play in supporting our network — external, neutral facilitation to
our mutual challenge will be to ensure a better understanding of
maintain a good, productive the role NFSP can play, both within
relationship when some business Post Office and the NFSP itself.
changes that impact postmasters
are not well received and NFSP
reactions to this are in conflict with
our expectations.
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Appendix
1. What was the rationale in establishing the agreement
Context
Post Office wishes to ensure that there is effective engagement between its branch
operators and the management structures within the organisation — it is a very large,
complex organisation made up of more than 8,000 separate businesses.
We believe a transformed NFSP can support this - a strong and credible body that is
the voice of the UK’s Post Office branch operators which can reflect views that add
value to the overall Post Office customer proposition through effective challenge,
contribution to business/operational/product development and also provide a range of
benefits to operators.
Post Office’s view is that supporting, via grant payments, the NFSP to transform itself
and securing a future will be commercially beneficial to both Post Office and
operators, by helping to drive the development of products and services which are
more attractive and relevant to our customers and identifying opportunities to do
things more efficiently and effectively.
Background
The current activity re-structuring the network (and the last decade’s closures) has
had a major impact on the NFSP - for many new operators, membership of what has
been seen as a quasi-trade union is not particularly important. For many branches,
the post office aspect will not be the prime part of their business, unlike for the
majority of traditional subpostmasters, and therefore their inclination to view paid
membership of NFSP as value for money will be lowered and membership was
predicted to decline.
NFSP recognised this was a threat to the future of their organisation and in the main
accepted that their traditional role would not exist in the future. They were therefore
looking to move from a quasi-Trade Union role to a Trade Association type of
organisation - representing the totality of the agency network and also have role in
the wider retail interest of members rather than just the post office aspects.
Developing the Grant Agreement
Tied primarily to their agreement to a revised Network Transformation approach that
includes mandated change for some aspects (the previous programme being
voluntary), Post Office agreed to develop a approach with them that would provide
long term funding and hence stability.
This has evolved into the completion of the Grant Agreement between Post Office and
NFSP (see below for a summary of features) - the provision of annual and project
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grant payments to support the operation and development of NFSP whilst providing
free membership for all postmasters.
Whilst in the past they have asserted a fairly typical trade union position of trying to
negotiate as much as possible for their individual members without really recognising
the bigger picture of the business as a whole, the Grant Agreement is seen as a
significant opportunity for both organisations to introduce a new type of relationship -
although this will not happen overnight and current ways of working can still be
unpredictable
e The Grant Agreement was formally approved by the Board in June 2015 and
signed in July 2015
« Free membership for postmasters on the new models was launched in October
2015 and to all postmasters from April 2016
e First payments for the Annual Plan were made in January 2016
Key Features
e The GA is based upon the principles brought to and endorsed by the Board
initially in October 2013.
e This provides a 15 year funding arrangement (£1.5m pa annual grant +
discretionary £1m pa project specific grants) for the NFSP and commits them to
supporting Network Transformation, including acceleration of the final phase of
Network Transformation. The project specific grants can only be accessed via
business cases submitted against existing POL processes i.e. funding is not
guaranteed.
e The annual grant enables the provision of free membership to all postmasters
e The agreement sets out specific activities NFSP can and cannot undertake,
defining clear activities that would represent a breach of the GA which Post
Office could then, if it chose, seek to rely on to terminate. This includes,
amongst other things, any public activity which may prevent Post Office from
implementing any of its initiatives, policies or strategies or other activities
which may be materially detrimental to Post Office.
e It also ensures that the NFSP must become representative of the whole network
- they must achieve and maintain a minimum membership of 50% of each
operating model (Main, Local etc).
e In line with the original principles, the 15 year term does not have a “for
convenience” break clause. However, the specific detail of termination events
and the detailed definition of the last phase of NT built into the agreement are
based on the principles brought to the board in October 2013 and the level of
detail achieved through negotiation has strengthened Post Office’s position.
The agreement can be terminated in the event of the NFSP breaching the clear
criteria as defined above.
e Therefore, whilst we envisage a 15 year agreement, we can and will terminate
it against the specific requirements we've defined as termination events if it's
not working - the 15 years is not guaranteed and expenditure beyond the
annual grant will only be made on a case by case basis.
e The GA is intended to assist the NFSP on their journey from a trade union to
trade association and enables a relationship between the organisations that
supports the engagement, development and growth of thousands of small
businesses.
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POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: May 2016
Executive Summary
Context
Our goal for 2016-17 is to achieve Our 3 year goals are:
EBITDAS of (£10m). 1. To establish the foundations of a
successful independent business.
2. To accelerate the transformation
of Post Office and reach
breakeven.
3. To secure commercial
sustainability for the long term.
In summary, our strategy is to stabilise our income in mails and grow in
financial services by focusing on the customer, moving up the value chain where
suitable; modernise our physical and digital channels; streamline our support
services; build a simpler, more cost effective operating model; alongside
improving our colleague and network engagement.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Conclusion
1. Building on a strong year end, we have had an encouraging start to this
financial year with EBITDAS and income ahead of target.
2. Our transformation is on track and we have delivered some significant
milestones in recent weeks, including completing separation from Royal Mail
and opening our 6000" modernised branch.
3. We are entering a critical period in the restructuring of Post Office Ltd with
multiple, associated industrial relations challenges.
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
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The Report
Looking Back
¢ Financial Performance - P1
— EBITDAS in P1 is £2.5m favourable driven by income from Financial Services
and Government Services. It is £5m higher than a year ago.
— Performance was particularly strong in P1 on Credit Card and Home
Insurance. Life Insurance, Banking, Identity and Passports also performed
well.
— Total Expenditure was in line with budget, with Postmaster costs being
£(1.1)m adverse (simply the flow down of improved income), offset by non-
staff costs (£0.5m favourable) and Project Opex (£0.6m favourable).
— As it is P1, we have not provided a full financial report. A summary of P1
performance is attached at annex A. Al Cameron will provide an update at the
Board meeting.
¢ Transformation
— As highlighted in the Transformation Update accompanying this report, we
completed technical and contractual IT separation from Royal Mail Group at
the end of March.
— There was some minor disruption but nothing significant or ongoing.
— This represents the conclusion of four years of hard work and collaboration
across both businesses and major investment in the Post Office infrastructure.
— In addition, I accompanied Tim Parker to open our 6000" transformed branch
in Nyetimber, West Sussex in early April. An outstanding achievement by the
Network Transformation Team.
¢ NFSP Conference
— Last week Tim and I attended the NFSP’s annual conference, along with other
colleagues from Post Office Limited.
— The event was well-attended and the debate was lively; with a strong theme
of creating a sustainable proposition for agents based on Post Office within a
retail environment coming through.
— Feedback was very positive and the conference represented a significant
milestone in the transformation that the NFSP is going through alongside POL.
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« Financial Performance - P1
-» Despite a strong overall performance in Financial Services, Mortgage,
Savings, Travel Money and Travel Insurance were all below target for P1.
— Telecoms and Lottery were also behind target.
> Marketing plans are in place for Mortgage, Travel and Telecoms. We have also
launched new mortgage products with some market-leading rates.
¢ Horizon
—> As reported last week, we were subject to a significant incident with Horizon
on 9'* May.
— Between 8.55 am and 10.15 am, approximately 65% of transactions on
Horizon failed to complete as the system began to degrade owing to memory
issues. The system was brought back to full trading capacity by 10:30.
— This incident occurred following a week’s live proving of the secondary system
and following transfer back to the primary system which, with no changes to
configuration, had run without incident for a year. It had also run on low
volumes on the Sunday without incident.
> The incident was wholly unacceptable and has been the subject of a formal,
contractual escalation with Fujitsu, who are working through the root cause.
— There was some media coverage on the day itself and the following day but
this was relatively low-key and short-lived.
-» Aconfiguration change enabled the system to start operating effectively and
no further issues have been experienced. However, we do not yet understand
why that change had the impact it did and until we do we will not be
switching between primary and secondary servers.
> We will revert to the ARC with a full root cause analysis and steps undertaken
when our work is complete.
Looking Ahead
e Strategy
— The Group Executive and I dedicated two days earlier this month to discussing
the future strategy for Post Office.
— These were highly productive discussions centred on how we become a
consistently profitable business so we can invest from a position of strength;
cement our position as the number one retailer of letters and parcels;
continue to grow our financial services business; complete the restructuring of
Confidential
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POL to be a much smaller, lower cost business that is aligned to the needs of
retailers in our agency network.
— Further work is now underway to prepare for the Board’s strategy days next
month.
e Project Paddington
— Further to signing the Paddington deal wit!
e have now finalised the detailed business case for the deal
‘line with the outline case signed off by the Board.
— The business case payback period remains at 2.8 years although there have
been small mevements.in.investment.casts and benefits.
> Costsarenow IRRELEVANT onthe pre-contract signature
assumption. This arises from updated branch build and redundancy costs
following detailed costing work, The total EBITDAS benefits now stand at
HIRRELEVANT: an improvement o'
* Industrial Relations
— We have entered into a critical period in delivering our restructuring with the
associated challenges in industrial relations across the Crown network, Supply
Chain, Customer Support Centres, pay and pensions.
-» We continue to have discussions with both CWU and Unite but the risk of
industrial action across the business remains significant.
* Reorganisation
— Last week we briefed the trade unions and colleagues in Finsbury Dials
Customer Support Centre and Financial Services Sales teams about a number
of proposed changes across the business.
— These entail 105 redundancies alongside the removal of a significant number
of vacancies.
« Iris
— Following discussions with the trade unions yesterday, we informed colleagues
today of our decision to withdraw from the external market and refocus
Supply Chain on serving the needs of post offices.
~» This entails 594 redundancies and the closure of 9 operational units.
At the time of writing, it had received limited media coverage; we are
monitoring this closely and will keep the Board informed.
+
Confidential
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Strictly Confidentiat
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Annex A
Period 1 — Financial Performance
P1
£m Actual Budget Variance
TOTAL GROSS INCOME 90.4 88.1
Cost of Sales (10.6) (10.8)
TOTAL NET INCOME 79.8 77.3
Staff Costs (21.4) (21.5)
Postmaster Costs (37.2) (36.1)
Non- Staff Costs (27.3) (27.8)
Total Expenditure (pre Project OpEx) (86.0) (85.4)
FRES - Share Of i fi 3, 3.
IE'
Project OpEx
Depreciation
Network Pi
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MAY BOARD MEETING
Transformation Update
Author: Michael Brown Sponsor: David Hussey Meeting date: 24"” May 2016
Executive Summary
Context
The Post Office is undertaking a complex transformation programme, designed to
modernise our network and IT infrastructure, simplify our cost base and create the
platform for customer-led growth. The core objective is to create a commercially
sustainable business equipped to cope with lower levels of government funding after
March 2018.
Questions this paper addresses
1. Overall, are we on track to deliver our key Transformation programmes?
2. What are the implications of any variance, for our outlook and plans?
Conclusion
1. Following a strong finish to 2015-16 we are on track to deliver our transformation
plans:
+ We achieved key Transformation year end targets including modernising 1,904
branches, Crown Break-even, separation from Royal Mail and delivery of £63m
of benefits vs a target of £51m, including and £54m of cost efficiencies.
* The risk profile has improved and remains stable following conclusion of Trinity.
+ Automation of Post Office Card Account transactions in the Crown network is
delayed.
2, The latest view of costs and benefits have been included in the three year plan.
+ We are on track to deliver Transformation financial benefits that are included in
the three year plan.
+ The delay to automation of the Post Office Card Account transactions in Crown
branches creates a £1.5m gap in the programme’s benefits in 2016-17. Options
to accelerate Crown Network Change activity to close the gap are being
considered.
Input Sought
The Board are asked to note the progress made, key challenges faced and actions
taken to address them.
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The Report
Looking Back
WHAT HAS GONE WELL (SINCE LAST PROGRESS.
+ Network Transformation
+ In 2015-16 we opened 1,904 modernised branches against a target of
1,850.
+ As at 9'May we have 6,155 modernised branches open (3,009 Local and
3,146 Mains).
+ From our modernised network we have:
+ Contributed an extra 192,150 hours in the network which is the
equivalent of 4,177 extra Post Offices operating core hours.
+ Reducing fixed pay to postmasters by £23m in 2015/16 and are
forecast to save £31m in 2016/17.
+ Crown Network Development
+ Subject to audit, the Crown network is forecast to exceed the break even
+ These are key milestones in achieving our ambition of a Crown network
going from break-even to a £10m profit run-rate by March 2018.
+ Point-of-Sale Software (Trinity)
+ There have been no legal challenges following the termination of the
Front Office contract with IBM and the extension of the Fujitsu contract
for provision of the Horizon Point-of-Sale system.
+ Separation
+ The programme to technically and contractually separate Post Office Ltd
from Royal Mail has successfully completed.
+ Delivery of Benefits
+ Transformation initiatives have delivered £63m of benefits in 2015-16
against a target of £51m.
+ £53.9m from cost efficiency savings including Crown and IT
savings
+ £4.8m from project Hawk.
+ £4.6m from Network Transformation
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* Support Services Transformation
+ The new Call Centre in Chesterfield has been operational from 25th April,
delivered 8 days early.
+ Delivery of benefits on track to start in July 2016, which enables delivery
of annualised savings of £3.3m benefits in 2016/17 in line with the
business case.
+ Crown Network Development
IRRELEVANT
* This is due to issues with the technical interfaces between suppliers to
verify the POCA PIN number. Resolving the issue requires significant
development.
+ Options to accelerate Crown Network Change activity to close the gap
are being considered with the Industrial Relations Steering Group.
Looking Ahead
+ Support Services Transformation
+ Chesterfield Call Centre to increase operational capacity from 20 desks to
95 by the end May.
+ Closure of St Helens and Leeds sites with the work transferring to
Chesterfield due at the end May.
+ One third of colleagues will transfer from the existing call centre in
Dearne, and two thirds will be newly recruited and trained.
+ Defined Benefit Pension Scheme
* The consultation period has been extended to 31% May to allow
employees and their representatives to take the potential for
redundancies into account when responding to the proposed changes to
pensions.
* Group Executive session on 24" May will review progress with
consultation.
* Project IRIS (Supply Chain Transformation)
+ Plans for Supply Chain will be communicated to colleagues on 17° May
* The programme plans are subject to consultation. Timelines and
business case are currently on track.
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+ Simple To Run Network
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* This programme’s objective is to deliver an attractive retail proposition
which is commercially sustainable for the Post Office.
+ A hypothesis to achieve this objective has been presented to the Group
Executive and further detailed analysis is being undertaken ahead of the
June Board.
+ Transforming Agents Proposition
* This programme has an objective to complete an integrated strategic
review of our commercial model and relationship with our Agents.
+ The programme is currently in a design phase.
* Currently, we are not reporting any ‘red’ risks and are confident that delivery risks
continue to be tightly controlled and managed.
+ Risks are regularly reviewed within and across Transformation programmes, clear
mitigation actions are agreed and broken down into manageable deliverables
ensuring we are regularly reducing the probability and impact of these risks.
+ There are three Transformation Programmes (Iris, Paddington and Pathfinder)
which are entering a phase which will significantly increase the likelihood of
industrial action. The IR Risk is well documented and managed by P&E, who work
closely with the IR Steering Group to ensure this is managed, controlled and the
impact is minimised.
In Conclusion
Our confidence in delivering
Transformation continues to increase due
to:
1, Achievement of key Transformation
year end targets.
2, The risk profile remaining stable
following conclusion of Trinity.
3, Progress across Transformation
programmes is in line with plans.
Confidential
We are on track to deliver
Transformational financial benefits that
are included in the three year plan.
We need to continue to closely manage
and mitigate risks in line with risk
appetite.
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Risks do exist across the portfolio and
there is an increased risk of industrial
action as a result of Transformation
activity.
Appendix - Programme Dashboard
Network
Transformation
Delivered 2015-16 targets, on track for 2016-17
targets.
Subject to audit, the Crown network is forecast.to__,
exceed.the break even.taraeti.. IRRELEVANT
Crown Network
Development
The project remains at Amber status whilst we work
through the commercials and confirm the end state
support model for the Simple To Run Network
environment.
EUC Branch
Good progress is being made against the delivery
schedule for release 1 of Horizon improvements.
Amber status pending baselining of plan and business
case.
Point of Sale
Software
On track for delivery in September 2016. Amber
status due to delays in agreeing exit plans with
incumbent vendors.
Back Office IT
Transition
On track to deliver a rationalised, consolidated
Support Services operation into Chesterfield by the
end of July 2016 and annualised savings of £3.3m.
Support Services
Transformation
Simple To Run
Network
Further detailed analysis required ahead of the June
Board.
Transforming On track.
Agents Proposition
Defined Benefit
Pension
Project will remain on amber until the outcome of the
consultation period is known.
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BOARD DECISION PAPER
The Post Office Advisory Council
Author: Jane Hill Sponsor: Mark Davies Meeting date: 24 May 2016
Executive Summary
Context
The Post Office Advisory Council (the Council) has been in existence for two years.
This paper is to update the Board on the background to its formation, the benefits it
has brought and its future purpose.
Questions addressed in this report
This paper seeks to address the question: why is the Council important to the Post
Office? The answer is twofold:
« it has developed and matured into a forum that makes a positive contribution.
« it symbolises a shift to more mutual ways of working by the Post Office. As the
potential for mutual ownership of the Post Office is still part of the legislative
framework in which we operate, the continuation of the Council supports this
strand of public policy.
Conclusion
The Council is an essential conduit between the Board and its key stakeholders,
providing a ready forum for engagement, feedback and discussion around key policy
changes and future plans.
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The Report
What is the opportunity?
The Post Office Advisory Council (the Council) was established in March 2014 to
provide a mechanism for the Post Office to engage stakeholders and to provide advice
and feedback on business issues. (It is not part of the formal governance
arrangements for the Post Office.) Terms of reference are in Annex 1.
Membership comprises employees, postmasters, representatives from the unions the
NFSP and other businesses including Google and Unilever. Short biographies of
members are in Annex 2. Members are not paid. The Council meets three times a
year - in March, July and November - and is chaired by Non-Executive Director Tim
Franklin.
The Public Affairs team acts as secretariat and also provide strategic oversight and
delivery. Our approach during the first year was to bring all members up to the same
level of knowledge about the Post Office, our strategy and the challenges we face.
During the Council’s second year we have moved to a more output-focussed
approach, seeking input and insights from members on current issues. The Council is
now starting to make a valuable contribution.
Business rationale for the Council
Two years on and seven meetings in, the Council has developed and matured into a
forum that has the potential to make a positive contribution to the Post Office at an
important time in its evolution. It acts as a critical friend, without being dominated
by the interests of either the unions or the NFSP, while bringing the customer
perspective as well as insights and experience from other sectors. The Council has
become a useful sounding board on current business issues and for testing emerging
thinking. Furthermore, members are an engaged and increasingly trusted group.
They are also keen to continue with their roles.
Public policy rationale for the Council
The Council was established during the 2010-15 Coalition Government when
mutualising the Post Office was a policy objective of Liberal Democrat ministers. A
“path to mutualisation” was set out in the Government's response to a public
consultation in 2012 - Building a Mutual Post Office. A number of pre-requisites
were identified, the most important being “achieving commercial sustainability” and
“building a mutual culture”’. On the latter, “the input of those with an interest in the
Post Office will be an essential ingredient in that cultural shift’?. The creation of the
Building a Mutual Post Office: The Government's response, -
* Building a Mutual Post Office: The Government's response.
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Post Office Advisory Council was to be a mechanism for achieving this cultural shift
and there was an initial emphasis on the Council’s stakeholder engagement role.
While mutualisation of the Post Office has slipped down the Government's agenda, the
potential for mutual ownership is still part of the legislative framework in which we
operate. The 2011 Postal Services Act provides for only two ownership models: to
remain in government ownership or to become a mutual. Today the Council remains
the biggest symbol of this mutualism strand of policy in which policymakers have a
residual interest. Disbanding the Council at this point in time could be seen as a
deliberate move against this strand of public policy.
Our current approach
Experience from recent meetings tells us that the Council adds most value when there
is a clear live issue, or work in progress, on which we are asking for input, and the
relevant business lead participates in the session. Over the past year we have
aimed to have at least one such item on the agenda at each meeting.
Recent examples of these sessions have been:
Post Office Vision (March 2015): Council members challenged the purpose and
clarity of an early draft, presented by the Communications Team, leading to a review
of the purpose and content of the Vision.
Social purpose of the Post Office (November 2015): the Council was asked to
consider how the social purpose of the Post Office should evolve in a commercially
sustainable way, to help inform the businesses approach to negotiations with
Government on future funding and strategy. Discussions during the session
highlighted the importance of the economics for the agent — with differing
perspectives from both the multiple represented on the Council, as well as
independent postmasters. The session also underlined the role of agents as guardians
of our social purpose, and the need for a more joined-up approach with their own
initiatives to be part of their local communities.
Future approach to network design (March 2016): the Council was asked to
consider how the Post Office could become a more attractive proposition for agents, to
inform development of the Simpler to Run Network. The session provided some very
clear areas for the Network team to focus on. For example, the need to simplify our
products and operation, integrate better with a retailer, align online and store, and do
more to promote opening hours.
Through its membership, the Council has also allowed us to foster closer links with,
and to learn from, other businesses and sectors. Last year colleagues from People &
Engagement were invited by Andrew Moys to attend the John Lewis Partnership
Council, the organisation’s main democratic body which represents partners and
ensures the business is run on their behalf.
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We have also benefitted from Google’s membership of the Council with Google
organising a workshop for Post Office colleagues to look at the opportunity for
harnessing the benefits of technology.
Individual Council members have also supported commercial teams, with both their
professional expertise and perspective as customers. For example, Marcus Buck, who
joined Unilever as a marketing management graduate trainee and is now responsible
for one of their global brands, has been working with the Post Office Head of Brand.
And Rebecca Glenapp, who runs a successful e-Commerce business, took part in some
consultation work that has helped us refine our offer to SMEs.
What do we need to do next to progress?
We intend to develop our approach to the Council, utilising the skills and experience of
members to benefit the business.
Each Council meeting agenda will have at least one “work in progress” item, on which
we ask for input, with the relevant business lead participating in the session. We will
do so by working with the Strategy team to set each agenda, and with the business
lead for each agenda item setting clear objectives for the session.
The Council’s Terms of Reference set out that, in addition to the Chairman, a second
Non-Executive Director would become a member. Neil McCausland took on this role
until he stood down from the Post Office last year. Rather than replace him, we
propose to invite non-executive members of the Board to attend Council meetings on
a rotating basis instead. A list of future Council meeting dates is at Annex 3.
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Appendix
1. Terms of Reference
2. Members’ biographies
3. Future Council meeting dates
1. Terms of Reference
PURPOSE
The Post Office Advisory Council (Council) exists to provide a forum for Post Office stakeholders
and other experts to discuss issues of interest and importance that impact on customers,
stakeholders and their communities.
The Post Office Board of Directors provides the primary governance of Post Office Limited (Post
Office).
ROLE
The role of the Council is to:
e provide a two-way channel of communications between the Post Office and its
stakeholders
provide a mechanism for stakeholders and experts to offer views and advice to Post Office
Board and the Group Executive on subjects brought to it
* increase understanding and strengthen relationships between Post Office, its stakeholders
and wider interest groups
* provide a community for advocacy and communication of Post Office issues
The Council
e — is not part of the formal governance arrangements of the Post Office
e is not a representative body
e has no decision-making authority
e may provide advice and views on matters brought before it but neither the Post Office
Board nor the Group Executive is required to act on that advice or those views
MEMBERSHIP
The Chairman will be appointed by the Post Office Board and will be one of the Board Non-
Executive Directors.
There shall be about twenty members plus two Non-Executive Directors of Post Office. Other
attendees will be members of the Group Executive (as required by the agenda), and guests as may
be invited from time to time at the discretion of the Chairman.
In the absence of the Chairman, a Council meeting may be chaired by any Post Office Non-
Executive Director in attendance who is appointed to act as Chair by the members.
Members will be selected to provide a diverse and balanced mix of skills, experience and stakeholder
representation. Selection will be through a mix of invitations for nominations from key stakeholder
groups and advertised competition, with interviews to ensure the membership has a strong mix of
skills, and fully reflects the geographical, stakeholder, social, community and commercial interests.
The aim is to ensure members represent views from the following broad categorisation of areas.
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Geography Diversity Experience
England Young Commercial
Scotland Later life Financial Services/Banking
Wales Carers Marketing
Northern Ireland Ethnic groups Retail
Rural areas SME
Urban areas Social
Disadvantaged areas Community
Affluent areas Government
Mails
Initial appointments will be for periods of two, three or four years to ensure continuity of membership.
Thereafter members will generally be appointed for a term of four years, renewable upon application
for further terms of one year at the discretion of the Chairman.
There is no right to renew membership and renewal may be refused on any reasonable grounds
including the need to refresh membership in order to stimulate fresh debate.
Membership will be terminated if a member misses two meetings within the term of their
appointment.
CONDUCT OF MEETINGS
All members will be given reasonable written notice of meetings.
Meetings will be held three times a year, and will last a full morning.
Members cannot send deputies except in the case of corporate members whose attending member
is unavailable. No deputy shall be allowed to attend unless approved in writing in advance by the
Post Office.
Members cannot bring guests unless approved in writing in advance by the Post Office.
All meetings shall be treated as confidential unless otherwise specified.
Recording of meetings on any form of media is not permitted.
Any member may be requested to leave a meeting if in the absolute discretion of the Chairman he
believes the member's conduct is or is likely to be detrimental to the purpose of the Council and the
overriding objective of a constructive exchange of views and debate.
The Chairman will feed back the views of the Post Office Board and Group Executive at each
meeting.
Following each Council meeting, the Chairman will provide feedback to the Post Office Board and
Group Executive as appropriate.
EXPENSES
Members will not be paid, but will be reimbursed reasonable out of pocket expenses for attending
meetings upon production of written receipts for the expenses incurred. If there is any dispute as to
the extent of any expenses to be recovered, the Chairman's decision will be final and binding.
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GOVERNANCE
The Post Office Secretariat will attend all meetings, and take a note of proceedings and discussions
at meetings.
Agendas and a summary of minutes of Council meetings will be published, redacted where
appropriate to protect confidential information and circulated to members.
The agenda will be set by the Post Office. Requests for items to be included on the agenda should
be made to the Chairman in writing (including email). The Chairman is not obliged to accept any item
on to the agenda.
If the Chairman does accept an agenda item, he may request that the point under discussion be
supplemented or supported by an accompanying document or documents. Failure to supply any
supporting documents reasonably requested by the deadline given will lead to withdrawal of the item
from the agenda.
February 2015
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2, Members’ biographies
Elizabeth Armstrong
Elizabeth has a background in customer services for Nationwide Building Society
where she was also National Executive Officer and Individual Cases Officer for the
Nationwide Group Staff Union. Now retired Elizabeth is involved in local politics and is
@ parish councillor. Not only does she bring a background of working in the financial
services area she also has a keen interest in enhancing services for rural
communities.
Theo Bertram
Theo Bertram is Head of Public Policy and Government Relations at Google UK. Prior
to joining Google in 2011, Theo was Head of Public Affairs at Telefonica 02. Between
2006 and 2010, he was a Special Adviser to the Prime Minister for both Tony Blair and
Gordon Brown and was Head of the Research and Information Unit at 10 Downing
Street.
Marcus Buck
Marcus was born and grew up in Liverpool. After graduating from Cambridge
University with a degree in History he worked for a large advertising agency on
campaigns for Radox, Santander and Boots. He then joined Unilever as a graduate
trainee in their Marketing function, he has also been the Brand Manager for Dove
Men+Care.
Andy Burrows
Andy Burrows is the Head of Post Office Policy for CITA. He leads the organisation's
work to promote the consumer interest in all aspects of Post Office services, including
the quality, accessibility and sustainability of the branch network. His work
programme also explores potential new services which could be offered through the
Post Office, including government services, credit unions and banking solutions for
low-income consumers,
Andy previously worked for a predecessor body, Postwatch, managing its consumer
scrutiny and research programme; and before that undertook research projects for
think tanks.
Tim Coomer
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Tim has a background in rural retailing and has worked for a FMCG wholesaler before
spending some time working for Community First where his work involved managing
successful support, advisory and training programmes tailored for rural retailers and
postmasters across the south west. Tim has a wide range of experience with both
independent and community retail coupled with an extensive knowledge of issues
faced by both rural communities.
Pardeep Duggal
Pardeep is Head of Digital Marketing at E.ON. Pardeep’s team manage the E.ON
website, mobile app and email campaigns, as weil as digital marketing including
social, paid activity and working with third parties.
Prior to joining E.ON, Pardeep worked in retail and financial services, always in
marketing, and moved into digital during its infancy.
Chris Feliciello
Chris is an Area Manager for a high street chain and has worked for them for over 20
years, hoiding a variety of positions in Yorkshire, Greater Manchester and North
Wales. Chris sits on Community Pharmacy Wales, supporting the interests of
community pharmacies in Wales.
Tim Franklin (Chair)
Tim Franklin joined the Board of Post Office Limited as a Non-Executive Director on 19
September 2012, He has 30 years experience working at board level in a variety of
financial services businesses in both the mutual and private sectors.
David Foley
David is the Chief Executive of three Chambers of Commerce, an Industrial Professor
at East Kent College and a Director of Academy FM, Dover People’s Port Trust and
Thames Capital Ltd. He sits on the board of a variety of community organisations and
private companies in different sectors of the economy.
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Rebecca Glenapp
Rebecca Glenapp launched LUX FIX with Alice Hastings-Bass in the summer of 2012.
Rebecca started her career in strategy consulting before leaving to work in business
development for digital start-ups for several years. The aim behind LUX FIX was to
build a business that offered an alternative to mass-market brands, working with
independent designers who provide the quality in materials and design without the
normal "designer" price tag. They now have over 150 designers on the site and have
launched e-shops for the Telegraph, Independent and Evening Standard fashion
teams.
Farida Iqbal
Farida has been working with Post Office Ltd for 18 years in a variety of different roles
and has seen the business adapt to the changing needs of its customers. Farida’s
experience includes working as a counter clerk at Crown branches, supporting teams
in the agency network, working with payment services on tenders for energy and
water utilities and she now works on the Network Transformation Programme.
Nilesh Joshi
Nilesh Joshi, is the National Executive Officer of the National Federation of
Subpostmasters. He has been an active member of the Federation for the last 15
years and joined the executive team after taking various roles at branch and regional
level.
In November 1990, Nilesh became the postmaster of the Forest Hill Road branch in
East Dulwich, which he still runs. In 2009 the branch won the Asian Trader
Independent Retailer of the year.
Marc Kidson
Marc is the Chair of the British Youth Council, a national youth campaigning charity,
and has been a researcher at the Institute for Government, a cross-party think tank
helping to improve the effectiveness of government. He served on the Post Office's
Stakehoider Forum from October 2011 to December 2013, looking at how the Post
Office defines its public purpose as an organisation.
Ben Lucas
Ben Lucas has a background as Chair of Public Services at the RSA. He is a public
policy and communications entrepreneur and has worked at the heart of the public
policy world for over three decades. He was previously founding Director of the 2020
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Public Services Trust. He began his working life as the research officer for the
construction union, UCATT; before becoming Jack Straw’s adviser during the mid-
1990s. Following this, he co-founded and became Managing Director of LLM
Communications, which became the leading independent public affairs advisory firm in
the UK, Ben is a founding Trustee of the think tank, New Local Government Network,
and an adviser to the Joseph Rowntree Foundation.
Ismail Loonat
Ismail has around twenty years’ experience as a postmaster and over the years has
built a strong rapport with the local community and businesses. Ismail’s efforts were
acknowledged when he was one of finalist for the Royal Mail Chair excellence award in
2009.
More recently, his Post Office obtained funding from the Post Office Community
Enterprise Fund. Ismail is an active community worker and has been a volunteer for
numerous charities.
Andrews Moys
Andrew has recently moved on from his role of Director of Communications at John
Lewis Partnership. He managed the Partnership's communications team of 25 with
responsibility for government and media relations, internal communications including
the Partnership's weekly magazine, The Gazette and the John Lewis Partnership
website.
Andrew started his career in management consultancy, before specialising in
corporate communications working for BAA, the world’s largest airports company, and
then at Cadbury, the global confectionery brand.
Brian Scott
Brian Scott is the Unite Officer for the CMA Sector of Unite. His responsibilities are for
all Unite members in the postal sector. Other areas for which Brian is responsible are
the European Social Dialogue and the Uni-Europa Postal Committee.
Brian has been a member of the Labour Party for over 30 years and is currently chair
of the Tywford branch. He joined the Post Office in 1974 and worked in BT fora
number of years before taking on his current role. He was a member of the CMA
Executive Council from 1984 to 1991 and held the position of National Vice-Chair for
three years and was Chairman of the Telecom Executive Committee for 4 years during
this period. He was made a National Honorary Member of the CMA in 1992.
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Lynn Simpson
Lynn fs a full time union representative for the Commu $ Union, This
year she was elected onto the Pos!
Office to hold this position
tal Executive of the CWU, the first woman from Post
Other positions she has held include Area Health and Safety, Industrial R:
Representative and Territorial Chair of the Southern Territory, She has been involved
in various joint working programmes including several National Duty reviews and a
new way of working trial which had staff engagement, customer satisfactio:
increased income at the heart of the pilot,
tions, Area
and
Nicholas Stuart
Nicholas is an NHS Consultant Cancer Specialist working in North Wales as a Professor
of Cancer Studies at the University of Bangor. Nicholas has worked in North Wales for
the past 21 years having previously trained in Southampton, Birmingham and Oxford.
Previously Nicholas has been Lead Cancer Clinician for North Wales Cancer Network
and Chair of the Welsh Forum of Local Negotiating Committees. He is involved with a
number of charitable groups including those that raise funds to help local cancer
services in North Wales and with the Northwest Cancer Research Fund based in
Liverpool.
Kevin Twynholm
Kevin is a lifelong retailer with a passion for innovation and meeting the ever-
changing needs of customers. He currently works for One Stop Stores Ltd overseeing
Retail Projects, Store Productivity and Services.
He has been involved with the Post Office Network Transformation programme since
the days of Post Office Essentials and has led the conversion of over 100 branches to
the new Local and Mains models.
Donna Underhill
Donna joined the Post Office in 2004 as a counter clerk and has worked in various
roles in the Crown Network before becoming Branch Manager 6 years
ago. Previously Donna has worked with First Friday and has been influential on all
aspects of the Crown Leadership Excelience Programme which has underpinned the
whole vision strategy.
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3. Future Council Meeting Dates
6" July 2016
2" November 2016
15" March 2017
5 July 2017
8" November 2017
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POST OFFICE Ltd. Board SUBSI youe
POMS Update to Post Office Board
Author: Nick Kennett Meeting date: May 2016
Executive Summary
sContext
Post Office Management Services (POMS) was established in late 2014 as a wholly
owned subsidiary of the Post Office Limited, to develop the consumer insurance
business. POMS launched a travel insurance proposition in early 2015 and became
directly regulated by the FCA as an insurance intermediary in June; in October 2015
POMS acquired the Post Office insurance business from Post Office Limited, which had
acquired it from the Bank of Ireland (UK) plc (Bol).
At ite meeting, thei board approved a five business strategy. It is
proposed that @ Summary of this strategy is presented to the Post Office Board in July.
Questions this paper addresses
1. What progress was made in 2015/16 towards delivering the strategic objectives?
2. What return on investment wil
3. What is the strategic plan for! mecevenr! and will this deliver the long term growth
anticipated in the FS strategy ptarr7-~~~
4, What are the key risks to the delivery of the Plan and what is the level of confidence
for its delivery?
Conclusion.
1. In 2015/16! completed many of the key building blocks as anticipated in the
long term strategy and the value opportunity from the business model is being
realised; core board, risk and governance structures are - operational.
2. After a slow start, wit
EBITDA (excluding exc
riLexceeding Q2 forecast byimecceva i
The 2016/17
“pauget targets a.
3. The near term focus’ is te
‘isk tothe current olan.
_IRRELEVANT _
4..The_.kev. financial.
Confidential
ndate to the Post
fice Board May 2016
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Input Sought
The Board is asked to note the progress made and confirm support to the strategic
direction and business intent set out.
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The Report
Looking Back
1. The qverarchina strateay and rationale in_establishing.
2. Overview of 2015/16
"WHAT HAS GONE WELL? _
1. EBITDA (before exceptional ae in As _this_was_below.. the,
i mainly due to IRRELEVANT !
Hl wricompleting Tater than originally udgeted: However, the position exceeds
thé G2 EBITDA forecast following a strong focus on income recovery and cost
control.
win2014_and_its.management of th
delivered a number
of the core building Tee = the long term FS strategy in 2015/16, including:
— POMS became authorised and regulated by the FCA in June 2015;
— POMS and Post Office signed sales and distribution, brand and services
agreements, with Post Office becoming the Appointed Representative (AR) of
POMS, under POMS’ principal status;
4 IRRELEVANT
2., Following the. establishment: of
3.
governance processes afid'téntrols, including:
— Organisation structure complete, integrating existing Post Office POI [IRRELEVANT
and selected recruits (in particular risk, strategy and product) into a-sirgte;
focused team;
— Board structure complete with the addition of a second INED, as Chair of the
POMS Audit, Risk and Compliance Committee;
Confidential
May 2016
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— Executive management structures in place in accordance with FCA principals,
with Executive, Risk & Compliance and Product Committees operational;
> Operational processes established with Post Office to drive sales, marketing
IRRELEVANT
a
AO
m
Tr
3
>
Za
a
5. In Q3 and Q4 General Insurance sales have been strong, with Home Insurance
generating record annual Sales and life having strong year-end momentum:
— Sales momentum has.
— As at March 2016 ‘mesa! had sufficient capital and funding to meet its
operational. and_.reauvsror! reauirements...Asat-March.2016.. the. teaulate y
RR
6. In conclusion, 'rretevantiig well established to deliver the opportunities forecast in
the original busitiéss plan:
— Financial and operational momentum are established;
Janagement and governance processes are in place;
iinretevantiiS Gaining control of customer proposition and process design from third
“parties;
— Initial capability acquired to deliver long term strategic objectives.
1. In 2015/1
— Net commission income in 2015/16 wa
IRRELEVANT.
IRRELEVANT
May 2016
Confidential
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perating costs were
eing dependent on COrstiltants aiid contractors ahead off
ntre costs have been brought down and we are working with our
provider (WebHelp) to bring this down further;
—> Consultancy costs have been cut, in particular for compliance services, as third
party team have been replaced by specialist
Looking Ahead
STRATEGY OVERVIEW & OPPORTUNITY
3. In 2016/17 we will continue to build the capabilities required to realist
potential
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4
IRRELEVANT
i
I
IRRELEVANT
There are a number of risks that need to be reviewed and managed accordingly,
INCIUGINO ce
1:
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In Conclusion
S well positioned to
deliver 6ri thé long term growth plan.
Key strategic deliverables in 2016/17
are critical and will provide the
structure for the future.
IRRELEVANT
deliver 2016/17 plan is good and on
the long term plan is balanced.
Nicholas Kennett
CEO, POMS
May 2016
Confidential
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to deliver in-branch sales targets
compliantly, effective marketing
support and digital capability.
May 2016
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Data Dashboard
2016/17 Plan
The proposed 2016/17 Plan is for net income of }
I IRRELEVANT] 116/17 vs 15/16
15/16 Forecast
15/16 16/17 Re-stated onto
Q3 Forecast Plan Var Annualised 8asis__ Var to 16/17 Plan
fm fm fm fm fm
Gross income
Cost of Sales
Net Income
Staff Costs
Non-staff Costs
POL Commission
Total Expenditure
EBITDA
eT
The mid-year 2015/16 acquisition of thew;
effect on year-on-year comparisons. To emove that ick
comparator has been calculated on a current run rate basis, excluding any unique one-
offs, to give a like-for-like view.
Against this restated comparator, with
[ “growth more total
operating costs is flat at! with savings in operating costs Off-setting increased
staff costs (reflecting the expansion of the eam headcount) and increase
;sammissions due to increased net income. er these result in.an EBITDA ot [imrevevanr!
I IRRELEVANT ‘than the latest Q3 2015/16 forecast and;
“gdjiisted forecast, _ wever, planned EBITDA cc
income stretch of IRRELEVANT
‘inues to include an unallécaceu’
‘(actions have been identified in
ipdate to the Post
Confidential iffice Board May 2016
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POST OFFICE Ltd. Board
urrecevant Jpdate to Post Office Board
oRURTTOrTWTeR RENTS tt Meeting date: May 2016
Executive Summary
~ IRRELEVANT I
i 7 UNE! iereveva
summary of trms-scrategy is presented to the Post Office Board in July.
proposed that™
Questions this paper addresses
1. What progress was made in 2015/16 towards delivering the strategic objectives?
2. What return on investment will } achieve?
IRRELEVANT:
3. What is the strategic plan for:
anticipated in the FS strategy pl
4. What are the key risks to the delivery of the Plan and what is the level of confidence
for its delivery?
Conclusion __
1.
long term strategy and the value opportunity from the business model is being
realised; core board, risk and governance structures are operational.
2. After a slow start, withi" ! completing n originally budgeted, 2
exceeding Q2 forecast b’
in the year. The 2016/17
rowth in EBITDA.
paid Post, Office Limited commissions of;
growth ini": income
3. .The.near.termfocus.is.to.continu
IRRELEVANT
Confidential
May 2016
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IRRELEVANT
Input Sought
The Board is asked to note the progress made and confirm support to the strategic
direction and business intent set out.
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The Report
Looking Back
1. The overarchina.strateay.and.cationale in. establishing.
2. Overview of 2015/16
WHAT HAS GONE WELL? _
1. EBITDA (before tional costs) in. 2015/16 .wastescevuer!_this was. below.the
annual plan offieeeevaxrimainly due t¢ IRRELEVANT H
nevevanticompleting later than originally budgeted. However, the position exceeds
“th€"Q2 EBITDA forecast following a strong focus on income recovery and cost
control.
3. In particular following I IRRELEVANT jhas established clear organisational and
governance processes afid'Controls; including:
— Organisation structure complete, integrating existing : IRRELEVANT
> Exécitive management stricttrés in place it accordance with FCA principals,
with Executive, Risk & Compliance and Product Committees operational;
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> Operational processes established.with. Post Office. to drive sales,.marketina,...
i IRRELEVANT
4. Projects to build:
advanced and
tapability to deliver the long term strategy are well
2016/17:
5. In Q3 and Q4 General Insurance sales have been strong, with Home Insurance
generating record annual sales and life having strong year-end momentum:
— Sales momentum has continued into P1.
—> As at March 2016: had sufficient capital and ee to meet its
capital was
6. In conclusion;: is well established to deliver the opportunities forecast in
the original business plan:
Financial and operational momentum are established;
M jement and governance processes are in place;
is gaining control of customer proposition and process design from third
parties;
Initial capability acquired to deliver long term strategic objectives.
Rana
1
> Net commission income in 2015/16 wai IRRELEVANT 3S a result
of lower branch sales and delays laun
Confidential May 2016
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2. 2015/16 operating costs were; rom higher contact centre costs
an being dependent on Consultants "arid contractors ahead
— Contact centre costs have been brought down and we are worki
provider (WebHelp) to bring this down further;
~» Consultancy costs have been cut, in particular for compliance services, as third
party team have been replaced by specialist recevant Staff.
our
Looking Ahead
STRATEGY OVERVIEW & OPPORTUNITY
1. The 2016/17 budget targets an EBITDA o'
ith income IRRELEVANT;
“IRRELEVANT
IRRELEVANT jas updated its business strategy! targeting to build a sustainable
Ct i ;
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There are a number of risks that need to be reviewed and managed accordingly,
including:
i
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Failure to deliver will impa'
deliver vrexerd 5 long term growth plan. financial growth and return ‘or
Key strategic deliverables in 2016/17 investment.
are critical and will provide the
_structure for the future.
toon is very dependent on Post Office “Office to build confidence that is it able
to deliver in-branch sales targets
compliantly, effective marketing
support and digital capability.
the long term plan is balanced.
Nicholas Kennett
CEO, POMS
May 2016
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Data Dashboard
2016/17 Plan
15/16 Forecast
Re-stated onto
Annualised Basis Var to 16/17 Plan
15/16 16/17
Q3 Forecast Plan Var
Gross income
Cost of Sales
Net Income
Staff Costs
Non-staff Costs
POL Commission
Total Expenditure
EBITDA
eT
The mid-year 2015/16 acquisition of the: business from! IRRELEVANT I has a distorting
effect on year-on-year comparisons. To remove that distortrorr;a-réstated 2015/16
comparator has been calculated on a current run rate basis, excluding any unique one-
offs, to give a like-for-like view.
~Against.this..restated comparator,
: IRRELEVANT _: growth more than offsetting a decline in
“Operating Costs is Fat a pRRELEvANT} with Savings in operating cos'
staff costs (reflecting the expansion of th
with
The Plan for total
-setting increased
I team headcount) and increased POL
income stretch of _
order to deliver the cost stretch).
The plan profit increases Fsusvan
Confidential ipdate to the Post Office Board May 2016
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Annual Report and Accounts 2015/16
Author: Dave Carter Sponsor: Alisdair Cameron Date: May 2016
Executive Summary
Context
1. The draft 2015/16 Annual Report and Accounts (ARA) is presented to the Board for review.
2. POL usually signs and publishes its ARA at the end of June or the first week of July. This
timetable has been maintained, giving an extended post balance sheet review period to
provide further assurance over the completeness and accuracy of the results.
3. The papers comprise a draft ARA, a briefing book setting out details of the financial results
and a report from Ernst & Young on their findings to date.
4. This draft of the ARA has been slightly updated for individual comments from the version
sent to the ARC but has not benefited from the debate at the ARC which meets on 19", It
is proposed that the Chairman of the ARC presents a verbal update for the Board
summarising the ARC’s discussions. However, if there are material re-writes proposed, we
will let you know.
5. The Board is being asked to delegate authority to the ARC to approve the ARA on its
behalf. It is proposed that a short ARC call is arranged for the end of June to confirm the
completion of the work, review any findings and agree that the ARA can be signed and
published, within the Board’s delegated authority.
Questions
6. The following questions are addressed:
« In summary, what were POL's financial results for 2015/16?
« What is the status of the work to support the ARA?
« What issues are we drawing to the Board's attention in their review?
The Main Report
Financial Results
7. Post Office made an operating profit of £105m and an EBITDAS loss of £24m in 2015/16.
This represented a significant improvement in EBITDAS from a loss of £57m in the previous
year. Commercial turnover was broadly flat at £981m, with total revenue declining with the
planned reduction in the Network Support Payment. Progress towards break-even has been
made by reducing net costs, especially through the impact of Network Transformation on
agents’ pay and in spite of higher pensions and bonus costs.
Strictly Private and Confidential 1
Yfice Board-24
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8. Overall, in line with our plans and budgets, POL is in a temporary period when we are
spending more on transformation than we receive through the declining Government
Grant. As a result, we uses more of our facility with government, increasing borrowings by
£155m to £465m, against a limit of £950m.
Audit Status
9. As previously discussed with the ARC, given the need to strengthen the financial control
environment, additional accounting and audit procedures are being carried out. The bulk of
this work is finished.
10. No significant issues have been identified in the work to date. Internal POL reviews have
identified a number of small adjustments, netting at a £1.2m reduction in EBITDAS, which
have been adjusted for in this draft of the ARA. The ARA also reflects some judgemental
adjustments agreed with EY and summarised in their report: these net to a £0.1m
reduction in profit, with no impact on EBITDAS.
11. As agreed with the ARC, procedures will be completed during the next few weeks and
updated with ongoing reviews of post year end transactions.
Matters for the Board's attention
Basis of preparation
12. The financial statements have been prepared on a basis that is consistent with prior years,
including the assumption that POL is a going concern. The logic underpinning this
assumption is set out in section 12 of the Briefing Book.
13. Nonetheless, the Board has recognised that the longer term financial stability of POL is
uncertain, with no funding or facilities guaranteed after March 2018. We have therefore
continued to impair the bulk of our capital expenditure and intangible assets in the year in
which it is incurred. The amount written off in 2015-16 was £136m (2014-15 £140m) and
further details are set out in section 19 of the Briefing Book.
14. The exceptions to this policy have been freehold property and long leasehold property and
land, reflecting their long term economic value independent from business activities.
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Restatement
16. As disclosed in the Interim report and accounts, the comparative figures for the year ended 29
March 2015 have been restated. The provision for postmasters’ compensation, included in
Network Transformation, has now been fully recognised in the results for the year ended 29
March 2015. The restatement affects exceptional costs, provisions and retained earnings as set
out in the table below. Within this report, the comparative income statement, statement of
comprehensive income, balance sheet and statement of changes in equity for the year ended
29 March 2015 have been restated. There has been no effect on the cash flow statement.
Total provisions (63) (87) (150)
Shareholders’ funds (retained earnings) (72) (87) (159)
Profit/(loss) for the year (54) (87) (141)
Discontinued Operation
17. Prior to the year end the business took the decision to discontinue the Mobile telephony
operation. In consultation with EY, this has been treated as a Discontinued Operation in the
financial statements, reported below EBITDAS and Operating Profit.
18. The net impact is a £2.8m increase in 2015-16 EBITDAS (2014/15: £3m) as operating
costs of £3m and income of £0.16m are removed. Within Discontinued Operations, the
total impact is a £10m cost, additionally reflecting £3.7m of balance sheet write-offs
(2014/15: £1m) and £3.5m of provisions relating to estimates of exit and termination
costs.
Disclosures
19. In the draft ARA, we have made some reductions in the amount of disclosure. The ARC
previously took the view that we should no longer be seeking to comply with the Combined
Code as an objective in itself, given the associated costs and bureaucracy. As a result,
some disclosures are optional.
20. In summary, we have removed the segmental reporting note as the key information is
already stated in the Financial and Business Review. We have retained a section on Risks.
We have removed the very detailed report on Directors’ Remuneration. However, on the
advice of our shareholder, we have put more disclosure around directors’ remuneration in
the notes to the accounts than is required by legislation, including a table of individual
earnings and a brief explanation of the incentive plans.
21. In the note on Commitments (Note 19 to the Group Financial Statements), we have
included a general statement headed “Contingent Liabilities”, noting that from time to time
we may face legal claims and concluding that “The Directors do not consider the outcome
of any current claim or action will have a material adverse impact on the consolidated
position of the Group.”
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22. We have been notified by a law firm of a claim on behalf of a group of 91 Postmasters. The
claim has been filed in the High Court, but has not been formally served on us. Among the
claimants are individuals who we believe may not participate in a class action, either
because they are time limited, have criminal convictions or have previously reached a full
and final settlement with us. The claim is not valued and no new information has been
provided.
23. Clearly, no provision has been raised as we think the chances of making a payment that we
can reliably estimate is remote. In addition, we have concluded that to disclose the
existence of the claim would give it a spurious importance. EY are keen that the ARC and
the Board debate this point and have recommended it is disclosed. Potential, additional
wording might be: "A High Court Claim has been issued on behalf of a number of Sub-
postmasters against Post Office in relation to various legal, technical and operational
matters. Full Particulars of Claim have not yet been received by Post Office.”
Input Sought
24. The Board is requested:
«to review and comment on the draft Annual Report and Financial Statements for 2015-16;
e give delegated authority to the ARC to approve the Annual Report and Financial
Statements; and
e give delegated authority to the Chairman, the Chief Executive and the Chief Financial
Officer to sign the Annual Report and Financial Statements following approval by the ARC.
nfidential
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The Post Office
2015/16 Annual Report and Financial Statements
Contents
1. Overview
1.1 Chairman's foreword
1.2 Chief Executive's statement
2. Financial and Business Review
3. Governance
3.1 Board Biographies
3.2 Corporate Governance
3.3 Directors' report
4. Financial Statements
4.1 Statement of Directors’ responsibilities
4.2 Independent Auditor’s report
4.3 Consolidated income statement
4.4 Consolidated statement of comprehensive income
4.5 Consolidated statement of cash flow
4.6 Consolidated balance sheet
4.7 Consolidated statement of changes in equity
4.8 Notes to the financial statements
4.9 Parent Company financial statements
4.10 Corporate information
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Draft to Board — IN STRICTEST CONFIDENCE —17 May 2016
Chairman’s Foreword
I was delighted to be appointed Chairman of the Post Office in September 2015, and I have very
much enjoyed getting to know the business over the last few months. In the first place the job of the
Post Office is to provide some essential services to our customers, and we are very conscious of our
obligation to ensure that 90 per cent of the population has a post office within a mile of where they
live. This amounts to operating the largest retail network in the UK with over 11,600 branches
dedicated to meeting the needs of a myriad of different communities throughout the country. I am
proud to be part of this long tradition of service to the public. But we are also a commercial
business, and in this report we have sought to provide a clear view of how we are performing, and
the challenges that lie ahead. For many years the Post Office has relied on a subsidy from the
Government and has also received a considerable amount of investment from public sources to
modernise the network. As a result of this investment, and thanks to the efforts of postmasters and
our staff to improve our business in many areas, the public subsidy has declined steadily and
EBITDAS, our key measure of performance before subsidy, has improved from a loss of £57m last
year to a loss of £24m in 2015/16.* Considering that the EBITDAS three years ago was a loss of
£116m, this demonstrates the substantial progress made in recent years. During 2015/16 the actual
Network Subsidy Payment received from the government reduced from £160m to £130m.
Ina time of straightened public finances, we cannot expect to call on the taxpayer indefinitely, and
the time has come for the Post Office to take on the challenge of becoming a fully sustainable
profitable business, whilst at the same time maintaining its public service obligations. If we are to be
successful over the medium term, we need to be capable of generating sufficient resources
internally so that we can invest in business development and growth in the future. The Post Office is
a national brand, trusted by consumers across a range of activities: postal services, cash
transactions, financial services and telecoms. Whilst we may need a small element of Government
funding over the medium term to maintain 3,000 or so community branches, there is no reason why
we cannot achieve positive financial results from the rest of our business. In particular the Post
Office has significant potential in the financial services market, but that will require substantial
investment behind our brand in what is a competitive marketplace.
Over the last few years there has been significant investment in the Network Transformation
Programme, and this is now bearing fruit in terms of a business model that is more flexible and
meets the needs of our customers. I was very pleased to open the 6000" branch to be modernised
in Nyetimber in West Sussex earlier this year. Now operating from a bright refurbished local
convenience store, it is open an extra 25 hours a week, including Sunday. It seemed to me that the
postmaster, Than Thevarajah, epitomises the energy, entrepreneurial spirit and customer focus that
lies at the heart of the modern Post Office. Whilst maintaining a comprehensive service offer, the
post office till fits well into a thriving retail business, creating footfall, and an opportunity to enhance
a personal service to customers.
At the same time as we have invested in our sub post offices, we have also made good progress with
our own operated post offices: self service kiosks have proved popular, and have helped to reduce
queues at peak times. To operate post offices in expensive prime retail town centre locations with
limited commercial add-on activity, can be a financial challenge, although considerable progress has
been made on stemming the losses in this area.
* Please see the Financial and Business Review on Page 7 for the calculation of EBITDAS.
Post Office Annual Report and Financial Statements I Page : 2
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As Paula’s report explains, several of the markets we operate are experiencing some turbulence, but
it can be done; the post office can still be a very attractive business proposition in an appropriate
retail setting.
This year has seen some changes to our Board, I would like to thank three of our members who
retired last year for their contribution to the revitalisation of the Post Office: Alice Perkins, my
predecessor, Neil McCausland and Alastair Marnoch. I very pleased to welcome two new members
of the Board — Carla Stent who is chairing our Audit and Risk Committee, and Ken McCall, who is,
chairing our Remuneration Committee. I would also like to acknowledge the supportive role of our
shareholder, the Department of Business, innovation and Skills, in the continuing development of
the Post Office. Similarly, I would like to record my appreciation of the work done by our Post Office
Advisory Group, chaired by Tim Franklin.
I have been struck by the diversity of our branches around the country, and yet there is a common
thread: they are places where all people and businesses can, and do, use a range of services that are
important to them in their everyday lives. This combination of commercial focus and community
involvement is exemplified by local postmasters such as Bryan Hewson at Amble in Northumberland.
Bryan has fully modified his branch which contains a community hub where people can come in and
use computers and get online. He is actively expanding his business and is a key part of the
community that won the coastal town section of the Great British High Street awards this year.
Bryan and his team are great examples — but they are not unique. So most of all, I would like to pay
tribute to everyone looking after our customers in the front line or in support, for their hard work
and their dedication to the highest service standards. All of these men and women make a
difference every day of the week to the lives of the many people who depend on the Post Office:
thank you.
Post Office Annual Report and Financial Statements I Page : 3
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Chief Executive’s Statement
The Post Office results for 2015/16 show continued progress towards commercial sustainability and
reduction in reliance upon Government. In 2015/16 we have reduced our operating loss before
subsidy by £33 million and financial support from Government by £50 million.
I am pleased we have increased our commercial turnover from £976 million to £981 million, in the
face of very challenging market conditions. We have grown revenue in our Financial Services and
Telecoms markets and maintained our Mails market position; our Government Services revenue has
declined. We have also delivered a £28 million reduction in cost across the business.
In 2015/16 we posted a loss of £24 million in our key EBITDAS measure maintaining a trend of steady
improvement:
Operating loss before depreciation amortisation,
exceptional items and Network Subsidy
Payment (£million)
The cash position of the company continues to be sound. It operates well within its facilities to meet
its own trading needs as well as enabling its network of Post Offices to pay and receive money on
behalf of the range of partners with whom we operate.
Our strategy is to build profitability whilst at the same time reducing year on year funding from
Government, thereby creating the potential to re-invest to secure the future of our nationwide
network. This enables around 60,000 of our Post Office colleagues in 11,600 communities to
undertake around a billion transactions a year on behalf of our customers — increasingly essential
services to local communities as banks and other businesses withdraw.
Post Office Annual Report and Financial Statements I Page : 4
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The implementation of this strategy is reflected in our performance;
a
ts)
EBITDAS, £ million
140
2012/13 _2m13/14 201s 2015/16 2016/17 _ 2017/18
seat Investment funding matttid Network Subsidy Payment (NSP) __—*— EBITDAS.
Funding from Government, £
To continue this progress, the Post Office needs to enhance its competitiveness and customer
service in the fast changing Mails, Financial Services, Government Services and Telecoms markets in
which we operate. And our central and support services need to become simpler - and cheaper - to
run, thus creating the conditions for postmasters to trade profitably and sustainably.
This requires:
- continued investment in the transformation of the branch network, and in IT and digital
capabilities to promote convenience to customers and flexibility in meeting their needs.
- Agreater focus on simplifying our central and support functions, enabling a more ambitious
reduction in costs
- ongoing development of profitable own brand products in Financial Services and continued
effective long term relationships with both the Royal Mail and others for whom we are a
trusted distributor.
In 2015/16 we have made progress in each of these areas. Working with postmasters across the UK,
we have passed the milestone of modernising 6000 branches, adding 190,000 extra opening hours
and improving adjacent retail/convenience offers too. I'm delighted these postmasters and their
staff have achieved over 95% customer satisfaction. We have started to restore the financial position
of our larger branches where we faced particularly high operating costs: my thanks to colleagues in
the Crown Post Offices who over a four year period have moved from a £46 million annual loss to a
breakeven position. We have completed the separation of our IT infrastructure from that of Royal
Mail Group. We have made our first acquisition, buying our joint insurance business from the Bank
of Ireland. We have commenced the restructuring and simplification of our central support functions
and service centres that support our branch network and its service to our customers.
These are important milestones and, combined with our improving financial results, they provide
confidence in our capabilities for the future. I am grateful to all those who work in Post Offices and
Post Office Annual Report and Financial Statements I Page : 5
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those who support them in various centres across the UK for their huge commitment, their
professionalism and their delight in serving customers.
Looking forward, I am in no doubt that the Post Office has a bright future. But at present our reality
is that we still make a loss. Some of our product markets are in structural decline — particularly in
Government Services where the shift online has reduced turnover by 9.2%. And where we have
identified significant potential growth in areas such as Financial Services and Telecoms, these
markets are intensely competitive with well established incumbents. The mails market is evolving
rapidly and success will demand ongoing innovation and flexibility. Our Government funding is only
in place until 2018 and is reducing significantly.
Our overriding objective is to support a sustainable and thriving network of Post Offices, from a low
cost support structure. There remains further work to do before we make enough money in
competitive and changing markets to reinvest sufficiently and sustainably in our systems, branches
and customer propositions. That means continuing to ask the hard questions of ourselves and being
resolute in implementing the answers.
To that end we have launched consultations with our people on closing our defined benefit pension
scheme to future accrual and [on reducing the operating cost of providing cash to Post Offices].
Further changes will follow but I am determined that, as we implement change, we stay true to our
values. The trust in the Post Office brand is built on its people; and especially as we go through
change we will take care to ensure everyone is treated with respect.
The prospect of further and potentially difficult change can be a hard message on the back of the
real progress that has been made during 2015/16. But it is the right thing to do and the only way we
can ensure that Post Offices remain open in every community and have a bright future serving our
customers and delivering our public purpose, ensuring services are available across the UK for
another generation.
Post Office Annual Report and Financial Statements I Page : 6
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Financial and Business Review
Summary results
The Post Office has maintained its commercial turnover with growth in Financial Services and
Telecoms offsetting a planned decline in the Royal Mail fixed fee in Mails and decreases in
Government Services and lottery turnover.
Our total revenue decreased by £25 million (2.2%) because of the planned reduction in the
Network Subsidy Payment (NSP) from Government. In spite of that, cost reduction and the
benefits accruing from continued high levels of investment enabled operating profit before
exceptional items to increase by 1.9%. Moreover, the critical measure of EBITDAS (operating loss
before interest, taxation, depreciation, amortisation, subsidy and exceptional items) which strips
out the Network Subsidy Payment showed significant improvement reducing the loss from £57
million to £24 million.
Key Financial Performance Indicators
2015,
2016 Restated Change
Turnover £981m — £976m £5m
Operating profit before exceptional items £105m —-£103m £2m
Operating loss before, depreciation, amortisation, exceptional items
and Network Subsidy Payment (EBITDAS) (£24m) — (£57m) £33m
Net cashflow (€109m) _£184m __(£293m)
Profit and Loss Summary
2015
2016 Restated Variance Variance
£m £m £m %
Turnover 981 976 5 Os
Network Subsidy Payment 230 160 (30) (18.8)
Revenue 1lll 1,136 (25) (2.2)
People costs (233) (238) 5 24
Other operating costs (808) (831) 23 2.8
Total costs (1,041) (1,069) 28 26
Share of profit from joint ventures and associates 35 36 (1) (2.8)
Operating profit before exceptional items from continuing operations 105 103 2 19
Add: Depreciation 1 oO 1
Less: Network Subsidy Payment. (130) (160) 30 (18.8)
EBITDAS (24) (57) 33 57.9
Post Office Annual Report and Financial Statements I Page : 7
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Revenue
The Post Office’s total revenue decreased by £25 million (2.2%) to £1,111 million due to a decrease
of £30 million in the Network Subsidy Payment (government grant revenue put towards the costs of
maintaining the Post Office network). The Post Office segments income into four pillars: Mails and
Retail, Financial Services, Government Services, and Telecoms. This commercial turnover increased
by £5 million to £981 million. The pillars and their performance are detailed on the next pages:
2015
2016 Restated Variance Variance
ém ém £m %
Mails and Retail 380 388 (3) (2)
Financial Services 303 290 B 45
Government Services 128 141 (13) (9.2)
Telecoms 130 120 10 83
Other income 40 37 3 Bl
Turnover 981 976 5 as
Network Subsidy Payment 130 160 (30) __(18.8)
Revenue zi 1136 (25) (2.2)
Mails and Retail
Mails and Retail includes the sale of parcels and other Mails products provided by Royal Mail and
Parcelforce. It also includes Lottery and Retail services such as sales of collectibles as well as
packaging and stationery. Revenue decreased in the year by £8 million (2.1%) whilst transactional
volumes in mails increased slightly.
2016 2015 Variance
£m £m %
Mails services 334 340—(1.8)
Retail and Lottery 46 48 (4.2)
Mails and retail 380 388 (2.1)
Product sales improved slightly by £1 million in the year. This position was underpinned by
good sales and service performance over the Christmas peak period (year on year trading
income was 3.6% higher) and by growth in areas related to online shopping (Home shopping
returns grew by 25%). The mails market remains competitive and fast changing as it continues to
shift towards package related activity and premium tracked products like Special Delivery.
The £2 million reduction in turnover from Retail and Lottery services was primarily driven by a
reduction in Lottery sales due to fewer rollovers and lower prizes.
Post Office Annual Report and Financial Statements I Page : 8
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Financial Services
The Financial Services pillar includes Post Office Money personal financial services products such as
mortgages, credit cards, insurance, savings, ATMs and travel products as well as traditional services
such as bill payment and over-the-counter banking transactions.
On 30 September 2015, Post Office Limited acquired from Bank of Ireland UK plc the business and
assets of our joint insurance business. Immediately following acquisition, Post Office Limited
transferred the business to its subsidiary Post Office Management Services Limited, a FCA regulated
entity, which operates the business alongside its existing travel insurance activities.
2016 2015 Variance
ém ém %
Personal Financial Services 152 127 19.7
Bill payment, banking and other financial services 151 163 (7.4)
Financial Services 303 290 45
Across Financial Services in aggregate, turnover increased by £13 million to £303 million (2015: £290
million), a 4.5% rise. This performance was the aggregate of strong growth in personal financial
services such as insurances and mortgages and a decline in more traditional services such as bill
payments.
Personal Financial Services turnover increased by £25 million (19.7%). This was primarily driven by
increased turnover from new insurance intermediation activities undertaken by Post Office
Management Services Limited, and through growth in savings and International money transfers.
Turnover from traditional Financial Services products declined by £12 million. Bill payment turnover
fell by £4 million reflecting a continuing shift from paper-based to electronically-delivered products.
and the increasing use of alternative payment methods. NS&d premium bonds turnover fell and
ceased to be available from Post Offices from 1 August 2015.
Offsetting this reduction within traditional products was an increase in banking revenue of £3
million with a 10% growth in banking transactions. Enhanced agreements with Barclays and HSBC
to add business customers were made during the year. 95 % of all personal bank accounts in the
UK are now accessible via post offices as work continues with the banks to secure an overall
framework for universal access. In an era of closures by the major banks, the Post Office network
maintains its position as the provider of a national infrastructure which meets community banking
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IRRELEVANT
Telecoms
The Telecoms pillar includes Post Office HomePhone and Broadband services as well as e-top up
services and phonecards.
2016 2015 Variance
£m £m %
HomePhone and Broadband 126 115 9.6
E top-ups and phonecards 4 5 (20.0)
Telecoms 130 120 8.3
Telecoms turnover of £130 million (2015: £120 million) increased by £10 million. This was driven
by a strong performance in our Homephone and Broadband services with a £11 million (9.6%)
increase in annual revenue to £126 million. E top ups and phonecard revenue fell by £1 million in a
generally declining market.
In the competitive Telecoms market an increase of 36,000 additions to the broadband customer
base were achieved and pricing adjustments in November 2015 improved revenue per customer
whilst maintaining our position as one of the best value providers in the market.
Our approach is characterised by tight management and effective margin control enabling strong
performance against market incumbents. Development of this business however needs to be
managed carefully to maintain these characteristics and in March 2016 Post Office made the
decision to withdraw from the development and roll out of a proposed mobile offer in order to
focus on its Homephone and Broadband activities.
Other income
Other income increased by £3 million to £40 million largely due to a change in the amortisation of a
historical agreement. Other income is generated primarily from the Supply Chain business that
manages and distributes cash for Post Offices and for third parties. The revenue generated by the
Supply Chain business has fallen by £3 million as the relatively high cost base made it difficult to
attract and retain external revenue.
Post Office Annual Report and Financial Statements I Page : 10
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Costs
Total costs decreased by £28 million to £1,041 million (2015: £1,069 million).
£m Costs- Prior Year to current Year
a
' £ I
Ree
T
2015 People Costs Other Operating 2016
Costs
People costs of £233 million (2015: £238 million) decreased by £5 million net of an increase to pension
costs of £2 million reflecting efficiency savings. Other operating costs decreased by £23 million to £808
million largely due to postmaster remuneration costs being lowered by £22 million arising from the
Network Transformation programme. The fixed element of postmaster remuneration cost has fallen
by £20 million in the year in addition to a reduction in indirect tax of £2 million. The variable element
has remained flat year on year.
Joint venture
Post Office Limited has a joint venture with the:
IRRELEVANT
IRRELEVANT
IRRELEVANT
Post Office Annual Report and Financial Statements I Page : 11
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Discontinued operations
The decision to withdraw from the development and roll out of a mobile offer has been disclosed in
the Financial statements as a discontinued operation, showing a loss for the financial year after tax
from discontinued operations on the consolidated income statement of £10 million.
Exceptional Items
Exceptional items are shown below:
2016 2015
Restated
fm fm
Operating exceptional items:
Restructuring costs including postmasters' compensation (283) (301)
Impairment of intangible assets, property, plant and equipment (136) (140)
Government grant 150 170
Net exceptional items (269) (271)
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 programmes and recognised to match the associated costs. The Government grant
funding for 2015-16 of £150 million (2014: £170 million) was received on 1 April 2015 and was fully
recognised in the year.
As disclosed in our Interim Report for the six months ended September 2015, an error was identified
in the calculation for postmasters’ compensation within the Network Transformation programme on
the balance sheet and exceptional items charged in the 2014/15 half year and full year. The March
2015 exceptional charge has been restated by £87 million. This was a timing error related to
recognition of the liability. It has not impacted payments to postmasters or the overall cost of the
programme.
Restructuring costs
Restructuring costs are shown below:
2016 2015
Restated
£m fm
Network Transformation programme
-Postmasters' compensation 102 154
-Programme costs 75 B
Crown Transformation programme 23 10
IT Transformation programme 30 16
Business Transformation programme 9 12
Redundancy costs 29 25
Business Transformation payments 4 1
Other exceptional items 1 10
Restructuring costs 283 301
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Impairment
Due to ongoing operational losses (excluding the 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.
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration
transferred and the amount recognised for non-controlling interests, and any previous interest
held, over the net identifiable assets acquired and liabilities assumed. After initial recognition,
goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested for
impairment annually as well as when there are any indicators of impairment. As noted above
Goodwill relates to the business combination and there are no indicators of Goodwill impairment at
the balance sheet date.
Government grants
In addition to the Network Subsidy Payment, the Post Office receives Government grant funding
towards the transformation programme. Government grant funding of £150 million was received in
the year (2015: £170 million). The additional government grant funding is included within operating
exceptional items to match the associated costs.
The grant was allocated to cover £31 million capital expenditure (2015: £59 million), £66 million
network transformation related postmasters’ compensation (2015: £43 million) and £53 million
network and IT transformation programme costs (2015: £68 million).
The level of grants will continue to reduce as set out in the current funding agreement with the
Government. State Aid approval for the funding from 2015/16 to 2017/18 was received on 19 March
2015.
Cash Flow and Net Debt
Post Office Limited operates a Treasury function and manages its own financial assets (including
network cash) and financial liabilities (mainly Government loans).
The Treasury function derives its authority from the Board and has the authority to undertake
financial transactions relating to the management of the underlying business risks, however, it does
not engage in speculative transactions and does not operate as a profit centre. The principal financial
instruments utilised are deposits and borrowings.
The cash and cash equivalents amounted to £712 million (2015: £821 million) at the year end.
There was a net cash outflow during the year of £109 million (2015: inflow £184 million). Net debt
(excluding cash in the Post Office network) increased by £209 million year on year as shown in the
table below. As planned, Government Grants, which are not expected to cover all of the costs of
Transformation, were received ahead of the associated spend. As a result we are in a period of net
expenditure.
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2016 2015
£m £m
Net cash (outflow)/inflow from operating activities (123) (15)
Income tax recovered 9 11
Net cash outflow from investing activities (145) (116)
Net cash (outflow)/inflow before financing activities (259) (120)
Add/(deduct) movement in cash in the network included in net cash
inflow 55 (51)
Finance costs paid (5) (3)
Net (increase)/decrease in net debt (209) (174)
Net debt brought forward at the beginning of the year (197) (23)
Total net debt carried forward at the end of the year (406) (197)
Post Office Limited’s borrowing facility from the Government and the associated Framework
Agreement imposes constraints on the availability of external borrowing and limits the purposes for
which the facility can be used to fund the cash and near cash items held within the Post Office
Limited network.
Post Office Limited’s treasury policy is to minimise the amount drawn down on the loan in order to
reduce its interest cost. The facility is limited to a maximum of £950 million, the unused but
available facility at the end of the year was £485 million. The maximum drawn down under the
facility during the year was £509 million on 6 January 2016. The facility is available at two days’
notice and has an end date of 31 March 2018.
Pensions
Post Office Limited is a participating employer within the Post Office Section of the Royal Mail
Pension Plan (RMPP), and until 31 March 2015 was a participating employer within the Royal Mail
Defined Contribution Plan (RMDCP).
Royal Mail plc is the principal employer of the Royal Mail Senior Executives’ Pension Plan (RMSEPP)
and Post Office Limited is a participating employer within RMSEPP. RMPP and RMSEPP are both
defined benefit plans. The Post Office operates a Defined Contribution Scheme - the Post Office
Pension Plan.
On 1 April 2012 - after the granting of state aid by the European Commission on 21 March 2012 -
almost all of the pension liabilities and pension assets of the Royal Mail Pension Plan (RMPP), built up
until 31 March 2012, were transferred to HM Government.
On this date, the RMPP was also sectionalised, with Royal Mail plc and Post Office Limited each
responsible for their own sections from that point. This pensions transfer left the RMPP fully funded
on an actuarial basis in respect of historic liabilities at this date.
The balance sheet pension position moved from an asset of £205 million at March 2015 to an asset
of £196 million at March 2016. The movement in the surplus is primarily due to an increase in the
long term liability partly offset by an improvement in the asset values.
Valuation of the RMPP scheme is carried out triennially with the next valuation being performed as at
1 April 2015. The valuation has not yet been completed due to the current consultation on proposals
to close the RMPP scheme to future accrual.
Both defined benefit plans closed to new members in March 2008, and RMSEPP closed to future
accrual on 31 December 2012. New employees were offered membership of the RMDCP following
this date. With effect from 1 April 2015 new employees were offered membership of the Post Office
Pension Plan, previous to this they were offered membership of the RMDCP.
Post Office Annual Report and Financial Statements I Page : 14
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The future funding of ongoing pension contributions into RMPP and deficit payments into RMSEPP
was agreed with the respective pension trustees during the year and payments were made in
accordance with the agreements. The net cash payments made are detailed below:
2016 2015
£m fm
Regular pension contributions (20) (22)
Funding of the pension deficit - RMSEPP (1) (1)
Payments relating to redundancy (3) (2)
Net cash payments (24) (25)
The income statement charge for the year was £3 million (2015: £3 million) in relation to the
defined contribution scheme and £27 million (2015: £25 million) in relation to the defined benefit
scheme.
The regular future service contributions cash rate for RMPP expressed as a percentage of
pensionable pay remained at 17.1% (2015: 17.1%). The regular rate of employee contributions for
the RMPP remains unchanged at 6%.
Events after the reporting period
In accordance with the funding agreement with government announced on 27 November 2013, for
which State Aid approval was received on 19 March 2015, Post Office Limited received £220 million
of funding on 1 April 2016, £80 million of which was the Network Subsidy Payment and £140 million
other Government Grant funding towards the transformation programme.
Post Office Annual Report and Financial Statements I Page : 15
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Corporate Governance
Good corporate governance continues to support Post Office’s iournev
Legal Ownership Structure
Insert
Post Office is a wholly owned subsidiary of Postal
Services Holding Company Limited. The Secretary of Corporate
State for Business, Innovation and Skills (BIS) holds a
special share in Post Office and the rights attached to Structure chart
that special share are enshrined within Post Office
Articles of Association.
Neither Postal Services Holding Company nor BIS,
through its Shareholder Executive (ShEx), have any day
to day involvement in the operations of Post Office or
the management of its branch network and staff.
However, Richard Callard, the ShEx representative, sits
on the Post Office Board as a Non-Executive Director.
Corporate Governance Overview 2015/16
At Post Office we maintain standards of corporate governance appropriate for our ownership structure, our
commitment to social purpose and our strategy to achieve commercial sustainability. We regularly review
these standards to ensure they continue to deliver at the appropriate level for our developing business needs
and relevant legal and regulatory advances. As a Government-owned entity we are committed to acting in
accordance with the Nolan Principles of Public Life, namely: selflessness; integrity; objectivity; accountability;
openness; honesty; and leadership. The Board is mindful of these principles both in its decision making and in
its responsibility for organisational culture.
Rationalisation of Committee Structure
During 2015/16 the Board reviewed its committee structure. The proposals resulting from this review
were to dissolve two committees: Financial Services; and Pensions.
Following dissolution, financial services and pensions risk is now considered by the ARC as part of a
consolidated risk approach. In considering the implementation of these changes, the Board reviewed
and revised the ARC’s terms of reference and membership to ensure that members had sufficient
expertise and experience, particularly in financial services. A formal arrangement was also put in place
for the POMS ARC to report into the Post Office ARC.
Post Office Annual Report and Financial Statements I Page : 16
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Board of Directors (as at 27 March 2016)
The Board is responsible for setting the business’ strategic aims, putting in place the
leadership to deliver them, supervising the management of the business and reporting to
the Shareholder and determining the Post Office vision, values and organisational culture.
During 2015/16 there was a 50 per cent change in non-executive Board membership but gender
diversity was maintained with 37.5 per cent women. This figure is in excess of Lord Davies’
recommendation for FTSE Boards of 25 per cent women and significantly ahead of the 19.6 per cent
on FTSE 250 boards, as stated in Lord Davies’ five year review published in October 2015.
Diversity in terms of time served is important for good succession planning and to maintain an
effective level of corporate knowledge and understanding. An appropriate spread of time served
ensures freshness of approach combines with knowledge and experience to deliver the most effective
strategic leadership for Post Office.
Time Served on Post Office Board
elis {CEO}
‘a Holmes
Tim Franklin
Richard Catlard
Alisdair Cameron {CFO}
ker (Chairman)
Ken Metall (sid)
Cariastent
0.06 1.00 4.08 5.06 6.00
#8 Time Served (Years}
The Board is comprised of an independent Non-Executive Chairman, the Chief Executive, the Chief
Financial Officer, five Non-Executive Directors (one of whom is designated the Senior Independent
Director) and the Company Secretary. Further information on the Board roles and responsibilities
can be found on page XX. Non-Executive Directors are not employees of Post Office but provide
services under the terms of an individual letter or appointment, signed at the commencement of
their directorship.
Directors’ statutory duties are set out in the Companies Act 2006. The primary duty of the directors
is to promote the success of Post Office Limited as a Company for the benefit of its Government
shareholder and the wider stakeholder community.
Three new Non-Executive Directors were appointed to the Board in 2015/16 and the process
followed for their recruitment is set out in more detail in the Nominations Committee report on
pages XX. Post Office seeks the most suitable candidates as directors and considers diversity in its
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appointments, including diversity of skills and experience. This is in keeping with the belief of Post
Office that a varied balance of backgrounds, experience and insights and a culture of inclusivity
across the entire workforce is in the best long-term interests of Post Office and should reflect the
communities it serves. In April 2015, Post Office was included in The Times’ top 50 employers for
women.
Tim Parker
Independent Chairman
Joined the Board 1 October
2015
PHOTO
Ken McCall
Senior independent Director
Joined the Board 21 January
2016
PHOTO
Paula Vennells
Chief Executive
Joined the Board 18 October
2010
PHOTO
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Richard Callard
Non-Executive Director
Joined the Board 26 March 2014
PHOTO
Alisdair Cameron
Chief Financial Officer
Joined the Board 28 January
2015
PHOTO
Tim Franklin
Non-Executive Director
Joined the Board 19 September
2012
PHOTO
Virginia Holmes
Non-Executive Director
Joined the Board 4 April 2012
PHOTO
Carla Stent
Non-Executive Director
Joined the Board 21 January
2016
PHOTO
Alwen Lyons
Company Secretary
Appointed as Company
Secretary 4 July 2011
PHOTO
Post Office would like to thank the following previous members of the Board who served as Non-
Executive Directors during the year 2015/16: Alice Perkins who stood down as Chairman on 31 July
2015; Neil McCausland who stood down as Senior Independent Director on 30 September 2015; and
Alasdair Marnoch who stood down on 31 July 2015.
Post Office Annual Report and Financial Statements I Page : 19
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Group Executive (as at 27 March 2016)
The Group Executive is the most senior management body and is comprised of the Chief Executive,
each of her direct reports and the Company Secretary
Membership
The Group Executive is chaired by Paula Vennells, Chief Executive and the other members are:
Alisdair Cameron Chief Financial Officer
Martin George Commercial Director
Kevin Gilliland Network and Sales Director
Neil Hayward Group People Director
David Hussey Business Transformation Director
Nick Kennett Financial Services Director
Alwen Lyons Company Secretary
Jane MacLeod General Counsel
Other members of the Group Executive during 2015/16 were:
David Ryan Group Business Transformation Director (left the Post Office in May
2015)
Role of the Group Executive
The Group Executive implements the strategy agreed by the Board and monitors business
performance and development at a day to day level. It meets regularly to discuss latest
developments, to discuss proposals for new business development, to receive financial and other
performance reports and to monitor business transformation and commercial development. It will
also address any urgent issues that have arisen within the business and which require senior level
resolution. Twice yearly, it reviews the results of personal performance assessments undertaken
throughout the organisation.
The Chief Executive, Chief Financial Officer and the Company Secretary also attend meetings of the
Board which facilitates and strengthens the communication channels between the senior leadership,
the Board and its Committees.
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Board
Role and responsibilities
The Board is accountable to the Secretary of State for BIS for the performance of Post Office and is
required to notify the Shareholder of certain actions, as set out in the Articles of Association.
The Board is also responsible for ensuring compliance with all legal and regulatory requirements,
supervising the management of the business, providing constructive challenge to the Group
Executive and communicating with the Shareholder. It has a schedule of matters reserved for its
decision and has approved terms of reference for its committees which are provided on the Post
Office website.
The Board approves the annual budget and business plan each year and did so last in March 2016.
The Board regularly reviews reports on performance against that Plan, together with receiving
periodic business reports from senior management. Directors are briefed on matters to be
discussed at Board and Committee meetings by papers distributed in advance, as well as by
management presentations.
In setting the risk appetite for Post Office and establishing a framework to manage and mitigate risk,
the Board takes guidance from its Audit, Risk and Compliance Committee, to which it delegates
oversight of risk management. This committee receives reports from the Group’s Head of Risk and
from the internal and external audit teams. Further detailed information on the management of risk
within Post Office, together with identification of principal risks, their impacts and mitigation can be
found in the Management of risk section on pages XX to YY.
Accountability
The Board is accountable to its Shareholder and to the large and diverse group of stakeholders of the
Post Office.
Key focus and achievements in 2015/16
During the year to 27 March 2016 the Board oversaw further significant progress in network
transformation, with another 1,904 branches modernised, bringing the total so far to 6,001 and
delivering a better service to customers. The Board also considered the development of the
financial services strategy including the approval to acquire the business and assets of our joint
insurance business from Bank of Ireland (UK) plc. Owning 100 per cent of the insurance business,
through the subsidiary Post Office Management Services Limited, was a significant development
contributing to the 19.7 per cent growth in personal financial services to £152m in 2015/16.
In 2015/16 the Board went through a period of transition with a change in 50 per cent of its Non-
Executive Directors. This refreshed Board will focus in 2016/17 on driving forwards efficiency and
ensuring that all support services are optimised to deliver the ongoing transformation journey
towards a sustainable and thriving network of Post Offices.
Post Office Annual Report and Financial Statements I Page : 21
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Non-Executive Directors’ Terms of Office at 27 March 2016
Non-Executive Date of appointment Term of Unexpired term at I Committee
Director office 27 March 2016 memberships
Tim Parker 1 October 2015 3 years 2years6 months 5 I Nominations
days (Chairman)
Remuneration
Richard Callard 26 March 2014 Until N/A Audit, Risk and
removal Compliance
Tim Franklin® 19 September 2012 4 years Smonths, 23 days I Audit, Risk and
Compliance
Virginia Holmes 4 April 2012 3 years? 2 years, 8 days? Nominations
Remuneration
Ken McCall 21 January 2016 3 years 2years,9 months, I Remuneration
25 (Chairman)
Audit, Risk and
Compliance
Nominations
Carla Stent 21 January 2016 3 years 2years,9 months, I Audit, Risk and
25 Compliance
(Chairman)
1. Tim Franklin is also Chairman of the Post Office Advisory Council
2. Virginia Holmes began a second three year term on 2 April 2015
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Board Meetings
During 2015/16 the Board met ten times (including extraordinary meetings in person or by
telephone for time critical issues). A record of Directors’ attendance is set out in the table below.
COMMITTEE ATTENDENCE TO BE INCLUDED IN THIS TABLE.
Director Meetings Extraordinary Meetings
(attended/eligible (attended/eligible to
to attend) attend)
Alice Perkins? 2/2 2/2
Tim Parker? 4/4 1/1
Richard Callard 77 3/3
Tim Franklin 77 3/3
Virginia Holmes 7/7 13
Alasdair Marnoch? 2/2 1/2
Neil McCausland* 3/3 2/2
Paula Vennells 7/7 3/3
Alisdair Cameron 7/7 3/3
Carla Stent® 2/2 0/0
Ken McCall® 2/2 0/0
1, Alice Perkins resigned 31 July 2015
2. Tim Parker was appointed to the Board 1 October 2015
3. Alasdair Marnoch resigned 31 July 2015
4, _ Neil McCausland served as interim Chairman from 1 August 2015 until his resignation on 30
September 2015
5. Carla Stent was appointed to the Board 21 January 2016
6. Ken McCall was appointed to the Board 21 January 2016
Conflicts of Interest and Independence
The Board may, in the furtherance of its duties, seek independent professional advice at the expense
of Post Office. During the period, no director sought independent professional advice. The Articles
give the directors power to authorise conflicts of interest. The Board has adopted a procedure by
which situations giving rise to potential conflicts of interest are identified to the Board, considered
for authorisation and recorded.
During the period, none of the directors had a material interest in any contract of significance with
Post Office or any of its subsidiaries. There was careful management of any potential conflicts of
interest for Alisdair Cameron during the period up to 30 October 2015 when he served as a Non-
Executive Director on the Board of Post Office Management Services Limited.
At all times during the periods of their appointments in 2015/16, the independent directors met the
criteria for independence set by the Board .
Post Office has arranged appropriate insurance cover in respect of legal action against directors of
Post Office and its subsidiaries.
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Committees
To assist in the execution of its corporate governance responsibilities, the Board has established a
governance structure of three committees which deal with specific topics requiring independent
oversight, specifically: audit, risk and compliance; nominations; and remuneration. Each committee
is chaired by a Non-Executive Director and the Board delegates certain authorities to these
committees which operate within their own agreed, documented Terms of Reference.
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Nominations Committee
Introduction from the Committee Chairman
During 2015/16 the Committee has been key in bringing new
capability to the Board to ensure the right talent is in place to
support the Post Office during its ongoing transformation. To do so
we have used a combination of external search capability coupled
with internal resourcing to ensure that we are able to access
specialist expertise relevant to each role. The Committee is mindful
of the value which diversity brings to the Board and considers this
when making any proposals for appointments.
While the focus in 2015/16 has been on external appointments,
going forward the Committee will focus on ensuring that we begin to
build a strong internal talent pipeline to create a sustainable
organisation.
Tim Parker
Membership and Attendance
The Committee is chaired by Tim Parker, Chairman and the other
members are Virginia Holmes and Ken McCall, the Senior
Independent Director. During 2015/16 Tim Parker and Ken McCall
joined the Committee, replacing Alice Perkins and Neil McCausland
who stood down from the Board.
The Committee operates in accordance with its Terms of Reference,
which were last approved by the Board in March 2015and reviewed
in November 2015.
The Committee’ key responsibilities are to:
* keep under review the structure, size and complexity of the
Board, together with the balance of skills, experience and
diversity available within the Board and each of its committees;
. “make recommendations to the Board regarding any changes in
Board membership;
manage the process for recruiting and replacing Board —
Directors (excluding the non-executive director nominated by
_the Shareholder as their representative), members of the I
Group Executive, the Company Secretary and Directors of Post
Office Management Services Limited;
«actively manage succession planning for the Board and the
Group Executive;
* review the process for the engagement of external search
agents for senior appointments;
* — ensure Directors’ appropriate disclosures of other business
interests and any potential conflicts of interest; and
oversee the process for Bo
evaluation.
rd and Committee performance
Post Office Annual Report and Financial Statements I Page : 25
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Work carried out by the Committee in 2015/16
During the period the Committee oversaw the recruitment and appointment process for three new
Non-Executive Directors. Using a skills matrix the Committee ensured the Board was comprised of
Members with the requisite skills and experience, including: PLC Board experience; non-executive
experience; financial services exposure; retail exposure; public sector and government exposure; IT
and digital knowledge; business transformation expertise; and experience of mails and logistics. The
use of this matrix was key in ensuring that all skills were represented, securing a strong and effective
Board for the future. The Committee also oversaw the process to appoint to the Board of Post Office
Management Services Limited an independent Non-Executive Director to chair its Audit, Risk and
Compliance Committee.
The Committee used the services of Russell Reynolds Associates to undertake market searches for
executive and non-executive appointments and to advise on succession planning. This firm did not
have any other connection with Post Office.
In 2015/16 the Committee also made recommendations to the Board for membership of its
committees and considered succession planning (in particular for the Group Executive) and talent
management. The Committee noted the formation of the L300, a forum for the top 300 leaders of
Post Office, to foster senior accountability and to develop the internal talent pipeline.
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Remuneration Committee
Introduction from the Committee Chairman
Having joined the Post Office Board as Senior Independent
Director and Chairman of the Remuneration Committee in
January 2016, I would like to thank my predecessor, Neil
McCausland, for his chairmanship.
In 2015/16 the Committee has effectively delivered against its
objectives to provide oversight for senior level remuneration
across Post Office Group and to use benchmarking as one
measure to ensure the appropriateness of this remuneration.
It has also provided oversight of the short term and long term
incentive plans.
Two of the three Committee members have changed during
the year. I am grateful for the consistency Virginia Holmes’
continued membership brings and am confident that the
refreshed Committee will discharge its duties effectively in the
coming year and with fairness and transparency.
Ken McCall
Membership and Attendance
The Committee is chaired by Ken McCall, Senior Independent
Director and the other members are Tim Parker, Chairman,
and Virginia Holmes. During 2015/16 Tim Parker and Ken
McCall joined the Committee, replacing Alice Perkins and Neil
McCausland who stood down from the Board.
The Chief Executive may attend meetings, at the invitation of
the Chairman, to discuss matters relating to the remuneration
of the Chief Financial Officer and members of the Group
Executive. However, the Committee is careful to recognise
and manage any potential conflicts of interest when receiving
views from the Group Executive and upholds the principle
that no individual may be involved in discussions concerning
their own remuneration.
The Committee operates in accordance with its Terms of
Reference, which were last approved by the Board in March
2015 and reviewed in November 2015.
Any changes in remuneration for directors of Post Office must
be approved in advance by the Shareholder, while the
remuneration of the Chairman and of the Non-Executive
Directors is set by the Shareholder. Also, no material changes
can be made to Directors’ base salaries, benefits or incentives
without Special Shareholder consent.
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Work carried out by the Committee in The Committee’ key responsibilities are to:
2015/16 .
*® make recommendations to the Board on the
During the year, the Committee reviewed and remuneration strategy and any changes to individual
made recommendations for the 2014/15 elements of the remuneration package for Executive
payments against the short and long term Directors; members of the Group Executive who
report directly to the Chief Executive; and other
senior level appointments with comparable
remuneration;
incentive plans and the targets, scorecard
measures (including stretch targets) and
objectives for 2015/16.
provide an oversight function for the remuneration
of the Directors of Post Office Management Services
long term incentive plan, the remuneration for Limited;
the Chief Executive and the Chief Financial
Officer and the fees paid to Non-Executive
The Committee also reviewed the rules of the
¢ — obtain information on salary levels across the
business and within external organisations of
Directors. with ‘
comparable size, in order to set remuneration levels
Prior to the acquisition in October 2015 of the within an appropriate context, while being mindful
insurance arm of Post Office via its wholly that any remuneration increases should correspond
with corporate and individual performance
improvements; and
owned subsidiary Post Office Management
Services Limited, the Committee reviewed,
and recommended for approval, the © have oversight of, approve and make
Remuneration Policy for the subsidiary. recommendations to the Board in respect of
remuneration levels for new senior executive
appointments. In doing 50, it liaises and works
external consultants and in the year under closely with the Nominations Committee.
review, advice was primarily obtained from
New Bridge Street Consultants on market
practice and benchmark development. New Bridge Street Consultants is part of the Aon Consulting
Group that, under its Aon Hewitt brand, acts as investment adviser to the Post Office section on the
Royal Mail Pension Plan. Post Office is satisfied that these two provisions of advice, from different
parts of the Aon Consulting Group are managed separately and therefore present no compromise of
independence.
The Committee is permitted to engage
Directors’ Remuneration Report
Statement by the Chair of the Remuneration Committee
This is my first statement on behalf of the Remuneration Committee. The executive remuneration
strategy and framework within Post Office Ltd is structured to support improvement in profita
and reduction in reliance upon Government funding and subsidy. This is to create a sustainable
business which can deliver its public purpose.
During 2015/16 progress has been made in these areas despite challenging market conditions. Most
of the targets for progress in the year have been achieved but it remains clear that the Post Office is
still only part way through its corporate transition. Targets will continue to be stretching in
recognition of the challenges ahead.
The bonus performance outturn in 2015/16 reflects the progress made in reducing our EBITDAS
loss, pace and extent of transformation of the network, high levels of customer service and
significant financial improvement in the performance of our Crown branches.
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For 2016/17 our long term incentive plan will continue the focus on significant and sustained
EBITDAS improvement and the maintenance of the unique access that people across the United
Kingdom have to Post Office branches.
The short-term incentive plan will continue to focus on financial improvements in a challenging
commercial environment in line with our business strategy and transformation objectives.
The Remuneration Committee is confident that the current policy maintains the strong link between
reward and demonstrable performance against the measures which drive the financial and
structural transformation of the Post Office to become a sustainable commercial business able to
deliver its public purpose.
The Remuneration Committee will continue to monitor and benchmark external best practice and
apply the highest standards of governance.
Details of directors’ remuneration can be found at XX
Ken McCall
Chair, Remuneration Committee
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Audit, Risk and Compliance Committee
Introduction from the Committee Chairman
Having joined the Post Office Board as Chairman of the Audit, Risk and
Compliance Committee near the end of 2015/16 I would like to thank
my predecessors for their chairmanship of the Committee.
In addition to its regular cycle of business, during the year the
Committee has also supported the further development of the Group-
wide Risk Management and the General Controls Frameworks.
Reviewing Group-wide risk oversight has been an important
development, ensuring that risk is appropriately managed as the
organisation undergoes transformation.
Looking forwards to 2016/17, the Committee will continue to build on
the good work of 2015/16 and will particularly ensure appropriate
oversight of financial services risk and the consideration of any impact
of prospective regulatory changes on this developing area for Post
Office.
I am confident that the revised membership of the Committee
encompasses a strong set of relevant skills and experience and will
Membership and Attendance
The Committee is chaired by Carla Stent, and the other members are Ken
McCall, the Senior Independent Director, Richard Callard and Tim Franklin,
both Non-Executive Directors. During 2015/16 Richard Callard, Ken
McCall, Tim Parker (until 20 January 2016) and Carla Stent joined the
Committee, with Alasdair Marnoch and Neil McCausland both leaving as
they stood down from the Board.
The Head of Internal Audit attended all meetings of the Committee and
also met the Committee Chairman, as required, through the year. The
external auditor was also invited to attend meetings of the Committee as
appropriate.
The Board considers that the Committee’s members have broad
commercial knowledge and extensive business leadership experience and
that this constitutes a broad and suitable mix of business and financial
experience and expertise.
The Committee operates in accordance with its Terms of Reference, which
were last reviewed by the Committee and approved by the Board in
September 2015.
Further detailed information on the management of risk within Post
Office, together with identification of principal risks, their impacts and
mitigation, can be found in the Management of Risk section on pages XX.
Post Office Annual Report and Financial Statements I Page : 30
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Work carried out by the Committee in fh ittee’ additional
2015/16 The Committee’ additional responsi
ities are to:
* provide governance of the auditing services, which
includes reviewing and making recommendations to
the Board on the nomination or discharge of the
external auditors;
During the year, the Committee reviewed and
recommended that the Board approve the
annual report and financial statements for
2014/15 and the interim report for 2015/16,
including consideration of principal and * review and agree the annual audit plans for both
strategic risks. It also approved the annual internal and external audit;
audit plans for both the internal audit function
* ensure the appropriateness of the Post Office
and the external auditors, Ernst & Young LLP.
relationship with the external auditor is managed,
The Committee reviewed the work carried out including consideration of the external auditor’s
by internal audit and by the external auditor, independence and endorsement of its remuneration
further details of which can be found below. and terms of engagement for approval by the Chief
Financial Officer;
As part of an holistic review of risk
management and internal controls, the
Committee supported and provided guidance
© review the provision of any non-audit services
provided by either internal or external audit;
on the further improvement of the Risk © devote specific time to the consideration and
Management Framework and clarification of overview of risks relating to the financial services
our general controls. This work included the businesses of the Group and to any risk relating to
development of a framework of key policies, existing and new pension schemes; and
reviewing business continuity procedures and
increasing the clarity and robustness of
accountabilities. The Committee’s review of
cyber risk during the year will continue into
2016/17.
consider the impact of any new legislative, regulatory,
market or other developments which could materially
or adversely affect Post Office and its subsidiaries.
Following the rationalisation of the committee structure to ensure comprehensive oversight of
Group-wide risk at the Committee, there was a formalisation of the reporting procedures between
the Committee and the equivalent committee for Post Office Management Services Limited. The
Committee also scheduled regular deep dives on financial services and pensions risk. In the year,
financial conduct risk was considered and a review was carried out on the Anti-Money Laundering
and Counter Terrorist Financing Framework on which the Committee will receive regular follow up
reports.
Internal Audit
The Committee received assurance from Internal Audit over Post Office’s key risk areas. To maintain
independence, the Head of Internal Audit reports functionally to the Chairman of the Committee
and operationally to the General Counsel. Assurance is achieved through a mixture of in-house
auditors, with skills and experience relevant to Post Office operations, supplemented by a co-
sourcing arrangement currently with PwC for more specialist, one-off expertise and Deloitte LLP for
business transformation assurance.
The annual plan is developed by Internal Audit across the risk universe with input from
management. It is approved by the Committee and may be updated, with the Committee’s consent.
Updates and findings are provided by the Head of Internal Audit at each meeting of the Committee.
Any significant findings or identified risks are closely examined so that appropriate action can be
taken.
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During the year, Internal Audit conducted 11 mainstream reviews, two financial services reviews and
facilitated a further seven on Business Transformation.
Business Area Audits Conducted
Mainstream Treasury Operational Risk, Social Media, Contract Management, Financial
Crime, Common Digital Platform, Agents Remuneration, Data Protection,
Mobile Proposition, Drop and Go, Property Regulatory Compliance, Travel
Expenses
Financial Services FS Conduct Risk, POMS Regulatory Readiness
Business Transformation Portfolio Design, End to End Financial Management, Benefits Management
Framework, Cross Towers Governance Structure, Programme Assurance
Authority, End User Computing, IT Separation from Royal Mail
At the end of the year, Internal Audit conducted a self assessment of compliance with the Internal
Audit Charter, which was reviewed by the Committee. Next year, this process will incorporate
feedback from auditees and Committee members on Internal Audit’s effectiveness.
External Audit
The external auditors are engaged to express an opinion on the financial statements. They review
and test the systems of internal financial control and the data contained in the financial statements
to the extent necessary to express their audit opinion. They discuss with management the reporting
of operational results and the financial condition of the Post Office and present their findings to the
Committee.
During the year the external auditors met once with the Committee in the absence of the executive.
The Committee agreed the external audit fee and considered the external auditors to have an
appropriate level of independence. Prior to the end of year a change in the external audit partner
provided enhanced levels of independence.
During the year XX% of the total fees paid to Ernst & Young were for non-audit services, an
increase/decrease on the 29% paid in 2014/15.
Annual Assessment
During the year, the Committee reviewed and recommended that the Board approve the
effectiveness of the:
e risk management framework, by reviewing evidence of risk assessment activity and the
summary of the material risks and action plans, via the Group Risk Profile
systems of internal control, primarily through agreeing the scope of the internal audit plan
and reviewing its findings, but also from reports from Management and external advisors
* preparation of the annual and interim financial statements and a review of the nature and
scope of the external audit.
In consequence, the Board, through the Committee, confirmed that there is a regularly reviewed
ongoing process of identifying, evaluating and managing the principal risks faced by Post Office and
their related controls. The process is continuing to evolve, but has been in place for the year under
review and up to the date of approval of the annual report and financial statements. The Board has
reviewed its effectiveness.
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Subject to acknowledgement of the reinstatement referred to on page XXX, the Board considers the
risk management, internal control systems and processes appropriate for Post Office activities and
designed to manage rather than eliminate the risk of failure to achieve Post Office strategic
objectives, protect our reputation and comply with regulatory standards. They provide reasonable,
but not absolute assurance, against material misstatement or loss.
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Management of Risks
Our Approach to Risk
We define risk as anything that can adversely affect our ability to meet the Post Office’s objectives, maintain its reputation and
comply with regulatory standards. Risk is an inherent part of how the PO seeks to grow and create value. We seek to
understand and harness risk in the pursuit of our aims and business plan objectives. As we progress, our aim is to operate
within an acceptable level of risk taking, in accordance with risk appetite parameters set by the Board. All staff are expected to
be aware of risks in their areas of responsibility and manage those risk intelligently in their day-to-day activities.
Risk Management Governance
The Board is accountable for the risk management and internal control systems in the Post Office, for reviewing their
effectiveness and for determining the nature and extent of the principal risks. Responsibility for day-to-day operations rests
with members of the Group Executive. The Risk and Compliance Committee, on behalf of the Group Executive, reviews the
operation of the risk management process and management of the principal risks. The committee is chaired by the General
Counsel, membership includes all of the Group Executive and the output is reported to the Audit, Risk & Compliance
Committee (ARC).
Assurance for the Board over the effectiveness of our risk management and internal controls is provided by the Audit, Risk and
Compliance Committee, through review of reports from Management, particularly the Risk & Compliance Committee (RCC),
Internal Audit, external advisers and External Audit.
Our Risk Management Framework
To improve our ability to consistently identify, manage and monitor risks, and take advantage of opportunities we might
otherwise miss, we have developed a structured framework for assessing, managing and communicating risk. The framework
identifies roles and responsibilities, the policies for how risks are managed, the tools and processes used, a risk appetite
statement and the reporting outputs to inform both Management and the ARC.
Material risks are identified by business areas (bottom up analysis) for their own risk management; Group Executive members
review these and add further strategic and external perspectives (top down review). The scope of risks to consider is facilitated
by a Risk Universe. Impact and likelihood is assessed for evaluating each risk, after consideration of the controls we have in
place. Where the resultant “net” risk profile is considered in excess of our risk appetite, consideration will be given as to how
the risk could be brought back within an acceptable level of risk taking. For other risks we may want to introduce monitoring
procedures. Details of our Principal Risks are included on page ZZ.
Our Control Framework
Our risk management efforts are underpinned by our internal control framework. The Board has put in place an organisational
structure with formally defined lines of responsibility and delegation of authority. Executive Management have established
procedures for setting our direction, planning and controlling the operation of our business, and reviewing and monitoring our
performance and conduct. These include:
* communication of the Group's strategy, objectives and targets
© expectations of standards of conduct by our colleagues as set out in our Code of Business Standards
* definition and review of our social purpose
* annual and three-year operating and capital plans which are reviewed by the Board. This includes the identification
and assessment of risks compared to our appetite
* monthly comparisons actual financial performance with budget by operating divisions, with consideration by the
Board of year end forecasts
* an organisational structure with lines of responsibility and appropriate segregation of duties
* change management approach, resources and governance are used to manage significant projects
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* formally defined delegations of authority, including capital investment limits and a treasury policy
* appointment of employees of the necessary calibre to fulfil their allocated responsibilities, with formal personal
development and appraisal procedures
‘* senior management remuneration designed to align personal and business objectives, as well as to discourage
dishonest, illegal or unethical acts
* a framework of operating, financial and IT policies
* a whistleblowing procedure for colleagues to raise concerns in confidence and if required, anonymously; a complaints
procedure is available to customers and third parties.
Progress during the year and plans for next year
During the year, we have continued to develop our risk management capability. Highlights of what’s been achieved and what is
planned for next year include:
Risk assessment: during 2015/ 16, there has been more
regular use of the risk management framework in business
areas and by RCC, with greater focus on defining further
actions required to manage risks and the introduction of
longer term horizon scanning
Control environment: during 2015/16, we have reviewed the
appropriateness of our Internal Control Framework and our
key policies and identified appropriate remediations
) Risk assessment: for 2016/ 17, we plan to focus our incident
reporting process to provide lessons learnt on our risk
assessments and operationalise our risk appetite further
Control environment: for 2016/17, we plan to formalise our
monitoring mechanisms for both our Internal Control
Framework and our key policies
Our Principal Risks and Mitigations
These are our principal risks, detailed with their potential consequences if they were to crystallise and how the Post Office
manages them. Any of these risks could have a material impact on our results, condition and prospects. However, these
risks should not be regarded as a complete and comprehensive statement of all potential risks; some risks are not yet
known and some that are not considered material could later turn out to be material.
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Potential risks
Consequences
Key Mitigations
STRATEGIC RISKS
A) Competitive threat
Post Office faces both opportunities for and threats
to income from our competitive market place.
- The Mails and parcels market remains intensely
competitive.
- Government Services are impacted by increased use of
digital channels and reduced public spending.
- Financial Services is a challenging market where
responding quickly to different strategies, business models,
and products is essential to growth.
Crystallisation of these
risks could result in not
achieving our growth
objectives, losing
market share and
revenues.
Customer perceptions and competitor behaviour are
key inputs to decision making.
Our strategy focuses on customer requirements,
market trends and competitor behaviour, working
with partners where appropriate, to offer customer
centric propositions, supported by a clear
distribution strategy.
Each product proposition developed in the context of
a customer strategy which describes target market,
channel of distribution and completing attributes.
B) Dependency on strategic relationships
Post Office has strategic relationships which are key
to its product offering and growth, for instance with
Royal Mail Group and Bank of ireland (UK) ple.
Misalignment of the strategic direction or focus with
the strategic partner could result in products that do
not support our growth strategy or meet our
customer or market requirements.
This could result in not
achieving our growth
objectives, losing
revenue and market
share.
Close working relationships established with our
strategic relationships.
Interactions scheduled with our strategic partners to
improve the product offering and service to drive
growth and profitability for both parties.
Contractual arrangements monitored and managed
to ensure that they are aligned with commercial
objectives and that relationships deliver to
expectations.
TRANSFORMATION RISKS
C) Benefits from business transformation
not realised
Budgeted savings from our transformation
programme may be delayed or not achieved, or
overall service compromised, due to pressures on
capability, capacity and the scale of change
This could result in not
achieving our growth
objectives, loss of
revenue and cost
savings, reduced
customer satisfaction
and damage to
reputation with
stakeholders.
Programme management office established, with
assurance oversight.
Detailed plans in place to manage the
transformation, and identify risks to ensure
transformation activities are delivered within budget
and on time.
Flexible resource augmentation model implemented
to ensure supply of people with the right capabilities,
skills and experience.
Benefits tracked from inception to delivery and into
business as usual operations through formalised
reviews during the lifecycle.
D) IT transformation not delivered in full
Our programme of IT transformation may not be
delivered in full due to the level of complexity of
replacing legacy IT and simultaneously implementing
new integrated service model
This could result in
systems and
infrastructure that are
not fit for purpose, may
add costs and lead to
business interruption.
Strategy and Integrated Service model developed
and monitored.
Programme teams and operational business teams
work closely to ensure that the objectives of the
strategy are delivered.
Business and Technology Transformation
governance, assurance and oversight plan in place
and operational.
E) Industrial action
The withdrawal of support from staff or
postmasters to the ongoing implementation of
Post Office transformation has the potential to
damage the business in terms of both reputation
and financial performance particularly if industrial
action takes place.
This could result in
business disruption
leading to loss of
revenue, reduced
customer satisfaction
and brand damage.
Well defined agreements with relevant unions.
Comprehensive engagement programme in place
with staff, unions and postmasters so as to ensure
that there is alignment with our vision and strategy
around transformation.
Contingency planning in place to minimise the impact
of potential industrial action.
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F) Lack of appropriate capal
The Post Office is dependent on its dedicated work
force to meet the expectations of its customers and
stakeholders. Continuing to attract, motivate,
develop and retain people is key to its success,
This could result in not
achieving our strategic
objectives and loss of
staff engagement.
Continual review of our organisational structure to
ensure it evolves and supports our requirements.
Key capabilities for our current and future state
needs identified with a capability heatmap,
Investment in developing our people.
G) Decline in customer experience
If we are unable to deliver an attractive customer
experience, via our products, service and channels,
we risk losing the support of our customers.
This could result in
reduced customer
satisfaction and brand
reputation, with
consequential loss of
market share and
revenues.
Customer strategy continually monitored to ensure
that it meets changing customer product and service
expectations and reflects current market and
competitor trends.
Channel strategy ensures we meet the changing
customer requirements for access and utilises
available and emerging technology to reflect,
changing customer needs.
H) Unattractive network proposition
As we transform, there is a risk that the Post Office
may not be able to retain, or attract sufficient new,
retail partners because of the complexity of our
network proposition and relative value to the retail
partner particularly compared to other categories.
‘As well as loss of
revenue, this could
result in shrinkage to
our network and breach
our public purpose
commitment.
New branch model being developed to provide
retailers with an attractive proposition relative to
other categories.
New branch model also ensures that we use modern
technology to drive simplicity of operations,
efficiency and cost reduction for the retailer, as well
as a better customer experience.
Branch model continually reviewed and updated to
respond to ongoing competitive threat and market,
conditions
1) Business interruption and cyber threat
Post Office is dependent on the continued
availability of its information systems and associated
infrastructure, These could be threatened, either
due to internal issues, external events or cyber
attack.
This could result in
disruption of service
leading to negative
customer experience,
breach of contractual
obligations and brand
damage.
Business continuity plans updated through review,
testing and enhancements.
New contracts have provisions covering the security,
resilience and availability of our IT systems and
infrastructure,
Information Security policies in place.
Penetration testing schedule to assess and improve
the security of our systems,
J) Dependency on third parties
Post Office works in partnership with a number of
third parties to deliver high quality services. We
need to successfully select, contract and monitor our
key in-source or out-source relationships and avoid
any unintentional breaches of contractual terms.
K) Stakeholder funding
The cost of delivering the public purpose of the Post
Office and meet the expectations of stakeholders
may exceed current forecasts.
This could lead to
business interruption
and additional costs
through failure to meet
contractual obligations.
This could result in not
achieving our growth
objectives, failing to
meet our public
purpose commitment
and damaging our
reputation with
stakeholders.
Contract management framework to monitor our
contracts and suppliers.
Assessment of risks and monitoring of mitigating
actions.
Defined key policies that we require our suppliers to
comply with and attest compliance.
Proactive engagement with stakeholders to ensure
there is full understanding of, and alignment with, the
strategic goals and the investment case required to
deliver them.
Annual and three-year operating and capital plans
developed and risk assessed.
Scheduled feedback to stakeholders and review.
L) Financial reporting and controls failure
Our financial controls are fundamental to delivering
our fiduciary responsibilities, management
This could result in loss
of revenue, increased
costs, financial
misstatement and
Defined and structured delegation of authority which
is reviewed and approved by the Board,
‘A Financial and Accounting manual and a framework
of supporting general controls ~ see our General
Post Office Annual Report and Financial Statements I Page : 37
518
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information, financial reporting and compliance with [ damage to reputation Controls Framework on page XXX.
accounting and governance standards. These may _I with stakeholders. © Documented financial controls, with additional
not operate effectively if they are not documented, assurance to be provided from a Control Self-
reviewed and monitored regularly. Assessment process.
M) Pension cost increases This could result in * Valuation assumptions and pension funding strategy
material increases in have regular external and internal monitoring and
The cost of servicing the current Defined Benefits required contributions, review.
scheme could become unbearably onerous as a adversely affecting our I ® Options being developed to minimise the impact of an
result of the prolonged low interest rate ability to achieve adverse valuation, with assistance from professional
environment, resulting in substantially increased commercial advisors,
Consultation process initiated on options for the
future of the Defined Benefit plan.
contributions. sustainability.
LEGAL & REGULATORY RISKS
N) Financial regulatory breach This could result in * New regulatory obligations monitored by relevant
regulatory censure, business owners, with support from Corporate
The Post Office operates under an extensive fines, litigation or Services.
regulatory environment, covering areas such as curtailment of trading, I * ©N-80ing training to our staff on legal and regulatory
financial and postal services, telecoms, procurement, I which could impact matters.
competition law and data security. This environment I income and/or damage I ® Regular compliance tests and monitoring are
continues to evolve, particularly in the financial our reputation with conducted.
services arena, and we need to ensure that the customers and © Internal and external assurance programmes are in
changing requirements continue to be identified and_I suppliers. place (including by our regulatory principals) to
met. ensure that we meet financial services regulatory
requirements, including sales practices and conduct,
customer experience and product experience and
delivery.
Post Office Annual Report and Financial Statements I Page : 38.
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Directors’ Report
The Directors present the Group Annual Report and Financial Statements for the year ended
27 March 2016.
Expected future developments
Expected future developments are detailed in pages XX to XX.
Results and dividends
The loss after taxation for the year was £XXm (2015: profit £XXm). The directors do not recommend
the payment of a dividend (2015: £nil dividend).
Political contributions
No political contributions were made in the year (2015: £nil).
Research and development
There was no research and development expenditure during the year (2015: £nil).
Directors and their interests
The following served as Directors during the year:
RJCallard
ACJ Cameron
TA Franklin
V AHolmes
A Marnoch (resigned 31 July 2015)
K S McCall (appointed 21 January 2016)
NW McCausland (resigned 30 September 2015)
TC Parker (appointed 1 October 2015)
A Perkins CB (resigned 31 July 2015)
CR Stent (appointed 21 January 2016)
P A Vennells
No director has a beneficial interest in the share capital of Post Office. The emoluments of Directors
are set out in the Directors’ Remuneration Report which appears on pages XX to XX.
People
Our goal is to ensure that everyone associated with our business — employees and postmasters — are
engaged and involved in the business and are aligned and equipped to meet our shared objectives.
We conduct regular employee surveys, which provide employees and postmasters the opportunity
to express their views and opinions on important issues. This two way communication encourages
all our people to contribute towards improving the business and delivering our strategic objectives.
To engender greater engagement, Post Office has structured and systematic communication
channels in place, ensuring employees and postmasters are informed on matters which impact
them.
As part of our commitment to drive better service for customers we continue to focus on improving
the quality of our leadership, ensuring we have the right skills for today and tomorrow, and
Post Office Annual Report and Financial Statements I Page : 39
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achieving greater involvement from employees, postmasters and their representative bodies.
We have launched a Learning Academy which provides high quality learning for all employees and
postmasters. We will continue to invest in developing the best talent to support our vibrant,
sustainable business, including graduate recruitment and active participation in the new
apprenticeship programme.
Underpinning all of this, is a need for dignity and respect in the workplace, where everybody feels
valued, is treated fairly and equally, and all our people play a full part in helping the business to
achieve its goals.
Corporate responsibility
Details of Post Office corporate responsibility activities are contained within a separate report on
page XX.
Disabled employees
The Post Office policy is to give full consideration to applications for employment from disabled
persons. Employees who become disabled while employed receive full support through the
provision of training and special equipment to facilitate continued employment where practicable.
Post Office provides training, career development and promotion to disabled employees wherever
appropriate.
Post balance sheet events
In accordance with the funding agreement with government announced on 27 November 2013, for
which State Aid approval was received on 19 March 2015, Post Office Limited received £220m of
funding on 1 April 2016. TBC
Going concern
After analysis of the financial resources available and cash flow projections for Post Office, the
Directors have concluded that it is appropriate that the financial statements have been prepared on
a going concern basis. Further details are provided in accordance with the fundamental accounting
concept in note X to the financial statements.
Financial instrument risk
The exposure of the Group to market risk, credit risk and liquidity risk has been disclosed in note X of
the annual report on pages XX-XX.
Audit information
The Directors confirm that, so far as they are aware, there is no relevant audit information of which
the auditor is unaware, that each Director has taken all reasonable steps to make themselves aware
of any relevant audit information and to establish that the auditor is aware of that information.
Auditor
The auditor, Ernst & Young LLP, is deemed to be reappointed under section 487(2) of the Companies
Act 2006.
By Order of the Board
Alwen Lyons
Secretary
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Post Office Limited
(Company Number 2154540)
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ
X June 2016
Post Office Annual Report and Financial Statements I Page : 41
Yfice Board-24
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Registered Number 2154540
Post Office Limited
Financial Statements
2015-2016
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DIRECTORS’ RESPONSIBILITIES STATEMENT
The directors are responsible for preparing the Annual Report, which includes the Directors’ Report,
Remuneration Report and Corporate Governance Statement, and the Group and Parent Company
financial statements, in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that
law the directors have elected to prepare the Group consolidated financial statements in accordance
with International Financial Reporting Standards (“IFRSs") as adopted by the European Union ("EU").
The financial reporting framework that has been applied in the preparation of the Parent Company
financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice). Under company law the directors must not approve the
financial statements unless they are satisfied that they give a true and fair view of the state of affairs
of the Group and Parent Company, and of the profit or loss of the Group and Parent Company for that
period.
In Preparing these financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
* make judgments and accounting estimates that are reasonable and prudent;
* state whether IFRS as adopted by the EU, and applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in the Group and Parent
Company financial statements respectively;
* prepare the financial statements on the going concern basis unless it is inappropriate to
presume that the Group and Parent Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and
explain the Company’s transactions and disclose with reasonable accuracy at any time the financial
position of the Company and the Group and to enable them to ensure that the financial statements
and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the
Group’s financial statements, Article 4 of the International Accounting Standards Regulation. They are
also responsible for safeguarding the assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial
information included on the Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors are responsible for preparing the Directors’ report and the Corporate Governance report
in accordance with the Companies Act 2006 and applicable regulations.
The Directors confirm that to the best of their knowledge:
«The Group consolidated financial statements, prepared in accordance with IFRS as adopted by
the EU and in accordance with the provisions of the Companies Act 2006 give a true and fair
view of the assets, liabilities, financial position and profit of the Group;
* The Parent Company financial statements prepared in accordance with United Kingdom
Generally Accepted Accounting Practice including FRS 101 “Reduced Disclosure Framework”,
give a true and fair view of the assets, liabilities, financial position and profit of the Company;
and
* The management report contained in this report includes a fair view of the development and
performance of the business and the position of the Group as a whole and of the Company,
together with a description of the principal risks and uncertainties they face.
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Independent auditor’s report to the members of Post Office
We have audited the consolidated financial statements of Post Office Limited for the 52-week period
ended 27 March 2016 which comprise the Group Income Statement, the Group Balance Sheet, the
Group Statement of Comprehensive Income, the Group Statement of Cash Flows, the Group
Statements of Changes in Equity, the Parent Company Statement of Comprehensive Income, the
Parent Company Balance Sheet, the Parent Company Statement of Changes in Equity and the related
notes 1 to 26. The financial reporting framework that has been applied in the preparation of the group
financial statements is applicable law and International Financial Reporting Standards (IFRSs) as
adopted by the European Union (EU). The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom
Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101
“Reduced Disclosure Framework”.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part
16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page [xx], the directors
are responsible for the preparation of the financial statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the Annual Report and Financial Statements.
to identify material inconsistencies with the audited financial statements and to identify any
information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
« the financial statements give a true and fair view of the state of the Group’s and of the Parent
Company's affairs as at 27 March 2016 and of the group’s loss for the 52-week period then
ended;
* the Group’s financial statements have been properly prepared in accordance with IFRSs as
adopted by the European Union; and
* the Parent Company financial statements have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting Practice, including FRS 101 “Reduced
Disclosure Framework"; and
* the Group and Parent Company financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Financial Report and the Directors’ Report for the financial
year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires
us to report to you if, in our opinion:
* adequate accounting records have not been kept by the parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
* the Parent Company financial statements are not in agreement with the accounting records
and returns; or
* certain disclosures of directors’ remuneration specified by law are not made; or
* we have not received all the information and explanations we require for our audit.
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Other matters
* The maintenance and integrity of the Post Office Limited web site is the responsibility of the
directors; the work carried out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any changes that may have occurred
to the financial statements since they were initially presented on the web site.
* Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Peter McIver (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
Date}
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Consolidated income statement
for the 52 weeks ended 27 March 2016 and 29 March 2015
2015
2016 (Restated)
Notes £m £m.
Continuing operations:
Turnover 981 976
Network Subsidy Payment 130 160.
Revenue 1,141 1,136
People costs excluding restructuring costs 2 (233) (238)
Other operating costs (808) (831)
Share of post tax profit from joint ventures 10 35 36
Operating profit before exceptional items for continuing operations 3 105 103
Operating exceptional items 4 (269) (271)
- government grant 150 170
- restructuring costs (283) (301)
- impairment (136) (140)
Operating loss from continuing operations (164) (168)
Profit on disposal of property, plant and equipment - =
Loss before financing and taxation from continuing operations (164) (168)
Finance costs 6 (5) (3)
Finance income 6 - 1
Net financing income relating to pensions 17 8 2
Loss before taxation from continuing operations (161) (163)
Taxation credit Zz 4 26
Loss for the financial year from continuing operations. (157) (137)
Discontinued operations:
Loss for the financial year after tax from discontinued operations 22 (10) (4)
Loss for the financial year (167) (141)
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Consolidated statement of comprehensive income
for the 52 weeks ended 27 March 2016 and 29 March 2015
2015
2016 (Restated)
Notes £m £m
Loss for the financial year from continuing operations (157) (137)
Loss for the financial year from discontinued operations 22 (10) (4)
Loss for the financial year (167) (141)
Other comprehensive income not to be reclassified to profit or loss in
Future periods
Remeasurements on defined benefit surpluses 17 (9) 54
Income tax effect Z 5 (9)
Total comprehensive income for the year (171) (96)
There are no other comprehensive income items that will be reclassified to the profit and loss in future
periods.
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Consolidated statement of cash flows
for the 52 weeks ended 27 March 2016 and 29 March 2015
2016 2015
£m_ _ém
Cash flows from operating activities
Operating profit before exceptional items from continuing operations 105 103
Operating loss from discontinued operations 22 (10) (4)
Total profit before exceptional items. 95 99
Adjustment for:
Share of profit from joint ventures 10 (35) (36)
Pension operating costs 2 30 28
Working capital movements: (81) (17)
Increase in trade and other receivables (14) (34)
( Decrease)/Increase in trade and other payables (61) 10
Increase in provisions for discontinued operations 22 3 -
(Decrease)/increase/ in non-exceptional provisions 15 (9) 2
Pension operating costs paid (23) (23)
Cash payments in respect of operating exceptional items: (109) (66)
IGovernment grant 150 170
Restructuring costs (253) (224)
Other (6) (12)
Net cash outflow from operating acti (123) (15)
Income tax recovered Zz. 9 11
Cash flows from investing activities
Dividends received from joint ventures 10 35 30
Finance income received - 1
Acquisition of insurance business. 21 (44) -
Purchase of fixed and intangible assets (136) (147)
Net cash outflow from investing activities (145) (116)
Net cash (outflow)/inflow before financing activities (259) (120)
Cash flows from financing activities
Finance costs paid (5) GB)
Payments to finance lease creditors - (3)
Proceeds of borrowings from BIS 14 155 310
Net cash inflow from financing activities 150 304
Net (decrease)/increase in cash and cash equivalents (109) 184
Cash and cash equivalents at the beginning of the year 12 821 637
Cash and cash equivalents at the end of the year 12 712 821
Post Office L
Consolidated balance sheet
at 27 March 2016 and 29 March 2015
imited
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2015
2016 (Restated)
Notes £m —m
Non-current assets
Intangible assets 8 44 -
Property, plant and equipment 9 9 10
Investments in joint ventures 10 67 67
Retirement benefit surplus 17 196 205
Trade and other receivables 11 12 10
Total non-current assets 328 292
Current assets
Inventories 6 6
Trade and other receivables it 409 397
Cash and cash equivalents. 12 712 821
Total current assets 1,127 1,224
Total assets 1,455 1,516
Current lial jes
Trade and other payables 13 (653) (718)
Financial liabilities - interest bearing loans and borrowings 14 (465) (310)
- obligations under finance leases 20 (8) -
Provisions 15 (151) (144)
Total current liabi (1,277) (1,172)
Non-current liabi
Other payables 13 (25) (30)
Provisions 15 (16) (6)
Total non- current liabi (41) (36)
Net assets 137 308
Equity
Share capital 18 - -
Share premium. 18 465 465
Retained earnings (330) (159)
Other Reserves 18 2 2
Total equity 137 308
The financial statements on pages XX to XX were approved by the Board of Directors on XXX 2016 and
signed on its behalf by:
P A Vennells
Chief Executive
A Cameron
Chief Financial Officer
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Consolidated statement of changes in equity
for the 52 weeks ended 27 March 2016 and 29 March 2015
Share Retained Other ‘Total
premium — earnings reserves equity
Notes £m £m £m £m
At 30 March 2015 (restated) 465 (159) 2 308
Loss for the year - (167) - (167)
Remeasurements on defined benefit surplus 17 - (9) - (9)
Income tax effect Zz : 5 2 5
At 27 March 2016 465 (330) 2 137
Share Retained Other Total
premium earnings _reserves equity
Notes £m £m ém ém
At 31 March 2014 465 (63) 2 404
Loss for the year (restated) - (141) - (141)
Remeasurements on defined benefit surplus 17 - 54 54
Income tax effect 2 : (9) (9)
At_29 March 2015 (restated) 465 (159) 2 308
10
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Notes to the financial statements
1. Accounting Policies
Financial year
The financial year ends on the last Sunday in March and for this reason these financial statements are made up
for the 52 weeks ended 27 March 2016 (2015: 52 weeks ended 29 March 2015).
Basis of preparation
The Group financial statements on pages XX to XX have been prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS. Unless otherwise stated in the accounting policies below, the
financial statements have been prepared under the historic cost accounting convention.
The Company is incorporated and domiciled in the United Kingdom. The Group consolidated financial statements
are presented in Sterling and all values are rounded to the nearest £million except where otherwise indicated.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary
undertaking as at 27 March 2016. Subsidiaries are consolidated from the date of acquisition, being the date on
which the Group obtains control, and continue to be consolidated until the date such control ceases. A dormant
set of financial statements for Post Office Management Services Limited (subsidiary) were prepared to 30
November 2014, The subsidiary began trading in January 2015 and the first set of financial statements have been
prepared for the 16 month period to 27% March 2016. The year end date is in line with the Company. The subsidiary
uses consistent accounting policies where appropriate and a its results have been consolidated into the group
financial statements. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group
transactions are eliminated in full.
New standards, amendments and interpretations issued not yet effective for the current year
The following standards and interpretations, which have been issued by the IASB and are relevant for the Group,
subject to EU ratification, become effective after the current year-end and have not been early adopted by the
Group:
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments was first issued in November 2009 and had since been amended several times. A
complete version of the standard was issued in July 2014 and is a replacement of IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 covers the classification, measurement and derecognition of financial assets
and financial liabilities, together with a new hedge accounting model and a new expected credit loss model for
calculating impairment. The new standard becomes effective for annual periods beginning on or after 1 January
2018, subject to EU adoption expected in first half of 2016. It is anticipated that the application of this amendment
will have no significant impact on the Group's income statement or balance sheet.
IFRS 15 Revenue from Contracts with Customers
The IASB issued IFRS 15 Revenue from contracts with customers in May 2014. The new standard provides a
single, five-step revenue recognition model, applicable to all sales contracts, which is based upon the principle
that revenue is recognised when control of goods or services is transferred to the customer. It replaces all existing
revenue recognition guidance under current IFRS and becomes effective for annual periods beginning on or after
1 January 2018, subject to EU adoption expected in 2016. The Group is currently considering the impact of IFRS
15 on its consolidated results and financial position.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
The amendments clarify the principle in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets that
revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset
is a part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-
based method cannot be used to depreciate property, plant and equipment and may only be used in very limited
circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods
beginning on or after 1 January 2016, with early adoption permitted. The Group is currently considering the impact
of these amendments on its consolidated results and financial position.
Amendments to IAS 27: Equity Method in Separate Financial Statements
The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint
ventures and associates in their separate financial statements. Entities already applying IFRS and electing to
change to the equity method in their separate financial statements will have to apply that change retrospectively.
First-time adopters of IFRS electing to use the equity method in their separate financial statements will be required
to apply this method from the date of transition to IFRS. The amendments are effective for annual periods
beginning on or after 1 January 2016, with early adoption permitted. The Group is currently considering the impact
of these amendments on its consolidated results and financial position.
Annual Improvements 2012-2014 Cycle
These improvements are effective for annual periods beginning on or after 1 January 2016, They include:
i
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IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Assets (or disposal groups) are generally disposed of either through sale or distribution to owners. The amendment
clarifies that changing from one of these disposal methods to the other would not be considered a new plan of
disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of
the requirements in IFRS 5. This amendment must be applied prospectively.
IAS 19 Employee Benefits
The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in
which the obligation is denominated, rather than the country where the obligation is located. When there is no
deep market for high quality corporate bonds in that currency, government bond rates must be used. This
amendment must be applied prospectively.
Amendments to IAS 1 Disclosure Initiative
The amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. The amendments
clarify:
« The materiality requirements in IAS 1;
That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may
be disaggregated;
« That entities have flexibility as to the order in which they present the notes to financial statements;
« That the share of OCI of associates and joint ventures accounted for using the equity method must be presented
in aggregate as a single line item, and classified between those items that will or will not be subsequently
reclassified to profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the
statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for
annual periods beginning on or after 1 January 2016, with early adoption permitted. The Group is currently
considering the impact of these amendments on its consolidated results and financial position.
There are no other standards and interpretations in issue but not yet adopted that the Directors anticipate will
have a material effect on the reported income or net assets of the Group.
The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet
effective,
Fundamental accounting concept - going concern
The Group has net assets of £137 million at 27 March 2016 (2015: £308 million). A 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) with a limit of £950 million from 30 March 2015 up to 31 March 2018 (it was
previously £1.15 billion)
At 27 March 2016 £485 million of the working capital facility was undrawn (2015: £840 million).
State Aid approval for the funding from 2015/16 to 2017/18 was received on 19 March 2015.
This funding takes the form of a Government Grant, enabling 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 which could not support a commercial retail outlet. New main and local branches are currently
being rolled out across the United Kingdom. Customers are benefitting from a much better retail experience
including very significantly 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 is a modernisation
programme and not a branch closure programme.
The Directors are satisfied with the continued progress made towards modernisation during 2015/16 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 and is not without.
risk.
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 next 12 months. Accordingly, on that basis, the
12
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Directors consider that it is appropriate that these financial statements have been prepared on a going concern
basis.
Prior year restatement
In preparing the financial statements for the current year, the comparative figures for the year ended 29 March
2015 have been restated. The provision for Postmasters’ Compensation, included in network transformation, had
not been fully recognised in the financial statements for the year ended 29 March 2015. The nature of the
provision is described in more detail in the accounting policies on page XX. The restatement affects exceptional
costs, provisions and retained earnings due to the loss in the year changing as a result of a restatement to the
exceptional charge. This represents an acceleration of an expected cost and there has been no impact on the
Group's funding position or on payments to Postmasters’. Within this report, the comparative income statement,
statement of comprehensive income, balance sheet and statement of changes in equity for the year ended 29
March 2015 have been restated. There has been no effect on the cash flow statement.
Total provisions (63) (87) (150)
Shareholders’ funds (retained earnings) (72) (87) (159)
Operating exceptional items - restructuring (214) (87) (301)
Profit/(loss) for the year (54) (87) (141)
Critical accounting estimates and judgements in applying accounting policies
The Group makes certain estimates and assumptions regarding the future. Estimates and assumptions are
continually evaluated based on historical experience and other factors. In the future, actual experience may
differ from these estimates and assumptions. In addition the Group has to make judgements in applying its
accounting policies which affect the amounts recognised in the accounts. The most significant areas where
judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Group are determined using methods relying on
actuarial estimates and assumptions. These pension figures are particularly sensitive to changes in assumptions
for discount rates, mortality and inflation rates. The Group exercises its judgement in determining the
assumptions to be adopted, after discussion with its Actuary. Details of the key assumptions are set out in note
17.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a
rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term.
Judgement has been applied in determining that for these purposes a high quality corporate bond constitutes AA
rated or equivalent status bonds.
Provisions
The Group has recognised provisions where a present legal or constructive obligation exists as a result of a past
event, where it is probable that an outflow of resources will be required to settle the obligation and a reliable
estimate of the amount can be made. Severance provisions are recognised for business reorganisation where
the plans are sufficiently detailed and well advanced and where appropriate communication to those affected has
been undertaken at the balance sheet date. Postmasters’ compensation provisions are recognised when either
Postmaster’s agree to terminate their existing contracts or sign the new format contracts under Network
Transformation. The total provision for Postmasters’ compensation at the yearend date represents
management's best estimate of the future obligation. Provisions are detailed in note 16. Due to the nature of
provisions the future amount settled may be different from the amount that has been provided.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate the risks specific to that liability.
Impairment of non-current assets
The Group assesses whether there are any indicators of impairment for all non-currents assets at each reporting
date as well as if events or changes in circumstances indicate that the carrying value may be impaired. Where
appropriate, an impairment loss is recognised in the income statement for the amount by which the carrying
value of the asset (or cash generating unit) exceeds its recoverable amount, which is the higher of an asset’s
net realisable value and its value in use. Due to on-going operational losses (excluding the Network Subsidy
Payment) the carrying value of some assets are impaired to zero on acquisition. Each asset category is
described below:
Property, plant and equipment excluding freehold property, long leasehold property and land:
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into
working condition for its intended use. These assets have a relatively short useful life and due to on-going
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operational losses (excluding Network Subsidy payment) they are impaired to zero on acquisition. If they were
not impaired they would be depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Piant and Machinery 3 - 15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2 - 15 years
Freehold property, long leasehold property and land:
As with other property, plant and equipment this is recognised at cost, including attributable costs in bringing
the asset into working condition for its intended use. These assets have a long useful life and a fair market
value, therefore these assets are not impaired on acquisition but would be considered for impairment if
indicators existed in line with Group policy noted above. They are instead depreciated on a straight-line basis
over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining
useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted where applicable on a
prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. These assets are
impaired to zero for the reasons noted above. If they were not impaired they would be amortised on a straight
line bases via a charge to income statement over the following period:
Software 1 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with Group policy noted above but are not
automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets
acquired and liabilities assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested
for impairment annually as well as when there are any indicators of impairment.
Non-current assets within subsidiaries
Subsidiaries are considered separate cash generating units and the need for impairment of assets is considered
within the subsidiary and is dependent on whether indicators of impairment exist within that subsidiary. At a
Group level the impairment is adjusted on consolidation to be in line with Group policy.
Revenue
Turnover from Government Services, Financial Services, Mails and Retail and Telecoms comprises the value of
services provided from the Group’s principle activities in providing a whole range of services through its physical
and digital channels. Turnover from Financial Services and some Retail services comprises the commission
received. Turnover relating to line rental for telecoms services is recognised evenly over the period to which the
charges relate and revenue from calls is recognised at the time the call is made. Turnover from all other
transactions is recognised when the transaction is completed. All turnover is derived wholly from within the United
Kingdom.
Turnover within the subsidiary Post Office Management Services Limited comprises the value of commissions
received from providing insurance intermediary services.
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The Network Subsidy Payment is Government grant revenue recognised to match the related costs of making
available the network of public Post Offices that the Secretary of State for Business, Innovation and Skills considers
appropriate.
Operating exceptional items
Operating exceptional items 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 in the year and in comparison to prior years.
Items classified within here will be material either because of size or nature and relate to the transformation of
the business rather than ordinary trading. This separate reporting of exceptional items helps to provide a better
picture of the Company’s underlying performance.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have
passed to the Group are capitalised at the inception of the lease with a corresponding liability recognised for the
fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease
term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are
classified as operating leases and rentals are charged to the income statement over the lease term. The aggregate
benefit of incentives are recognised as a reduction of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures
Investments in joint ventures within the Group’s financial statements are accounted for under the equity method
of accounting. Under this method the investment is carried in the balance sheet at cost plus post-acquisition
changes in the Group’s share of the net assets of the joint venture less any impairment in value. The income
statement reflects the Group’s share of post-tax profits from the joint venture.
Inventories
Inventories include stationery, retail and lottery products and are carried at the lower of cost and net realisable
value after adjusting for obsolete or slow-moving stock.
Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed
or are disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by
the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and
unused tax assets and losses except:
- initial recognition of goodwill
~ the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit and loss
= taxable temporary differences associated with investments in subsidiaries and interest in joint ventures, where
the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future and
- deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available
against which they can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the
tax asset is realised or the liability is settled, based on tax rates that have been substantively enacted at the
balance sheet date. Deferred tax balances are not discounted.
Current and deferred tax is recognised in the income statement, except to the extent that it relates to items
recognised in other comprehensive income or directly to equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Company. All
members of defined benefit schemes are contracted out of the earnings-related part of the State pension scheme.
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of
return on a high quality corporate bond of equivalent currency and term. The resulting defined benefit asset or
liability is presented separately on the face of the balance sheet. Full actuarial funding valuations are carried out
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at intervals not normally exceeding three years as determined by the Trustees and, actuarial valuations are carried
out at each balance sheet date and form the basis of the surplus or deficit disclosed. When the calculation at the
balance sheet date results in net assets to the Group, the recognised asset is limited to the present value of any
future refunds of the plan or reductions in future contributions to the plan (the asset ceiling).
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service
costs and any gains and losses arising from settlements, curtailments and past service costs. The net difference
between the interest costs and the expected return on plan assets is recognised as net pensions interest in the
income statement. Actuarial gains and losses are recognised immediately in the statement of comprehensive
income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the
statement of comprehensive income.
For defined contribution schemes, the Group’s contributions are charged to operating profit, as part of staff costs,
in the period to which the contributions relate.
Foreign currencies
The functional and presentational currency of the Group is sterling (£).
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of
the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from
the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates
are recognised in profit or loss.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectible
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad
debts are written off when identified.
Borrowing costs
Borrowing costs in relation to the working capital loan facility are recognised as an expense when incurred unless
they are directly attributable to the construction or development of a qualifying asset, in which case they are
capitalised using the weighted average cost of borrowing for the period of construction/development.
Government grants
Government grants are shown separately in the income statement to match the expenditure to which they relate.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past
event, it is probably that an outflow of resources will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at an appropriate pre-tax rate.
Financial instruments
The classification of financial instruments included on the balance sheet is set out below:
Financial assets
Financial assets are measured at fair value at the balance sheet date. They are classified into the following
categories loans and receivables or available for sale as appropriate based on the purpose for which they were
required. Financial liabilities are measured at either fair value at the balance sheet date or as financial liabilities
measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at
amortised cost.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the
balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent
arm’s length market transactions; reference to the current market value of another instrument which is
substantially the same; and discounted cash flow analysis and pricing models.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or
expires.
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All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised
within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair
value measurement as a whole:
* Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities
* Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable
* Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines
whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the
lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand, including cash in the Post
Office network and short-term deposits (cash equivalents) with an original maturity date of three months or less.
In addition the Group uses Money Market funds as a readily available source of cash and these funds are also
categorised as cash equivalents. Cash equivalents are classified as loans and receivable financial instruments.
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents
as defined above, net of bank overdrafts.
The subsidiary Post Office Management Services Limited holds some fiduciary cash balances, there are held on
trust on behalf of insurance third parties, see note 12 for details.
2. Staff costs and numbers
Employment and related costs were as follows:
2016 2015
People costs excluding restructuring costs: £m £m.
Wages and salaries 184 191
Social security costs 19 19
Pension costs (note 17) 30 28
Total 233 238
Period end employees _Average employees
1
Total employees 6,605 6,876 6,667 7,281
Total employee numbers can be categorised as follows:
2016 2015
Administration 1,261 1,324
Crown Offices 3,344 3,406
Supply Chain 1,360 1,524
Network and Crown transformation programmes 640 622
Total 6,605 6,876
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3. Operating profit from continuing operations before exceptional items
Operating profit from continuing operations before exceptional items is stated after charging:
2016 2015
£m ém
Postmasters’ fees 413 435
Bureau de Change foreign currency exchange losses - 1
Depreciation 1 -
Cost of inventories recognised as an expense 3 4
Operating lease charges - Land and buildings 17 20
Fees payable to the group's auditors for audit and other services: £000 £000
- parent company and group audit 346 391
-audit of subsidiary 70 -
-audit related assurance services 40 40
other non-audit services 106 173
Operating exceptional items
2016 2015
£m (Restated)
ém
Government Grant 150 170
Restructuring:
Business transformation* (13) (13)
Network transformation including Postmasters’ compensation (note 15) (177) (227)
Crown transformation (23) (10)
IT transformation (30) (17)
Restructuring - severance (29) (25)
~ other (11) (9)
Total restructuring (283) (301)
Impairment:
Impairment of intangible assets (note 8) (93) (56)
Impairment of property, plant and equipment (note 9) (43) (84)
Total impairment (136) (140)
Total operating exceptional items (269) (271)
Restructuring:
Restructuring costs are those incurred in order to implement the major transformation programmes primarily the
Crown and Network programmes which are discussed further in the Financial Review on page XX. Network
transformation includes the costs of Postmasters’ compensation (2016: £102 million, 2015: £154 million) which
are payments made to Postmasters’ as a result of the ongoing programme.
*Business transformation costs include £2 million of acquisition costs, see note 21 for further details on this
acquisition.
Impairment:
See the accounting policies on page XX for details.
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5. Directors’ emoluments
The Directors received the following emoluments:
2016 2015
£000 £000
Emoluments, excluding pension contributions and LTIP* TBC 1,234
Contributions to pension schemes TBC -
Amounts receivable under Long-Term Incentive Plans TBC 157
“Figures include any cash supplements received in lieu of pension and any payments in lieu of notice.
Directors accruing pension entitlements during the period under: 2016 2015
Number Number
Defined benefit schemes - -
Defined contribution schemes - 2
The highest paid Director received the following emoluments:
2016 2015
£000 £000
Emoluments and LTIP, excluding pension contributions but including cash
supplements received in lieu of pensions TBC 522
Company contributions to pension schemes : :
Remuneration for each director for the financial year 2015/16
Name Annualised I Actual Benefits I Cash in lieu smIp LTP Total Total
salary/fees I salary/fees 2015/16 I ofpensionI 2015/16 I 2015/16 I 2015/16 I 2014/15
2015/16 2015/16 2015/16
(note 1)
Non Executive Directors
Tim 40,000 40,000 - - - - 40,000 40,000
Franklin
Virginia 40,000 40,000 - - - - 40,000 40,000
Holmes
Alasdair 45,000 15,000 - - - - 15,000 45,000
Marnoch
(note 2)
Ken McCall 50,000 12,500 - - - - 12,500 NWA
(note 3)
Neil 50,000 25,000 - - - - 25,000 50,000
McCausland
(note 4)
Tim Parker 75,000 37,500 - - - - 37,500 N/A
(note 5)
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Alice 100,000 I 33,333 - - - - 33,333 I 100,000
Perkins
(note 6)
Carla Stent 45,000 8,831 - - - - 8,831 N/A
(note 7)
Richard O 0 - - - - 0 0
Callard
(note 8)
Executive Directors
Paula 250,000 I 250,000 9,900 62,500 TBC 143,500 TBC 521,987
Vennells
Alisdair 240,000 240,000 13,919 56,189 125,002 - 510,110 90,124
Cameron +75,000
(note 9)
Note 1: The annualised fees are shown as at 27" March 2016 or at the date of leaving.
Note 2: Alasdair Mamoch resigned from the Board and left on 31% July 2015
Note 3: Ken McCall was appointed to the Board on 21% January 2016
Note 4: Neil McCausland resigned from the Board and left on 30" September 2015
Note 5: Tim Parker was appointed to the Board on 1% October 2015. Mr. Parker donates the after tax value of his
Board fees to charity.
Note 7: Alice Perkins resigned from the Board and left on 31% July 2015
Note 7: Carla Stent was appointed to the Board on 21* January 2016
Note 8: Richard Callard is an employee of the Shareholder Executive of the Department for Business, Innovation,
and Skills.
Note 9: Alisdair Cameron received a bonus of £75,000 in October 2015; this is shown separately in the STIP
column. This was compensation for the variable pay which Alisdair gave up to join Post Office and was payable
after six months’ service depending upon performance conditions being met. The inclusion of this amount in
Alisdair’s contract and its payment against the performance conditions were agreed by the Remuneration
Committee and the Special Shareholder.
Remuneration Policy Summary
The table describes the STIP and LTIP available for the Executive Director's.
The remuneration framework for the Executive Directors requires consent from the Special
Shareholder each year.
Short-Term Incentive I The STIP drives and rewards performance over the single financial year
Plan (STIP) against a key financial and operational targets taken from the business
scorecard. Metrics and targets are determined and set each year
according to business priorities.
80% of the STIP plan is determined by business targets, with the
remaining 20% linked to the achievement of personal performance
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objectives.
The target opportunities for the Chief Executive and Chief Financial
Officer are 48% and 40% respectively.
Long-Term Incentive I The LTIP is designed to reward and retain key executives and senior
Plan (LTIP) managers on the achievement of strategic longer term targets linked
to the development and growth of a sustainable business.
The specific performance targets are determined for each LTIP cycle
with reference to the three-year plan which is agreed with the Special
Shareholder.
The target opportunities for the Chief Executive and Chief Financial
Officer are 70% and 50% respectively.
Differences in remuneration policy for the Executive Directors and employees generally
The remuneration policy for the Executive Directors takes account of their level of responsibility and
their influence over Post Office’s performance. Accordingly, a higher proportion of their total
remuneration package is at risk and subject to performance (under the STIP and LTIP). The incidence
and potential amounts payable under such incentives across the workforce are determined by their
role and grade within the organisation.
Claw-back provision
Executive Directors have claw-back clauses in their contracts, as well as the STIP and LTIP rules,
which provide for the return of any over-payments in the event of misstatement of the accounts, error
or gross misconduct on the part of an Executive Director. These provisions are structured in line with
market best practice.
6. Net finance costs
2016 2015
£m —£m
Interest receivable . 1
Interest payable on loans (2) (1)
Finance charges (3) (2)
Total (5) (2)
7. Taxation
(a) Taxation gains recognised in the year
2016 2015
£m —m
Corporation tax credit for year (9) (10)
Tax _under provided in previous years - (7)
Current tax (9) (17)
Deferred tax credit relating to the origin and reversal of temporary differences 2 (9)
Effect of change in tax rate 3 :
Income tax credit reported in the consolidated income statement (4) (26)
Deferred income tax of £5 million (2015: £9 million) has been credited (2015: debited) to other comprehensive
income relating to actuarial movements in the retirement benefit surplus. This offsets the deferred tax debit of £5
million (2015 (credit): £9 million) that has been reported in the consolidated income statement.
(b) Factors affecting current tax credit on profit on ordinary activities
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 20% (2015: 21%).
The differences are explained below:
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2016 2015
£m Restated
£m
Loss on ordinary activities before tax from continuing operations (161) (163)
led operations nl AE A)
Accounting loss before taxation (171) (167)
Loss on ordinary activities multiplied by the standard rate of corporation tax in
the UK of 20% (2015: 21%) (34) (35)
Net decrease in tax charge as a result of recognition of deferred tax assets 8 (16)
Expenditure disallowable for tax 1 2
Adjustment in respect of prior period - (7)
Effect of unutilised losses carried forward 28 36
Joint venture profit after tax included in Group pre-tax profit (2) (6)
Total current tax (see above) (4) (26)
(c) Deferred tax
Deferred tax assets relate to the following:
Balance sheet Income statement
2016 2015 2016 2015
£m —m £m ém
Pensions temporary differences (25) (30) (5) 9
Losses available for offset against future
taxable income 25 30 : :
Total deferred tax asset : - (5) 9
Income statement (5) 9
(d) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £166 million (2015: £141 million), comprising £78 million
(2015: £74 million) relating mainly to fixed asset timing differences, £1 million (2015: £1 million) relating to
timing differences on provisions and £87 million (2015: £66 million) relating to tax losses that are available to
offset against future taxable profits. The Group has rolled over capital gains of £2 million (2015: £3 million); no
tax liability would be expected to crystallise should the assets into which the gains have been rolled be sold at
their residual value, as it is anticipated that a capital loss would arise.
The Finance Act 2013 reduced the main rate of corporation tax to 19% with effect from 1 April 2017 and 18%
with effect from 1 April 2018. Following these changes, deferred tax balances were reduced from 20% to 18%.
The impact of this change on deferred tax balances is included in these financial statements.
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8. Intangible assets
Software Goodwill Total
2016 2015 2016 2015 2016 2015
£m ém —m ém £m —m
Cost
At 30 March 2015, 31 March 2014 297 243 - - 297 243
Reclassifications - (3) - - - (3)
Additions 93 57 44 - 137 57
Disposals (1) - - - (1) -
At 27 March 2016, 29 March 2015 389 297 44 - 433 297
Amortisation and impairment
At 30 March 2015, 31 March 2014 297 243 - - 297 243
Reclassifications - (3) - - - (3)
Amortisation and impairment 93 57 - - 93 57
(see note 4)
Disposals (1) 7 ; - (1) -
At 27 March 2016, 29 March 2015 389 297 - - 389 297
Net book value
At 27 March 2016, 29 March 2015 . . 44 - 44 .
Goodwill relates to the acquisition from Bank of Ireland of the business and assets of the joint insurance business.
The goodwill sits within Post Office Management Services Limited. See note 21.
The impairment figure for intangible assets in 2015 includes £1 million for discontinued operations, see note 22
for details. Note 4 only includes figures for continuing operations which explains the £1 million difference. These
assets were disposed of in the current year as shown above.
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9. Property, plant and equipment
Land and Bi gs.
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m ém £m £m £m £m £m
Cost
At 31 March 2014 100 17 113 44 1 739 1,014
Reclassification* (31) 26 6 - - 2 3
Additions 16 12 - 1 - 55 84
Disposals (2) : (4) (5) 2 (13), (24)
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 - - 4 - 38 43
Disposals (1) - (3) (1) - (3) (8)
At 27 March 2016 77 58 90 43 1 843 1,112
Depreciation and
impairment
At 31 March 2014 91 16 113 44 1 739 1,004
Reclassification* (31) 26 6 - - 2 3
Depreciation and
impairment 16 12 - 1 - 55 84
Disposals (2) - (4) (5) - (13) (24)
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification (6) 3 (22) - - 25 -
Depreciation and
impairment
(see note 3 and 4) 2 - - 4 - 38 44
Disposals (4) = (3) (1) a (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Net book value
At 27 March 2016 8 1 - - - : 9
At 29 March 2015 9 1 : : : : 10
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land,
which represents £3 million (2015: £3 million) of the total cost of properties.
* Reclassifications have been done in the year between freehold, long leasehold, short leasehold and fixtures and
equipment in relation to Postmaster’s branches. Reclassification between freehold, long leasehold and short
leasehold asset categories is due to the fact that all land and building assets are classified as freehold whilst they
are an asset under construction, then once works are complete and lease contracts are confirmed, the asset is
moved into the correct respective category.
10. Investments in joint ventures
The following entity has been included in the consolidated financial statements using the equity method:
Joint ventures
During 2015/16 and 2014/15, the Group’s only joint venture investment was a 50% interest (1,000 £1 ordinary
A shares) in First Rate Exchange Services Holdings Limited, whose principal activity is the provision of Bureau de
Change. First Rate Exchange Services Holdings Limited is a company registered in the United Kingdom. The
registered address of First Rate Exchange Services Holdings Limited is Great West House, Great West Road,
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Brentford, Middlesex, TW8 9DF. The financial statements of the joint venture are prepared for the same reporting
period as the Group.
2016 2015
Joint venture Joint venture
£m —m
Share of net assets
Total net investment at 30 March 2015, 31 March 2014 67 et
Share of post tax pre dividend profit 35 36
Dividend (35) (30)
Total net investment at 27 March 2016, 29 March 20 67 67
2016 2015
Joint Joint
venture venture
Share of assets and lial £m —m
Current assets 205 191
Non-current assets 6 6
Share of gross assets 211 197
Current liabilities (144) (130)
Share of net assets. 67 67,
Share of revenue and profit:
Revenue 79 82
Profit after tax 35 36
11. Trade and other receivables
2016 2015
£m £m
Current:
Trade receivables 93 101
Prepayments and accrued income 73 106
Client receivables 229 162
Other receivables ee
Total 409 397
Non-current:
Prepayments 12 10
The Group receives and disburses cash on behalf of Government agencies and other clients to customers through
its branch network. Amounts owed from/to government agencies and other clients are disclosed separately as
client receivables (as above) and client payables (see note 13).
As at 27 March 2016 trade receivables of £16 million (2015: £14 million) were impaired and fully provided for.
During the year £4 million (2015: £6 million) of the provision has been utilised and an additional £6 million (2015:
£3 million) has been provided for. Trade receivables of £21 million (2015: £21 million) were past due but not
impaired. The aging analysis of the trade receivables are as follows:
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2016 2015
£m £m
Not yet overdue 72 80
Past due not more than one month 12 8
Past due more than one month and not more than two months 3 3
Past due more than two months. 6 10
Total 93 101
The fair value of trade and other receivables is not materially different from the carrying value.
12. Cash and cash equivalents
2016 2015
£m —m_
Cash in the Post Office Limited network 653 708
Short-term bank deposits 57 93
Fiduciary cash balances held on behalf of
insurance third parties 2 -
Money market fund investments. : 20
Total cash and cash equivalents 712 821
Where interest is earned it is at a floating or short term fixed rate. The fair value of cash and cash equivalents is
not materially different from the carrying value.
The fiduciary cash balances are held within Post Office Management Services Limited and are held on trust on
behalf of insurance third parties and cannot be called upon should the Company become insolvent.
13. Trade and other payables
2016 2015
£m £m
Current:
Trade payables 51 30
Accruals 161 160
Deferred income 39 29
Social security 8 9
Client payables 375 454
Capital payables 16 25
Other payables 3 ii
Total 653 718
Non-current:
Other payables 25 30
The fair value of trade and other payables is not materially different from the carrying value.
14. Financial liab interest bearing loan and borrowings
2016 2015
£m £m
Department of Business, Innovation & Skills loan
drawn down 465 310
26
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The loan under the facility is short dated on a programme of liquidity management and matures on average 1 day
after the year end (2015: 1 day). The fair value of borrowings approximate their carrying value due to the short
term maturities of the loan. On maturity it is expected that further loans will be drawn down under this facility,
which expires in 2018. The undrawn committed facility, in respect of which all conditions precedent had been met
at the balance sheet date, is £485 million (2015: £840 million). The average interest rate on the drawn down
loans is 1.0% (2015: 1.0%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited
network,
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and
a negative pledge over cash and near cash items. The negative pledge is an agreement not to grant security over
the assets or to set up a vehicle that has the same effect.
15. Provisions
Network
Transformation Other Total
ém £m £m
At 29 March 2015 (restated) 127 23 150
Acquired through the business . 1 1
combination (note 21)*
Charged in operating exceptional
items 123 54 177
Charged in operating costs - 6 6
Charged for discontinued . 3 3
operation
Utilisation (95) (47) (142)
Unused amounts in the year -
operating exceptionals (21) @) (26)
Unused amounts in the year —
operating costs a : @) @
At 27 March 2016 134 33 167
Disclosed as:
At 27 March 2016
Current 132 19 151
Non - current 2 14 16
134 33 167
At 29 March 2015
Current 126 18 144
Non-current 1 5 6
127 23 150
The Network Transformation provision relates to payments due to postmasters in relation to the major
transformation programme, see the accounting policies note on page XX for further details of this provision..
Other provisions of £33 million (2015: £23 million) include £30 million for continuing operations, this includes £19
million onerous lease obligations, £3 million severance and £8 million of smaller provisions including £1 million for
personal injury claims and £1 million which sits within the subsidiary Post Office Management Services Limited
and relates to the repayment of commission received in the event of the cancellation of insurance policies. It also
includes £3 million in relation to the discontinued operation as disclosed in note 22.
*A provision was acquired as part of the acquisition from Bank of Ireland of the business and assets of the joint
insurance business, see note 21.
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16. Financial assets and liabilities
a. Financial assets and liabilities by category
The breakdown of the Group’s financial instruments at 27 March 2016 and 29 March 2015 is shown below:
2016 2015
Current Non Total = Current Non Total
current Current
£m £m___ £m £m £m
Financial assets
Trade and other receivables 394 - 394 378 - 378
Cash and cash equivalents 712 - 712 821 - 821
Financial liabilities
Trade and other payables (606) (4) (610) (680) (2) (682)
BIS loan (465) - (465) (310) - (310)
Finance leases obligations (8) - (8) : : -
Total financial assets/
(liabilities) 27 (4) 23 209 (2) 207
Except for prepayments, social security and deferred income, which have been excluded from the table above, all
of the Group’s financial assets and liabilities by nature and classification for measurement purposes are considered
loans and receivables.
The fair value of the Group’s financial assets and liabilities approximate their carrying value due to the short term
maturities of these instruments. The fair value of financial assets and liabilities is defined as the amount at which
the Group would expect to receive upon selling an asset or pay to transfer a liability in a transaction between
market participants at the measurement date.
The nature of the inputs used in determining the values of the financial assets and liabilities is quoted prices
(unadjusted) in active markets for identical assets and liabilities, All of the Group’s financial assets and liabilities
are therefore considered as Level 1 in the fair value hierarchy.
The Group has no Level 2 and Level 3 financial instruments and there have been no transfers between the levels
of fair value hierarchy during the period.
b. Financial risk management objectives and policies
The Group is exposed to a variety of financial risks: market risk (including foreign currency risk, interest rate risk),
credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of
financial markets and aims to minimise potential adverse effects on the Group's financial performance.
Interest rate risk
The Group is exposed to changes in interest rate on floating rate debt, cash deposits and money market fund
investments. Interest rate risk on borrowings is managed through determining the right balance of fixed and
floating debt within the financing structure. Market conditions are considered when determining the desired
balance of fixed and floating rate debt. Had there been a 50 basis point increase in interest rates, there would
have been a £5m favourable impact on the Group’s equity and income statement. A 50 basis point decrease would
have resulted in a £5m adverse impact on the Group’s equity and income statement.
Foreign currency risk
The Group is exposed to foreign currency risk resulting from balances held to operate Bureau de Change services.
The currencies which these transactions are primarily denominated are the US dollar and Euro. The Group’s foreign
currency risk management objective is to minimise the impact on the Income Statement of fluctuations in the
exchange rates. The Group hedges its foreign currency risk principally through external forward foreign currency
contracts to cover near-term future revenues with a number of providers including First Rate Exchange Services
Holdings Limited.
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The following table demonstrates the sensitivity of financial instruments to a reasonably possible change in the
US dollar and Euro exchange rates, assuming they are unhedged and with all other variables held constant, on
profit/(loss) before tax and equity.
Strengthening Effect on Effect Strengthening Effect on Effect
/ (weakening) profit onequity — / (weakening) profit on equity
in US dollar rate —_ before tax in euro rate before tax
per cent £m £m per cent £m £m
Increase / Increase / Increase / Increase / Increase /
Increase / (decrease) (decrease) (decrease) (decrease) (decrease) (decrease)
2016 10 2 2 10 4 4
(10) (2) (2) (10) (4) (4)
2015 10 1 1 10 3 3
(10) (1) (1) (10) (3) (3)
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss
to the Group. Financial credit risk arises from cash balances (including bank deposits and cash and cash
equivalents) held by the Group and business credit risk arises from exposures to customers. Business risk includes
commission receivable and client related settlements for amounts paid out of the Post Office network on their
behalf.
The Group aims to minimise its financial credit risk through the application of risk management policies approved
by the Board. Counterparties are limited to major banks and financial institutions. The policy restricts the exposure
to any one counterparty by setting appropriate credit limits. The maximum exposure to credit risk is limited to the
carrying value of each class of asset summarised in note 11.
Business credit risk is monitored centrally. The level of bad debt provision is less than 2% (2015: less than 2%)
of turnover.
Capital management
The Group's objectives when managing capital (defined as the net of borrowings and amounts due under finance
leases and cash and cash equivalents excluding cash in the Post Office Network) are to safeguard its ability to
continue as a going concern and to maintain an optimal capital structure in order to support the business and
maximise stakeholder value. In managing the Group’s capital levels the Board and the Group Executive regularly
monitor the level of debt in the Group, the working capital requirements and the forecast cash flows. The Board
and Group Executive plan accordingly following this review process in order to meet the Group’s capital
management objectives.
Liquidity risk
The Group’s primary objective is to ensure that the Group has sufficient funds available to meet its financial
obligations as they fall due. This is achieved by aligning short-term investments and borrowing facilities with
forecast cash flows. Typical short-term investments include short term bank deposits with approved
counterparties. Borrowing facilities are regularly reviewed to ensure continuity of funding.
The Group has adequate cash reserve to meet operating requirements in the next 12 months.
At 27 March 2016 the Group has unused facility of £485 million (2014: £840 million). The facility expires in 2018.
The tables below analyses the Group’s financial assets and liabilities into relevant maturity groupings based on the
remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table
are the contractual undiscounted cash flows and include interest, where applicable.
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12 1-2 2-5 > Total
Months Years Years 5 Years
At 27 March 2016 £m
Financial assets
Trade and other receivables 394 7 - . 394
Cash and cash equivalents 712 - - - 712
Financial liabi
Trade and other . -
Pavables (614) 4) (618)
Interest bearing loan (465) 7 - ~ (465)
Finance leases obligations (8) 7 - - (8)
Total financial assets/ 19 (4) - - 15
(liabilities)
12 1-2 2-5 > Total
Months Years Years 5 Years
At 29 March 2015 £m
Financial Assets
Trade and other receivables 378 - - . 378
Cash and cash equivalents 821 - - - 821
Financial Liabilities
Bank overdraft - - . ° -
Interest bearing loan (310) - - - (310)
Finance leases obligations . . . i -
Total financial assets/ 200 (2) . - i98
(liabilities)
17. Pensions
The disclosures in this note reflect the two defined benefit schemes: Post Office Limited sectionalised RMPP
scheme which is independently operated by the Group and the 7% share of the RMSEPP scheme. Royal Mail
Group Limited is the principal employer in Royal Mail Senior Executive Pension Plan (RMSEPP) and Post Office
Limited became a participating employer with effect from 1 April 2012. It also includes the defined contribution
scheme Post Office Pension Plan.
The disclosures in this note show how the value of the assets and liabilities has been calculated at the balance
sheet date.
The Group participates in pension schemes as detailed below.
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Name Eligibility
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Post Office Pension Plan* UK employees Defined contribution
*From 1 April 2015 the Post Office Pension plan replaced the Royal Mail Defined Contribution Plan.
Defined Contribution
The charge in the income statement for the defined contribution schemes and the Group contributions to these
schemes was £3 million (2015: £3 million) during the year. New recruits joining from 31 March 2008 are able to
begin paying contributions to the new plan after they have worked for the Group for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The
latest full actuarial funding valuation of RMPP was carried out as at 1 April 2012 using the projected unit method.
For RMPP, this valuation was concluded at £135 million surplus. The latest full actuarial funding valuation of
RMSEPP was carried out as at 31 March 2012 using the projected unit method. For 100% of the RMSEPP plan, the
valuation was concluded at £83 million deficit. Valuations are carried out triennially and the next one is being
performed as at 1 April 2015. The valuation has not yet been completed due to the current consultation on
proposals to closing the scheme to future accrual. RMPP includes sections A, B and C each with different terms
and condition:
* Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
* Section B is for members (or beneficiaries of members) who joined after 1 December 1971 and before 1
April 1987 or to members of Section A who chose to receive Section B benefits;
* Section C is for members (or beneficiaries of members) who joined after 1 April 1987 and before 1 April
2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008.
The changes encompassed:
* the Plans closed to new members from 31 March 2008;
* all pensions and benefits earned before 1 April 2008 are linked to final pensionable salary, but
defined benefits built up from 1 April 2008 are earned on a “career average pensionable salary”
basis;
* from 1 April 2014, pensionable salary was amended to the amount in force at that date, increasing
each 1 April thereafter in line with RPI (up to 5% each year), with allowance for certain promotional
increases. This change resulted in a one-off exceptional gain of £102 million for the 2013/14
financial year;
* employees can continue to take their pension on reaching 60 but the normal retirement age increased to
65 for benefits earned from 1 April 2010;
* from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age at 55,
and continue working while still contributing to the Pension Plan until the maximum level of benefits has
been reached; and
« RMSEPP was closed to future accruals on 31 December 2012.
Payment of £17 million (2015: £19 million) was made by the Group during the year in respect of regular 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% (2015: 17.1%), effective from April 2010. This rate is
not expected to change materially during 2016/17. However, in February 2016, Post Office went out to formal
consultation with active members (and their representatives) of the Post Office section of the Royal Mail Pension
Plan regards to the potential closure of the RMPP to future accrual with effect from 1 September 2016. The closure
is subject to the outcome of the pensions consultation and no final decision will be until the formal consultation
has been completed. The proposed closure will also require consent of the Trustee of the RMPP. This closure if it
occurs could affect the rate paid in 2016/17.
The Group pays 7% of the total deficit payment required to fund the deficit in RMSEPP and a payment of £1 million
(2015: £1 million) was made by the Group during the year. No RMPP deficit payments were made during 2014/15
or 2015/16. For RMSEPP, deficit recovery payments will be £1 million per annum, from 1 April 2010 to 31 January
2024.
A current liability of £nil (2015: £1 million) has been recognised for payments to the pension schemes relating to
redundancy. During the year, payments of £3 million (2015: £2 million) relating to redundancy were made.
The weighted average duration of the RMPP fund is 26 years, and for the RMSEPP fund is 21 years. Over the next
financial reporting period to 27 March 2016 it is expected that employer contributions to the plans will be £17
million and £1 million for RMPP and RMSEPP respectively.
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The following disclosures relate to the gains/losses and surplus/deficit in the scheme recognised for RMPP and
RMSEPP defined benefit plans in the financial statements of the Group:
a) Major long-term assumptions
The size of the RMPP pension surplus, which is large in the context of the Group and its finances, is materially
sensitive to the assumptions adopted. Small changes in these assumptions could have a significant impact on the
surplus and overall income statement charge. The major long-term assumptions in relation to both RMPP and
RMSEPP were:
At 27 March 2016 = At 29 March 2015
% pa % pa
Rate of increase in salaries 2.8 2.8
Rate of pension increases - RMPP sections A/B 1.8 1.9
Rate of pension increases - RMPP section C 2.8 2.8
Rate of pensions increases - RMSEPP members transferred
from Section A or B of RMPP 1.8 19
Rate of pension increases - RMSEPP all other members 2.8 2.8
Rate of increase for deferred pensions - RMSEPP members
transferred from Section A or B of RMPP 1.8 1.9
Rate of increase for deferred pensions 1.8 1.9
Discount rate 3.5 3.5
Inflation assumption (RPI) - RMPP & RMSEPP 2.9 3.0
Inflation assumption (CPI) - RMPP & RMSEPP 1.8 19
The ultimate cost of the RMPP plan to the Group will depend upon future events rather than the assumptions
made. The assumptions made may not be borne out in practice and as such the cost of the plan may be higher
(or lower) than disclosed.
In common with other defined benefit schemes, the main risk in relation to the arrangements is the value of the
assets does not keep pace with the increase in the value of the liabilities. This can arise for many reasons, but
the most significant risks are as follows:
Investment risk: If the assets of the arrangements fall short of expectations, this will lead to a decrease in the
funded status.
Asset volatility: The arrangements hold return seeking assets (including equities and property) which are
expected to outperform corporate bonds in the long term but give exposure to volatility and risk in the short
term. RMPP does, however, invest in liability driven investment (LDI) assets, for example Corporate Bonds, which
mitigates the impact of interest rate and inflation volatility on the funded status.
Inflation risk: Higher inflation rates than expected will act to increase the plan liabilities as benefits will increase
to a higher level than assumed. The arrangements have a maximum pension increase (generally 5% per annum)
written into the rules which limits the increase for many benefits, so limiting the impact of high inflation. This
includes pensionable pay in RMPP, which was amended with effect from 1 April 2014. In addition, the arrangement
holds assets that increase in value as price inflation expectations rise, so mitigating the impact of rising inflation
expectations. These assets include LDI assets in respect of RMPP.
Changes in bond yields: A decrease in corporate bond yields will increase the plan liabilities, although this will
be partially offset by an increase in the value of the bond holdings and, to some extent, the LDI assets.
Pensioner longevity: If members live longer than expected, the liabilities would increase because pensions would
be paid for a longer time.
Liabilities accrued in the Royal Mail Pension Plan to 31 March 2012 were transferred to the Royal Mail Statutory
Pension Scheme. These liabilities are substantially no longer an obligation of the Group and consequently the
transfer resulted in a significant removal of pension risk from the Group.
The following table shows the potential impact on the RMPP assets and pension surplus of changes in key
assumptions:
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2016 2015
£m £m
Changes in RPI and CPI inflation of +0.1% pa (5) (4)
Changes in discount rate of +0.1%pa 5 4
Changes in real salary growth of +0.1% pa (2) (1)
Changes in CPI assumptions of +0.1% pa (1) (4)
An additional 1 year life expectancy (6) (5)
The sensitivity analysis has been prepared using projected benefit cashflows as at the latest full actuarial valuation
of the plan. The same method was applied as at the previous reporting date. The accuracy of this method is limited
by the extent to which the profiles of the plan cashflows have changed since those valuations although any change
is not expected to be material in the context of the above sensitivity analysis.
Mortality: The mortality assumptions for the RMPP sectionalised scheme are based on the latest self-administered
pension scheme (SAPS) mortality tables with appropriate scaling factors (106% for male pensioners and 101% for
female pensioners). For future improvements the assumptions allow for ‘medium cohort’ projections with a 1.25%
floor. These are detailed below:
Average expected life expectancy from age 60:
For a current 60 year old male RMPP member
For a current 60 year old female RMPP member
For a current 40 year old male RMPP member
For a current 40 year old female RMPP member
2016 2015
27 years 27 years
30 years 30 years
29 years 29 years
32 years 32 years
b) Plans’ assets
The assets in the plans for the Group were:
Market value 2016 Market value 2015
Sectionalised RMPP £m —m
UK equities - 1
Overseas equities - 10
Corporate bonds* 233 217
Property 11 8
Private Equity 10 12
Cash and cash equivalents aL 6
Bond/fixed interest funds 41 50
Index-linked funds. = 10
Other loan/debt funds 28 20
Alternative asset funds 43 11
Equity funds - 34
Fair value of RMPP assets 407 379
Surplus in plan before asset ceiling adjustment 223 229
Less effect of asset ceiling (29) (27)
Surplus in plan after asset ceiling adjustment 194 202
*£15 million relates to UK Government Bonds. £215 million to an LDI investment containing UK Government
Bonds, it is a liability driven investment and £3 million to an infrastructure debt holding which is EUR
denominated and fixed interest.
Post Office Limited
Market value 2016
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Market value 2015.
Share of RMSEPP £m £m
UK equities 1 1
Overseas equities 10 1
Government bonds 15 16
Alternative asset funds 2 -
Property 2 2
Other assets - 1
Fair value of share in plan assets for RMSEPP. 30 31
Present value of share in plan liabilities for RMSEPP. (27) (26)
Surplus in plan for the share of RMSEPP before asset ceiling 3 5
adjustment
Less effect of asset ceiling (1) (2)
Surplus in plan for share of RMSEPP after asset ceiling 2 3
adjustment
A retirement benefit surplus of £196 million is disclosed on the balance sheet, representing the surplus in plans
of £223 million and £3 million for RMPP and RMSEPP respectively, and net of tax of £30 million at a rate of 35%
on the element of the surplus which is recoverable through a refund from the plans.
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded. All
RMPP and RMSEPP assets are securities with a quoted price in an active market.
c) Movement in plans’ assets and liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Assets Sectionalised Sectionalised
RMPP 2016 £m__RMPP 2015 £m
Assets in sectionalised RMPP at beginning of period 379 260
Contributions paid 19 24
Employee contributions paid 6 7
Finance income 14 12
Actuarial (losses)/gains (8) 81
Benefits paid to members (3) (2)
Assets in sectionalised RMPP at end of period 407 379
Share of Share of
Assets RMSEPP 2016 RMSEPP 2015
Share of assets in RMSEPP at beginning of period 31 26
Contributions paid 1 1
Finance income 1 1
Actuarial (losses)/gains (2) 4
Benefits paid to members (2) q)
Share of assets in RMSEPP at end of period 30 31
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Changes in the present value of the defined benefit pension obligations are analysed as follows:
Sectionalised
Sectionalised
RMPP 2016 RMPP 2015
£m ém
Liabilities in sectionalised RMPP at beginning of period (150) (90)
Current service cost (27) (25)
Curtailment costs* (1) (1)
Finance cost (6) (5)
Employee contributions (6) (7)
Actuarial loss - (23)
Experience adjustments on liabilities 3 (1)
Benefits paid 3 2
ies in sectionalised RMPP at end of period (184) (150)
es Share of Share of
RMSEPP 2016 RMSEPP 2015
£m £m
Share of liabilities in RMSEPP plans at beginning of period (26) (24)
Finance cost (1) (en)
Actuarial loss (1) (2)
Benefits paid 1 1
Share of liabi 's in RMSEPP at end of period (27) (26)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated
compensation costs, Estimates of both are included, for example, in any redundancy provisions raised. The
curtailment costs above represent the costs associated with those people paid compensation in respect of
redundancy during the accounting period. Such payments may occur in an accounting period subsequent to the
recognition of costs in the income statement.
Post Office Limited
d) Recognised charges
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An analysis of the separate components of the amounts recognised in the performance statements of the Group
is as follows:
Sectionalised
RMPP 2016 £m
Sectionalised
RMPP 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptior
items:
Current service cost 27 25
Total charge to operating profit before exceptional items 27 25
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments 1 1
Total charge to operating profit 28 26
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 6 5
Interest income on plan assets (14) (12)
Net pensions credit to financing (8) (2)
Net charge to the income statement before deduction for tax 20 19
Analysis of amounts recognised in the statement of comprehens
income:
Actual return on plan assets 6 93
Less: expected interest income on plan assets (14) (12)
Less: taxation on surplus recoverable through plan refunds (2) (4)
Actuarial (losses)/gains on assets (all experience adjustments) (10) 77
Experience adjustments on liabilities 3 (1)
Effects of changes in actuarial assumptions on liabilities - (23)
Actuarial losses on liabilities 3 (24)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (7) 53
Share of RMSEPP
Share of RMSEPP
2016 £m 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to net pensions interest:
Interest on plan liabilities 1 1
Interest income on plan assets (1) (1)
Net pensions credit to financing - -
Net charge to the income statement before deduction for tax : :
Analysis of amounts recognised in the statement of comprehens'
income:
Actual return on plan assets (1) 5
Less: expected interest income on plan assets (1) (1)
Less: taxation on surplus recoverable through plan refunds 1 (1)
Actuarial (losses)/gains 0 (all experience adjustments) oo A)
Experience adjustments on liabilities -
Effects of changes in actuarial assumptions on liabilities (2) (2)
Actuarial losses on liabilities (2) (2)
Total actuarial (losses) /gains recognised in the statement of
comprehensive income (2) 1
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18. Equi
Called up share capital:
2016 2015
£ £
Authorised
Ordinary shares of £1 each 51,000 51,000
Total 51,000 51,000
Allotted and issued and fully paid
Ordinary shares of £1 each . . . __50,003 50,003
Total 50,003 50,003
On 7 August 2007 1,000 ordinary shares of £1 each were issue in return for £313 million cash paid by the the
Secretary of State for Business, Enterprise and Regulatory Reform. A share premium of £312,999,999 resulted
from this subscription. In April 2008 two ordinary £1 shares were issued in return for £152 million cash paid by
the Secretary of State for Business, Innovations and Skills Reform. A share premium of £151,999,998 resulted
from this subscription.
19. Commitments
Capital commitments contracted for but not provided in the financial statements amount to £62 million (2015:
£96 million).
The Group is also committed to the following minimum lease payments under non-cancellable operating leases:
Within one year
Between one and five years 35 43
Beyond five years 29 27
Total 78 87
Contingent liabilities: As a large, nationwide retailer operating in dynamic and competitive markets, we may be
subject to regulatory investigations and may face damage to our reputation and legal claims.
From time to time, we may be named as a defendant in legal claims or be required to respond to regulatory actions
in connection with our activities. This may include claims for substantial or indeterminate amounts of damages
from customers, employees, consultants and contractors, or may result in penalties, fines, or other results adverse
to us. Like any large company, we may also be subject to the risk of potential employee or agent misconduct,
including non-compliance with policies and improper use or disclosure of our assets or confidential information.
The Directors do not consider the outcome of any current claim or action will have a material adverse impact on
the consolidated position of the Group.
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20. Finance lease liabilities
2016 2015
Present
value Present value
of minimum of minimum
Minimum lease = Minimum lease
payments payments payments payments
—m £m £m ém
Within one year 8 8 - -
Between one and five years - - - :
Total minimum lease payments 8 8 - -
Less amounts representing finance
charges - - - :
Present value of minimum lease
payments - -
Of which:
Current 8 8 - -
Non-current, - - : aa
The aggregate finance charges allocated for the period in respect of finance leases was £nil (2015: £211,078).
The fair value of finance lease liabilities is not materially different from the carrying value.
The Gi tracts fc t
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22. Discontinued Operation
In March 2016 the Group decided to discontinue its mobile operation. The results of this operation are disclosed
below:
2016 2015
£m £m
Revenue - -
Expenses (10) (4)
Loss before taxation (10) (4)
Taxation - -
Loss for the year from discontinued operation (10) (4)
Balances on the balance sheet at year end for project closure costs and termination charges are as follows:
2016 2015
£m ém
Provisions 3 -
Total Liabilities (note 15) 3 -
Write down of intangible assets and prepayments
Intangible assets for mobile amounted to £2 million in the year (£1 million in prior year) and these were impaired
at acquisition in line with Group policy so no further write down was required on closure of the operation. The
impairment is included in the £10 million above (£4 million above prior year). There were prepayments on the
balance sheet of £2 million prior to the decision to discontinue this operation and these have been written down
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Separately:
* the Group has certain loan facilities with Government (note 14);
* the Group has received a Government Grant of £150 million, all of which was recognised through the
income statement; and
* the Group has received the Network Subsidy Payment from Government (note 1).
Key management comprises Executive and Non-Executive Directors of the Post Office Limited Board and the
members of the Group Executive at 27 March 2016. The aggregate remuneration of the key management
personnel of the Post Office Group is set out below:
2016 2015
£000 £000
Short-term employee benefits* TBC 3,380
Post-employment benefits TBC 68
Other long-term benefits TBC 307
Total TBC 3,755
*Payment in lieu of notice has been included in short-term employee benefits. Please refer to the
Director's Remuneration Report on page XX for further details.
24. Post balance sheet events
In accordance with the funding agreement with government announced on 27 November 2013, for which State
Aid approval was received on 19 March 2015, Post Office Limited received £220 million of funding on 1 April
2016.
25. Immediate and ultimate parent company
At 27 March 2016, the Directors regarded Postal Services Holding Company Limited as the immediate and ultimate
parent company. The largest group to consolidate the results of the company is Postal Services Holding Company
Limited, a company registered in the United Kingdom. Postal Services Holding Company Limited financial
statements can be obtained from Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Post Office Limited
Post Office Limited
Parent Company Financial Statements
2015-2016
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Company statement of comprehensive income
At 27 March 2016
2015
2016 Restated
Notes. £m £m
Loss for the financial year from continuing operations (157) (143)
Loss for the financial year from discontinued operations (10) (4)
Loss for the financial year (167) (147)
Other comprehensive income not to be reclassified to profit or loss in
future periods
Remeasurements on defined benefit surplus 11 (9) 54
Income tax effect. 5 (9)
Total comprehensive income for the year (171) (102)
There are no other comprehensive income items that will be reclassified to the profit and loss in subsequent
periods.
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Company balance sheet
at 27 March 2016
2015
2016 (Restated)
Notes £m £m
Non-current asset
Intangible assets 2 - :
Property, plant and equipment. 3 9 10
Investment in subsidiaries 4 50 -
Investments in joint ventures 5 1 1
Retirement benefit surplus ai 196 205
Trade and other receivables 6 12 10
Total non-current assets 268 226
Current assets
Inventories 6 6
Trade and other receivables 6 411 399
Cash and cash equivalents 2 698 817
Total current assets 1,115 1,222
Total assets 1,383 1,448
Current liabilities
Trade and other payables 8 (648) (716)
Financial liabilities - interest bearing loans and borrowings 9 (485) (310)
- obligations under finance leases 13 (8) -
Provisions 10 (150) (144)
Total current liabilities (1,271) (1,170)
Non-current liabilities
Other payables 8 (25) (30)
Provisions 10 (16) (6)
Total_non-current liabilities (41) (36)
Net assets 71 242
Equity
Share capital 12 - -
Share premium 12 465 465
Retained earnings (394) (223)
Total equity 71 242
The financial statements on pages XX to XX were approved by the Board of Directors on XXX 2015 and
signed on its behalf by:
P A Vennells A Cameron
Chief Executive Chief Financial Officer
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Company statement of changes in equity
at 27 March 2016
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Retained
Share earnings Total
premium —m equity
Notes £m £m
At 30 March 2015 (restated) 465 (223) 242
Loss for the year - (167) (167)
Remeasurements on defined benefit
surplus 11 - (9) (9)
Income tax effect - 5 5
At 27 March 2016 465 (394) 71
Retained
Share earnings Total
premium £m equity
Notes £m £m
At 31 March 2014 465 (121) 344
Loss for the year (restated) - (147) (147)
Remeasurements on defined benefit
surplus 1 - 54 54
Income tax effect : (9) (9)
At 29 March 2015 (restated) 465 (223) 242
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Notes to the financial statements
1. Accounting Policies
The accounting policies which follow set out those which apply in preparing the financial statements for the year
ended 27 March 2016.
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are made up to
the 52 weeks ended 27 March 2016 (2015: 52 weeks ended 29 March 2015).
Authorisation of financial statements
The parent company financial statements of Post Office Limited (the ‘Company’) for the year ended 27 March 2016
were authorised for issue by the Board of Directors on XX xxx 2016 and the balance sheet was signed on the
Board’s behalf by P A Vennells and A Cameron. Post Office Limited is a limited company incorporated and domiciled
in England and Wales.
Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (FRS 101). Theses financial statements are prepared under the historical cost convention.
As permitted by Section 408 of the Companies Act 2006 Post Office Limited has not presented its own income
statement. The result dealt with in the accounts of the company amounted to £167 million loss (2015 (restated):
£60 million loss).
The results of Post Office Limited are included in the consolidated financial statements of Post Office Group which
are available from Companies House.
The Company has taken advantage of the following disclosure exemptions under FRS 101:
(a) the requirements of IFRS 7 Financial Instruments: Disclosures
(b) the requirements of paragraphs 91-99 of IFRS 13 Fair Value Measurement
(c) the requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative
information in respect of:
i. paragraph 73(e) of IAS 16 Property, Plant and Equipment
i. paragraph 118(e) of IAS 38 Intangible Assets
(d) the requirements of paragraphs 10(d), 10(f), 39(c) and 134-136 of IAS 1 ‘Presentation of Financial
Statements’
(e) the requirements of IAS 7 Statement of Cash Flows
(f) the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and
Errors’
(g) the requirements of paragraph 17 of IAS 24 ‘Related Party Disclosures’
(h) the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into
between two or more members of a group, provided that any subsidiary which is a party to the transaction is
wholly owned by such a member.
Fundamental accounting concept - going concern
In making an assessment of the Company’s ability to continue as a going concern, the Directors have considered
the going concern assessments made in relation to the Group (see note 1 on page XX) and are of the view that it
is appropriate that these financial statements have been prepared on a going concern basis.
Prior year restatements
In preparing the financial statements for the current year, the comparative figures for the year ended 29 March
2015 have been restated. The provision for postmasters’ compensation, included within network transformation
had not been fully recognised in the financial statements for the year ended 29 March 2015. The nature of the
provision is described in more detail in the accounting policies. The restatement affects exceptional costs,
provisions and retained earnings due to the loss in the year changing as a result of a restatement to the
exceptional charge. This represents an acceleration of an expected cost and there has been no impact on the
Group's funding position or on payments to Postmasters’. Within this report, the comparative statement of
comprehensive income, balance sheet and statement of changes in equity for the year ended 29 March 2015
have been restated. There has been no effect on the cash flow statement.
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As previously Restatement 29 March 2015
reported Restated
Total provisions (63) (87) (150)
Operating exceptional items - restructuring
costs (214) (87) (301)
Shareholders’ funds (retained earnings) (136) (87) (223)
Profit/(loss) for the year
(87) (147)
Critical accounting estimates and judgements in applying accounting policies
The Company makes certain estimates and assumptions regarding the future. Estimates and assumptions are
continually evaluated based on historical experience and other factors. In the future, actual experience may
differ from these estimates and assumptions. In addition the Company has to make judgements in applying its
accounting policies which affect the amounts recognised in the accounts. The most significant areas where
judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Company are determined using methods relying
on actuarial estimates and assumptions. These pension figures are particularly sensitive to changes in
assumptions for discount rates, mortality and inflation rates. The Company exercises its judgement in
determining the assumptions to be adopted, after discussion with its Actuary. Details of the key assumptions are
set out in note 11.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a
rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term.
Judgement has been applied in determining that for these purposes a high quality corporate bond constitutes AA
rated or equivalent status bonds.
Provisions
The Company has recognised provisions where a present legal or constructive obligation exists as a result of a
past event, where it is probable that an outflow of resources will be required to settle the obligation and a
reliable estimate of the amount can be made. Severance provisions are recognised for business reorganisation
where the plans are sufficiently detailed and well advanced and where appropriate communication to those
affected has been undertaken at the balance sheet date. Postmasters’ compensation provisions are recognised
when either Postmaster’s agree to terminate their existing contracts or sign the new format contracts under
Network Transformation. The total provision for Postmasters’ compensation at the yearend date represents
management's best estimate of the future obligation. Due to the nature of provisions the future amount settled
may be different from the amount that has been provided.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate the risks specific to that liability.Impairment of non-current assets
The Group assesses whether there are any indicators of impairment for all non-currents assets at each reporting
date as well as if events or changes in circumstances indicate that the carrying value may be impaired. Where
appropriate, an impairment loss is recognised in the income statement for the amount by which the carrying
value of the asset (or cash generating unit) exceeds its recoverable amount, which is the higher of an asset’s
net realisable value and its value in use. Due to on-going operational losses (excluding the Network Subsidy
Payment) the carrying value of some assets are impaired to zero on acquisition. Each asset category is
described below:
Property, plant and equipment excluding freehold property, long leasehold property and land:
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into
working condition for its intended use. These assets have a relatively short useful life and due to on-going
operational losses (excluding Network Subsidy payment) they are impaired to zero on acquisition. If they were
not impaired they would be depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Piant and Machinery 3-15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2 - 15 years
Freehold property, long leasehold property and land:
As with other property, plant and equipment this is recognised at cost, including attributable costs in bringing
the asset into working condition for its intended use. These assets have a long useful life and a fair market
value, therefore these assets are not impaired on acquisition but would be considered for impairment if
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indicators existed in line with Group policy noted above. They are instead depreciated on a straight-line basis
over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining
useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted where applicable on a
prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. These assets are
impaired to zero for the reasons noted above. If they were not impaired they would be amortised on a straight
line bases via a charge to income statement over the following period:
Software 1 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with Group policy noted above but are not
automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets
acquired and liabilities assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested
for impairment annually as well as when there are any indicators of impairment.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have
passed to the Company are capitalised at the inception of the lease with a corresponding liability recognised for
the fair value of the leased item or, if lower, at the present value of the minimum lease payments, Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease
term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor are
classified as operating leases and rentals are charged to the income statement over the lease term. The aggregate
benefits of incentives are recognised as a reduction of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures
Investments in joint ventures within the Company's financial statements are stated at cost less any accumulated
impairment losses.
Investments in subsidiaries
Investments in subsidiaries within the Company’s financial statements are stated at cost less any accumulated
impairment losses. The carrying value relates solely to the Company's investment in Post Office Management
Services Limited, a 100% subsidiary of the Company and is less than £1m.
Inventories
Stocks, which include printing and stationery, retail and lottery products, are carried at the lower of cost and net
realisable value after adjusting for obsolete or slow-moving stock.
Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed
or are disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by
the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and
unused tax assets and losses except:
- initial recognition of goodwill
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= the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit and loss.
- taxable temporary differences associated with investments in subsidiaries interest in joint ventures, where the
timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference
will not reverse in the foreseeable future and
- deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available
against which they can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the
tax asset is realised or the liability is settled, based on tax rates that have been substantively enacted at the
balance sheet date. Deferred tax balances are not discounted.
Current and deferred tax is recognised in the income statements, except to the extent that it relates to items
recognised in other comprehensive income or directly to equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Company. All
members of defined benefit schemes are contracted out of the earnings-related part of the State pension scheme.
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of
return on a high quality corporate bond of equivalent currency and term. The resulting defined benefit asset or
liability is presented separately on the face of the balance sheet. Full actuarial funding valuations are carried out
at intervals not normally exceeding three years as determined by the Trustees and, actuarial valuations are carried
out at each balance sheet date and form the basis of the surplus or deficit disclosed. When the calculation at the
balance sheet date results in net assets to the Company, the recognised asset is limited to the present value of
any future refunds of the plan or reductions in future contributions to the plan (the asset ceiling).
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service
costs and any gains and losses arising from settlements, curtailments and past service costs. The net difference
between the interest costs and the expected return on plan assets is recognised as net pensions interest in the
income statement. Actuarial gains and losses are recognised immediately in the statement of comprehensive
income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the
statement of comprehensive income.
For defined contribution schemes, the Company’s contributions are charged to operating profit, as part of staff
costs, in the period to which the contributions relate.
Foreign currencies
The functional and presentational currency of the Company is sterling (£).
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction (or at the contracted
rate if the transaction is covered by a forward foreign currency contract). Monetary assets and liabilities
denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date (or
the appropriate forward contract rate). All differences are taken to the income statement.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad
debts are written off when identified.
Borrowing costs
Borrowing costs are recognised as an expense when incurred unless they are directly attributable to the
construction or development of a qualifying asset, in which case they are capitalised using the weighted average
cost of borrowing for the period of construction/development.
Government grants
Government grants of a revenue nature are recognised to match costs in relation to the performance of certain
specified activities.
Provisions
Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past
event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at an appropriate pre-tax rate.
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Financial instruments
Financial assets
Financial assets are measured at fair value at the balance sheet date. They are classified into the following
categories as appropriate loans and receivables or available for sale as appropriate based on the purpose for which
they were required. Financial liabilities are measured at either fair value at the balance sheet date or as financial
liabilities measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at
amortised cost.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the
balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent
arms length market transactions; reference to the current market value of another instrument which is
substantially the same; and discounted cash flow analysis and pricing models.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or
expires.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash
equivalents) with an original maturity date of three months or less. In addition the Company uses Money Market
funds as a readily available source of cash, and these funds are also categorised as cash equivalents.
Auditor’s remuneration
The remuneration paid to auditors is disclosed in the Group financial statements (note 3).
Director's emoluments
The emoluments paid to Directors are disclosed in the Group financial statements (note 5).
2. Intangible assets
2016 2015
At 30 March 2015, 31 March 2014 297 243
Reclassifications - (3)
Additions 91 57
Disposals - -
At 27 March 2016, 29 March 2015 388 297
Impairment
At 30 March 2015, 31 March 2014 297 243
Reclassifications - (3)
Impairment (see note 5 in the 91 57
Group financial statements)
Disposals : -
At 27 March 2016, 29 March 2015 388 297
Net book value
At 27 March 2016, 29 March 2000
The above intangible assets relate to software.
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3. Property, plant and equipment
Land and Bi gs.
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m ém £m £m £m £m £m
Cost
At 31 March 2014 100 17 113 44 1 739 1,014
Reclassification* (31) 26 6 - - 2 3
Additions 16 12 - 1 - 55 84
Disposals (2) : (4) (5) 2 (13), (24)
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 - - 4 - 38 43
Disposals (1) = (3) (1) = (3) (8)
At 27 March 2016 77 58 90 43 1 843 1,112
Depreciation and
impairment
At 31 March 2014 91 16 113 44 1 739 1,004
Reclassification* (31) 26 6 - - 2 3
Depreciation and
impairment 16 12 - 1 - 55 84
Disposals (2) - (4) (5) - (13) (24)
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification (6) 3 (22) - - 25 -
Depreciation and
impairment
2 - - 4 - 38 44
Disposals (1) : (3) (4) = (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Net book value
At 27 March 2016 8 1 - - - : 9
At 29 March 2015 9 1 : : : : 10
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land,
which represents £3 million (2015: £3 million) of the total cost of properties.
* Some reclassifications have been done in the year between freehold, long leasehold, short leasehold and fixtures
and equipment in relation to Postmasters’ branches. Reclassification between freehold, long leasehold and short
leasehold asset categories is due to the fact that all land and building assets are classified as freehold whilst they
are an asset under construction, then once works are complete and lease contracts are confirmed, the asset is
moved into the correct respective category.
4. Investment in subsidiaries
The carrying value of £50,000,100 relates solely to the Company's investment in Post Office Management
Services Limited, a 100% subsidiary of the Company. It relates to 50,000,000 shares with a nominal value of £1
and 1 share with a nominal value of £100. The registered address of Post Office Management Services Limited is
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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5. Investments in joint ventures
2016 2015
£m —m
Investment in joint ventures 1 1
6. Trade and other receivables
2016 2015
—m ém
Current:
Trade receivables 93 101
Amounts owed by group undertakings 6 2
Prepayments and accrued income 68 106
Client receivables 229 162
Other receivables 15 28
Total 411 399
Non-current:
Prepayments and accrued income 12 10
7. Cash and cash equivalents
2016 2015
—m £m
Cash in the Post Office Limited Network 653 708
Short-term Bank Deposits 45 89
Money market fund investments : 20
Total 698 817
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8. Trade and other payables
2016 2015
ém £m
Current:
Trade payables 51 29
Accruals 157 159
Deferred income 39 29
Social security 8 9
Client payables 375 454
Capital payables 16 25
Other payables 2 41
Ot tn 848. 216.
Non-current:
Other payables 25 30
9. Financial liabilities - interest bearing loans and borrowings
2016 2015
Department of Business, Innovation & SI
drawn down 465 310
The loan under the facility is short dated on a programme of liquidity management and matures on average 1 day
after the year end (2015: 1 day). The fair value of borrowings approximate their carrying value due to the short
term maturities of the loan. On maturity it is expected that further loans will be drawn down under this facility,
which expires in 2018. The undrawn committed facility, in respect of which all conditions precedent had been met
at the balance sheet date, is £485 million (2015: £840 million). The average interest rate on the drawn down
loans is 1.0% (2015: 1.0%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited
network.
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and
a negative pledge over cash and near cash items. The negative pledge is an agreement not to grant security over
the assets or to set up a vehicle that has the same effect.
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10. Provisions
Network
Transformatio Other
n £m Total
£m. £m.
At 29 March 2015 (restated) 127 23 150
Charged in operating exceptional
items 123 54 177
Charged in operating costs - 5 5
Charged for discontinued . 3 3
operation
Utilisation (95) (46) (141)
Unused amounts in the year -
operating exceptionals (21) (6) (26)
Unused amounts in the year - .
operating costs (2) (2)
At 27 March 2016 134 32 166
Disclosed as:
Current 132 18 150
Non - current 2 14 16
134 32 166
The Network Transformation provision relates to payments due to postmasters in relation to the major
transformation programme, see the accounting policies note on page XX for further details of this provision.
Other provisions of £32 million (2015: £23 million) include £29 million for continuing operations, this includes £19
million onerous lease obligations, £3 million severance and £7 million of smaller provisions including £1 million for
personal injury claims. It also includes £3m in relation to the discontinued operation as disclosed in note 19.
11. Pensions
The disclosures in this note reflect the two defined benefit schemes: Post Office Limited sectionalised RMPP
scheme which is independently operated by the Company and the 7% share of the RMSEPP scheme. Royal Mail
Group Limited is the principal employer in Royal Mail Senior Executive Pension Plan (RMSEPP) and Post Office
Limited became a participating employer with effect from 1 April 2012. It also includes the defined contribution
scheme Post Office Pension Plan.
The disclosures in this note show how the value of the assets and liabilities has been calculated at the balance
sheet date.
The Company 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
Post Office Pension Plan* UK employees Defined contribution
*From 1 April 2015 the Post Office Pension plan replaced the Royal Mail Defined Contribution Plan.
Defined Contribution
The charge in the income statement for the defined contribution schemes and the Company contributions to these
schemes was £3 million (2015: £3 million) during the year. New recruits joining from 31 March 2008 are able to
begin paying contributions to the new plan after they have worked for the Company for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The
latest full actuarial funding valuation of RMPP was carried out as at 1 April 2012 using the projected unit method.
For RMPP, this valuation was concluded at £135 million surplus. The latest full actuarial funding valuation of
RMSEPP was carried out as at 31 March 2012 using the projected unit method. For 100% of the RMSEPP plan, the
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valuation was concluded at £83 million deficit. Valuations are carried out triennially and the next one is being
performed as at 1 April 2015. The valuation has not yet been completed due to the current consultation on
proposals to close the scheme to future accrual. RMPP includes sections A, B and C each with different terms and
conditions:
* Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
* Section B is for members (or beneficiaries of members) who joined after 1 December 1971 and before 1
April 1987 or to members of Section A who chose to receive Section B benefits;
* Section C is for members (or beneficiaries of members) who joined after 1 April 1987 and before 1 April
2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008.
The changes encompassed:
«the Plans closed to new members from 31 March 2008;
* all pensions and benefits earned before 1 April 2008 are linked to final pensionable salary, but
defined benefits built up from 1 April 2008 are earned on a “career average pensionable salary”
basis;
* from 1 April 2014, pensionable salary was amended to the amount in force at that date, increasing
each 1 April thereafter in line with RPI (up to 5% each year), with allowance for certain promotional
increases. This change resulted in a one-off exceptional gain of £102 million for the 2013/14
financial year;
* employees can continue to take their pension on reaching 60 but the normal retirement age increased to
65 for benefits earned from 1 April 2010;
* from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age at 55,
and continue working while still contributing to the Pension Plan until the maximum level of benefits has
been reached; and
* RMSEPP was closed to future accruals on 31 December 2012.
Payment of £17 million (2015: £19 million) was made by the Company during the year in respect of regular 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% (2015: 17.1%), effective from April 2010. However, in
February 2016, Post Office went out to formal consultation with active members (and their representatives) of the
Post Office section of the Royal Mail Pension Plan regards to the potential closure of the RMPP to future accrual
with effect from 1 September 2016. The closure is subject to the outcome of the pensions consultation and no
final decision will be until the formal consultation has been completed. The proposed closure will also require
consent of the Trustee of the RMPP. This closure if it occurs could affect the rate paid in 2016/17.
The Company pays 7% of the total deficit payment required to fund the deficit in RMSEPP and a payment of £1
million (2015: £1 million) was made by the Company during the year. No RMPP deficit payments were made
during 2014/15 or 2015/16. For RMSEPP, deficit recovery payments will be £1 million per annum, from 1 April
2010 to 31 January 2024.
A current liability of £nil (2015: £1 million) has been recognised for payments to the pension schemes relating to
redundancy. During the year, payments of £3 million (2015: £2 million) relating to redundancy were made.
The weighted average duration of the RMPP fund is 26 years, and for the RMSEPP fund is 21 years. Over the next
financial reporting period to 27 March 2016 it is expected that employer contributions to the plans will be £17
million and £1 million for RMPP and RMSEPP respectively.
The following disclosures relate to the gains/losses and surplus/deficit in the scheme recognised for RMPP and
RMSEPP defined benefit plans in the financial statements of the Company:
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b) Major long-term assumptions
The size of the RMPP pension surplus, which is large in the context of the Company and its finances, is materially
sensitive to the assumptions adopted. Small changes in these assumptions could have a significant impact on the
surplus and overall income statement charge. The major long-term assumptions in relation to both RMPP and
RMSEPP were:
At 27 March 2016 = At 29 March 2015
% pa % pa
Rate of increase in salaries 2.8 2.8
Rate of pension increases - RMPP sections A/B 1.8 1.9
Rate of pension increases - RMPP section C 2.8 2.8
Rate of pensions increases - RMSEPP members transferred
from Section A or B of RMPP. 1.8 1.9
Rate of pension increases - RMSEPP all other members 2.8 2.8
Rate of increase for deferred pensions - RMSEPP members
transferred from Section A or B of RMPP. 1.8 1.9
Rate of increase for deferred pensions 1.8 1.9
Discount rate 3.5 3.5
Inflation assumption (RPI) - RMPP and RMSEPP 2.9 3.0
Inflation assumption (CPI) - RMPP and RMSEPP. 1.8 1.9
The ultimate cost of the RMPP plan to the Company will depend upon future events rather than the assumptions
made. The assumptions made may not be borne out in practice and as such the cost of the plan may be higher
(or lower) than disclosed.
In common with other defined benefit schemes, the main risk in relation to the arrangements is the value of the
assets does not keep pace with the increase in the value of the liabilities. This can arise for many reasons, but
the most significant risks are as follows:
Investment risk: If the assets of the arrangements fall short of expectations, this will lead to a decrease in the
funded status.
Asset volatility: The arrangements hold return seeking assets (including equities and property) which are
expected to outperform corporate bonds in the long term but give exposure to volatility and risk in the short
term. RMPP does, however, invest in liability driven investment (LDI) assets, for example Corporate Bonds, which
mitigates the impact of interest rate and inflation volatility on the funded status.
Inflation risk: Higher inflation rates than expected will act to increase the plan liabilities as benefits will increase
to a higher level than assumed. The arrangements have a maximum pension increase (generally 5% per annum)
written into the rules which limits the increase for many benefits, so limiting the impact of high inflation. This
includes pensionable pay in RMPP, which was amended with effect from 1 April 2014. In addition, the arrangement
holds assets that increase in value as price inflation expectations rise, so mitigating the impact of rising inflation
expectations. These assets include LDI assets in respect of RMPP.
Changes in bond yields: A decrease in corporate bond yields will increase the plan liabilities, although this will
be partially offset by an increase in the value of the bond holdings and, to some extent, the LDI assets.
Pensioner longevity: If members live longer than expected, the liabilities would increase because pensions would
be paid for a longer time.
Liabilities accrued in the Royal Mail Pension Plan to 31 March 2012 were transferred to the Royal Mail Statutory
Pension Scheme. These liabilities are no longer an obligation of the Company and consequently the transfer
resulted in a significant removal of pension risk from the Company.
The following table shows the potential impact on the RMPP assets and pension surplus of changes in key
assumptions:
2016 2015
£m £m
Changes in RPI and CPI inflation of +0.1% pa (5) (4)
Changes in discount rate of +0.1%pa 5 4
Changes in real salary growth of +0.1% pa (2) (1)
Changes in CPI assumptions of +0.1% pa (1) (1)
An additional 1 year life expectancy (6) (5)
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The sensitivity analysis has been prepared using projected benefit cashflows as at the latest full actuarial valuation
of the plan. The same method was applied as at the previous reporting date. The accuracy of this method is limited
by the extent to which the profiles of the plan cashflows have changed since those valuations although any change
is not expected to be material in the context of the above sensitivity analysis.
Mortality: The mortality assumptions for the RMPP sectionalised scheme are based on the latest self-administered
pension scheme (SAPS) mortality tables with appropriate scaling factors (106% for male pensioners and 101% for
female pensioners). For future improvements the assumptions allow for ‘medium cohort’ projections with a 1.25%
floor. These are detailed below:
Average expected life expectancy from age 60! 00000 20M 2018
For a current 60 year old male RMPP member 27 years 27 years
For a current 60 year old female RMPP member 30 years 30 years
For a current 40 year old male RMPP member 29 years 29 years
For a current 40 year old female RMPP member 32 years 32 years
b) Plans’ assets
The assets in the plans for the Company were:
Market value 2016 Market value 2015
Sectionalised RMPP —m £m
UK equities - 1
Overseas equities - 10
Corporate bonds* 233 217
Property 1 8
Private Equity 10 12
Cash and cash equivalents 41 6
Bond/fixed interest funds 41 50
Index-linked funds - 10
Other loan/debt funds 28 20
Alternative asset funds 43 it
Equity funds : 34
Fair value of RMPP assets 407 379
Present value of RMPP liabilities (184) (150)
Surplus in plan before asset ceiling adjustment 223 229
Less effect of asset ceiling oe a ee C-) ne CL) ee
Surplus in plan after asset ceiling adjustment 194 202
*£15 million relates to UK Government Bonds. £215 million to an LDI investment containing UK Government
Bonds, it is a liability driven investment and £3 million to an infrastructure debt holding which is EUR
denominated and fixed interest.
Market value 2016 Market value 2015,
Share of RMSEPP ém ém
UK equities 1 1
Overseas equities 10 1
Government bonds 15 16
Alternative asset funds 2 -
Property 2 2
Other assets : 1
Fair value of share in plan assets for RMSEPP 30 31
Present value of share in plan liabilities for RMSEPP (27) (26)
Surplus in plan for the share of RMSEPP before asset ceiling 3 5
adjustment
Less effect of asset ceiling (1) (2)
Surplus in plan for share of RMSEPP after asset ceiling 2 3
adjustment
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A retirement benefit surplus of £196 million is disclosed on the balance sheet, representing the surplus in plans
of £223 million and £3 million for RMPP and RMSEPP respectively, and net of tax of £30 million at a rate of 35%
on the element of the surplus which is recoverable through a refund from the plans.
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded. All
RMPP and RMSEPP assets are securities with a quoted price in an active market.
c) Movement in plans’ assets and liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Sectionalised
Sectionalised
Assets
RMPP 2016 £m__RMPP 2015 £m
Assets in sectionalised RMPP at beginning of period 379 260
Contributions paid 19 21
Employee contributions paid 6 7
Finance income 14 12
Actuarial (losses)/gains (8) 81
Assets in sectionalised RMPP at end of period 407 379
Share of Share of
Assets RMSEPP 2016 RMSEPP 2015
£m —m
Share of assets in RMSEPP at beginning of period 31 26
Contributions paid 1 1
Finance income 1 1
Actuarial (losses)/gains (2)
Benefits paid to members. nC)
Share of assets in RMSEPP at end of period
30
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabilities Sectionalised Sectionalised
RMPP 2016 RMPP 2015
—£m —m
Liabilities in sectionalised RMPP at beginning of period (150) (90)
Current service cost (27) (25)
Curtailment costs* (1) (1)
Finance cost (6) (5)
Employee contributions (6) (7)
Actuarial loss - (23)
Experience adjustments on liabilities 3 (1)
Benefits paid 3 2
Liabilities in sectionalised RMPP at end of period (184) (150)
Liabilities Share of Share of
RMSEPP 2016 RMSEPP 2015
—£m ém
Share of liabilities in RMSEPP plans at beginning of period (26) (24)
Finance cost (1) (1)
Actuarial loss (1) (2)
Benefits paid 1 1
Share of liabilities in RMSEPP at end of period (27) (26)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated
compensation costs. Estimates of both are included, for example, in any redundancy provisions raised. The
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& Accounts
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curtailment costs above represent the costs associated with those people paid compensation in respect of
redundancy during the accounting period. Such payments may occur in an accounting period subsequent to the
recognition of costs in the income statement.
d) Recognised charges
An analysis of the separate components of the amounts recognised in the performance statements of the Company
is as follows:
Sectionalised Sectionalised
RMPP 2016 £m RMPP 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptioi
items:
Current service cost 27 25
Total charge to operating profit before exceptional items 27 25
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments 1 1
Total charge to operating profit 28 26
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 6 5
Interest income on plan assets (14) (12)
Net pensions credit to financing (8) (7)
Net charge to the income statement before deduction for tax _
Analysis of amounts recognised in the statement of
comprehensive income:
Actual return on plan assets 6 93
Less: expected interest income on plan assets (14) (12)
Less: taxation on surplus recoverable through plan refunds oo 2).
Actuarial (losses)/gains on assets (all experience (10)
adjustments)
Experience adjustments on liabilities 3 (1)
Effects of changes in actuarial assumptions on liabilities - (23)
Actuarial losses on liabilities 3 (24)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income
58
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Share of RMSEPP = Share of RMSEPP
2016 £m 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 1 1
Interest income on plan assets (2) (1)
Net pensions credit to financing : :
Net charge to the income statement before deduction for tax : :
Analysis of amounts recognised in the statement of comprehens:
income:
Actual return on plan assets (1) 5
Less: expected interest income on plan assets (1) (1)
Less: taxation on surplus recoverable through plan refunds 1
Actuarial (losses)/gains on assets (all ex
Experience adjustments on liabilities -
Effects of changes in actuarial assumptions on liabilities () (2)
fence adjustments
Actuarial losses on liabilities () (2)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (2) i
12. Equity
Called up share capital:
2016 2015
£ £
Authorised
Ordinary shares of £1 each 51,000 51,000
Total 51,000 51,000
Allotted and issued
Ordinary shares of £1 each 50,003 50,003
Total 50,003 50,003
Share premium:
On 7 August 2007 1,000 ordinary shares of £1 each were issue in return for £313 million cash paid by the the
Secretary of State for Business, Enterprise and Regulatory Reform. A share premium of £312,999,999 resulted
from this subscription. In April 2008 two ordinary £1 shares were issued in return for £152 million cash paid by
the Secretary of State for Business, Innovations and Skills Reform. A share premium of £151,999,998 resulted
from this subscription.
13. Commitments
Capital commitments contracted for but not provided in the financial statements amount to £62 million (2015:
£96 million).
Details of the Company commitments under non-cancellable operating leases are disclosed in the Group financial
statements (note 19).
14.
Details of the Company’s finance lease liabilities are disclosed in the Group financial statements (note 20).
nance lease Ii ies
15. Related party disclosures
Details of transactions with related parties are disclosed in the Group financial statements (note 23).
16. Operating exceptional items
Details of operating exceptional items are disclosed in the Group financial statements (note 4).
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17. Taxation
Details of the taxation gains recognised in the year are disclosed in the Group financial statements (note 7a).
18. Business combinations
Details of the business combination which arose in the year is included in note 21 in the Group financial
statements.
19. Discontinued operations
Details of the discontinued operation are included in note 22 in the Group financial statements.
20. Post balance sheet events
In accordance with the funding agreement with government announced on 27 November 2013, for which State
Aid approval was received on 19 March 2015, Post Office Limited received £220 million of funding on 1 April
2016.
21. Immediate and ultimate parent company
At 27 March 2016, the Directors regarded Postal Services Holding Company Limited as the immediate and ultimate
parent company. The largest group to consolidate the results of the Company is Postal Services Holding Company
Limited, a company registered in the United Kingdom. Postal Services Holding Company Limited financial
statements can be obtained from Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Corporate information
Registered Office Actuary
Post Office Limited Towers Watson Limited
Finsbury Dials Watson House
20 Finsbury Street London Road
London REIGATE
EC2Y 9AQ Surrey
RH2 9PQ
Auditor Consumer Body
Ernst & Young LLP Consumer Focus
1 More London Place 4th Floor
LONDON Artillery House
SE1 2AF Artillery Row
London
SW1P 1RT
Solicitor
Linklaters LLP
One Silk Street
LONDON
EC2Y 8HQ
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Post Office Limited
Audit, Risk and Compliance Board Sub-
Committee
Year ended 27 March 2016
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
19. Impairment
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13
17
19
22
24
25
27
28
29
35
36
38
39
1.
Glossary
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Below is a listing of key abbreviations used throughout this document with the full
meaning given:
Abbreviation I Meaning
AEI Application, Enrolment & Identity
AT™ Automated Teller Machine
BACS Bankers’ Automated Clearing Services
BAU Business As Usual
BIS Department for Business, Innovation & Skills
BOI Bank of Ireland
CPI Consumer Price Index
DVLA Driver & Vehicle Licensing Authority
DWP Department of Work & Pensions
Eagle Deal in August 2012 to sell Post Office Financial Services (POFS)
to the Bank of Ireland, restructure commission rates for personal
financial services and extend the contract to 2023
EU BRP European Union Biometric Residents’ Permit
FRES First Rate Exchange Services
Gamma Accontract 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 Goods Received Not Invoiced
HPBB Homephone and Broadband
Horizon Horizon Next Generation- IT Counter system in branches
NBV Net Book Value
NS&I 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
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2. Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for the
year ended 27 March 2016. It is a summary of the key data, trends and analyses which
readers may find useful to further their own understanding of the results for 2015-16. It
is to be read in conjunction with the Report & Accounts.
Most of the analysis is based on the comparison of 2015-16’s actual results to those of
the prior year.
Comparison against budget is discussed in the Monthly Performance Report presented to
the Post Office Limited Board.
3. Accounting Policies
Post Office Limited Group report its results under International Financial Reporting
Standards (IFRS). Post Office Limited Company and Post Office Management Services
Limited report under Financial Reporting Standard 101 Reduced Disclosure Framework
(FRS 101).
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4. Primary Statements
4.1 Consolidated Income Statement
2015
2016 (Restated)
£m —m
Continuing operations:
Turnover 981 976
Network Subsidy Payment 130 160
Revenue 1,111 1,136
People costs excluding restructuring costs (233) (238)
Other operating costs (808) (831)
Share of post-tax profit from joint ventures 35 36
Operating profit before exceptional items for continuing operations 105 103
Operating exceptional items (269) (271)
- government grant 150 170
- restructuring costs (283) (301)
- impairment (136) (140)
Operating loss from continuing operations (164) (168)
Profit on disposal of property, plant and equipment - :
Loss before financing and taxation from continuing operations (164) (168)
Finance costs (5) (3)
Finance income - 1
Net financing income relating to pensions 8 7
Loss before taxation from continuing operations (161) (163)
Taxation credit 4 26
Loss for the financial year from continuing operations (157) (137)
Discontinued operations:
Loss for the financial year after tax from discontinued operations (10) (4)
Loss for the financial year (167) (141)
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4.2. Consolidated statement of cash flows
2016 2015
£m £m
Cash flows from operating activities
Operating profit before exceptional items from continuing operations 105 103
Operating loss from discontinued operations (10) (4)
Total profit before exceptional items 95 99
Adjustment for:
Share of profit from joint ventures (35) (36)
Pension operating costs 30 28
Working capital movements: (81) (17)
Increase in trade and other receivables (14) (34)
(Decrease)/Increase in trade and other payables (61) 10
Increase in provisions for discontinued operations 3 -
(Decrease)/increase/ in non-exceptional provisions (9) 7
Pension operating costs paid (23) (23)
Cash payments in respect of operating exceptional items: (109) (66)
Government grant 150 170
Restructuring costs (253) (224)
(Other (6) (12)
Net cash outflow from operating activities (123) (15)
Income tax recovered 9 11
Cash flows from investing activities
Dividends received from joint ventures 35 30
Finance income received - 1
Purchase of business combination (44)
Purchase of fixed and intangible assets (136) (147)
Net cash outflow from investing activities (145) (116)
Net cash (outflow) /inflow before financing activities (259) (120)
Cash flows from financing activities
Finance costs paid (5) (3)
Payments to finance lease creditors - (3)
Proceeds of borrowings from BIS 155 310
Net cash inflow from financing activities 150 304
Net (decrease)/increase in cash and cash equivalents (109) 184
Cash and cash equivalents at the beginning of the year 821 637
Cash and cash equivalents at the end of the year 712 821
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4.3. Consolidated balance sheet
2015
2016 (Restated)
£m £m
Non-current assets
Intangible assets 44 -
Property, plant and equipment 9 10
Investments in joint ventures 67 67
Retirement benefit surplus 196 205
Trade and other receivables 12 10
Total non-current assets 328 292
Current assets
Inventories 6 6
Trade and other receivables 409 397
Cash and cash equivalents 712 821
Total current assets 1,127 1,224
Total assets 1,455 1,516
Current liabilities
Trade and other payables (653) (718)
Financial liabilities - interest bearing loans and borrowings (465) (310)
- obligations under finance leases (8) -
Provisions (151) (144)
Total current liabilities (1,277) (1,172)
Non-current liabilities
Other payables (25) (30)
Provisions (16) (6)
Total non- current liabilities (41) (36)
Net assets 137 308
Equity
Share capital - -
Share premium 465 465
Retained earnings (330) (159)
Other Reserves 2 2
Total equity 137 308
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5. Operating Profit before exceptional items.
5.1 Operating profit bridge analysis
ém
105
(25) @)
2015 Revenue Share of Profit People Costs Other Operating Subpostmasters 2016
from Joint Costs Costs
Venture
5.2 Explanations for key movements are as follows:
* Revenue - section 6
« People costs - section 7.2
« Postmasters costs - section 7.3
« Other Operating Costs — section 7.4
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6. Revenue
27 March 29 March
2016 2015 ~~ Variance
£m £m Em
Mails 334 340 (6)
Retail & Lottery 46 48 (2)
Financial Services 303 290 13
Government Services 128 141 (13)
Telecoms 130 120 10
Other 40 37 3
Turnover 981 976 5
Network Subsidy Payment 130 160 (30)
Revenue 1,111 1,136 (25)
The decrease in year on year total revenue of £25m (2.2%) to £1,111m (2015
£1,136m) is driven by the £30m decrease in the Network Subsidy Payment, partially
offset by an increase of £5m in turnover.
The following commentary gives further detail on the turnover variances by category:
6.1.1 Mails
A summary of the £5.5m (2%) decrease in Mails turnover is set out below. After
adjusting for a planned decrease in the fixed fee and an element of back billing the
underlying trading variance shows a decrease of £1m.
—m
Total reduction (5.5)
Less: planned decrease fixed fee 6.4
Add: one off (back billing) (1.9)
Underlying trading variance (1.0)
The key movements within the underlying trading variance are:
e« £1.3m reduction in stamps and labels income (1%)
« £1.7m reduction in special mails including international (2%)
« £0.5m net decrease in other products
Offset by
« £2.5m increase in Home Shopping Returns (27%)
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6.1.2 Retail & Lottery
Retail and Lottery turnover has decreased by £2.4m:
¢ Lottery is £1.7m lower than last year, £1.6m of the fall is due to Camelot income and
the remainder to Health lottery. This is a combination of a poorly performing games
and a shift online and represents a trend expected to continue into 2016-17.
¢ Retail is £0.7m lower than prior year as a result of smaller retail square footage post
refurbishments.
6.1.3 Financial Services
Financial Services income has increased by £13.2m year on year. Overall PFS
(MoneyGram, Post Office savings, insurance, travel, lending and current accounts) is
up by £24.4m (19.7%) year on year. Revenue from traditional products has declined
by £11.2m.
By product the main drivers of the PFS £24.4m increase are:
* £4.4m increase in Savings products.
IRRELEVANT
0 Sereremercase nm rrirrerpromuciy
co £5.5m increase in Travel Insurance revenues driven by the new POMS
subsidiary and £0.2m for Travel money card, offset by
o £1.5m decrease in Bureau income due to the travel sector having seen a
general decline and the supermarkets expanding their networks and marketing
investment.
« £4.1m increase from Moneygram as we have gained market share. Transfers to
certain Eastern European countries is up 50% and we have increased our network
access fees
IRRELEVANT
« £0.6m increase in Lending revenue from
o £0.8m increase in credit cards
o £0.2m decrease from mortgages and personal loans
Other Financial Services revenue decreased by £11.2m:
« A £6.1m decrease in Postal Order income. This is due to a prior year change in
policy resulting in write back to revenue of uncashed postal orders over 12 months
old (a change from 24 months previously).
« A £1.9m decline from bill payments resulting from a warmer winter, as well as
utilities and other bill payment clients continuing to migrate customers to other
payment methods such as direct debit and online. We have also lost clients such
as Derby City Council to Paypoint and travel ticketing clients such as West
Yorkshire ticketing scheme.
« £2.5m decrease in Payment services due to a declining market.
« £4.0m decrease in NS&I as the product ceased in June 2015.
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The above decreases were partially offset by:
« £1.1m increase in ATM revenue driven by the increased volumes as machines
reach maturity
« £2.7m net increase in Banking
o anincrease of £3.6m in personal banking because of higher volumes, specifically
cash withdrawals and the impact of other banks closing their branches, offset
by
o a£0.8m decrease in business banking revenues due to a fall in corporate deposit
rates from the Santander contract.
6.1.5 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 £130.0m (2015 £119.8m) has increased by £10.2m. This
has been driven by the line rental price increase of £2 introduced in January 2015 and
a further increase of £1 in November 15.
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Income from mobile top-ups was £0.7m 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.
HPBB 2015/16 2014/15 Variance
Average customer base 459,356 452,094 7,262 i
ARPU £22.85 £21.23 £1.62:
In March 2016 the decisions was taken to withdraw from the development and roll out
of a proposed mobile offer in order to focus on its core Telecoms activities. The income
and expenditure in relation to mobile has been disclosed as a discontinued operation on
the consolidated income statement and is a loss of £10m (2015 £4m).
2016 2015
Gross Income 0.2
Operating Expenses (3.0) (2.9)
EBITDAS Impact (2.8) (2.9)
Supplier Termination Costs (2.5)
Project Shutdown Costs (1.1)
Balance Sheet - Capex (1.7) (1.0)
Balance Sheet - Prepayment (2.0)
Discontinued Operations (10) (4)
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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 full year ending 27 March 2016
compared to the full year ending 29 March 2015
2016 2015 Variance
£m Em £m
Expenditure - (pre- exceptional) Notes
Wages & Salaries (154) (167) 12 8%
Pensions (31) (29) (2) (7%)
Overtime (8) (10) 2 20%
Bonus & Productivity (15) (7) (8) (114%)
Employers’ NI (19) (19) 0 0%
Temporary Resource (6) (6) 0 0%
PEOPLE COSTS 7.2 (233) (238) (5) 2%
Postmasters' costs 7.3 (413) (435) 22 5%
Legal Costs 7.4.1 (5) (3) (2) (67%)
Staff & Agent Related Costs (10) (10) 0 0%
Consultancy & Advisory Services (4) (3) (1) (33%)
Brand & Marketing 7.4.2 (25) (34) 9 26%
Property & Facilities Management 7.4.3 (53) (61) 8 13%
IT Infrastructure & IT Services 7.4.4 (102) (92) (10) (11%)
Finance & Losses 7.4.5 (25) (4) (21) (525%)
Cost Of Sales 7.4.6 (110) (106) (4) (4%)
Other Operating Costs 7.4.7 (56) (76) 20 26%
Vehicles (5) (7) 2 29%
Total Other Operating Costs 7.4 (395) (396) 1 0%
TOTAL EXPENDITURE (Pre Exceptionals) (1,041) (1,069) 28 3%
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7.2 People Costs (2016 £233m vs 2015 £238m)
7.2.1 People costs (2016 £233m vs 2015 £238m)
People costs have decreased by £4.8m (2.0%) to £233.1m, representing 22.3% (2015
22.2%) of the cost base.
The number of people employed also decreased, by 271 net to 6,605 at 27 March 2016
(2015 6,876), primarily due to redundancies arising from the Crown and Transformation
Programmes.
The people cost movement comprises:
e Wages and Salaries have decreased by £11.9m (7.1.%), a £10.1m reduction in basic
pay driven by fewer people and cost control and £1.8m relating to reduced staff project
costs
e Pension costs have increased by £2.2m (8.1%), reflecting an increase in the RMPP
IAS19 service cost rate to 28.5% (2015:23.0%)
e Productivity costs have increased by £7.9m (114.1%), due to increase in management
bonus accrual to 87% reflecting current performance levels compared to 50% bonus
booked in prior year, and the release of over accrual of 13/14 in the prior year.
¢ Overtime has decreased by £2.0m (20.5%).
7.2.2 People Numbers
The People numbers were as follows:
Period end
employees Average employees
2016 2015 2016 2015
Total employees 6,605 6,876 6,667 7,281
CT & NTP 640 622 616 609
Average Employees (excl. CTP &
NT) 6,051 6,672
Staff Cost (excl. overtime & temporary
resource) (£219,191) (£221,331)
Average Cost per employee (£36,225) (£33,175)
7.2.3 Average Cost per Employee
The average number of employees for year ending 27 March 2016 was 6,667 (2015
7,281). The average annual cost per employee, (excluding exceptional costs and
exceptional heads: CT & NTP), has increased by £3,050 (9.2%) to £36,225 (2015
£33,175). This is largely due to the prior year bonus accrual which anticipated 50%
bonus pay out compared to current year bonus anticipation of 87% bonus pay out.
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7.3 Postmaster costs (2016 £413m vs 2015 £435m)
7.3.1 Total postmasters costs decreased by £21.9m (5.0%). This reduction was largely made
up of £19.7m reduced fixed costs as a result of Network Transformation and £2.1m
lower National Insurance as postmasters move to new contracts. Variable costs were
flat with the prior year.
The average annual cost per postmaster branch (excluding VAT and NI) is £39,952
(2015 £41,713). This is a 4.2% decrease on the prior year. The decrease is as a result
of the reduced fixed income payments through the Network Transformation
Programme.
2016 2015
Agency Branches (incl. Mains and
Locals) 10,127 10,172
Outreach 1,175 1,136
Crown 316 326
Total Branches 11,618 11,634
7.4 Other Operating Costs (2016 £395m vs 2015 £396m)
7.4.1 Legal Costs have increased by £2.0m, £1.2m is driven by legal support of strategic
projects, primarily Sparrow and £0.5m is due to risk and compliance related work.
The remaining £0.3m is due to other smaller legal costs.
7.4.2 Brand & Marketing Costs have decreased by £9.4m (26%) year on year. £8.5m in
relation to reduced creative agency fees, £3.9m to decreased market research costs
and £1.2m reduced corporate communication. These savings are offset by £3.9m
7.4.3:
IRRELEVANT
7.4.4 IT Infrastructure & IT Services costs have increased by £10m (10%) mainly due to
£16.2m of increased Comnuter Infrastructure.costs.for_licences.on.senaration.from..
i IRRELEVANT
IRRELEVANT
offset by reduced Horizon terminal services of £15.4m.
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7.4.5 Finance costs have increased by £20.7m, mainly driven by a one off lump sum of
£15.6m VAT rebate in the prior year, which also covered prior years. Current year
central rebate figure is £1.8m with most of the VAT recovery now appearing against
the individual cost lines. Credit and debit card processing charges have increased by
£1.5m and Telecoms losses were £1.3m higher than last year, customer bad debt
increased by £3.7m partially offset with other smaller favourable movements.
7.4.6 Cost of Sales has decreased by £4m (4%), detailed below:
2016 2015 Variance Variance
£m Em —m % Comments
Decrease due to decision to
Mails & Retail (3) (4) 1 15% restrict product range to higher
margin items
Financial 9 i
Services (4) (1) (3) (270%) Increase is due to POMS
Increase of £0.8m is due to
Government £2m related to Verify service
Services (29) (28) () (3%) offset by £1.2m lower POCA
volumes
Increase of £1.5m due impact
9
Telecoms (74) (73) (1) (2%) oF higher customer numbers
Total (110) (106) (4) (4%)
7.4.7 Other Operating costs have decreased by £19.5m. The prior year included £10.8m for
client comI ensation relating to the historical overcharges relating to ‘death notified
nd £10.4m for project expenditure as all was recorded against this
ld finance system, (project expenditure is now recorded across the
relevant categories above). The remaining variance is driven by. lower_managed
service costs} }and
telecommunicauon-cust recucuons:
7.4.8 Project expenditure is now reported within the appropriate cost categories and has
decreased by £11.3m to £12.0m and is detailed below:
2015-16 Project Expenditure £m
Eagle — contractual commitment to £4m pa sales capability (4.0)
investment
Mobile (Wave) (0.7)
Invest to Grow FS (0.4)
Sparrow (2.8)
Other Invest to Grow (3.4)
People & Organisation (0.5)
Digital (0.2)
Grand Total (12.0)
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8. Quality of Earnings
As in previous years, we look at the impact of any one-off items in EBITDAS as set out in the
table below. We do not believe that these items change the users’ understanding of the
accounts or require additional presentation.
2016 2015 Change Change
£m Em £m %
Post Office Limited (consolidated)
Reported profit before other exceptional items H
Network Subsidy Payment (
Add back depreciation i
Reported EBITDAS
Gamma one-off income release* i i
Billing corrections re 2014-15 ' t
Back-billing to RM for Certificates of Posting work i
Fujitsu compensation for poor service in 2013-14 I RRELEVANT i
Change in Telecoms bad debt policy i I
Client compensation relating to prior years I '
ATM rates provision release
Bonus outturn lower in 2013-14 than accrued
Bank of Ireland cost recovery debt provision I !
VAT and NI recovery re earlier years I
Total adjustments i
Total
* Individually disclosed
Each item in the table is explained further below
~ IRRELEVANT I
8.2 Billing corrections and back-billing
Corrections of £0.8m were made to year end revenue estimates early in 2015-16
relating to 2014-15. £1m of additional cost was recognised in the year which related
to overbilling in previous years. In September 2015, Royal Mail were back-billed £2m
for Certificates of Posting services in prior years and not previously invoiced.
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8.3 Fujitsu compensation
Compensation of j* was received in 2015-16 relating to poor service during the
migration of the Telecoms service from BT to Fujitsu in 2013.
8.4 Telecoms bad debt policy
During the year the bad debt policy was revised in two ways which in aggregate led to
a one-off increase in cost. Firstly it was amended to provide for all debt over 90 days
from a policy of providing for all debt over 60 days. Secondly the policy is now to
provide for the gross amounts owed rather than net of customers who have made
early payments.
8.5 Client compensation
An error was identified that has led to a client being overcharged for approximately 5
years and a provision was booked for compensation for the overcharges in 2014-15.
8.6 VAT and NI recovery re earlier years
In 2014-15 there were additional VAT recoveries relating to earlier years when the
recovery rates were confirmed with HMRC, in addition NI recovery was recognised in
2014-15 relating to the decision by HMRC that the new postmaster contracts for
Mains were subject to VAT rather than NI.
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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 UK senior Defined benefit
Pension Plan (RMSEPP) executives (closed)
Post Office Pension Plan* UK employees Defined
contribution
* From 1 April 2015 the Post Office Pension plan replaced the Royal Mail Defined
Contribution Plan. Royal Mail Pensions Trustees Limited manages the main defined benefit
scheme Royal Mail Pension Plan (RMPP) which has circa 3,503 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 year to 27 March 2016 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 29 March 2015 and 27 September
2015.
March March
2016 I 2015
% pa RMPP Post Office Section I
Inflation (RPI) 2.9 i 3.0
Inflation (CPI) 1.8 i 1.9
Discount rate (i.e. bond rate) 3.5 I 3.5
Rate of increase in Pensionable 2.8 i 2.8
salaries I
Rate of pension increases - RMPP A/B 1.8 I 1.9
Rate of pension increases - RMPP C 2.8 I 2.8
Rate of increases in deferred pensions 1.8 i 1.9
Demographic assumptions, for example mortality, remain aligned with the assumptions
used for the actuarial valuation and unchanged from those made in March 2015.
9.3 Movements in the defined benefit surplus
The movement in the RMPP defined benefit surplus during the year to 27 March 2016 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.
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Year ended Year ended
27 March 29 March
2016 2015
£m Em
Opening sectionalised RMPP net retirement bene 229 170
surplus
Current service cost (27) (25)
Curtailment costs (1) (1)
Net financing credit 8 7
Employers contributions 19 21
Actuarial gains/(losses) (5) 57
Closing RMPP net retirement benefit surplus 223 229
RMSEPP surplus 3 5
Total net retirement benefit surplus 226 234
Effect of asset ceiling (30) (29)
Closing net retirement benefit surplus 196 205
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 2015-16 service cost,
expressed as a percentage of pensionable pay is 28.5% for RMPP (March 2015 - 23%).
Payments of £17m were made in respect of RMPP future service contributions at a rate
of 17.1% (March 2015 - 17.1%) and £2m was paid in relation to 2015/16 in respect of
enhancements on redundancy in early retirement (a further £1m was paid in respect of a
balance accrued at the end of 2014/15). There has been a reduction in the surplus due
to a £10m difference between the service cost and payments made in respect of RMPP
future service contributions.
The net financing credit of £8m, 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 £5m during the year arose primarily due
to a decrease in the value of assets which resulted in an actuarial loss of £8m; this was
as a result of changes in market conditions. This actuarial loss was partially offset by an
actuarial gain on the Defined Benefit Obligation of £3m, has been caused by an ‘experience
adjustment of liabilities’ due to early leavers and lower than expected benefit increases.
The RMSEPP surplus has decreased to £3m due to actuarial losses of £3m (£2m loss on
assets, £1m loss on liabilities) offset by contributions paid of £1m.
The charge in the income statement and cash contributions for the defined contribution
scheme were £3m in the year to 27 March 2016.
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. Royal Mail took
legal advice both before and after sectionalisation. This confirmed that Post Office Limited
and Royal Mail Pic have absolute rights to the assets left over in their individual sections
after benefits have been secured if the RMPP terminates. There is no trigger for termination
in the Trust Deed but that does not mean that the RMPP cannot terminate. It would be
wound up by the courts, or the Regulator, or when the last beneficiary dies.
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Towers Watson has calculated that Post Office Limited would be able to recover £139m of
the £223m surplus in RMPP through lower contributions and the remaining £84m could
therefore be recovered through a refund together with the £3m surplus in RMSEPP. The
element of surplus that is recoverable through a refund would be subject to a 35%
withholding tax charge. Therefore the overall surplus on the balance sheet, (made up of a
£223m surplus for RMPP and £3m surplus for RMSEPP), has been reduced by £30m to
£196m. The element that is recoverable through lower contributions has resulted in a
reduction to the deferred tax balance from £30m at 29 March 2015 to £25m at 27 March
2016. This has resulted in a credit directly to equity of £5m offset by a debit of £5m
reported in the consolidated income statement.
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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 years ended 27 March 2016 and 29 March 2015.
2015-16 = =2014-15
Exceptional items £m £m
Government Grants 150 170
Restructuring costs including postmasters’ compensation (283) (301)
Impairments (136) (141)
Total operating exceptionals (269) (272)
Non-operating exceptionals:
Profit on disposal of property : -
Net Exceptional gain/ (loss) (269) (272)
10.2 Government Grants - In April 2015 the Post Office received grants totalling £150m from
the Government, (April 2014 £170m) to fund capital projects and transformation. The
larger amounts utilised in the full year to March 2016 are: £66m against postmasters’
compensation, £31m against capital spend and £53m against network transformation
and IT transformation programme costs.
10.3 Restructuring costs - £200m of restructuring costs relate to Network and Crown
Transformation. These programmes are being implemented to achieve a major change in
the network. They include the introduction of new style agency offices and seek to
improve the profitability of the Crown network. The overall figure includes £82m (broken
down in the table below) - Network Transformation and Crown Transformation
programme costs, £16m onerous property lease costs and £102m postmasters’
compensation.
Redundancy costs for the full year amount to £29m and include £16m admin (“Wave”)
severance costs, £8m Crown severance and £5m Supply Chain severance costs.
IRRELEVANT he remaining costs relate to
<naneing THE TT iifrastructure ana are row aecréasing due to the programme reaching
the next phase where most related costs are being capitalised.
£10m of exceptional costs relate to the business separation programme, costs incurred
in the current year are due to the set-up of new support services and short term support
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Network and Crown Transformation costs (other than Postmasters’ compensation) to
March 2016 were made up as follows:
Network Transformation —£m
Programme Costs 22
Investments (e.g. enabling works) 22
Fixtures and equipment, non-capital 25
Other (Legal, Communications, consultation, IT projects) 6
Total Network Transformation 75
Crown Transformation 7
Total 82
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11. Interest, Cash, Debt, Funding and Hedging
11.1 Net finance costs March 2016 £5m vs March 2015 £3m
26 March 29 March
2016 2015
Finance costs & investment income £m =m
Interest received on investments - UK = 1
Total finance income - =
Interest charged on Government borrowings (2) (1)
Other finance costs (3) (2)
Total finance costs (5) (3)
Net finance cost (5) (2)
Interest payable on the BIS Loan has increased year on year (2015/16 £2m, 2014/15
£1m) due to higher draw-down.
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
26 March 29 March
2016 2015
Net cash/debt analysis Section £m £m
Cash in the Post Office Limited network 11.3 653 708
Short term bank deposits 59 93
Money market fund investments Ed 20
Total cash and cash equivalents 712 821
Loans, repayable on demandorlessthani year 11.4 (465) (310)
Total 247 511
11.3. Cash within the Post Office Limited network (March 2016 £653m vs March 2015 £708m)
The decrease in Post Office network cash from March 2015 levels can be chiefly attributed
to the cessation of NS&I products, and associated lower holdings of both cheques and
debit card transactions.
11.4 Loans and borrowings (March 2016 £465m vs March 2015 £310m)
Total cash and cash equivalents decreased by £109m which, ceteris paribus, would have
decreased the loan by that amount. This decrease is made up of a reduction in network
cash of £55m (see above) and decrease in cash at bank and Money Market Funds of
£54m due to more efficient treasury function.
Government funding of £280m was received on April 1st 2015 which would further offset
the loan.
However both these factors were more than offset by Capital Expenditure of £(138)m
and Exceptional spend of £(276)m due to the transformational projects, so the loan
increased as outlined above. The remaining difference is working capital movements and
miscellaneous.
11.5 Loan facilities
At the year end the Post Office had external borrowings of £465m.
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12. Going concern
Post Office Limited has net cash and cash equivalents of £712m and a borrowing facility
of £950m of which £465m was drawn down at 27 March 2016.
12.1. Background
On 27 November 2013, a funding agreement was announced providing:
e Funding of £280m for 2015-16 (received 1 April 2015)
e Funding of £220m for 2016-17 (received on 1 April 2016)
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 was received on 19 March
2015.
On 28 March 2012 it was recognised that the working capital facility was no longer
deemed State Aid.
The going concern analysis is based on the recent three year plan.
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. 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 2016-17 budget and three year 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 in the past but has now been extended, as it has always been
allowed under the Working Capital Facility agreement, to include uncleared debit/credit
card payments, short term bank deposits and money market fund investments which
also meet the definition. Downside scenarios have been overlaid reflecting the lower
cash flows if the three year operating plan does not materialise. 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.
12.3. Summary conclusion
Based on the analysis, there is available borrowing headroom until March 2019. 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
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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.
Post Office Limited Funding Analysis
Table 1: March 2016
£m (cumulative apart from free cash flow) 2015-16 2016-17 2017-18 2018-19
Opening Funds (197) (406) (526) (548)
Borrowing facilities 950 950 950 950
Restriction due to level of network cash and other security (100) (100) (100) (100)
Borrowings from other sources - finance leases, bank overdraft ete
Latest plan free cashflow before assumed non NSP grant injection (359) (260) (92) 9
Non NSP grant injection per October 2013 plan 150 140 70
Closing Funds Headroom 444 324 302 3ii
Remove NSP beyond 2018 funding agreement. (60)
Adjusted Headroom pre risk 444 324 302 251
Table 2: Risks, with management actions
£m (cumulative) 2015-16 _2016-17__ 2017-18 _ 2018-19
Headroom pre risk (as above) 444 324 302 251
Risks
Income growth in 3 year plan does not materialise (20) (64) (148)
Cost savings from income shortfalls (at 50% assumed) 10 32 74
Cost savings don't materialise (29) (79) (63)
Income decline 100% faster than plan (22) (63) (121)
Cost savings from income shortfalls (at 50% assumed) 11 32 61
Headroom post risks pre management actions 444 274 160 54
Management actions 59 92 100
Sell Corporation tax losses to FRES 9 17
Reduce or postpone investment and discretionary opex 50 75 100
Headroom post risk and management actions 444 333 252 154
Table 1
This table shows the budget and plan projections for 2016-17 and beyond. It demonstrates
positive headroom throughout the plan period.
Table 2
This table sets out the impact of theoretical downside scenarios if the plan does not generate
the income streams anticipated or the anticipated cost savings do not materialise.
There are further actions that could be taken but are not required. These include the sale of
property.
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13. Property, plant and equipment and non-current assets held for sale
13.1 Net Book Values
The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed
assets at March 2016 was £53m (March 2015 £10m). All assets are impaired on
acquisition except land and buildings and POMS assets. Movements during the year
were as follows:
Land Vehicles,
and plant Intangible Total
buildings and fixtures __ fixed assets £m
Movement in NBV —£m £m £m
NBV at 29 March 2015 10 - - 10
Add capital expenditure 1 41 137 179
Less disposals - - - -
Less depreciation (1) - - (1)
Less impairment (1) (41) (93) (135)
NBV at 29 March 2016 9 : 44 53
Intangible fixed assets includes £44m goodwill i
year of the general insurance business from the; IRRELEVANT
13.2 Capital expenditure
The table below summarises the larger capital items by category:
£m
Hawk insurance business 44
EUC programmes 39
IT Risk & Resilience 29
Network Transformation 20
Front Office IT 17
IT Networks 6
Digital 4
Separation 3
Other 17
Total 179
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14. Goodwill, investments and intangibles
14.1 Investments in joint ventures and associates
27 March 29 March
2016 2015
£m Em
Investment in joint ventures 67 67
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15. Working capital
15.1 Inventories (March 2016 £6m vs March 2015 £6m)
27 March 29 March
2016 2015
£m —m
Scratchcards 4
Retail 2
Total
15.1.1 Inventory written off
The provision for stock write downs and discrepancies is £0.6m (March 2015 £0.5m).
Shrinkage and obsolete stock written off at year end was £0.4m.
15.2. Trade receivables (Current)
Receivables are tabulated below, followed by a detailed explanation of the various
balances.
Receivables
27 March 29 March
2016 2015
Section £m £m
Trade receivables 15.2.1 93 101
Client receivables 15.2.2 229 162
Prepayments and accrued
income 15.2.3 73 106
Other receivables 15.2.4 14 28
Total 409 397
15.2.1 Trade receivables: Current (due within one year)
Trade receivables
27 March 29 March
2016 2015
ee Emo Em
Sales ledger 35 22
Homephone debtors 8 6
Postmaster debt 5 7
Uncleared debit, credit cards 35 53
8 12
Other 2 1
Total 93 101
The largest decrease relates to uncleared debit and credit card receivables which have
been reclassified from Cash into receivables for both the current and prior years. This
balance has decreased on account of the cessation of NS&I products.
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15.2.2
A profile of the sales ledger within trade
Trade receivables
receivables is as follows:
27 March 29 March
2016 2015
I IRRELEVANT I 18 8
“Bill payment partners 7 4
Others 10 10
Total 35 22
Ageing of Trade receivables:
Debtors over 60 days overdue: March 2016 Enil (March 2015: Enil).
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.
Client receivables
Analysis of client balances at year end is as follows:
Client receivables
27 March 29 March
2016 2015
£m —£m
ATM (Bank of Ireland) 128 100
Card Account (JP
Morgan) 62 28
Partner banks 32 25
Others 7 9
Total 229 162
The main increases year on year are within Card account and ATM balances. The
increase in ATMs is due to period end coinciding with Easter weekend, increasing
banking activity. Card account increased as customers were able to claim a week’s
withdrawals in advance due to the bank holiday.
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15.2.3 Prepayments and accrued income at 27 March 2016 total £74m (March 2015 £106m)
Prepayments and accrued income
27 March 29 March
2016 2015
£m £m
Accrued income 58 87
Prepayments 15 19
Total 73 106
Prepayments of £15m represent the remainder of the £74m total. The prepayment of
Also at March 2016 there is £4m of property cost prepayments, (March 2015 £5m) and
other prepayments of £3m (March 2015 £3m).
15.2.4 Other receivables at 27 March 2016 total £14m (March 2015 £28m)
IRRELEVANT
I eeetevanr! +) the £3.8m debtor for NI paid in respect of agency offices transferring to VAT-based :
‘-vornracts was received, and the £7m "Ultra" debtor was released and offsets an
equivalent release in payables.
Remaining at March 2016 is: tax debtor for losses to be sold to FRES £10m and VAT
recoverable £4m.
15.2.5 Non-current receivables at
This represents prepayments in respect of telephony contracts with Fujitsu.
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15.3. Payables: amounts due within one year
27 March 29 March
A summary of payables categories is: 2016 2015
Section £m Em
Trade payables 15.3.1 51 30
Accruals and deferred income 15.3.1 161 160
Client payables 15.3.2 375 454
Advance customer payments 39 29
Capital payables 15.3.1 16 25
Social security 8 9
Government grant deferred income
(NSP) 15.3.4 - -
Other payables 3 11
Total 653 718
15.3.1 Trade payables and accruals
Trade payables and general,
capital accruals
27 March 29 March
2016 2015
£m —m
Trade payables 51 30
Accruals, GRNI 86 89
Postmaster, employee pay
balances 53 53
Productivity, bonus schemes 15 12
Others 7 6
Accruals and deferred income 161 160
Capital accruals 16 25
Total Trade payables and
accruals 228 215
The increase in Trade payables is driven by an adjustment for uncleared BACS
payments of £14m which is transferred from Client payables (March 15 £22m, not
transferred from Client).
The remaining Trade payables amount comprises of supplier invoices awaiting
payment, the largest of which was Fujitsu £4m (March 15 £1m).
Postmaster and employee pay balances are stable and remain at £53m.
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General expense accruals, GRNI (goods received, not invoiced) and capital accruals
typically reflects project throughput of the business. Always a significant amount,
GRNI accounts for £36m (March 15 £37m) of the total. Finally the reduction in capital
accruals reflects the slower pace of capital additions in 15/16.
~The remainder of the BACS reduction is due to £14m of the BACS adjustment being included
in trade creditors at the half year and a general reduction in Client Payables.
The decrease in the DVLA balance represents the decline in payments to the DVLA in branch.
Customers are increasingly moving towards purchasing directly from the DVLA online.
The increase in the Santander balance reflects Easter customer transactions, in particular
business banking.
15.3.3 Advanced customer payments
This category also includes specific, non-client, creditors as follows:
Advanced customer payments
27 March 29 March
2016 2015
£m Em
Advanced customer payments 7 1
Postal order liability 11 12
Drop and Go 1 1
Gamma 4
Telephony credit balances 4 4
Homephone line rental advance
payments 10 7
Other 2 -
Total 39 29
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The largest movement in advanced customer payments (£5m) relates to an increase in Bill
payments driven by the timing of invoicing to customers and correction of Transcash
invoices. Additionally Homephone Line rental advance payments have increased by £3m due
to higher customer numbers, price increases and re-phasing of billing.
The Postal order liability reflects a creditor for uncashed Postal orders. Postal orders are
valid for 6 months but the liability has been retained at 12 months reflecting that they would
normally be honoured up to this date.
15.4 Payables: amounts due after one year
Payables due after one
year
27 March 29 March
2016 2015
£m —m
--Rent-free incentives 4 2
“IRRELEVANT I 0 _
25 30
The rent free incentive creditor relates to buildings with an initial rent free period where the
cost are over the life of the lease is spread evenly. Over half of the balance relates to
Finsbury Dials (£1.6m).
i IRRELEVANT deferred income concludes in financial year 2022-23 and is recognised in
‘rine witrarTragréed amortisation schedule. The final instalment of £2m was received early in
ee
IRRELEVANT
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16. Provisions
Provisions (March 2016: £163m vs March 2015: £150m)
Crown
Conversion Network
Vacant/ Transformation Other
Onerous Em —m
leases Total
ém ém
At 29 March 2015 7 127 16 150
Transferred 1 1
Charged/ (released) in
operating exceptional items 16 102 33 151
Charged as discontinued
operation 3 3
Charged/ (released) in
operating costs 4 4
Utilisation (5) (95) (42) (142)
At 27 March 2016 18 134 15 167
Disclosed as: Current 151
Disclosed as: Non-current 16
The Network Transformation provision relates to compensation payments due to
postmasters' who have signed up to the new contract terms or for a termination payment.
However due to an error being identified in the calculation the opening provision was
ponactatad.ta £1.27 {faemertt LANE wnnnnnnnnnnnnnnnnnnnsnnnnnnnai
IRRELEVANT I
POL’s mobile product was treated as a discontinued “operation and z a 3 provision in respect
of supplier termination and project closure costs was charged exceptionally at £3m.
Finally the total for Other provisions includes £1m for a legacy dilapidations liability
(March 2015: £1m). The main reason for the balance being down on opening is due to
the provision for DWP historical overpayment of £11m being settled in full in the year.
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17. Litigation and Claims- Potential Claims regarding Horizon
Background
17.1 Post Office Ltd has received various claims from postmasters (PMs) alleging defects in
the Horizon system and Post Office’s internal processes.
17.2 Following discussions with James Arbuthnot MP and the “Justice for Subpostmasters
Alliance” (JFSA), in July 2012 independent investigator Second Sight Support Services
Ltd (Second Sight) was appointed to carry out a review of these claims.
17.3 On 8 July 2013, Second Sight published a Report finding shortcomings in Post Office’s
internal training and support to PMs 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 launched a
Complaint Review and Mediation Scheme aimed at understanding and resolving
individual complaints made about Horizon.
Mediation Scheme
17.5 The Scheme received 150 applications, 136 of which were investigated in detail (the
remainder being either ineligible or swiftly resolved). The cases have now all
progressed through the Scheme, which was formally closed on 31 March 2016.
Political Activity
17.6 The Scheme and allegations concerning Horizon have been the subject of
Parliamentary debate, most notably the Westminster Hall Debate on 17 December
2014 and BIS Select Committee hearing on 3 February 2015.
17.7 There has been no recent significant political activity. Post Office teams continue to
work closely with BIS officials and ministers to keep them appraised of developments.
Legal Activity
17.8 A Claim Form in Bates & 90 Others v. Post Office Limited, Claim No. HQ16X01238,
was issued the in the High Court, Queen’s Bench Division on 11 April 2016. The first
named Claimant is Alan Bates of the JFSA.
17.9 Post Office is not yet required to take any action in response - the Claim Form has not
been served on Post Office, and no Particulars of Claim have been provided. The
Claimants have until 11 August 2016 to serve the Claim Form.
17.10 The Claim Form sets out the name of the 91 Claimants and brief details of the claims.
Beyond asserting multiple legal causes of action and that the Claimants “expect to
recover more than £200,000”, very little information has been provided about the:
- factual basis for the claims;
purported commonality between the claimants; or
damages sought and how they are to be quantified.
17.11 Further detail of the claims have been provided in the “Letter of Claim”, which Post
Office received on 28 April 2016. The legal team are currently reviewing the
document.
17.12 The Claimants’ solicitors (Freeths LLP) have offered to mediate the disputes. Post
Office is reserving its positon on this until it better understands the claim.
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17.13 Post Office agents may seek to rely on the Bates action to dispute repayment of
shortfalls in branch cash holdings, e.g. in defence to BAU debt recovery action.
Media Activity
17.14 The Scheme and allegations concerning Horizon have been the subject of significant
media coverage, most notably the BBC Panorama programme “Trouble at the Post
Office” broadcast on 17 August 2015.
17.15 There has been no recent significant media activity. Post Office teams continue to
manage media and communications activity.
Regulatory Activit
17.16 Post Office is engaging with the Criminal Cases Review Commission (CCRC) in relation
to 24 applications made by former PMs seeking a review of their convictions. The
CCRC can refer a case to the Court of Appeal if its review identifies new evidence or
legal argument which gives rise to a “real possibility” that the conviction would be
overturned on appeal.
17.17 Post Office’s Legal team is liaising with the CCRC so as to comply with its statutory
obligations under the Criminal Appeals Act 1995, and continues to provide very
substantial documentation to the CCRC for review. Although the CCRC has said it is
nearing the end of its investigations, there is no estimated date for completion.
17.18 Post Office also received 49 simultaneous “Data Subject Access Requests” (DSARs).
Post Office has substantively responded to all these DSARs and concluded this work
stream. DSAR applicants can formally complain to the Information Commissioner's
Office if they are not satisfied with the response they receive. To date, no such
formal complaint has been made.
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18. Taxation
18.1 Income statement
A breakdown of the tax credit for the year is shown below:
2016 2015
£m —£m
Corporation tax credit for year (9) (10)
Tax under provided in previous years : (7)
Current tax (9) (17)
Deferred tax credit relating to the origin and reversal of tempora
differences 2 (9)
Effect of change in tax rate 3 :
Income tax credit reported in the consolidated income statement (4) (26)
A deferred tax credit of £25m was recognised in the year to March 2015 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 year to March 2016 the proportion of the surplus recoverable
through future contributions decreased and therefore a deferred tax debit of £5m has
been recognised to account for the deferred tax effect of this.
The corporation tax credit for the period of £9m represents the losses that we expect
to surrender to FRES through consortium relief for the period.
POL 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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19. Impairment
Post Office Limited (POL) was loss-making at its inception in 2001 and has impaired the
majority of non-current assets in all years since 2002/3. POL has continued to impair
assets on the basis of operating losses (excluding Network Subsidy Payment), net cash
outflows and the reliance on Government support and funding.
IAS 36 requires annual impairment tests where there is any indicator of impairment. The
principle is that the assets are carried at no more than their recoverable amount (the
higher of the amount which can be realised through the asset’s use or sale.) An asset's
recoverable amount represents the greatest value to the business in terms of the cash
flows that it can generate.
As noted above, since the inception of POL some assets have been impaired as a
combination of ongoing losses, cash outflows, and reliance on the government have
meant that value in use is Enil i.e. that the assets are not generating cash flows, and fair
value less costs to sell are £nil as the assets are not considered to be readily saleable due
to their use being specific to POL (for example Horizon system and cash collection
vehicles).
This approach is consistent with IAS 36 which includes a number of indications of
impairments including forecasted operating losses or net cash outflows as well as any
indicators that are relevant to specific business circumstances.
Asset categories are considered separately below:
19.1 Property, plant and equipment excluding freehold property, long leasehold property and
land
These assets have a relatively short useful life (between 2 and 15 years) and are impaired
in full.
19.2 Freehold property, long leasehold property and land
These assets have a long useful life and have a clear market value and could be sold,
these assets are not impaired but are instead depreciated on a straight line basis over
their useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the
estimated remaining useful life
19.3 Intangible assets with a finite useful life
In POL all of these assets are software, the have a short useful life of between 1 and 6
years and are impaired to zero.
19.4 Intangible assets arising on acquisition or with an indefinite useful life
These assets are considered for impairment individually but are not automatically
impaired. Goodwill is considered separately below.
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19.5 Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the
consideration transferred and the amount recognised for non-controlling interests, and
any previous interest held, over the net identifiable assets acquired and liabilities
assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment
losses. Goodwill is tested for impairment annually as well as when there are any
Indicators. Of IMPAIMENG. nee ee nena
IRRELEVANT
19.6 Non-current assets within subsidiaries
Subsidiaries are considered separate cash generating units and the need for impairment
of assets is considered within the subsidiary and is dependent on whether indicators of
impairment exist within that subsidiary. At a Group level the impairment is adjusted on
consolidation to be in line with Group policy.
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&. Annual Report & Accounts
Building a better
~ working world
Post Office Board-24/05/16 219 of 557
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working world
Private and confidential 12 May 2016
Audit and Risk Committee
Post Office Limited
20 Finsbury Street
London
EC2Y 9AQ
Dear Members of the Audit and Risk Committee
Audit Results Report
We are pleased to present our Audit Results Report for the forthcoming meeting of the Audit
and Risk Committee. This report summarises our preliminary audit conclusion in relation to
Post Office Limited’s financial position and results of operations for the 52 week period ended
27 March 2016 (“the period’).
The audit is designed to express an opinion on the Post Office Limited (“Post Office”) Group
and Company financial statements for the period ended 27 March 2016 and address current
statutory and regulatory requirements. This report contains our findings related to the areas of
audit emphasis, our views on Post Office’s accounting policies and judgments and material
internal control findings.
This report also contains our preliminary summary of audit differences, communications
regarding our independence and a summary of communications we are required to make to
you.
This report is intended solely for the information and use of the Audit and Risk Committee,
Board of Directors and Management. It is not intended to be and should not be used by anyone
other than these specified parties.
We welcome the opportunity to discuss the contents of this report with you at the Audit and
Risk Committee meeting scheduled on 19 May 2016.
Yours faithfully
Peter Mclver
Engagement Partner
For and on behalf of Ernst & Young LLP
-. CO NR . Cs
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Contents
Overview
Status of the audit
Significant accounting and auditing matters
Summary of audit differences
Control themes and observations
Appendices
A-— Independence report
B — Management representation letter
C — Required communication to those charged with governance
ts Report
Office Board:
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Overview
This overview is intended for use as an outline agenda for our discussion at the Audit and Risk Committee meeting to
be held on 19 May 2016 and includes a summary of our principal findings. Further details are contained within the main
body of this report.
We conducted our audit for the 52 week period ending 27 March 2016 in accordance with International Standards on
Auditing (UK and Ireland) in order fo provide reasonable assurance that your financial statements are free of material
misstatement, as set out in our engagement letter dated 22 January 2016.
Status of the audit (page 10)
A status of our work is included on page 10. We will provide the Audit and Risk Committee with a verbal update on the
progress and conclusion of our audit at its meeting on 19 May 2016.
Materiality
We have recalculated our materiality based on 1% of actual revenue as per draft Group Consolidated Financial
Statements. We did not identify significant changes compared to the materiality communicated to you in our Audit
Planning Report dated 17 March 2016.
The overall materiality used remained at £10.8m. Our performance materiality was set at 50% of overall materiality
and was £5.4m. Our reporting threshold for audit differences remained at £542k.
Scope update
There were no changes in our audit scope compared fo that which was communicated in our Audit Planning Report
dated 17 March 2016. As explained in our Audit Quality Enhancements paper dated 19 April 2016, we re-considered
our audit approach in response to the identified significant risks.
Significant accounting and auditing matters (page 12)
We focused on accounting and auditing matters identified as significant for 2016 audit. We summarised the key areas of
focus and preliminary findings from our audit procedures performed as of 12 May 2016 below.
Significant risks (page 13)
» Completeness of Postmasters Compensation Provision (£134m): As a result of our audit procedures, we
identified an understatement of Postmasters Compensation provision by £1.0m. This understatement relates to 56
Post Office branches which are currently “being engaged”, based on the average compensation of £17,396 per
branch being forced to leave the network. This judgmental adjustment has been recorded by Management. No other
significant differences were identified
» Revenue recognition across diverse range of revenue streams (£1,111m): As a result of our audit procedures,
we are satisfied that revenue for the group is materially correct and has been recognised in compliance with group
policy and IFRS.
» Classification of exceptional items relating to Transformation (£283m) and utilisation of Government Grant
{£150m): As part of our audit procedures, we concurred with Management's classification of exceptional items being
consistent with group policy and IFRS. As part of our test of details we identified the following judgmental
differences:
~ an understatement of a provision related to the IT Support services provided by Royal Mail Group to Post Office post
separation under Master Services Agreement. The total amount of understatement is £0.8m. This adjustment has
now been recorded by Management;
- an overstatement of accrual balances related to Network Transformation: Project Enabling Works (£2.7m) older
than 12 months and Operational Business Change OBC”) (£1.2m) older than 6 months. Based on previous
experience and historical data we would have expected these balances are utilised within respective period,
therefore proposed to reverse these accruals. These have both been adjusted by Management.
®» Risk of management override around estimates and judgments: We have performed various procedures to
address the risk of fraud and management override throughout our audit focussing on revenue recognition,
completeness of Postmasters’ compensation provision, areas susceptible to judgements and estimates and unusual
transactions. No issues were identified.
Office Linite
adit Results Rewort
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Other areas of audit focus (page 22)
Horizon Subpostmasters Claim: As part of our discussion with the Group Chief Financial Officer and the Group
Legal Counsel we understand that Post Office Limited have received a formal Letter of Claim from Freeths
Solicitors on behalf of 91 applicants on 28 April 2016. We have received the copy of this letter. It contains a number
of allegations made against Post Office. We understand that there is no quantification of the claim for damages at
this point of time. At the date of this report Management are in the process of reviewing this letter and will prepare
the necessary response and the litigation strategy. There is no provision recognised as at 27 March 2016 for this
claim. The financial statements now include a generic contingent liability note regarding receipt of such claims,
stating no material impact is expected. We will update our assessment as part of subsequent events review
procedures performed up to our sign-off date.
AJ
AJ
Mm
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—I
IRRELEVANT
Pension valuation and accounting (net surplus £196m): As part of our audit procedures, we are satisfied with
Management's assumptions used for pension liability valuation, being within the acceptable range. At the date of
writing this report we are yet to finalise our audit procedures in relation to pension plan assets valuation. in
February 2016, Post Office commenced a formal consultation with active members (and their representatives) of
the Post Office section of the Royal Mail Pension Plan (“RMPP”) with regards to the potential closure of the RMPP
to future accrual with effect from 1 September 2016. The closure is subject to the outcome of the pensions
consultation and no final decision will be made until the formal consultation is completed. The proposed closure will
also require consent of the Trustee of the RMPP. This closure, if it occurs, could affect the pension average pay in
the 2016/17 financial year.
IT and SAP CFS (Core Finance System): We engaged our EY [TRA team to assist us in testing of IT General
controls over in-scope IT applications for 2016 audit. This includes HNGX, POLGAP, SAP CFS and SAP HRP. We
identified user access issues for POLSAP and SAP CFS. We instructed Management to perform alternative
procedures to validate whether access maintained by the users of these two applications was appropriate
throughout 2015/16 year. As at the date of this report this analysis is yet to be finalised.
Supply Chain Restructuring (Project Iris): We discussed with the Supply Chain Director and the Network &
Sales Finance Director the timing of the Supply Chain Restructuring project. Post Office Limited Management is
preparing a detailed restructuring plan and consultation which is to be completed by 19 May 2017. We reviewed the
Project iris timetable and the Board of Directors minutes. Based on our audit procedures performed we are satisfied
with Management's conclusion that there is no restructuring provision obligation as at 27 March 2046.
Our detailed comments and the results of our audit procedures on these items are included on pages 22 to 25.
ard 24,
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Report & Acy
counts
Overview (cont'd)
Summary of audit differences (page 27)
As at the date of this report, we have not identified any unadjusted audit differences above our reporting threshold of £542k
for the year ended 27 March 2016. We summarised the audit adjustments identified as part of our audit which have been
now recorded by Management on page 27.
Control themes and observations (page 29)
Our preliminary control observations and recommendations have been documented on page 29. These are currently being
discussed with Management. We will be summarising our final observations in Management letter as there continues to be
opportunities for further consistency and efficiency of processes and controls across the business.
Independence (page 32)
We consider ourselves to remain independent and objective. Please refer to our independence report in Appendix A.
Audit Opinion
Subject to finalisation of our audit work, we expect to issue unmodified audit opinion.
/
_ CD 2 oD CC
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rt & Accounts
Status of the audit —
The audit is well progressed with our procedures now primarily focussed on the audit of the financial statements and
certain balances. Our audit work in respect of the opinion on Post Office Limited consolidated financial statements is
substantially complete. The following items relating to the completion of our audit procedures were outstanding at
the date of drafting this report. We will provide the Committee with a verbal update at its meeting on 19 May 2016.
fem Actions to resolve __ Responsibility
+ Review of the final version of ‘front end’ of the annual report including review of
aspects of the Directors’ Remuneration Report, Chairman's and CEO's
statements and completion procedures thereon;
+ Review of directors’ emoluments disclosures once final bonus outturns
confirmed;
Annual report and Management and
accounts + Review of the final version of ‘back half including comments on financial EY
statements and disclosure notes; and
+ Detailed review of subsequent events;
+ Financial statements to be approved by Management and the Audit Report to be
signed by EY.
Postmasters’ + Finalisation of audit documentation upon receipt of remaining supporting Management and
Compensation Provision documentation as part of our sample selected for testing. EY
Exceptional items Finalisation of audit documentation upon receipt of remaining supporting Management and
documentation as part of our sample selected for testing. EY
Pension plan assets + Follow up remaining pension plan assets confirmations; Management and
confirmations + Review and follow up the differences with confirmations received (if any). EY
+ Finalisation of alternative procedures to support the appropriateness of user
IT Audit access for SAP CFS and POLSAP; Management and
+ EY to review analysis prepared by Management.
+ Follow up on comments provided to date;
Corporate tax + Review of final corporation tax supporting files and corporate tax financial Management and
statement disclosures.
To be completed through to the date of our audit opinion on the Group and
Subsequent events Company financial statements (matters to be updated include: enquiries of Management and
procedures Management, review of latest management accounts, unrecorded liabilities testing EY
and board minute review to date of signing).
To be signed/ dated cont ith our audit opinion on the G a latagement and
‘on To be Signed/ dated contemporaneous with our audit opinion on the Group an ‘Audit committes
Letter of representation Co pany financial statements, which is anticipated to be in June/July 2016.
+ Finalisation of audit documentation upon receipt of remaining supporting
documentation as part of our sample selected for testing; Management and
Journal entries testing . : agement al
Follow up on queries to Company in relation to journal entties selected for EY
testing.
+ Follow up on final signed deliverables from PwC FRES component audit team;
FRES - Interoffice + Review of PwC component team’s working papers for FRES audit. ey
reporting deliverables
Goodwill impairment Fialistion of EY review of Management's assumptions for analysis of CGU's Management and
analysis identification and impairment of goodwill. EY
Going concem EY to finalise the review the Management's going concem assessment Management and
assessment EY
Pest Oifoe
fice Board
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counts
Significant accounting and auditing matiers
Introduction
Where there are significant transactions or matters arising during the year we have performed our audit
procedures on these items as they arise. Our year end report only deals with new and open items. We have
summarised below the key financial reporting matters that we have previously considered and reported to you
during FY2016.
Accounting and auditing matters subject to significant judgements and
estimates
Management is required to disclose significant estimates and judgements in the financial statements. The
following outlines the basis for our assessment of the level of subjectivity involved in accounting matters reported
to you
Level of subjectivity
This rating applies only to significant estimates and indicates the level of subjectivity in the estimate as well as the
reliability of the underlying data used fo develop the estimate.
Description
Estimate involves significant judgement and is made with litte verifiable historical experience,
current trend information or market and industry comparative information.
Medium Estimate still involves some judgement and is made with verifiable historical experience.
current trend information, or market industry comparative information.
Low Estimate involves limited judgement and is made with verifiable historical experience, current
trend information, or market industry comparative information.
The following ‘dashboard’ summarises the significant accounting and auditing matters set out in this report. If
seeks to provide the Audit Committee with an overview of the subjectivity involved based on the above criteria.
The detail of each accounting matter is set out after the dashboard.
Level of
Subjectivity
Areas of audit emphasis: 2016
Completeness of Postmasters Compensation Provision* (page 13) High
Revenue recognition across diverse range of revenue streams" (page 14) Medium
Classification of exceptional items relating to Transformation and utilisation of High
Government Grant" (page 15)
Impairment of fixed assets and intangible assets, including goodwill (page 19) Medium
Pension valuation (page 22) Medium
* identified as a significant risk under International Standards on Auditing and communicated in our Audit Planning Report in March 2016
is Report
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& Annual Report & A
coounts
Significant accounting and auditing matiers
(con d)
Significant risks
in our Audit Planning Report we identified four areas of audit risk that we deemed to be significant in the context of
our audit of Post Office Limited. Auditing standards define significant risks as those with a high likelihood of
occurrence and, if they were fo occur, could result in a material misstatement of the consolidated financial
statements. These significant risks are discussed below.
1. Completeness of Postmasters Compensation Provision of £133m (2015: £127m)
in August 2015 Management of Post Office Limited (“POL") identified that the Provision for Postmasters’
Compensation had not been fully recognised in the financial statements for the half year ended 28 September 2014
and for the year ended 29 March 2015. The total amount of restatement recognised was £87 million and £67
million for the year ended 29 March 2015 and the half year ended 28 September 2014 respectively. We concurred
with the accounting treatment of prior year adjustment and the amount of restatement recognised.
We have assessed the completeness of Postmasters Compensation Provision as a fraud risk (as defined by
auditing standards) and thus as a significant risk (as fraud risks are also significant risks). Our foous has been
specifically on the completeness of the provision recorded as at 27 March 2016. As part of our audit procedures we
noted that Management recorded a £123m additional charge, which was offset by £95m payments made during
the year and a release of provision totalling £21m (as explained below). The net provision now stands at £134m.
In order to address this risk we performed our planned audit procedures as follows
To ensure that every branch has been accounted for and that the Postmasters’ compensation provision is
complete, we have performed an independent reconciliation of 100% of the branch population. This involved
checking the status of each of the 12,471 branches at 27 March 2016 and understanding the journey they have
made since the half year. We compared this to Management's results and used this to identify anomalies and
challenge the provision analysis provided by Management. We have satisfied ourselves that the movement in
the journey of the branches is reasonable.
To ensure that every branch in the Post Office Network is classified correctly, we have independently
categorised each branch into their categories into a specific type of journey at 27 March 2016, based on their
individual attributes and challenged Management's assessment by comparing results. No exceptions were
identified.
To vouch the attributes and classification of the branches in the network we selected a sample of 594 branches
and checked supporting documentation to check that where a provision is applicable, it has been recognised
in the correct period by obtaining the signed contracts and checking that the dates of the signed agreements.
We checked that branches selected for testing are not duplicated in any other category. Where we identified
unusual items or categories, these were communicated to Management and adjusted where necessary.
is Report 3
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Significant accounting and auditing matiers
(con d)
14. Completeness of Postmasters Compensation Provision of £134m (2015: £127m)
(cont'd)
To check the validity and accuracy of POL’s records we selected a sample of 50 Conditional Resignation Pack
(CRP) contracts and checked dates for correct cut off and sign off. We also traced the contracted amounts of
these CRPs per POL’s records to POL's cash utilisation reconciliation and bank statements, showing the
amount being settled post year end.
To further gain assurance on the completeness of the exceptional items charge we have challenged
Management's charge by performing a reasonableness test on each category of the Postmasters compensation
elements by comparing costs incurred to date against budgeted costs and estimated costs to complete for the
various programmes. This involved understanding the number of open projects and how the estimated costs to
complete are computed. At the date of this report this work is still in progress.
We have had held discussions with the Director of Network (Sharon Bull) and other senior non finance members
of the organisation to improve our knowledge and understanding of developments that could impact the
Postmaster compensation provision and the progress the transformation is making against its planned targets,
this enabled us to corroborate our testing results and Management explanations.
We have performed an unrecorded liabilities test on 100% of the subsequent cash payments to Postmasters
made post year end (for April 2016). This was done by checking that ali payments to Postmasters made post
year end are included in the provision at year end and we are now independently sampling 25 selected
payments for May and June months post year end to actual bank statements. At the date of this report this work
is still in progress.
We have not identified any material differences as part of our test, with the exception of the following
As a result of our audit procedures, we identified an understatement of the charge for Postmasters
Compensation provision of £1.0m. This understatement relates to a group 56 Post Office branches identified by
Management as currently “being engaged”. Following discussions with Management we understood these
branched are likely to result in compensation once engagement concludes and therefore should be provided for
as at 27 March 2016. We determined the £1.0m balance based on the average compensation of £17,396 per
branch included within Fixed Pay Compensation (FPC). The FPC branches are those branches which had not
confirmed to POL that they were to convert nor leave the Network and so were being forced out of the Network
by POL. This judgemental adjustment has now been recorded by Management. No other significant differences
were identified and this has been corrected by Management and is included in the provision of £134m.
As part of our audit procedures, we identified that in the second half of the year following a detailed analysis and
new information received, Management released part of the provision totalling £21m.
» This represents Management's best estimate of the release to account for Post Office branches now unlikely to
convert. These branches were advertised as leavers in the previous period and the Post Office has now not been
able fo find a replacement. The Postmaster’s resignation obligation is conditional on Post Office finding a
replacement. This detailed analysis was performed by Management and resulted in 501 branches identified as
being unlikely to convert.
» This is in tine with Management's expectation as the original programme was set out to transform up to 8,000
branches (non-community and non-pilot branches), which has been subsequently revised down to 7,500
branches due to Management's expectation that they will not be able to find a replacement for 500 branches.
Management have put together a task force for the first half of FY2017 to further assist in finding replacements
for these branches. At this stage, Management has predicted that it would sensible to reduce the provision for
leavers payments by around 250 leavers, even considering a high success of the task force, management
expects there to still be at least 250 unplaced branches.
» We acknowledge that this is an area of judgement and it illustrates the difficulty to assess this Postmasters’
Compensation Provision. We recommend that Management performs regular review of the assumptions applied
and revise accordingly when new information become available. For the purposes of 2016 audit we concurred
with Management's assumptions to assess the amount of provision release. We will update our testing of the
reasonableness of this assumption as part of subsequent events procedures.
is Report i”
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Significant accounting and auditing matters
(contd)
2. Revenue recognition across diverse range of revenue streams (£1,171m)
The Company continues to sell a large variety of products/services across a number of revenue streams. 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 defined in the specific underlying contracts.
As detailed in our planning board report, the main risk associated with the diverse range of revenue streams is
ensuring the correct contractual terms are being applied to the revenue lines. We also note that reward and
incentive schemes based on achieving profit targets may place undue pressure on Management to achieve
revenue forecasts. We have therefore identified revenue recognition and management override as a significant
and fraud risks both of which impact our revenue testing.
The main focus of our testing to address the risk of revenue recognition is summarised as follows:
We performed system walkthroughs over POL’s revenue lines and also performed detailed test of controls
work on those revenue fines, this testing involved checking correct contractual rates and volumes data in their
calculations, No issue identified and we have taken a controls-based approach to all revenue lines
w
We performed detailed testing on over 19 key customers giving us a coverage totalling 95% of the group
revenue. Our detailed tests included checking that revenue rates and commissions for each revenue line is
being appropriately applied in accordance with the terms of the relevant sales contracts. Further we checked
all revenue transaction with these key customers back to invoice and cash receipts.
Where a revenue estimate is made for a revenue line for a month prior to actual sales volumes and billing
reports being available, we have checked invoices subsequently posted in order to check that adjustments
were made for the estimated revenue figure to reflect the actual sales for all periods tested.
Our audit procedures also considered the accounting treatment for significant products or revenue streams
where applicable by reviewing all new significant revenue contracts and any changes to existing contracts with
customers. We did not identify any exceptions in relation to Management's application of its revenue
recognition policy.
To ensure that revenue has been included in the correct period, in addition to the procedures above, we have
performed detailed cut-off procedures over revenue postings before and after period end, and checked that
the amounts recognised as revenue are appropriate, and that where appropriate they have been correctly
recognised in trade debtors, accrued revenue or deferred revenue in the appropriate period.
We also examined the fluctuations of revenue against budget and prior year by corroborating variances to the
relevant evidence obtained through our other testing procedures. In addition, where appropriate we have
corroborated Management’s explanations for movements using our knowledge of developments in the
industry and business.
Post Office Manager
_..and_ comprise: IRRELEVANT
I IRRELEVANT
Based on the procedures performed, we conclude that revenue, accrued income and deferred income balances.
for the FY16 financial year are appropriately stated.
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant
Post Office is executing a Transformation across its network in order to modernise it as part of the overall
strategy to make the Post Office competitive for the future. This one-off programme 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.
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3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
in addition, the Department of Business, Innovation & Skills (‘BIS’) provides a government grant to POL to
subsidise network transformation expenditure, agents compensation and related capital expenditure. POL offsets
this government grant against the related expenses in the exceptionals section of their Income Statement, in line
with [AS 20 Government Grants.
Please refer to the table below for the details on exceptional items recorded for 2016 year:
3.1 Network Transformation (£75m) and Crown Transformation costs (23m)
The Network Transformation and Crown Transformation costs are attributable to the modemisation of Post
Office’s existing branches as part of the transformation programme.
The network transformation has reached approximately 75% of completion, tracking in line with budget
Management note that the costs of network and crown transformation are exceptional in nature given that a
branch modernisation programme of this scale has not been carried out before and it is not treated as business
as usual within the Post Office. We agree with Management's conclusion that this transformation is significant in
nature, and an one off event, subsidised by the government grant (also an exceptional item) and therefore is
appropriately presented on the face of the income staternent to allow a better understanding of financial
performance in the year.
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Significant accounting and auditing matiers
(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.1 Network Transformation (£75m) and Crown Transformation costs (23m) (cont'd)
Substantive audit procedures performed:
in additions to discussions held with Management as part of our audit procedures we have also had held
ssions with the Director of Nefwork (Sharon Bull} and other senior non finance members of the
organisation to improve our knowledge and understanding of developments that could impact the both the
Network and Crown transformation and understand how it is tracking fe plan. This has enabled us to
corroborate our testing results and Management explanations.
We selected a sample of 57 transactions giving us a coverage of 49% for Network Transformation cost in the
year and we tested ov: 0% of the Crown transformation costs. Our tests involved obtaining the details and
e of the costs = ihe overall strategy of the programme and we e
transaction to supporting documentation such as invoices and project approvals to validate that they
directly related to transformation costs and not related to routine expenses related to the normal course of the
business.
As a result of our audit procedures, we initially identified two judgemental adjustments relating to the
overstatement of accrual balances with Network Transformation Exceptional items, relating to Project
Enabling Works (£2.7m) and Operational Business Change (OBC) (£1.2m). We identified that the Project
Enabling Works accruals were older than 12 months, these costs relate to costs incurred by Postmasters that
to be reimbursed by POL. For the OBC accrual we hav ‘ified the costs relating to accruals older than.
nths, these accruals are for works that POL have placed with suppliers for equipment services, which we
Sm
would expect fo have been settled. These have both been adjusted by Management now.
Management's overall treatment is consistent with the approach followed in the prior year and the basis on which
the government grant, which partially funds the Post Office Transformation spend, was agreed.
3.2 Agents Compensation expense (£102m)
Postmasters compensation charge continues to be significant in the year. The postmasters continued to be
incentivised and compensated for ensuring their branches take part in the Network Transformation programme
We coordinated our testing approach with the audit procedures we performed to address identified significant risk
in relation to completeness of Postmasters’ compensation provision. Please refer to respective section on page
3.3 Redundancy costs (£29m)
Redundancy costs largely related to the Crown Transformation programme and the redundancy of staff as part of
cost saving initiatives and as such are treated as exceptional.
We reviewed the respective signed conditional resignation notices given to agents and vouched a sample of 17
items to termination payments to notices submitted and concluded the cost is appropriate. We have also obtained
the breakdown of the redundancy plans and checked corroborated the charge against Management's formal
plans.
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(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.4 Separation (211m)
Separation costs comprise of costs incurred to achieve separation from Royal Mail. in fine with prior year, POL has
continued to incur separation costs with respect to building internal functional capabilities and implementing new
commercial relationships. Since the separation Royal Mail Group ("RMG'), the Company has had a Master Services
Agreement(MSA) in place which relates to an agreement with RMG to provide IT support services to POL. post-
Separation. These costs are part of a defined programme and are designed to bring about significant changes to the
business. The MSA was supposed to end in September 2015.
However, due to delays in separating out some of the IT services, there was a need to extend this arrangement to
31 March 2016. POL have now formally separated all of the services and the Separation programme has been
formally closed down. POL have estimated internally that the maximum extension costs and penalty charges which
RMG could try to levy on them is approximately £3.0m plus irrecoverable VAT (c£0.3m). POL have accrued for
£2.5m of these costs (including irrecoverable VAT) in exceptional items as it arises as a result of the Separation
Programme, which has been consistently accounted for as exceptional. The costs are still under negotiation with
RMG to finalise a settlement. We proposed to increase the provision by £0.8m which has been recorded by
Management
We would not expect any further costs next year, however have confirmed costs are of the same nature as the prior
year
3.5 IT Transformation Costs (£30m)
The IT transformation was one of Post Office’s key programmes to deliver the commitments made in 2010 in the
Government Funding and Strategic Plan. During the year Management terminated an agreement with IBM who were
contracted to perform iT Transformation work in respect of Front Office software for the POL branches. The
agreement with IBM was terminated for commercial reasons and this work has been contracted to Fujitsu in the
year. { IRRELEVANT i
Management's view was that this cost arose as part of the Transformation programme and was fundamental in
achieving the objectives of the POL Transformation.
We selected a sample of 17 transactions giving us a coverage of 79% of IT Transformation cost. Our tests involved
obtaining the details and the nature of the costs incurred against the overall strategy of the programme and we
checked each transaction to supporting documentation such as contracts, invoices and project approvals to validate
that they are directly related to IT transformation costs and not related to routine expenses related to the normal
course of the business.
We have held various meetings across the business with the Heads of the Network and IT Transformation
programmes to corroborate our testing results.
Consistent with prior year, Management treats this specific transformation project as an exceptional cost given the
project results in a fundamental change to the entire Post Office [T model. In our view we would not generally expect
iT upgrades to be considered as exceptional items, however due to the unique IT environment POL finds itself in
post separation from Royal Mail and the IT infrastructure required to create an independent group, we can accept
these IT costs being treated as exceptional. Given the continuing rationale of impairing assets, these costs have
been impaired as an exceptional item. Management noted that the changes in the Network Transformation project
would not be achievable without the IT transformation project. Management continues fo be consistent in its
treatment of IT Transformation costs.
We have revisited the appropriateness of classifying such costs as exceptional and reviewed supporting documents
to satisfy ourselves that these costs link to one-off major IT project costs relating to transformation
We concurred with Management's treatment of these costs in FY16 as exceptional and we have challenged
Management to continue to assess these future costs on a specific basis to determine when they become business
as usual costs.
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(contd)
3. Classification of exceptional items relating to Transformation and utilisation of
3.6 Business Transformation Programme (£9m)
The Business Transformation Programme is a wide reaching programme tasked with delivering £300m of cost
savings. As such, it is expected to radically transform the structure of the business. The Business Transformation
Programme 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
We checked the nature of the costs that make up the £9m to supporting invoices. We checked £6.2m which is
6.69% of the total vouched that this it consist of consultancy costs related to the Business Transformation
Programme cost saving initiative payable to consultants. We concur with Management's treatment of these costs in
FY16 as exceptional, but we have challenged Management to continue to assess these future costs on a specific
basis to determine when they become business as usual costs
3.7 intangible and Fixed Asset Impairment
Post Office continue to adopt a policy of fully impairing all intangible and fixed asset and long leasehold additions
made during the year in which they are purchased, except for freehold land and buildings. Management's
justification for adopting this policy is due to the fact that Post Office has historically been, and continues to be a
loss making entity excluding the Network Subsidy Payment and Government grant it receives and in its current
form is not a viable commercial business (without the government support)
As an additional factor in the decision to impair, Post Office has been working on a major programme of network
change thal will cost approximately £500m. We observed the transformation spend and strategy is included within
the current State Aid funding package and investment of this scale will lead to significant cash outfiows for the
immediate future. The resulting transformational change is specifically designed to impact the longer term
profitability of the organisation and accordingly Management believes that Post Office will continue to be loss
making entity in the near to medium term.
We have challenged Management on the appropriateness of this policy. Management's view is that there is no
current evidence to support the profitability of the business without state aid. On the basis of our discussions with
Management we believe Management's approach is appropriate and prudent in 100% impairing all assets on
acquisition, reflecting value in use and cost
The fixed asset impairment charge for the year is £136m {PY £141m). The year on year increase in fixed asset
additions is mainly a consequence of network and crown transformation related capital expenditure to modernise
POL branches.
For the reasons noted above we continue to agree that Post Office’s accounting policy for impairment and
disclosure of the charge as an exceptional item is reasonable, and in line with IAS 36, impairment of Assets.
We discussed with Management the impact on the financial statements and forecasting as it becomes more likely
that Post Office will be cash generative without reliance on government grants. We recommend Management
should continue to review its impairment policy at each reporting period in relation to these assets, produce full
DCF impairment models and ensure the fixed asset registers are appropriately maintained
IRRELEVANT
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Significant accounting and auditing matiers
(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.7 Government grant - State Aid Funding
On 18 March 2015, POL received confirmation that its application for State Aid funding for 2015/16 to 2017/18
had been approved. This approval entitles POL to receive the following funding from the Department of Business,
innovation & Skills (‘BIS’) by way of grants: FY2015/16 - £280m, FY2016/17 - £220m, FY2017/18 - £140m.
Of the amounts above, £130m (2015/16), £80m (2016/17), and £70m (2017/18) were agreed to be made by way
of a network subsidy payment, which has been regularly paid by the government to POL over the last few years,
enabling the company fo keep branches open that would otherwise not be viable. We have confirmed receipt of
the government grant and reviewed updates to the terms and conditions of the funding agreement, no issues
identified. POL received the full funds for FY2015/16 grant allocation from BIS in April 2015; £130m by way of a
draw down of the network subsidy and an additional £150m to fund capital projects and transformation costs. We
have confirmed receipt of the government grant and have confirmed that there have not been any updates to the
terms and conditions of the funding agreement. The full £150m which is classified as exceptional has been
utilised in the year to date against capital spend, network transformation and {T transformation costs and
subpostmasters compensation.
Based on our procedures performed, we conclude that the government grant has been appropriately recognised
in the income statement in accordance with the contract from BIS.
4. Risk of management override around estimates and judgements
During the normal course of an audit, we are required fo perform procedures to address risks that could result in
material misstatement due to fraud and error including the risk of management override of controls. There are
both specific and tailored procedures performed to ensure that sufficient consideration is given to these risks.
The risk of fraud and management override exists in all businesses and is heightened where the economic
environment is challenging and where there is significant change being implemented across a business
potentially giving rise to the opportunity, pressure or incentive to perpetrate a fraud. Areas of focus from an audit
perspective to address the risk of management override include
» Revenue recognition
» Estimates and judgements, and
» Unusual transactions
The table below highlights the specific areas which we believe are more susceptible to the risk of management
override or bias for Post Office and the procedures we have performed to address the risk.
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Significant accounting and auditing matiers
(con d)
4. Risk of management override around estimates and judgements (cont'd)
Revenue recognition ~ Our focus was on cut off via manipulation of -—_—_—Refer to page 15 for details.
revenue recorded close to yea rend
Impairment of goodwill ~ There is subjectivity relating to the Refer to page 19 for details.
assumptions used to value acquired intangible assets.
Valuation of provisions ~ There is subjectivity in management's Refer to page 13 for details.
determination of their best estimate of amounts provided.
Journal entries ~ By their nature, there is the potential for the risk of We have performed journal entry testing at the group
management override of the financial statements through processing of _ level and at component level focussing on:
journal entries. » Entries made near to the year end;
> Post —ciosing adjustments;
» Entries made in relation to transactions outside the
normal course of business;
> Analysis of journal entries by user profile and the
posting day of the week;
> Entries relating to our fraud risk around revenue
recognition (Refer to page 15).
Entity level controls ~ There is a tisk that controls operating at the We performed various procedures to assess the ‘tone
centre ate not implemented consistently across the group. from the top’ and the design and implementation of
key entity level controls and assessed the overall
control environment to be effective.
During the course of our audit, we found no evidence of material, or potentially material fraud or error in the
financial statements.
We have not been made aware of any further material instances of known fraud within the group in addition to.
those previously reported.
In addition, for provisions we have challenged senior management to understand the material movements in
provisions in the year. We considered the aspects and attributes of each provision individually, assessing
whether its accounting treatment meet the requirements of [AS 37. Material movements within provisions related
mainly to utilisation and charge of severance and agents’ compensation provisions.
We have vouched a sample of provision charges to supporting documents such as formal redundancy and
severance plans for severance provision increases and signed voluntary and/or compulsory redundancy
notifications for increases in agent's compensation provision in the year. This enabled us to check the validity of
charges to provisions in the year. Where provisions have been ulilised in the year we have vouched a sample to
evidence of payment
We concluded that each individual provision meets the criteria of provisions as per the requirements of [AS 37 —
Provisions, and have therefore been appropriately provided for at the end of the year.
fice Board
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(contd)
Other areas of audit focus
in addition to the significant risk areas highlighted in the previous section, there were a number of other accounting
and auditing matters which have arisen during the year. Details of each are provided below:
Horizon Subpostmaster claim
As part of our discussion with Group Chief Financial Officer and Group Legal Counsel we understand that Post
Office Limited have received a formal Letter of Claim from Freeths Solicitors on behalf of 91 applicants on 28 April
2016, We have received the copy of this letter. it contains the number of allegation made to Post Office. We
understood that there is no quantification of the claim for damages at this point of time. At the date of this report
Management is in process of reviewing this letter and will be preparing the necessary response and will be
preparing the litigation strategy. There is no provision recognised as at 27 March 2016 for this claim. The financial
statements now include a generic contingent liability note regarding receipt of such claims, stating no material
impact is expected. We will update our assessment as part of subsequent events review procedures performed up
to our sign-off date.
Pensions valuation and accounting
Pensions accounting can be a highly subjective area given the impact that relatively minor changes in assumptions
can have on the valuation of the defined benefit liability. Based on current calculations, Post Office has a net surplus
at the year end of £196m (2015: £205m) as follows:
oo Le vo RMPP == RMSEPP- ss RMPP=sRMSEPP
Fair value of pension plan assets 407 30 379 3
“Pension liabilities mea eer eo ee
‘Surplus in plan before assets ceiling adjusimont 223 3 229 5
“Effectofassetsceling ao Wo tan oe
‘Surplus in plan after assets ceiling adjustment 194 2 202 3
We have confirmed that the approach and methodology applied by Management are consistent with previous
reporting periods. We have reviewed and challenged Management's calculations, specifically with respect to the
pension assumptions. The key assumptions are noted in the table below along with our assessment of where these
assumptions are within our acceptable range of outcomes.
Financial assumptions [Prudent Central Optimistic I
Discount rate
Price inflation (RPI)
Price inflation (CFI}
payt (above inf) Cp
Pens incs def (above CPI)”
Demographic Prudent Central Optimistic
Males
Mortality in
retirement
Females
Ratrement age
Commutation”
Consistent with prior years, we used an EY actuarial specialist to evaluate these assumptions and we consider them
to be within an acceptable range, albeit the inflation assumption continues to be at the upper end of the acceptable
range
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(cont! qd
VAT Considerations
The business has been fairly stable over the past year in terms of service offerings and the market. In light of this,
the VAT processes and systems have not had any major changes in the year.
The work carried our by our VAT specialists included;
Review of POL process notes for Accounts Payable and Accounts Receivable and VAT return compilation
Review of the quarterly VAT records throughout the year, including the January - March 2016 VAT submission
and the reconciled the draft (unsubmitted) VAT figures to the year end VAT ledger balance
Understand and review of any changes to the VAT group during FY16.
Check of any VAT assessments and disclosures to HMRC, along with confirmation that there are no
outstanding issues.
Enquiring about any complex, unusual or significant transactions that have occurred during FY16
The above work was carried out by reviewing the relevant documentation, taking part in detailed discussions with
Carl Nielsen (Head of VAT) and ian Lakin (Tax Compliance Manager), and walking through the AP/AR processes
with the relevant POL finance staff.
We have also reviewed correspondence with HMRC on other complex, unusual, or significant transactions or
issues with VAT, and note that there are no outstanding queries with HMRC or other VAT provisions.
Management has also confirmed that there are no further unusual transactions or VAT planning arrangements
apart from those disclosed to us
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Significant accounting and auditing matiers
(con d)
VAT Considerations (cont'd)
Based on the work performed, including by our VAT experts, no errors were identified on the returns in respect of
POL’s inputs and outputs compared to the overall turnover and expenses figures. The partial exemption recovery
method agreed with HMRC in July 2014 has not been amended in FY16. The method allows for direct attribution
of fully taxable supplies followed by an allocation of the residual input VAT based on the value of POL’s supplies
in relation to ‘mail’ and ‘non-mail’ services for that period. The provisional rate of residual input VAT recovery for
FY16 has been set at 55%. This rate has been hardcoded into the POL’s iT platform (CFS) during the year as
recommended by us in the prior year. Based on the work performed we consider the current VAT processes to be
robust and responsive to changes in the legislation and HMRC’s approach
We would advise Management to continue to assess the VAT recovery rate on a regular basis to ensure VAT is
appropriately monitored and recorded through out the year.
As a result of our work, we believe that the financial statements are free from material misstatement in this area.
Corporation Tax Considerations
Current tax
POL outsource the preparation of their tax computations to Wilkins Kennedy. We have audited the tax charge,
involving experts from our EY tax team where appropriate.
Our testing focused on the following key areas:
»8s)/Profit before. 7 ; (169) Sue aery sea
(26)
“ceness
and correct classifications in accordance with !AS 12 is still in progress
Deferred tax assets and liabilities
At 27 March 2016, the Group has a net deferred tax balance of £nil on the balance sheet (2015: £nil). A deferred
tax liability of £5m in respect of the movement in the pension surplus has been recorded through OCI. This is
offset by the recognition of an equal deferred tax asset in respect of tax losses carried forward at 29 March 2015
which has been recorded in the income statement.
The deferred tax liability referred to above relates to the pension surplus of £226m (before withholding tax)
recognised for accounting purposes. We understand that it is Management's expectation that £139m of the
pension surplus will be recovered solely through a reduction in future pension contributions over the life of the
scheme as advised by actuaries. The reduction in future pension contributions will increase the future current tax
liabilities of Post Office and, therefore, a taxable temporary difference arises in respect of which a deferred tax
liability is recognised. it is Management's intention that the remaining element of the surplus of £87m will be
recovered through refunds from the scheme. Accordingly, the surplus has been shown on the face of the balance
sheet net of a 35% withholding tax of £30m. We agree this treatment is appropriate and in line with EY’s
interpretation of IFRIC 14. Consistent with prior years, no deferred tax assets have been recognised in respect of
losses and other temporary differences for the year ended 27 March 2016 (other than to match the deferred tax
liability arising on the pension surplus), due to uncertainty around the availability of future taxable profits.
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Significant accounting and auditing matiers
(con d)
Supply Chain Restructuring (Project Iris)
We discussed with the Supply Chain Director and Network & Sales Finance Director the timing of Supply Chain
Restructuring project. Post Office Limited Management has prepared a detailed restructuring plan and
consultation which is to be approved by 19 May 2017. We reviewed Project Iris timetable and conducted a Board
of Directors minutes review. Based on our audit procedures performed we are satisfied with Management
conclusion that there was no restructuring provision obligation as at 27 March 2016 as no formal decision was
made pre 27 March 2016 therefore POL was not demonstrably committed to the restructure at year end.
Going concern considerations
POL continues to operate in a net fiability position and continues to experience net cash outflows (excluding
government State Aid funding). POL therefore continues to be reliant on State Aid to remain a going concern
State Aid approval for the funding for 2015-16 to 2017-18 was received on 19 March 2015 as detailed above. in
addition to State Aid approval POL has an existing working capital facility with BIS with a limit of £950 million from
31 March 2015 up to 31 March 2018.This working capital facility is used to finance network cash requirements.
Management's cash flow forecast up to 2020-21 indicates that POL will continue to see cash outflows until
2016/17, even including State Aid. We have received Management's year end going concern assessment. At the
date of this report we are yet fo finalise our review. The draft financial statements include a going concern note
covering the above
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Summary of audit differences
Summary of audit differences
amounis we believe should be recorded in
fe as ‘known’ or igem Known differences represent lems thai be
and relate to a definite set of facts or circumstances. Judgemental differences genera
fate fo facts of eltcumstances thal ate uneertain or open to interpret
courately quanti
involve estimation and
We have ideniified five judgmental audit differences, including Network transformation Project Enabling accrual
older than 12 months and Operation Busir Age over nonths, understatement of Postrnasters
ion Provision, understater is and impairment for
are intangible assets of POMS. All
also identified one
contract costs from accrued
audit di
abilities to provisions which has been corrected by Management
Assets Assets non- Liabilities incomes
Misstatements (¢m) eurrent current current expenses,
Debit’ Debit! Debit! Debit/(Credit)
Judgemental (Credit) (Credit) (Credit) Current period
Corrected misstatements:
‘Network Transformation OBC Acciual- This is a release 72 ay
‘of an accrual where projects have no dates or are over 6
months old. These are for vendor costs where itis
generally expected that the costs should be paid within
2 months.
Network Transformation Project Enabling Works Accrual By @?)
- This relates to an accrual for agents claiming back for
‘work carried out in order to convert branches. This is the
release of any costs greater 12 months old as it would
be expected that these costs are claimed back within
this time frame.
Understatement of Postmasiers Compensation i) To
Provision for ali branches that are currently being
‘engaged (56 branches at an average amount of
£17,396).
Understatement of pravision for the costs related to Cay O8
Royal Mail Separation contract (maximum exposure of
£3.3m) and reclassification from accruals to provisions
‘ine,
IRRELEVANT ia :
‘RECSSHTEAON RUMI GREENS
Transfer of £2.5m from accruals to provisions for the 25
costs related to Royat Mail Separation contract and o
reclassification from accruals to provisions line. @5)
- (2) 24 (0.4)
Balance sheet totals
ion: Subject to our ouistanding ders, there are no amounts that we identified that are individually or in
feral fo the ¢ tation and disclosures of Ihe consolidated financial y the year
stalements i
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Control themes & observations
As part of our audit of the financial statements, we obtain an understanding of the internal control and IT
environment sufficient to plan our audit and determine the nature, timing and extent of testing performed.
Although our audit was 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 can confirm that on the basis of our audit work performed, we did not identify any significant deficiencies in
internal controls. However we have identified certain control deficiencies below from this year’s audit cycle. We
anticipate providing a detailed Management Letter incorporating certain recommendations for process
improvements noted by us in the performance of our procedures.
The following is a summary of our considerations:
1. Financial statements implications:
Revenue
We recommend Management maintains robust and detailed analytical review of revenue fluctuations and
deviations during the year in comparison with historical data and industry data on a individual revenue lines
basis. We expect this to cover the precision level and expectations developed by Management. We
understood Management is working on formalising this analysis.
Exceptional items
As part of our audit procedures we noted that the company maintains large volume of information related to
exceptional items in Excel spreadsheets. This may result in manual errors and completeness issues as a
result of various sources of information used. We recommend the Company to develop a uniformed database
and standardised procedures for exceptional items recordkeeping.
2. Observations on the IT Environment
The following IT applications are in scope for our audit’ HNGX, POLSAP, SAP CFS and SAP HRP.
HNGX and POLSAP are supported by third party service providers Fujitsu and Steria. Our audit approach was
to rely on the ISAE 3402 report commissioned by Fujitsu over the controls it operates, and independently test
controls operated by Atos, Steria and POL.
HRP has previously been tested as part of the Royal Mail (RM) audit. With the separation of the RM and POL IT
environments, this year, HRP was tested as part of the POL audit procedures. Due to the separation of IT
infrastructure supporting POL and RM applications, the ISAE 3402 report provided by CSC did not cover the SAP
HRP application. As we were unable to rely on this report for the 2016 audit, we have independently tested the
controls operated by CSC, Steria and POL for this application
CFS is supported by CGI and Steria. As no ISAE 3402 reports were available, we performed independent testing
of controls operated by CGI, Steria and POL.
In respect of Fujitsu-operated controls, no significant findings were noted in the ISAE 3402 report, and we
have therefore been able to rely upon it as part of our audit approach.
Our testing of the Post Office operated controls confirmed that some of the control observations raised last
year have been remediated and/or the risk formally accepted by Management, whilst some of the
observations have recurred.
Although we noted that a periodic review of users’ access rights were implemented in the year for POLSAP
covering Supply Chain (SC) and Financial Service Centre (FSC) POLSAP users, the SC review which was
initiated in September was incompiete as not all line manager responses had been received. Additionally, we
noted that the periodic review had been initiated for CFS users only in January 2016, however such review
was also not completed. We recommend Management should ensure that the access for all application users
is periodically reviewed and evidence retained.
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Control themes & observations (contd)
Observations on the IT Environment (cont’d)
As a result of the incomplete periodic review of users’ access rights, we performed alternative procedures to
validate that access held by users at the time of our testing was appropriate. Although these additional
procedures are currently incomplete, we have observed exceptions that prevent us from being able to fully
rely on the controls around appropriateness of access for the CFS and POLSAP applications. These
exceptions are currently being validated and discussions being heid to determine the effect on the overall
audit approach,
We also observed during our employee leavers testing, that there were a number of active POLSAP, CFS
and SAP HRP accounts belonging to leavers that were not removed in a timely manner. We were however
able to perform additional procedures to validate that these accounts had not been used after the leaving date
and therefore concluded the control deficiency have not significantly impacted our audit of the financial
statements. Management should revoke the access of terminated employees immediately and perform
investigations to identify the root cause of leavers retaining their access.
During our change Management procedures on the CFS and HRP applications, we observed that a number of
changes had been developed and implemented by the same user which violated the principle of segregating
incompatible duties within the change Management process. We are in the process of performing additional
procedures to mitigate the risk of inappropriate changes being implemented into the live environment.
Management should work with the third parties (CGI and CSC) in implementing a control fo segregate
incompatible duties when developing and implementing system changes.
Post Gifioe Landes 23
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We confirm there are no changes in our assessment of independence since our previous confirmation in our
planning board report. We complied with the APB Ethical Standards and in our professional judgement the firm is
independent and the objectivity of the audit engagement partner and audit staff has not been compromised within
the meaning of regulatory and professional requirements.
We consider that our independence in this context is a maiter that should be reviewed by both you and ourselves
it is therefore important that you and your Audit Committee consider the facts of which you are aware and come
to a view. If you wish to discuss any matters concerning our independence, we will be pleased to do so at the
forthcoming meeting of the Audit Committee on 19 May 2016.
Relationships, services and related safeguards
We highlight the following significant facts and matters that may be reasonably considered to bear upon our
objectivity and independence, including the principal threats, if any. We have adopted the safeguards noted below to
mitigate these threats along with the reasons why they are considered to be effective.
Service 4: Fujitsu ISAE 3402 report ~ Performed on continued annual basis Not a prohibited service
ISAE3402 report for the Fujitsu services > Aseparate team from the POL IT team has
supporting the POL aecourt This {gpor wil been engaged for the review of the ISAE3402
provide an assesament of the Figs controls report, and standard ring feneing applied
between two teams.
supporting POL business critical systems. We
have placed reliance on the ISAE3402 as part
of the 2015-156financial statement audit. > Went through review exercise to ensure in line
with EY independence rules
Service 2: ISAE 3000 report on POL Note Performed on continued annual basis» Not a prohibited service
Circulation Scheme related services to the The tandard -upon-procedur
Bank of England for the FY2015-16 period , Where Management instructs us on evactly
\d to be performed in May 2016.
angio pe perrormeg in May the procedures to be performed and we
conclude by issuing a factual findings report
only.
Service 3: Agreed-upon procedures Performed on continued annual basis ~~» Not a prohibited service
performed which relate to testing of
eevonaats lating ta the ean fern the > These are standard agreed-upon-procedures,
Department of Business, Innovation and where Management instructs us on exactly
Skils (1S). the procedures to be performed and we
conclude by issuing a factual findings report
only.
Service 4: Agreed-upon procedures Performed on continued annual basis ~~» Not a prohibited service
performed to ensure that the amount which
is collected by Post Office Limited on behalf > These are standard agres-upon procedures,
Of the DVLA for road tax is subsequently where Management instructs us on exactly
paid over fo the DVLA. the procedures to be performed and we
conclude by issuing a factual findings report
only.
Service 4: Agreed-upon procedures Performed on continued annual basis» Nota prohibited service
performed to ensure that the amount which
eallected by Peat Office Liniiee on behalt » These are standard agreed-upon-procedures,
Of the DVLA for road tax is subsequently where Management instructs us on exactly
paid over to the DVLA, the procedures to be performed and we
conclude by issuing a factual findings report
only.
Overall, we consider that the safeguards that have been adopted appropriately mitigate the principal threats
identified and we therefore confirm that EY is independent and the objectivity and independence of the audit
engagement partner and the audit engagement team have not been compromised
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6A Report & Accounts
i
Appendix A Independence update (contd)
Fees update
As part of our reporting on our independence, we set out below a summary of fees for the year ended 27 March
2016.
- DVLA Agreed Upon Procedures Report
Total* 489,000
*Excludes out of pocket expenses incurred
We confirm that none of the services have been provided on a contingent fee basis.
Ernst & Young LLP 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. See below for a
summary of our firm wide policies.
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Appendix Independence report (contd)
Firm-wide policies
Ernst & Young LLP 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 Ernst & Young LLP for maintaining objectivity and independence.
Further details of the key policies and processes in place within EY for maintaining objectivity and independence
can be found in our annual Ernst & Young LLP Transparency Report which the Firm is required to publish by law.
The most recent version of this Report i is for the 2015 year and can be found at hiip “www ey oc
{
BY.
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.
Trai 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 identity
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 evaluates the system of quality control
operated by the firm for its audit practice.
Business relationships EY UK 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.
Ernst & Young LLP has also established the EY/Ethies 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.
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Appendix B
Management representation letter for statutory
reporting
June 2016
Erst & Young
1 More London Place
London SE1 2AF
Atin: Peter Melver, Audit Partner
Post Office Limited ~ Financial Statements for the 52 week period ended 27 March 2016
Dear Sirs,
This letter of representations is provided in connection with your audit of the consolidated and parent company
financial statements of Post Office Limited (“the Group and Company’) for the 52 week period ended 27 March
2016. We recognise that obtaining representations from us concerning the information contained in this letter is a
significant procedure in enabling you to form an opinion as to whether the consolidated and parent company
financial statements give a true and fair view of (or ‘present fairly, in all material respects,’} the Group and
Company financial position of Post Office Limited as of 27 March 2016 and of its financial performance and its
cash flows for the 52 week period then ended in accordance with, for the Group, international Financial Reporting
Standards as adopted by EU ("IFRS"), and for the Company , FRS101.
We understand that the purpose of your audit of our consolidated and parent company financial statements is to
express an opinion thereon and that your audit was conducted in accordance with International Standards on
Auditing, which involves an examination of the accounting system, internal control and related data to the extent
you considered necessary in the circumstances, and is not designed to identify - nor necessarily be expected to
disclose - all fraud, shortages, errors and other irregularities, should any exist.
Accordingly, we make the following representations, which are true to the best of our knowledge and belief,
having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves:
A. Financial Statements and Financial Records.
1. We have fulfilled our responsibilities, as set out in the terms of the audit engagement letter dated 22 January
2016, for the preparation of the financial statements in accordance with, for the Group IFRS, and for the
Company FRS 101
2. We acknowledge, as members of management of the Group and Company, our responsibility for the fair
presentation of the consolidated and parent company financial statements. We believe the consolidated and
parent company financial statements referred to above give a true and fair view of the financial position,
financial performance and cash flows of the Group in accordance with IFRS and for the Company in
accordance with FRS 101, and are free of material misstatements, including omissions. We have approved
the consolidated and parent company financial statements.
3. The significant accounting policies adopted in the preparation of the Group and Company financial
statements are appropriately described in the Group and Company financial statements.
4. As members of management of the Group and Company, we believe that the Group and Company have a
system of internal controis adequate to enable the preparation of accurate financial statements in accordance
with IFRS for the Group and FRS 101 for the Company that are free from material misstatement, whether
due to fraud or error.
5. We believe that the effects of any unadjusted audit 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 consolidated and parent company financial statements taken as a
whole.
is Report 38
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Appendix B
Management representation letter for statutory
reporting (continued)
B. Fraud
14. We acknowledge that we are responsible for the design, implementation and maintenance of internal controls
to prevent and detect fraud
2. We have disclosed to you the results of our assessment of the risk that the Group and Company financial
statements may be materially misstated as a result of fraud
3. We have no knowledge of any fraud or suspected fraud involving management or other employees who
have a significant role in the Group or Company's internal controls over financial reporting. In addition, we
have no knowledge of any fraud or suspected fraud involving other employees in which the fraud could have
a material effect on the consolidated or parent company financial statements. We have no knowledge of any
allegations of financial improprieties, including fraud or suspected fraud, (regardless of the source or form
and including without limitation, any allegations by “whistleblowers") which could result in a misstatement of
the consolidated or parent company financial statements or otherwise affect the financial reporting of the
Group or Company.
¢. Compliance with Laws and Regulations
1. We have disclosed to you all identified or suspected non-compliance with laws and regulations whose effects
should be considered when preparing the consolidated and parent company financial statements.
D. Information Provided and Completeness of information and Transactions
1. We have provided you with:
* Access to all information of which we are aware that is relevant to the preparation of the financial statements
such as records, documentation and other matters;
+ Additional information that you have requested from us for the purpose of the audit; and
+ Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit
evidence.
2. All material transactions have been recorded in the accounting records and are reflected in the consolidated
and parent company financial statements.
3. We have made available to you all minutes of the meetings of shareholders, directors and committees of
directors (or summaries of actions of recent meetings for which minutes have not yet been prepared) held
through the 52 weeks ended 27 March 2016 to the most recent meeting on the following date: list date].
4. We confirm the completeness of information provided regarding the identification of related parties. We have
disclosed to you the identity of the Group and Company's related parties and ail related party relationships
and transactions of which we are aware, including sales, purchases, loans, transfers of assets, liabilities and
services, leasing arrangements, guarantees, non-monetary transactions and transactions for no
consideration for the period ended, as well as related balances due to or from such parties at the 27 March
2016. These transactions have been appropriately accounted for and disclosed in the consolidated and
parent company financial statements
5. We believe that the significant assumptions we used in making accounting estimates, including those
measured at fair value, are reasonable.
6. We have disclosed to you, and the Group and Company has complied with, all aspects of contractual
agreements that could have a material effect on the consolidated and parent company financial statements in
the event of non-compliance, including all covenants, conditions or other requirements of all outstanding debt.
7. In accordance with FRS 101 paragraph 5, we have notified our shareholders in writing, in accordance with
reasonable timeframes and format requirements, of our intention to take advantage of disclosure exemptions
in paragraph 8 of FRS 101 {in accordance with paragraphs 6 to 7 of FRS 101) in the company individual
financial statements.
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Appendix B
Management representation letter for statutory
reporting (continued)
E. Liabilities and Contingencies
1. All liabilities and contingencies, including those associated with guarantees, whether written or oral, have
been disclosed to you and are appropriately reflected in the consolidated and parent company financial
statemenis.
2. We have informed you of all outstanding and possible litigation and claims, whether or not they have been
discussed with legal counsel
3, We have recorded and/or disclosed, as appropriate, all liabilities related litigation and claims, both actual and
contingent, and have disciosed in Note 20 to the consolidated and parent company financial statements all
guarantees that we have given to third parties.
4. We confirm that we have disclosed all relevant information relating to the ongoing challenges and actions in
relation to the Horizon Subpostmasters claim to allow an assessment of the financial implications. in addition
we have discussed with you any additional information that has come to light subsequent to 29 March 2015.
The judgments that we have made reflect the most current advice received from external legal counsel
F, Subsequent Events
1. Other than the receipt of funding for the financial year 2016/17 described in Note 25 to the consolidated and
parent company financial statements, there have been no events subsequent to period end which require
adjustment of or disclosure in the consolidated and parent company financial statements or notes thereto.
H. Comparative information ~ comparative financial statements
in connection with your audit of the comparative consolidated and parent company financial statements for the
year ended 29 March 2015, we represent, to the best of our knowledge and belief, the following:
in preparing the financial statements for the current year, the comparative figures for the year ended 29 March
2015 have been restated. The provision for postmasters’ compensation, included in network transformation had
not been fully recognised in the financial statements for the year ended 29 March 2015. The restatement affects
exceptional costs, provisions and retained earnings due to the loss in the year changing as a result of a
restatement to the exceptional charge. Within this report, the comparalive income statement, statement of
comprehensive income, balance sheet and statement of changes in equity for the year ended 29 March 2015
have been restated. There has been no effect on the cash flow statement.
The comparative amounts have been correctly restated to reflect the above matter and appropriate note
disclosure of this restatement has also been included in the current year's consolidated and parent company
financial statements. There have been no significant errors or misstatements, or changes in accounting policies,
other that the matters described above, that would require a restatement of the comparative amounts in the
current year’s consolidated and parent company financial statements.
Other differences in the amounts shown as comparative amounts from the amounts in the consolidated and
parent company financial statements for the year ended 29 March 2015 are solely the result of reclassifications
for comparative purposes.
1. Going Concern
1. Note 1 to the consolidated and parent company financial statements discloses all of the matters of which we
are aware that are relevant to the Group and Company's ability to continue as a going concern, including
significant conditions and events, our plans for future action, and the feasibility of those plans.
J. Equity
1. We have properly recorded or disclosed in the consolidated and parent company financial statements the
share/capital stock repurchase options and agreements, and shares/capital stock reserved for options,
warrants, conversions and other requirements.
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Appendix B
Management representation letter for statutory
reporting (continued)
K, Contingent Liabilities
1. We are unaware of any violations or possible violations of laws or regulations the effects of which should be
considered for disclosure in the Group and Company financial statements or as the basis of recording a
contingent loss (other than those disclosed or accrued in the Group and Company financial statements).
2. We are unaware of any known or probable instances of non-compliance with the requirements of regulatory
or governmental authorities, including their financial reporting requirements, and there have been no
communications from regulatory agencies or government representatives concerning investigations or
allegations of non-compliance.
L. Income and Indirect Taxes
14. We acknowledge our responsibility for the tax accounting methods adopted by the Group and Company,
which have been consistently applied in the current period, and for the current year income tax provision
calculation (and Value added Tax)
2. We also acknowledge our responsibility for the plans with respect to future taxable income, which represent
our estimates as to the outcome of those plans, based on available evidence, and for the significant
assumptions used in our analysis. We would implement such strategies as necessary to prevent a tax
operating loss or credit carryforward from expiring.
3. We have disclosed to you all tax opinions, correspondence with tax authorities, or other appropriate
information that served as support for the accounting for potentially material matters.
M. Use of the Work of a Specialist
1. We agree with the findings of the specialists that we engaged to evaluate the corporate taxation and pension
valuations and have adequately considered the qualifications of the specialists in determining the amounts
and disclosures included in the consolidated and parent company financial statements and the underlying
accounting records. We did not give or cause any instructions to be given to the specialists with respect to
the values or amounts derived in an attempt to bias their work, and we are not otherwise aware of any
matters that have had an effect on the independence or objectivity of the specialists.
N, Estimates
- Completeness of Postmasters compensation provision;
- Classification of exceptional items relating to Transformation and utilisation of Government Grant
impairment of fixed assets and intangible assets, including goodwill
~ Pension valuation
1. We believe that the measurement processes, including related assumptions and models, used to determine
the accounting estimates have been consistently applied and are appropriate in the context of IFRS for the
Group and FRS101 for the Company.
2. We confirm that the significant assumptions used in making the above estimates appropriately reflect our
intent and ability to carry out the specific courses of action in relation to those entities on behaif of the entity.
3. We confirm that the disclosures made in the consolidated and parent company financial statements with
respect to the accounting estimate(s) are complete and made in accordance with IFRS for the Group and
FRS101 for the Company.
4. We confirm that no adjustments are required to the accounting estimates and disclosures in the consolidated
and parent company financial statements due to subsequent events.
O, Retirement benefits
1. On the basis of the process established by us and having made appropriate enquiries, we are satisfied that
the actuarial assumptions underlying the scheme liabilities are consistent with our knowledge of the business.
All significant retirement benefits and all settlements and curtailments have been identified and properly
accounted for.
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Appendix B
Management representation letter for statutory
reporting (continued)
P. Completeness of Postmasters Compensation Provision
14. We have provided to you with access fo all information and additional information you have requested in
relation to Postmasters Compensation Provision and access to persons within the Company involved in
Postmasters Compensation Provision calculation and analysis from whom you determined it necessary to
obtain audit evidence.
2. We have not provided you with signed contracts for 140 Pilot branches as these are not retained by us. Prior
to the launch of the Network Transformation Programme, the concept was tested through a series of Pilot
branches and funded by a separate initial budget and therefore does not need to be provided for within the
Network Transformation provision at 27 March 2016.
3. We believe the £21m release of Postmasters Compensation Provision is the best estimate based on the
most recent assessment of the branches fail to convert
Q. Impairment of fixed assets and intangible assets
1. We confirm we assessed the indicators of impairment for fixed assets and intangible assets as at 27 March
2016. We believe the assumptions used in determining the carrying value of the goodwill recorded on a group
level are appropriate and not impairment is required as at 27 March 2016.
Yours faithfully,
Chief Executive Officer
Chief Financial Officer
is Report 28
Appencix C
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Required communications with the Audit
and Risk Committee
There are certain communications that we must provide to the Audit and Risk Committees. We have detailed
these here together with a reference of where and when they were covered:
—
Communicate one tire!
el - eal tining of Commun
Overview of planned scope and timing of the audit v Refer to our 2016 Audit Planning Report
Major issues discussed with management in connection with Refer to our 2016 Audit Planning Report
initial or recurring retention
Other information in documents containing audited financial v Discussed within this report.
statements
‘Significant audit adjustments v Discussed within this report.
Unrecorded misstatements considered by management to be v Discussed within this report.
immaterial
Expected modifications to the audit report v Not applicable, we do not anticipate any
modifications to our audit report.
Our judgements/views about qualitative aspects of the v Discussed within this report.
Company's accounting practices and financial reporting
Disagreements with management Not applicable, no such instance noted
during our audit.
Consultations with other accountants Not applicable, no such instance noted
during our audit.
Serious difficulties encountered in dealing with management Not applicable, no such instance noted
when performing the audit during our audit.
The adoption of, or a change in, an accounting policy Not applicable, no such instance noted
during our audit
sats Report «
t Of
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260
of S57,
Aooounts
Appencix C
Required communications with the Audit
and Risk Commitiee (contd)
‘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
> Anoverview of the type of work to be performed on the
financial information of the components
>» Anoverview 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.
—
er eee
—
Ce icce
—
annual
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Planredinctvsl ining of commoneation
jo the Avail ond Risk Commitee
Discussed within this report.
Not applicable - no such events and
conditions to communicate to the
committee.
Discussed within this report.
Discussed within this report.
No such instances of fraud to
communicate.
Not applicable - no such matters to
communicate to the committee.
No such instances to communicate.
We have attached a draft management
letter of representation in an appendix to
this 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.
Discussed within this report.
No such instances of fraud to
communicate.
st Office Board-24/05/18
Aooounts
Appencix C
Required communications with the Audit
(contd)
and Risk Committee
Audit and Risk Committee pre-approval of services, including
pre-approval of internal control-related services and
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
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fee
Discussed within this report.
Discussed within this report.
Discussed within this report.
Discussed in our Audit Planning report
dated and in this report
Discussed within this report.
Discussed within this report.
Discussed within this report.
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6. Annuai Report & Accounts
1 & Young LLP
Assurance I Tax I Transactions I Advisory
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POST OFFICE PAGE 1 OF 6
POST OFFICE BOARD DECISION PAPER
Crown Network Strategy Update
Author: Julie Thomas — Sponsor: Kevin Gilliland Meeting date: 24 May 16
Executive Summary
Context
In July 2015, the Post Office (POL) Board approved the current strategy for the Crown
network, covering the period 2015-18. This was established with the aim of moving the
Crowns through the breakeven point during FY15/16 and on to sustainable profitability
thereafter. The first year of this strategy has exceeded expectations (with Crowns out-
turning FY15/16 at a £2.7m profit), and the programme team has also gained new
insights which can be used to enhance the strategy. Concurrently the pace of
simplification, cost reduction and profitability improvement sought across the wider
business has accelerated. Furthermore, our wider Network strategy is being refreshed in
advance of the June 2016 Board, together with important aspects of the business’ longer-
term commercial strategy. In this context, opportunities are now being explored to further
enable profitability improvements via changes to Crowns.
Questions addressed in this report
1. Is the 2015 strategy for the Crown Network still a “no regret” approach?
2. What are the opportunities and challenges associated with substantially fewer Crowns?
3. What are the key questions for our long-term Crown strategy?
Conclusion
1. The fundamental themes of the current 2015-18 Crowns strategy are “no regret” and
are being successfully delivered.
2. The Crown Network is now profitable and 100 of our 314 Crowns are classified as
strategically-important, flagship, branches. However the majority of Crowns are still
run under commercially sub-optimal, or loss-making, models. Our target is to make all
branches in the Network cash-generative and the Crowns are no exception. Whilst
direct ownership provides stability and strong brand prominence in our most important
locations, it also consumes significant management time and drives in central costs.
Transition away from Crowns is politically and operationally challenging, and a simple
proposition of like-for-like franchising will not enable us to fully optimise the
profitability of the Crowns. High levels of investment are required for any fundamental
change above that already approved (£100-£150m additional spend) but this must be
balanced with the opportunity cost of sub-optimised branches (c.£18m p.a. EBITDAS).
3. The key questions to address are; how branch models could be re-engineered to
enable easier franchising; what this would mean for our customer proposition and
commercial strategy; what the plan would be to enable Crowns-driven cost reduction
from the wider business; the choices available when engaging Government on any
fundamental Crown network changes; how the costs and risks of transition could be
reduced; and the consequences around people and I.R.
Input Sought Input Received
Does the Board have appetite for a transformation Board endorsement of 2015-18 Crown
programme to much further reduce the Crown Strategy, July 2015. Board approval of
network considering the levels of investment required I Paddington (WH Smith deal), April 2016. GE
and likely return? If so, a fuller business case will be I review of more radical Crown options, April -
developed for a decision at the September Board. May 2016
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The Report
What is the opportunity and why now?
1. The objective is to refresh the Crown strategy in light of new opportunities and
challenges arising since the 2015 Crown strategy was established. This will lead to
the development of an outline business case for a more aggressive reduction in the
size of the Crown branch network than was set out by the 2015 strategy.
2. The 2015 Crown strategy set out the rationale for, and benefits of, a directly-run
flagship network. However it noted that only 100 Crowns have a good fit against the
strategic vision that was set out. For the remainder, the only rationale for retaining
them under a direct ownership model was that the costs and benefits of transition to
any alternative model (or closure) would exceed the 3 year payback period which was
targeted at the time the current strategy was approved.
3. The 2015 strategy looked at the costs and benefits of changes to improve the
profitability of Crown (or replacement Agency) branches, but was deliberately
agnostic to any cost reductions across the wider business which could be enabled by
a much-reduced Crown network. This was a deliberate choice because of the degree
of uncertainty at the time about the business’ intentions and the mechanisms which
would be available for large-scale cost reduction beyond the Crowns area. There is
now increasing clarity about this.
4, During FY15/16 significant progress has been made in terms of delivering change in
Crowns and improving our “flagship” presence on the high street using the WH Smith
branch network:
a) The Project Paddington deal with WH Smith (WHS) has been negotiated and
signed. This will see 28 unprofitable, un-strategic Crown branches franchised; 33
Crown branches hosted in order to reduce their property costs; contracts
extended on 97 of our largest Mains (which are operated by WHS); significantly
up-weighted Post Office brand prominence across the WHS branch estate; and
POL ATMs and Self-Service Kiosks introduced into the WHS estate. This deal has
helped POL gather valuable insights on how the commercial and operational
model for large franchising deals will need to evolve in future in order to be
successful.
b) A further 11 Crown branches have been advertised as franchise opportunities,
and applicants are currently being assessed for their suitability. Demand has
been received from the market for every one of these branches. Preparatory
work has been completed on 42 additional branches, of which 21 are ready to be
advertised for franchise as part of the current strategy.
c) 2.un-profitable, un-strategic branches have closed, where there was surrounding
network capacity in place to absorb demand. Public consultations have
commenced (or are about to commence) for a further 4 closures.
d) Trials of a new retail offer in Crowns have been run with both WHS and VOW
Retail (the incumbent provider) and both trials have seen strong growth in retail
sales. A public procurement exercise is in-flight to select and appoint a new retail
supplier to Crowns. A renegotiation of the Photo Me contract and rollout of
further machines has increased our ability to generate income from otherwise
under-utilised square footage.
e) A project to automate Post Office Card Account transactions on Self-Service
Kiosks has been mobilised, with pilots of the new service planned for the end of
this financial year. (This project is running later than originally planned, which
has introduced a £1.5m in-year benefits gap for 16/17, to be mitigated by
acceleration of other programme activities.)
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5. FY15/16 has also presented new opportunities and challenges for the Crowns strategy,
namely:
a) The business has accelerated its simplification agenda. Progress has been made on
the business’ Target Operating Model and on mechanisms to achieve a Simpler to
Run Network. The business’ capacity to take out wider costs beyond the Crown
network is now both increased and better understood.
b) The Government's introduction of the National Living Wage has made franchising
large, labour-intensive, Crowns onto standard Mains contracts even less profitable
for retailers. However the increasingly intense competitive pressures on the retail
sector have added even more need to guarantee footfall into stores, and so
demand for Crown franchises has still been seen. The quality of this demand has
been variable, however, with WH Smith continuing to be the only national multiple
with both experience of running large Post Offices and an appetite to take more in
any significant numbers.
Cc) The increasing pressures of property cost on retailers, particularly in central
London, mean it is now virtually impossible to franchise a Crown in zone 1 or 2 of
London. The space required from the retailer is simply not available. The same
property cost pressure is being felt by the agency network in central London, and
Crowns which remain are proving essential for continuity of Post Office service.
d) To achieve large-scale franchising deals with retailers, without expensive
inducements or over-scale fees beyond standard Mains terms, it is increasingly
clear that we will need to move away from a standard like-for-like Crown to Main
franchise pattern. Future deals will need to explore different branch models, with
service potentially dissipated across multiple retail partners, and self-service
automation forming a much higher part of the model offered.
e) Considering the array of people changes planned or in-flight in the wider business,
there will be greater opportunities to reduce the cost of transition over future
years (e.g. from adjusted redundancy terms), or to take out cost from the wider
business as a result of changes in the Crown network.
What do we propose to do and why?
The proposal
6. The Crown Network Strategy will be refreshed and presented to the September Board
meeting. In particular the refresh of the Crown Network Strategy will focus on:
a) The updated position of the Crown Network, following progress made in FY15/16.
b) The strategic and economic benefits of the Crown network considering the
commercial needs of the wider business, but also any costs or constraints that the
Crown network's existence imposes on the wider business.
c) Areduced target size and shape for the Crown network for both 2018 and 2020.
This will take into consideration the business’ Target Operating Model, our
ambitions for a Simpler To Run Network, levers available to reduce the costs of
change in the Crown Network, and commercial requirements of the business.
d) The change roadmap, considering the optimised balance of models, optimised
EBITDAS benefits, the best use of investment funds, and co-ordination with other
change activities across the business to manage both opportunities and risks.
ies
Industrial Relations, political and stakeholder reaction to change
7. Further franchising will lead to increased political and public pressures, including
adverse media coverage where transformation of the network is viewed as job losses
and back-door privatisation. For example, as a result of the announcement of POL’s
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intention to Franchise 39 Crown branches, we are now answering Parliamentary
Questions from MPs in the impacted constituencies, Freedom of Information requests
from consumer groups and requests to attend either MP or Union-organised public
meetings. Furthermore, some customers view a Crown as giving their town a
particular status and will campaign against change for that reason. Although this is
resource hungry, POL’s experience through 25 years of Franchising Crowns (from
1500 down to 300 now) and various Network Change programmes impacting Agency
branches, means we know that the negative feedback and press coverage is usually
localised to the area impacted and is short-lived. Once the change has taken place,
the customer experience is generally improved through more modern, accessible
premises and longer opening hours.
8. Long-running industrial action significantly disrupts the Crown Network and or Supply
Chain businesses (due to conflation of issues as a result of CWU representation across
both parts of the business), delaying change and impacting short or medium term
service and profitability. The Crowns team will develop proposals together with the
People and Engagement team and the Industrial Relations Steering Group in order to
establish the right phasing and people approach, before reporting back.
Impact on Post Office commercial strategy & brand
9. There is a risk that during the consultation period for franchises, customers are
dissuaded to buy-in to the proposed change by staff who are negatively impacted
themselves or by trade unions who campaign against the change. This particularly
impacts migration rates of the Travel and Telephony businesses where convenience
and rates are key to customers and competition on the high street for this product is
high. Marketing plans will be developed to attract customers to the new location as
well as capability support at the new location. Experience has shown that the wider
cost savings of franchising more than compensate for this revenue loss.
10. The Personal Financial Services business relies on directly-employed staff generating
business in branches. There is a risk that franchising Crown branches adversely
impacts the wider FS strategy, resulting in reduced income. The FS Strategy will
identify the most important branches based on customer demand / opportunity. The
existing network of branches in WHS stores includes private consultation rooms for
Financial Services sales, and the number of such rooms is increasing with the recent
Paddington deal. The current ‘Hub & Spoke’ trials will need to be developed into more
formal ways of working to ensure the ownership model is less important to meet our
FS growth aspirations. As above, revenue loss is included in all business cases so that
we provide an accurate picture of the business impact of franchising or closure.
The business case
11. The strategy refresh will recommend an outline business case for changes to the Crown
network in terms of further projects to; increase automation, including counter-less
operation of some branches; apply voluntary redundancy; deliver property deals;
better monetise our retail space; and franchise or close branches.
12. Beyond this, the refreshed strategy will also provide guidance on what the
improvements to the outline business case could be in scenarios where more radical
levers were available for use such as; Compulsory Redundancy; major reductions in
Voluntary Redundancy terms; reductions to service provision in urban deprived areas
or conversely use of subsidy to maintain service in those areas; and/or a policy of
active cannibalisation of the Crown network.
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What options did we consider?
13. More radical options for the Crown Network are under review. A policy of wholesale,
or very large scale, franchising or closure would be challenging without; changes to
the commercial and operational proposition for potential franchise partners;
increasing use of compulsory redundancy; and changes to terms available under
voluntary redundancy.
14. Some indicative scenarios are modelled below in order to help frame a common
understanding of the viability of certain radical options. These would require
investment above and beyond that already approved by the Board for the current
Crown strategy. The below scenarios work on the basis of potential changes to the
227 remaining Crown branches which are not subject to franchise or closure under
business cases already approved by the Board:
Indicative economics
Option One-off cost One-off benefit I Recurring EBITDAS Payback
(£m) (£m) (Em p.a.) period (years)
(157) 19 18 77
ts account for £62m of the one off costs
perience during recent chan grammes, C
uctions would ste £1.1m of the recurring E
Franchise all 227 I Settlement a:
branches
this scenario,
19 24
tly reduce staff exit costs without jeopardi:
ja the overall investment cost would drop
umed 45% reduction in this scenario). Increasing central cost
reductions by $0% beyond current assumptions would add another £6m to
recurring EBITDAS,
(56) 7 ? 7.0
tment environment we could teke the tess radica
directly aking at a b -
it but only tackling a smaller amount of
ot optimise the profitability of every branch.
Franchise all 227
branches - best
case
Franchise all 73
remaining loss-
ng branches
It delivering EBITDAS
central cost (£2m). This would
15. A single deal to franchise the entire estate, either via a large scale procurement
exercise or even under a Joint Venture has not been ruled out, however this is
considered unlikely to produce a better economic return than is achievable via other
mechanisms. WH Smith is the only national multiple chain with the experience of
running large ex-Crown Post Offices and a significant geographic reach, however there
are still over 100 Crowns which have no geographic alignment to an existing WH
Smith presence, and in many cases these locations do not align with a local market
which WH Smith wants to enter.
What do we need to do next to progress?
ed option?
16. We will report back to the June Board on how the Network, and the mix of branch
models within it (including Crowns), will support the refreshed commercial strategy
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of the business, the progress made with the Simple to Run Network initiative and our
long term approach for Community and Outreach branches.
17. Subject to Board appetite, a refreshed version of the Crown Network Strategy will be
developed, to cover the timeframe of 2016-2020 and this will be presented to the
September 2016 Board meeting. This will take into account the latest Crown branch
P&L budgets and Paddington (WHS deal) benefits; the medium to long-term roadmap
for our people; and the wider business cost reduction opportunities.
18. Delaying or rejecting a revision of the Crown Network strategy would result in missed
opportunities for further cost reduction from the Crown network.
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BOARD
Postmaster Litigation
Author: Jane MacLeod / Rodric Williams Sponsor: Jane MacLeod Meeting date: 17 May 2016
Executive Summary — Subject to Legal Privilege
Context - Bates & 90 Others v. Post Office Limited
1. On 11 April 2016, 91 (mostly former) postmasters issued a High Court Claim
formally starting a court case against Post Office (the “Claim’”).
2. The Claimants have until 11 August 2016 to “serve” the Claim Form, which will
trigger Post Office’s obligations to respond to the Claim through the Court. We
have however been provided with a copy for information only.
3. The Claim Form contains very little information. However, on 28 April 2016 the
Claimants’ solicitors (Freeths LLP) sent a 53-page “Letter of Claim” setting out the
allegations in more detail (the “Letter”). Court Protocol requires us to respond to
the Letter before the Claim passes to the Court for formal case management.
4. The Claim potentially poses significant legal, financial, operational and reputational
risk to Post Office.
5. This paper:
- summarises the status of and next steps in the Claim; and
- provides an initial overview of timing, costs and affected stakeholders.
Questions addressed in this report
e What are the Claimants alleging?
¢ What process will the Claim follow and over what time frame?
e What are the estimated costs of responding to the Claim?
e What are Post Office’s objectives for the Claim?
* Who are the stakeholders?
What are the Claimants alleging?
6. The Letter sets out the bases on which the Claim will be made. Despite its length,
there is nothing new or surprising in the Letter, and it does not set out how much
the Claimants are claiming or how they propose calculating that amount.
7. Much of the Letter focuses on technical points of law, with the main focus being
the relationship between Post Office and postmasters, seeking to place greater
responsibility on Post Office for branch accounting difficulties.
8. Apart from some generalised statements, there is no allegation that there is a
systemic failure in the Horizon software. Rather, the Letter claims that because
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Horizon has the potential to cause discrepancies in branch accounts, Post Office
should not have relied on it so heavily and done more to investigate it as a possible
source of branch shortfalls.
Other familiar allegations include poor training/support, the ability of Fujitsu to
alter remotely branch transactions, improper criminal prosecutions, and putting
undue pressure on postmasters to make up shortfalls.
What process will the Claim follow and over what time frame?
The Letter
10.
11.
The Letter asks Post Office to respond to the issues raised and agree in principle
to a “Group Litigation Order” (“GLO”) so issues common to the Claimants can be
efficiently managed through the Court.
10.1. There are practical and tactical implications for agreeing to a GLO which
will substantially influence the way the Claim proceeds. For example, Freeths
may not be able to fund the litigation if we can show the individual claims are
not sufficiently common for a GLO. Equally, an early favourable ruling on an
issue we want to treat as common (e.g. the effect of a criminal conviction or
limitation period) could reduce the number of claimants and thus the economic
viability of the litigation.
10.2. Post Office is therefore entitled to know more about the Claim and the
purported common issues before making any decision about a GLO.
Freeths have questioned whether Post Office would be prepared to mediate these
claims. At this stage it is not possible to form a view as to whether mediation
would be viable in some or all of the cases. However we will keep under constant
review whether options to mediate or settle would provide a better outcome for
Post Office.
The Claim
12.
13.
14.
15.
Freeths need to decide by 11 August 2016 whether to serve the Claim Form and
start the formal Court procedures.
Set out at the Appendix to this Report is an “Estimated Litigation Timetable”, which
sets out the main steps in standard litigation through to trial, assuming the Claim
Form is served during August 2016.
The Court's procedures are designed to examine the issues rigorously, and
accordingly take time. Assuming that this case follows standard procedures, the
Claim might not come to trial until November 2018. Whether or not the Claim
proceeds under a GLO could impact substantially this timeframe, e.g. the standard
timetable may not start to run until the GLO issues are finalised, which could take
some months, or the litigation may not proceed at all if no GLO is made.
The Court’s procedures provide for regular assessment of the Claim and the risks
and benefits of continuing with it, which ensures that the vast majority of cases
are settled before trial.
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What are the estimated costs of responding to the Claim?
16. The Court actively manages costs due to the resources litigation consumes and the
“loser pays” presumption which requires the unsuccessful side to pay a substantial
portion of the other side’s costs (typically 65% to 90%). The Court’s processes
also require “front end loading” where significant costs are incurred at the
beginning of a claim to narrow down the issues and save costs overall.
17. We estimate that responding to the Letter in a robust and proportionate manner
will incur external legal costs at approximately the same rate as during the Sparrow
Mediation Scheme, i.e. £30,000 to £50,000 per month for the next three to six
months. More detailed costings will be provided and updated as the Claim
progresses.
18. Should the matter proceed to a full trial, Legal costs and expenses for the Claim
could easily exceed £1million, particularly if the performance of the Horizon system
itself becomes a key issue. By way of reference, Post Office successfully defended
at trial a 2006 “Horizon”-related claim brought by one former agent, the costs of
which exceeded £300,000.
What are Post Office’s objectives?
19. The Claim challenges a critical part of Post Office’s business - how we engage with
our postmasters, and how we allocate risk and responsibility for the Post Office
transactions, cash and stock they handle.
20. Even though most of the Claimants are former postmasters, the Claim raises issues
in respect of current and future b.a.u. activities (e.g. branch accounting, agent
contract management, and debt recovery) because it concerns the core branch
accounting principles and systems, including Horizon, currently in use.
21. We therefore see two main objectives in responding to the Claim:
21.1. Proportionately manage Post Office’s legal defence.
21.2. Protect the Network going forward so that Post Office and current agents
have confidence in our systems.
Stakeholders
22. The Claim will have a wide impact on Post Office, affecting Network, Finance and
the FSC, IT (including our relationship with Fujitsu), HR, Legal and
Communications, each of which will help inform Post Office’s defence.
23. Other stakeholders will be interested in the Claim, e.g. BIS and the NFSP.
However, the involvement of external stakeholders should be limited to appropriate
updates provided as part of an agreed communications plan so as to maintain legal
privilege and confidentiality in the legal advice we receive and the strategy and
tactics adopted in our defence of the Claim.
Input Sought
The Board is requested to note the content of this paper.
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Appendix - Estimated Litigation Timetable
Step Estimated Proportion
completion of overall
date work
1. Pre-Action Correspondence: Initial investigations into alleged August 2016 5%
issues and correspondence between the parties to establish the
basis for the claim and the defence
2. Claim Form served: Legal proceedings are formally begun with August 2016
service of the Claim Form on Post Office
3. Statements of Case: Each party produces formal Court January 2017 10%
documents setting out their legal positions. The SPMRs will produce
a Particulars of Claim. Post Office will then produce a Defence. The
SPMRs will then file a Reply to the Defence.
4, Case Management: The Court orders the steps to be undertaken April 2017 5%
before trial and a timetable for their completion. This may require
multiple short Court hearings.
5. Formation of the Group: The SPMRs will apply for formal June 2017 5%
recognition that their claims form a Group Action. The Court will
define the issues common to the Group and set a deadline by which
further Claimants may join the Group.
6. Disclosure: All parties are required to search for relevant November 2017 25%
documents and provide those documents to the other parties
7. Witness statements: All parties must draft and exchange March 2018 15%
statements setting out the evidence to be given by each of its
witnesses.
8. Expert evidence: Parties commission experts to investigate and July 2018 15%
report on technical issues (eg. Horizon). Reports are exchanged
and meetings held between experts to narrow the points of
disagreement.
9. Trial: A trial will likely take several weeks and require several November 2018 20%
months of preparation.
40. Judgment. It will likely take a Judge several months to consider I February 2019
the case and draw up the judgment.
Notes
Step 5: Formation of the Group could occur at an earlier stage and possibly before Step 3: Statements of
Case. This depends on how the SPMRs wish to proceed.
The above timetable assumes that all points of dispute will be considered in one single trial. It is possible
that certain discrete or preliminary points may be dealt with separately at an earlier stage. If there
are any preliminary hearings these will likely occur before Step 6 and will the delay the above
timetable by 3 - 6 months.
Following Step 10: Judgment, there is the possibility of an Appeal and there will also be costs proceedings.
These could take a further 6-12 months.
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POST OFFICE BOARD GOVERNANCE UPDATE
Modern Slavery Statement
Author: Nisha Marwaha Sponsor: Jane MacLeod Meeting date: 5 May 2016
Executive Summary
Context
The Modern Slavery Act 2015 (the Act) challenges slavery, domestic servitude,
forced and compulsory labour and human trafficking. Post Office is required to
produce an annual slavery and human trafficking statement (Statement)
setting out what steps have been taken to ensure its business and supply
chains are slavery free. This paper attaches the Statement which must be
approved by the Post Office Board and signed by a Director.
Questions this paper addresses
1. What specific risks should the board be aware of?
2. What action have we taken so far?
3. What are other businesses doing and how do we compare?
Conclusion
e Post Office has been undertaking due diligence on its business and supply chains
to identify any risk areas.
e Post Office has prepared a Statement which must be published within 6 months of
year end.
e A steering group appointed in January 2016 is responsible for creating a project
plan and undertaking due diligence on Post Office’s and POMS supply chains.
e The steering group has identified that the highest level of risk is within our Agency
network. We will be taking action to address this risk including amending our
contracts with our Postmasters to require compliance with the Act.
e Post Office’s Statement has been prepared using Home Office guidance and in
consideration of other available Statements by UK and international companies.
e Post Office will have to take ongoing action to meet the requirements under the
Act.
Input Sought
The Board is asked to approve the Statement.
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The Report
What specific risks should the board be aware of?
e The requirement to publish a Statement applies to “commercial organisations”
which (a) supply goods or services and (b) have a total turnover of not less than
£36,000,000. It will therefore not apply directly to Postmasters if their turnover is
less than £36 million per year.
— However, Postmasters are part of the Post Office supply chain. Post Office must
state what steps it has taken to ensure that slavery and human trafficking is
not taking place in any of its supply chains or in any part of its business.
e To date we have not identified any direct relationship with an individual or company
registered in a high risk country.
e The due diligence that we have undertaken so far indicates that there is a potential
risk on non-compliance within our agency Network:
— The reason for this is that there are a large number of people employed by
Postmasters (including multiple partners) but who are not employees of Post
Office or POMS. They work directly for the Postmasters (including multiple
partners). We will be taking action to address this risk (see below) including
working to amend our contracts with our Postmasters to require compliance
with the Act and we will be delivering training to Postmasters as and where it
is appropriate.
What action have we taken so far?
1. GE member Neil Hayward delegated responsibility for our Modern Slavery
initiatives to a steering group lead by Hannah Dalton (Head of HR). The steering
group was appointed in January 2016.
2. The steering group has developed a project plan to carry out due diligence of our
business and implement change. Our ongoing work involves a risk analysis of our
core business and its related supply chains.
What are other businesses doing and how do we compare?
1. We looked at statements for international companies with complex supply chains
to get a flavour for content and examples of initiatives.
> For example: Ford
e They have published a statement which is approx. 2 pages long.
e Ford recognise their supply chain is extensive and complicated and that it
presents challenges.
e« Some of Ford's initiatives are similar to ours - this is encouraging given that
Post Office’s business and supply chains are not as extensive as Ford.
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2. Many companies have not yet published their Statements, but we have looked at
a variety to ensure that our approach is consistent. We are confident that the detail
in our Statement and our project plan is appropriate at this stage, but we will
monitor developments and keep the adequacy of the Statement under review.
3. We also looked at what some of our partners are doing:
WH Smiths
e Statement not yet published.
e They use the Ethical Trading Code of Conduct and Human Rights Policy. It
incorporates the ILO Conventions to scope out the current position on Modern
Slavery related matters.
e The policy specifies a person who takes responsibility for the Code.
Bank of Ireland
e Do not currently have a Modern Slavery statement.
e Publish a Responsible Business Report which currently makes no reference to
Modern Slavery.
e As a key partner, Post Office should investigate directly with BOI as there
appears to be very little in terms of Modern Slavery related matters.
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Post Office Limited (Post Office) & Post Office Management Services Limited (POMS)
Modern Slavery Transparency Statement 2015-2016
May 2016
Executive Summary
This statement sets out the steps we have taken during the last financial year to ensure that
Modern Slavery is not taking place in any of our supply chains or any part of our business, It is
made pursuant to section 54(1) of the Modern Slavery Act 2015 (MSA).
Our business
Post Office is the UK’s largest retail network and the largest financial services chain in the UK
with more branches than all of the UK’s banks and building societies put together. We have
provided services for more than 370 years and currently supply more than 170 products and
services (mails & retail; financial services; governments services; and telephony) from a
Network of more than 11,500 Post Office branches nationwide.
Post Office directly manages currently over 300 of the Network branches. The remainder of the
branches are managed on an agency basis by Postmasters and multiple partners.
Our supply chains
We currently operate throughout the UK, however our supply chains connect with suppliers with
a global reach.
Banking services
Our banking services are provided through a joint venture with the Bank of Ireland (Bol).
Postmasters
Postmasters can operate one or more branches. As agents they have control on how they run
their branches on a day-to-day basis. All those working in an agency Post Office branch are
employees of the Postmaster.
Multiple partners
A large proportion of the agency part of our network is run by multiple partners.
Trade Unions
In our Crown network, we work closely with the Communications Workers Union (CWU) and
Unite (CMA) Communications Managers Association.
Third Party Suppliers/Procurement
We also procure products and services from a wide range of national and international
businesses.
Respon: ity and due igence
Responsibility for our Modern Slavery initiatives currently resides with a steering group which
was appointed in January 2016. It is tasked with the development of a project plan to carry out
due diligence and implement change. Our ongoing work involves a risk analysis of our core
business and its related supply chains.
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Where are the risks of Modern Slavery at Post Office /POMS?
To date we have not identified any direct relationship with an individual or company registered
in a high risk country. The due diligence that we have undertaken so far indicates that there
could be a risk of non-compliance within our agency network because there are a large number
of people employed by Postmasters (including multiple partners) but who are not employees of
Post Office or POMS. They work directly for the Postmasters (including multiple partners). We
will be taking action to address this risk (see below).
What we have done so far
« Our Whistleblowing Policy has been updated to include references to concerns about
Modern Slavery.
« We have adapted the Post Office recruitment policy to address MSA requirements.
« We conducted an assessment of the Post Office procurement process to ensure it aligns
with the MSA. As part of this process we conducted a review of the criteria used by Post
Office to evaluate whether suppliers meet Post Office’s minimum tendering requirements.
Next steps
Our work on Modern Slavery continues and we intend to introduce the following changes in the
near future.
e Updating Postmaster's selection and appointment process to address MSA requirements.
« Amending our standard form procurement contracts.
« Developing a communication and training plan to ensure our suppliers, staff and agents
are aware of Post Office’s obligations in relation to Modern Slaver and informing them
about the Modern Slavery Helpline.
Our policies
We currently operate the following policies that describe our approach to Modern Slavery:
* Code of Business Standards
« Whistleblowing Policy
Further information
If you have any concerns about the issues raised in this statement or if you think you have
identified signs of Modern Slavery then please either contact us or call the Government's Modern
Slavery Helpline on 0800 0121 700.
Signed: eee
Name:
Date:
Strictly Confidential
POL00030888
POL00030888
POST OFFICE ~ BOARD PAGE 1 OF 4
Post Office Limited Sealings
Author: Alwen Lyons Meeting date: 24 May 2016
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1400 to 1421 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1400 to 1421 inclusive in the seal register
is hereby confirmed.
Strictly confidential
Date
16 May 2016
POST OFFICE LIMITED
Register of Sealings
Company Number
21554540
POL00030888
POL00030888
Seal
Number
Date of
Sealing
Date of
Authority
Description of Document
Persons Attesting
To Document
Destination of
Document
1400
1401
1402
1403
07/03/2016
07/03/2016
15/03/2016
15/03/2016
04/03/2016
04/03/2016
14/03/2016
14/03/2016
TR1 relating to Ground Floor, 92 Station Road, West
Wickham, BR4 OQE between Post Office Limited and
Royal Mail Group Limited.
I TRI relating to Ground Floor, Kirkby Post Office,
Newtown Gardens, Liverpool, L32 8RN between Post
Office Limited and Royal Mail Group.
Licence to Assign relating to Lease of the Post Office
forming part of the premises known as Otley Post
Office, 21 Nelson Street, Otley, LS21 1ST between
Post Office Limited, Martin Goldthorpe, Martin
Goldthorpe Limited and Martin Goldthorpe and Pear!
_ Janet Goldthorpe.
Rent Deposit Deed relating to the Post Office
forming part of the premises known as Otley Post
Office, 21 Nelson Street, Otley, LS21 1ST between
Post Office Limited, Martin Goldthorpe Limited and
Martin Goldthorpe and Pearl Janet Goldthorpe.
Alwen Lyons
Alwen Lyons
Victoria Moss
Victoria Moss
Jean Reynolds
Jean Reynolds
Jean Reynolds
Jean Reynolds
1404
1405
22/03/2016
23/03/2016
22/03/2016
17/03/2016
Deed of Surrender of Part and Deed of Variation
relating to lease of 22-24 South Street, Romford,
RM1 LRA between Golftee Nom A Limited and
Golftee Nom B Limited and Post Office Limited.
Deed of Novation between Post Office Limited, NCC
Group Escrow Limited, 3M Cogent Inc. and 3M
United Kingdom PLC relating to the Single Licence
Software Escrow Agreement dated 11th July 2011
between NCC Escrow International Limited, Post
Office Limited and 3M Cogent Limited.
Two copies sealed. Labelled (a) and (b).
Victoria Moss
Victoria Moss
Jean Reynolds
Jean Reynolds
1406
24/03/2016
21/03/2016
Deed of Variation for "Safe Haven" Agreement
between CSC Computer Sciences and Post Office
Limited.
Two copies sealed, labelled (a) and (b).
Alwen Lyons
Stan Kitchiner
Register of Sealings
Alwen Lyons
Page 2
POL00030888
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POST OFFICE LIMITED
Date Register of Sealings Company Number
16 May 2016 21554540
Seal Date of Date of Description of Document Persons Attesting Destination of
Number Sealing Authority To Document Document
1407 06/04/2016 I 06/04/2016 Underlease between Wildmoor (Hull) Limited and Victoria Moss Jean Reynolds
Post Office Limited relating to Unit 51A The North
Point Shopping Centre, Kingston-Upon-Hull
Humberside.
1408 08/04/2016 I 09/03/2016 Second Deed of Variation of the Collaboration Victoria Moss Julie Thomas
Agreement between Post Office Limited, WH Smith
High Street Limited and WH Smith Travel Holdings
_ Limited.
1409 12/04/2016 07/04/2016 Lease between Simpsons Paints Limited and Post. Victoria Moss Jean Reynolds
Office Limited relating to ground floor and
basement, 354 and 356 Edgware Road London W2
1410 12/04/2016 I 12/04/2016 I Framework agreement for the operation of Post Paula Vennells Julie Thomas
Office concessions at WH Smith
Two copies, labelled 1410a and 1410b.
1411 12/04/2016 I 12/04/2016 Master Framework Agreement. Paula Vennells Julie Thomas
_Two copies labelled 1411a and 1411b.
1412 12/04/2016 I 12/04/2016 Third deed of variation of collaboration agreement. Paula Vennells Julie Thomas
__Two copies labelled 1412a and 1412b.
1413 12/04/2016 12/04/2016 Ri relating to Balham Post Office, 92a Balham Victoria Moss Jean Reynolds
High Road, London SW12 9AF, between Post Office
Limited and RT Incorporated Limited.
1414 12/04/2016 12/04/2016 Lease relating to the Post Office forming part of the — Victoria Moss Jean Reynolds
premises known as 92A Balham High Road, London
SW12 9AF between RT Incorporated and Post Office
__Limited.
1415 12/04/2016 12/04/2016 Deed of variation relating to 92A Balham High Road, I Victoria Moss Jean Reynolds
London SW12 9AF between Post Office Limited and
RT Incorporated Limited.
1416 12/04/2016 12/04/2016 Pre-emption agreement relating to Balham Post Victoria Moss Jean Reynolds
Office, 92a Balham High Road, Balham SQ12 9AF,
_ between RT Incorporated and Post Office Limited.
Register of Sealings Alwen Lyons Page 3
Date
16 May 2016
POST OFFICE LIMITED
Register of Sealings
Company Number
21554540
POL00030888
POL00030888
Seal
Number
Date of
Sealing
Date of
Authority
Description of Document
Persons Attesting
To Document
Destination of
Document
1417
14/04/2016
19/02/2016
Deed of amendment to the parent company
guarantee between Fujitsu Services Limited and
Post Office limited.
Alwen Lyons
Michelle McMahon
1418
1419
1420
21/04/2016
21/04/2016
03/05/2016
20/04/2016
19/04/2016
15/04/2016
TR1 relating to 121-125 Peckham High Street,
London, SE15 5SF between Post Office Limited and
I Audenfield Limited
TR1 relating to Ground Floor Post Office, 243-245,
Selhurst Road London, SE25 6XR between Post
Office Limited and Agadir Limited
Settlement deed between Post Office Limited and
Jonathan Brenton and Nicholas Sutton in respect of
a dispute between Mr Brenton and Post Office
Limited by which Post Office Limited will make an ex
gratia payment totalling £75,920 without admission
of liability.
Alwen Lyons
Alwen Lyons
Victoria Moss
Jean Reynolds
Jean Reynolds
Jessica Madron
1421
06/05/2016
06/05/2016
TR1 relating to 2-4 Gratton Road, London, SW17
O0SQ between Post Office Limited and Tasklane
Limited.
Victoria Moss
Jean Reynolds
Register of Sealings
Alwen Lyons
Page 4
POL00030888
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POST OFFICE PAGE 1 OF 1
BOARD DECISION PAPER
Project Paddington
Author: Alwen Lyons Sponsor: Alwen Lyons Meeting date: 24 April 2016
Executive Summary
Context
The Board were asked by email on 5 April 2016 to delegate authority to the CEO to
sign a variation to the existing Collaboration Agreement, a Master Franchise
Agreement and a Framework Concession Agreement with WHSmith (WHS) in
connection with Project Paddington.
The Board approved this request by email response and the CEO signed the
agreements on 12 April 2016.
The Board’s delegation now requires formal ratification.
Input Sought
1. The Board is asked to ratify the decision by the Board to delegate authority to the
CEO to sign the Collaboration Agreement, a Master Franchise Agreement and a
Framework Concession Agreement with WHSmith.
Strictly Confide
Location:
1.19 Wakefield , Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ, United Kingdom
Post Office Board
24 May 2016
ATTENDANCE LIST
ATTENDEES
SIGNATURE
Parker, Tim
Callard, Richard
Cameron, Alisdair
Paula, Vennells
Stent, Carla
Tim, Franklin
Virginia, Holmes
Also in attendance
Alwen, Lyons
MacLeod, Jane
Apologies for absence
McCall, Ken
Additional access
CoSec
Wechsler, Tom
Yfice Board-24
POL00030888
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Post Office Board Agenda
POL00030888
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Present in Attendance Apologies
24" May 2016 + Tim Parker (Chairman) + Alwen Lyons * Ken McCall
+ Richard Callard + Nick Kennett
Stent tine Finish Time + Tim Franklin * Steve Ashton
12.30hrs 16.00hrs * Virginia Holmes + Jane Hill
+ Carla Stent + POAC guest
+ Paula Vennells * Mark Davies
Room 1.19 Wakefield + Alisdair Cameron * Natasha Wilson
+ Neil Hayward
* Kevin Gilliland
+ Jane MacLeod
1. Minutes of previous Board and Decision Minutes formally agreed Alwen Lyons
Committee meetings including Status
Report
2. CEO Report CEO report noted CEO to update the Board on the report. CEO
Including IR updates
POMS — Steve Ashton POMS Chi
Decision
Progress noted
3. POAC Update on POAC from the Chairman and a member of the council Tim Franklin/
Jane Hill
4. Peregrine Phase 1 Progress noted Update the Board on Phase 1 of Peregrine, negotiation with the Nick Kennett
Bank of Ireland
Presentation of POMS strategy, milestones and risks by the POMS.
Chairman & CEO
Annual Report and accounts approved as recommended by the
ARC
Decision
performance conditions
Steve Ashton/
Nick Kennett
Mark Davies/
CFO
Approval of STiP payments and performance conditions as
recommended by RemCo (Paper to be walked in)
Neil Hayward/
Natasha Wilson
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@
Post Office Board Agenda
Crown and Network Strategy Discussion To update the Board on the Crown & Network strategy Kevin Gilliland
9. Items for noting :
9.1 Sparrow Noting Board aware of the litigation and response to the Letter of Claim; General Counsel
9.2 Modern Slavery Decision To approve the statement required by the Modern Slavery Act. General Counsel
9.3 Sealings Noting Board aware of the affixing of the seal; Company Secretary
9.4 Ratifications Decision Board Decisions ratified: Paddington; Company Secretary
10. Any Other Business
close I a I 16.00
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Post Office Limited — Strictly Confidential
POLB 16(2™)
POLB 16/13 - 16/15
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 12.00 noon on 09 February 2016
at 20 Finsbury Street, London EC2Y 9AQ and by telephone conference
Present:
Tim Parker Chairman
Richard Callard Non-Executive Director (by telephone)
Alisdair Cameron Chief Financial Officer
Virginia Holmes Non-Executive Director
Ken McCall Senior Independent Director
Carla Stent Non-Executive Director
Paula Vennells Chief Executive (by telephone)
In Attendance:
Alwen Lyons Company Secretary
Jane MacLeod General Counsel (GC)
Piero D'Agostino Head of Legal Commercial
Alison Jaap Head of Design
Apologies:
Tim Franklin Non-Executive Director
POLB 16/13 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting.
(b) The directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with the
requirements of section 177 of the Companies Act 2006 and the
Company's articles of association
POLB 16/14 PROJECT TRINITY
(a) The CEO thanked the team for the work undertaken on project
Trinity and acknowledged the complexity involved in addressing the
issues arising from the Front Office IT plans.
(b) The CFO explained that four key questions had been considered
before recommending the Trinity changes to the Board:
1. Would this be the right option commercially and operationally
for Post Office?
2. Would the extension of the Fujitsu (FJ) contract on the terms
described be in the best interests of Post Office?
3. Could the change be made in a legally compliant way?
4. Would it deliver a long term cost effective relationship with FJ?
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(c) The Board discussed the options available and asked for more
detail on the termination of the IBM contract.
(d) The GC explained that the IBM contract specifically permitted
termination for convenience and set out a formulaic calculation of
amounts payable in the case of exercise. In the current
circumstances this resulted in a payment of c£13 million to IBM
plus the cost of the work already completed. The Board asked if the
£13m could be reduced and the GC advised that this would be
difficult to achieve, although the amounts payable for work
undertaken to date would need to be negotiated.
(e) The Board asked which companies might challenge the
procurement process. The CFO advised that both Accenture or
CSC would be aggrieved by the decision and that they represented
the greatest risk. The numbers contained in the business case
included provision for a challenge.
(f) I The Board discussed the length of the proposed contract with FJ.
The GC explained that Post Office had proposed an extension to
the FJ contract of 4 years with 2 further one year extensions...
However FJ had suggested a 6 year term, with the ability to
terminate after 4 years. The GC explained that the risk of a
successful challenge would increase if there was a material
extension to the term, as a longer term may not be considered a
‘modification’ of the existing contract, but rather the award of a new
contract, in which case the Regulation 72 exemption would not
apply. The CEO noted that this risk needed to be considered in
light of the benefits that would be obtained from a longer contract.
ACTION: (g) The GC was asked to test the impact of a longer term contract
6c period on regulation 72 of the Public Contract Regulations
2015.
ACTION: (h) The Board asked the CFO to consider whether, and if so, how
CFO the termination costs would be disclosed in the Accounts.
ACTION: (i) I The GC was asked to consider whether the termination costs
Gc would need to be disclosed under an FIO request.
(j) I The Chairman requested the GC to provide an update on the risk of
an action for misfeasance in public office. The GC explained that a
complainant, who has suffered a loss, could bring an action for the
tort of misfeasance in public office. However there were a number
of elements of the tort which would need to be established, one of
which was to establish that the Company and/or the Board had
acted with malice or bad faith, causing deliberate injury to the
POL Board minutes, 09 February 2016 2 DRAFT v1
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(k)
ACTION: ()
CFOIGC
(m)
ACTION: (n)
CFO
complainant. Accordingly, the GC noted that if the Board believed
in good faith that a change of contractor was not possible for the
economic and technical reasons set out in the Board papers, and
that a change would cause significant inconvenience and/or
substantial duplication of costs, then it would be more difficult to
establish that Post Office or the Board had acted with malice or in
bad faith.
The Board considered the decision to terminate the IBM contract
and agreed that it was in the best interests of the Company and
although the £13m termination cost was high, it was a contractual
obligation and could be defended if required.
The CEO proposed that a review would be undertaken of the
initial procurement processes leading up to the decision to
award the contract to IBM, to ensure that any lessons from
that review were captured. The findings from that review
would be reported at the ARC.
The CFO stressed that Trinity enabled the Business to remain
within its funding plan to March 2018, explaining that the funding
post 2018 was still to be agreed
The Board asked, as part of the presentation of the 3 year plan
in March, to be provided with a list of projects, their value and
the committed spend.
After careful consideration, the Board:
Noted the proposal for the termination of the IBM contract and the
extension of the Fujitsu contract for Horizon.
Noted the risks and issues arising around delivery and legal and
procurement.
Approved the termination of the IBM contract.
Approved the extension of the Horizon contract with Fujitsu on the
terms set out in the paper.
Approved the on-off costs of £39.1m and the operating costs of
£107.3m for the committed minimum contract of 4 years.
Authorised each of the Group Chief Executive Officer (CEO) and
the Chief Financial Officer (CFO) to:
POL Board minutes, 09 February 2016 3 DRAFT v1
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¢ finalise the necessary contractual documentation (including the
Notice to Terminate and all ancillary documentation) to
terminate the IBM contract;
¢ finalise the necessary contractual documentation to extend the
Fujitsu Horizon contract and any ancillary documentation; and
« — authorise the execution of all such documentation.
POLB 16/15 CLOSE
(a) There being no further business, the Chairman declared the meeting
close.
Chairman Date
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POLB 16(3")
POLB 16/16 - 16/25
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a Board meeting held at 9.00am on 21 March 2016
at 20 Finsbury Street, London EC2Y 9AQ.
Present:
Tim Parker Chairman (Minutes POLB 16/19-16/25)
Richard Callard Non-Executive Director
Alisdair Cameron Chief Financial Officer
Tim Franklin Non-Executive Director
Virginia Holmes Non-Executive Director
Ken McCall Senior Independent Director
Carla Stent Non-Executive Director
Paula Vennells Chief Executive
In Attendance:
Alwen Lyons Company Secretary
Martin Edwards Director of Strategy (Minute POLB 16/19 only)
Dave Carter Group Financial Controller (Minute POLB 16/19 only)
Mark Ellis Supply Chain Director (Minute POLB 16/20 only)
Nick Kennett Financial Services Director (Minute POLB 16/22 only)
POLB 16/16 INTRODUCTION
(a) In the absence of the Chairman Ken McCall, Senior
Independent Director took the Chair, noted that a quorum
was present and opened the meeting.
(b) Each Director confirmed that they had no conflicts of
interest in relation to the business to be considered at the
meeting.
POLB 16/17 MINUTES OF THE PREVIOUS BOARD AND COMMITTEE
MEETINGS INCLUDING STATUS REPORT
Minutes
(a) The minutes of the meeting of the Board held on 22™
January 2015 were approved as accurate records and the
Chairman was authorised to sign them.
(b) The minutes of the Audit, Risk and Compliance Committee
meeting held on 10'* November 2015 were noted.
POL Board minutes, 21 March 2016 1 FINAL
ACTION: CFO
ACTION: CFO
POLB 16/18
ACTION: CEO
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(c)
(d)
(e)
Status Report
POLB 16/10 (c) — The Board noted the options set out in
the Prosecutions Policy paper and endorsed the publication
of the policy on the Post Office’s website.
POLB 15/102 (d) — The Board noted the paper provided.
The CFO said that the approach to suppliers covered cyber
security as a whole and not purely Distributed Denial of
Service (DDoS) risk.
Provide a list of the Top 20 suppliers to the ARC
The CEO proposed that a supplier strategy be
presented at a future ARC covering the Top 20
Supplier relationships and Supplier compliance.
The Board noted the Status Report dated 14/03/2016.
CEO REPORT
(a)
(b)
(c)
(d)
CEO Report
The CEO introduced the CEO Report, focusing on the
following key points:
Scorecard performance
The CEO believed that the Business was now well placed to
hit the financial target for the year and that the 6000"
transformed branch would be opened before the Easter
break.
The Board asked the CEO to pass on _ their
congratulations to Kevin Gilliland and the Network
Transformation team for the excellent result.
Project Paddington
The CEO explained that Project.
with I
Board within the next hree weeks. The CEO assured the
B ard that this was af IRRELEVANT
Project Pathfinder
The CEO explained that the period had
been extended by a month to take account of a request for
_Mare time. fram individuals affected; the timing o'
IR NT _jand to enable a considered view on the
nMnouncement.
POL Board minutes, 21 March 2016 2 FINAL
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(e) ,The CFO clarified thatthe!
IRRELEVANT
the Business needed to be sure that theirreevaw
IRRELEVAN id not have a significant effect or -tre-~
nmsultation. The Board acknowledged that the timing wa:
ACTION: NH
Ministerial Meeting.
(f) Richard Callard reported that the Minister had recently met
Brian Scott, Unite, and that they had discussed both
franchising and pensions. The Minister had taken the line
that these were commercial decisions for the Board and the
Executive.
(g) Transformation Report
The CEO explained that the transformation plans were being
rebased after the Trinity project. It was agreed that the IT
strategy would be presented at the July Board.
ACTION: CFO The IT Strategy would be a topic for discussion at the
July Board meeting.
(f) The Board noted the CEO report.
POLB 16/19 APPROVAL OF ONE YEAR OPERATING PLAN AND BUDGET
2016/17, THREE YEAR PLAN AND APPROVAL OF RELEASE
OF BUDGET INFORMATION TO SHEX FOR FUNDING
OBLIGATION
(a) The Chairman welcomed Martin Edwards, Director of
Strategy, and Dave Carter, Group Financial Controller, to
the meeting.
Period 11 Financial Results
(b) The CFO introduced the Period 11 Financial Results. The
Board acknowledged the EBITDAS performance for
2015/16, recognised that this had been driven by cost
reduction and asked whether this delivered the necessary
growth and run rate for 2016/17. The CFO explained that
over the next two years he expected slight income decline
during a period of right sizing the cost base, but that the
year-end run rate for 2015/16 was consistent with the
budget for 2016/17.
POL Board minutes, 21 March 2016 3 FINAL
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(c) The Board noted the Period 11 Financial Results.
2016/17 Bi in Year Plan
(d) The CFO introduced the 2016/17 budget and 3 year plan.
(e) The proposed budget and year 2 of the three year plan were
aligned with the rebased funding targets agreed with ShEx,
being an EBITDAS targets of -£10m in 2016/17 and +£28m
in 2017/18. Year 3 of the plan was outside of the existing
funding agreement.
(f) Tim Parker joined the meeting.
(g) The Board questioned the shape of the income in the 3 year
plan which remained flat for 2 years and then showed
significant Financial Services (FS) growth. Martin Edwards
explained that year 3 of the plan included £15m FS income
from the buyout of Junction.
(h) The CFO explained that the next 2 years were the main
focus of the plan as these years aligned to the current
Government funding agreement. The Executive and ShEx
would start to consider the next funding agreement in the
summer after the Board strategy day.
(i) The CFO noted that there was considerable risk in achieving
the -£10m target in 2016/17 and therefore the Group
Executive was in the final stage of agreeing more stretching
cost targets to mitigate that risk.
(i) The Board approved the 2016/17 budget.
(k) I The Board approved the 3 year plan and noted that the plan
would be overlaid by the new Strategic Plan.
(1) The Board discussed the 2016/17 scorecard and the
proposal to have EBITDAS as the only target aligned to the
STIP (Short Term Incentive Payment). The CFO explained
that the GE had discussed this proposal and agreed that it
should be recommended to the Board as a 1 year proposal
to support the rightsizing of the cost base.
(m) The CEO assured the Board that she and the Executive
recognised the need for a balanced scorecard including
customer, people and operations targets and that GE
personal objectives for 2016/17 would also include
attestation for the areas of risk for which they are
accountable.
(n) Richard Callard reminded the Board that the Government
had to approve STIP measures and targets and that they
POL Board minutes, 21 March 2016 4 FINAL
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may prefer to continue with a Network Transformation
element as this related directly to the funding.
(0) The Board approved the 2016/17 scorecard and noted that
the bonus structure, thresholds and targets would be
discussed at the Remuneration Committee on 12" April.
Release of Budget information to ShEx to fulfil the
fundin ligation
(p) The Board approved the release of the 2016/17 budget
information submission to ShEx in order to release the
Government funding.
(q) I Martin Edwards and Dave Carter left the meeting.
(r) Tim Parker took over the role of Chair.
POLB 16/20 PROJECT IRIS
(a) The Chairman welcomed Mark Ellis, Supply Chain Director,
to the meeting.
(b) Mark Ellis explained the work undertaken since the January
Board to finalise the options considered, confirm the
business case benefits, and build and test the contingency
plans. The implementation plan had been shortened from
10 to 7 months.
(c) The Board recognised that implementation of IRIS was
going to be difficult and asked, in the event of Industrial
Action (IA), if there were other areas, such as marginal
outsourcing which should be included in the proposal. Mark
Ellis accepted that there were other changes to ways of
working which could have been considered. However he
recommended that these be implemented at a later stage
as no guarantees were being given for future ways of
working.
(d) The CFO stressed that if IA led to changes such as
postmasters managing their own cash, this may be a
template for the future and could lead to completely new
ways of working.
(e) The Board asked if consideration had been given to further
reducing the number of depots and closing the difficult sites
in London. Mark Ellis explained that modelling had shown
the optimal number of sites to be 14-16 and that the plan
was to keep 15 depots. A proposal for fewer, larger depots
had been considered but discounted because of the capital
expenditure required. The Business needed a depot in
POL Board minutes, 21 March 2016 5 FINAL
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London and had chosen to close Dartford and keep East
London open.
(f) Mark Ellis explained that any IA would put pressure on the
quality of service to the largest 30 external customers, who
make up 75% of the revenue. It was expected that this
revenue would be lost quickly.
(g) The Board discussed the pension consultation and IRIS
announcement timings as debated earlier in the meeting,
with the action for Virginia Holmes to opine.
(h) Mark Ellis assured the Board that Security and Health &
Safety issues had been considered and addressed in the
contingency planning.
(i) The CEO stressed that ShEx and the Minister were sighted
on the plans and were supportive. Richard Callard
suggested that the Executive include briefing DWP as part
of the stakeholder plan.
ACTION: ME Include DWP briefing in the IRIS stakeholder plan.
(j) I The Board_approved the recommendation to restructure the
Supply Chain and exit the external market whilst noting that
this was likely to trigger prolonged, public industrial action.
(k) The Board approved the immediate next steps including
contingency preparations, conversations with Government
and a scene setting conversation with the Unions. Subject
to discussions regarding the pension consultation.
() The Board approved the proposed negotiating mandate.
(m) ME left the meeting
POLB 16/21 ITEMS FOR NOTING
Cash and Working Capital
(a) The CFO introduced the Cash, Working Capital and
Headroom paper. The Board discussed the paper and
agreed that more focus would be required on cash in the
future with the possibility of it becoming a bonus worthy
objective as headroom tightened.
(b) The Board ni
d the paper.
Trinity Contract
(c) The CFO introduced the project Trinity paper and updated
the Board on a FOI request received from a legal firm. The
POL Board minutes, 21 March 2016 6 FINAL
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GC would lead on the response to the request ensuring any
commercial information was redacted.
(d) The Board noted the progress made.
Sealings
(e) The Board resolved that the affixing of the Common Seal of
the Company to the documents set out against items
numbered 1379 to 1399 inclusive in the seal register is
hereby confirmed.
POLB 16/22 ITEMS FOR RATIFICATION
Contract Extensi
explained the rationale behind extending the
for two years.
(b) The Board approved the award of a two year contract
t : i delegating authority to
the CEO or the CFO to sign the contract.
i Contract
(c) The Board approved a new contract with
of five years and a maximum cost o ‘nmeevaeri aN delegated
authority to the CEO and CFO to sign a
parameters.
ct within these
[IRRELEVANT ‘Contract
(d) The Chairman welcomed Nick Kennett, Financial Services
Director to the meeting.
(e) Nick Kennett explained the short term agreement
negotiated with the IRRELEVANT ) which is targeting
to generate an adartional income to Post Office in
2016/17; in receiving this payrriént, Post Office will support
fomewnireduce the size and cost of its liability balance sheet.
“TRE additional income is included in the 2016/17 AOP.
(f) I The agreement also included an extension from two to four
years of the run-off pracesses in thefiz ontract if Post
Office were to advise"! from 2021 it_isexitina,
Financial Services. This extension supports IRRELEVAN
manage the risks associated with Post OffiCiceememgperenent
the impact on Post Office being negligible as it pre-supposes
that Post Office had made the strategic decision to exit the
personal financial services market. Post Office would
receive income over four, rather than two, years.
(g) Nick Kennett also assured the Board tl agreement
_did not affect any negotiation regarding! or the wider
he confirmed that the coré exit/termination
I IRRELEVANT
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provisions, were Post Office to remain in Financial Services,
are unchanged.
(h) The Board approved the proposed agreement with==*"and
authorised the CFO and Director of Finangial.Services..to,
finalise the terms of the arrangement wit! LEVANT ;
approve the form of legal agreement to give effect to the
arrangement and sign any such agreement(s) in accordance
with Post Office’s usual procedures.
(j) Nick Kennett left the meeting
POMS Articles
(k) I The Board approved the specified amendments to the
articles as set out in Appendix A of the paper.
POLB 16/23 VERBAL UPDATES FROM BOARD COMMITTEE CHAIRS
Remuneration Committee (RemCo) Update
(a) Ken McCall gave a verbal update from the RemCo meeting
held on the 9" February 2016.
The main areas the meeting covered were:
e The letter to the Minister regarding bonus claw-back
for the Postmaster Compensation provision error.
e Directors’ remuneration report and key trends in the
market.
e LTIP trends in the market place and design
principles.
« The need to recalibrate the LTIP to provide
meaningful incentives.
The Board noted the update.
Nomination Committee (NomCo) Update
(b) The Chairman gave a verbal update from the NomCo
meetings of 25'" November 2015 and 9" February 2016.
The main areas the meetings covered were:
e Appointment of two new NEDs.
e Confirmation of Board Committee membership.
« Recruitment of a Digital Director and Sales Director.
e Changes to the senior leadership population and
introduction of the L300 group.
The Board noted the update.
Audit, Risk and Compliance Committee (ARC) Update
(c) Carla Stent gave a verbal update from the ARC meeting held
on the 17" March 2016.
The main areas the meeting covered were:
e Update from the POMS ARC Chair and the
relationship with POMS.
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e Risk & Controls framework update. Two new risks
were included; Health & Safely and Pensions.
¢ Report & Accounts corporate governance statement
agreed.
« Approved the internal audit plan including a cyber-
security audit.
e Year end audit discussed with Ernst & Young (EY) and
the audit partner challenged to explain how the audit
would be more effective this year.
The Board asked what Health & Safety issues had moved
the risk to Amber on the risk register. The CFO explained
that the new Director of Property was putting new processes
in place to manage 3% parties, the issues raised by these
processes had been included on the agenda of the Executive
Health & Safety Committee. Until this was complete the risk
should remain as Amber.
The Board noted the update.
Post Office Advisory Council (POAC) Update
(d) Tim Franklin gave a verbal update from the POAC meeting
help on the 17" March 2016.
The main areas the meeting covered were:
e The network branch proposition was debated with
input from the Business, Onestop and an
independent postmaster.
e Input from the Council on customer and retailer
proposition.
e Review of Council membership - everyone has asked
to stay on the Council — they are invaluable source of
feedback.
ACTION: CoSec Circulate the POAC minutes to the Board
The Board noted the update and that POAC is an agenda
item at the next Board meeting.
POLB 16/24 ANY OTHER BUSINESS
Sale of.
(a) The CFO explained opportunity to sell
Office tax losses to which would generate ;
income. This was the limit which could be sold und.
(b) The Board approved the sales of ta :
POLB 16/25 CLOSE
(a) I There being no further business, the Chairman declared the
meeting close.
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POLARC 16(1*)
POL ARC 16/01 - 16/09
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
held at 9.30am on 22 January 2016
at 20 Finsbury Street, London EC2Y 9AQ
Present:
Carla Stent Chairman (Chair)
Tim Franklin Non-Executive Director (TF)
Ken McCall Non-Executive Director (KM)
Richard Callard Non-Executive Director (RC)
In Attendance:
Paula Vennells Chief Executive (CEO)
Alisdair Cameron Chief Financial Officer (CFO)
Garry Hooton Audit Manager (GH)
Alwen Lyons Company Secretary (AL)
Jane MacLeod General Counsel (GC)
Mike Morley-Fletcher Head of Risk and Assurance, Corporate Services, (MMF)
Angus Grant Ernst & Young, (AG)
Mounia Mukina Ernst & Young, (MM)
Amanda Bowe Post Office Management Services Limited Non-Executive
Director & Chair of ARC (AB) (Minute 16/07 only by phone)
POLARC 16/01 INTRODUCTION
(a) A quorum being present, the Chairman opened the meeting.
(b) Each Director confirmed that they had no conflict of interest in
relation to the business to be considered at the meeting.
POLARC 16/02 MINUTES OF THE MEETING HELD ON 10 NOVEMBER 2015, STATUS
REPORT AND MATTERS ARISING
(a) The minutes of the meeting held on 10 November 2015 were
approved as presented and the attendant Committee member was
authorised to sign them as a true record.
(b) IThe Committee noted the action list dated 1°* December 2015.
(c) The CFO explained that Audit fee for 2015/16 had yet to be
finalised as the focus had been on completion of the
subpostmasters’ compensation issue.
ACTION: CFO Report back on the on the finalisation of the Audit fees.
(d) The Committee asked how the Executive were dealing with the
issue of inappropriate expenses claims. The GC explained that the
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issue, relating to confusion over LIW/Homebase categorisation,
was being addressed by the introduction of an annual
reconciliation. The ARC asked for an update on the implementation
of the recommendations from the Financial Crime audit at the
March meeting.
Report back on the implementation of the recommendations
ACTION: GC from the Financial Crime audit at the March ARC.
(e) IThe Committee noted that at the last meeting the CEO had
requested a review to give assurance regarding the security of
customer data (minute POLARC 15/44 (e)). The GC was asked to
circulate the outcome of the review to the Committee
ACTION: GC Circulate the report on security of customer data to the ARC.
The Chair asked the GC to review the Internal Audit timetable
ACTION:GC to include cyber risks.
POLARC 16/03 RISK UPDATE
(a) MMF introduced the Risk Update and undated the Committee with
the progress made to date on the Risk Management Project Plan.
(b) MMF explained the new Group Risk Profile which identified and
evaluated the (GE) Group Executive's proposed top risks for the
Business. The Committee discussed the Risk Profile and
challenged whether Industrial Relations was the highest risk. They
asked the Business to consider whether:
e failure to achieve cost reduction targets;
e failure to renegotiate an effective MDA with RMG; and
e cyber security attacks which disrupt systems — for example,
those affecting payments to POCA customers;
should be identified as higher risks.
Reconsider the Top Risks and whether they should include
failure to achieve cost reduction targets; failure to renegotiate
ACTION: MMF an effective MDA with RMG; and cyber security attacks which
disrupt systems — for example, attacks which affect payments
to POCA customers.
(C) The Chair asked that the Risk Profile be amended to clearly show
GE accountability for managing each risk. KM suggested that the
sign off by the GE owner should be included in any year end
attestation process.
Ensure the Risk Profile shows clearly which GE member is
accountable for managing each risk. Include GE signoff, for
ACTION: MMF the individual risks for which they are accountable, as part of
the new yearend attestation process for year ending March
2017.
(4) MMF explained that general controls had been identified and
collected into a “Framework”, so that the GE could ensure that the
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controls in place were at the right standard, and have the right
effect enabling them to be evidenced for yearend attestation (year
ending March 2017). The Committee asked if the Group Executive
would have personal objectives aligned to the Framework. The
CEO assured the Committee that personal objectives for GE
members would be aligned to the General Control Framework.
The CEO agreed to ensure that all areas in the General Control
ACTION: CEO Framework were assigned to Group Executive members as
part of their personal objectives
(e) The Committee discussed the ‘Tone from the Top’ and agreed it
needed more clarity as the project progressed. It was agreed that
this would be the key messages, behaviours and communication
that the CEO and GE demonstrated at all times. These needed to
be aligned and to exemplify the values of the Post Office.
(f) IThe CFO explained the alignment with the Financial Controls
project which was building systems to enable attestation that
financial controls were working. He noted that this was work in
progress.
(g) The Committee discussed the frequency of attestation and
reporting and AG explained that in the Financial Services industry
quarterly reporting would be expected. The CFO proposed the
introduction of six monthly reporting to align with the external
reporting calendar. The Chair noted that it took time to embed
attestations and recommended that the Executive have “dry runs”
prior to the year end attestation (year end March 2017).
The CFO/GC to ensure that the areas in the General Controls
Framework are understood and that the Group Executive
ACTION: GC/CFO recognised their accountabilities to attest to the controls
being in place in time to support the Directors’ statement in
the 2016/17 Report & Accounts.
(h) IThe Committee asked for an update on the Control Framework at
the next ARC with more details of controls, GE owners and subject
matter experts, plus a timetable for when the ARC will receive
assurance.
Produce a statement including more details of controls, GE
ACTION: MMF owners and subject matter experts, plus a timetable for when
the ARC will receive assurance.
(i) I MMF updated the Committee on the progress in the Policy
Framework project, explaining that the ‘strawman’ included in the
paper was likely to change, and that the approach was being tested
using the policies owned by the GC. The Committee asked for
dates and timelines for establishing the succinct set of Key Policies,
setting out what can be expected over the next quarters.
ACTION:MMF Include dates and timelines in the Policy Framework
document, with detail as to what the amalgamated policies
include.
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(j) The CFO highlighted the challenge in articulating a pricing policy
across the wide range of products sold by the Business. The
complexity was acknowledged and it was accepted that the policy,
if required, may need to be restricted to a set of principles.
(k) The Committee asked Ernst & Young (EY) to provide a list of the
key policies which they would expect to see in a market median
company, to act as a benchmark.
(1) MMF introduced the Business Continuity project and explained the
aim of the Business to benchmark against the measurable
IS022301 business continuity standard.
(m) The Committee were perturbed by the findings to date. The CEO
was disappointed by the language in the report and challenged the
extent to which the ‘business continuity & crisis management is
deficient, unpractised and not embedded within the organisation's
culture’. The CEO gave examples of the recent flood crisis where
offices had been given support and reopened because people were
very aware of how to manage the network in a crisis. The CEO
believed that, since separation from RMG, more could have been
done to document and test the procedures in place.
(n) The Committee asked the GE sponsor of the paper to update the
ARC on the progress being made. Including a list of top suppliers
and whether they have contingencies in place; specifically before
the next meeting.
Continue to update the ARC on the progress being made to
improve Business Continuity. Including a list of top suppliers
ACTION:GC and whether they have Business Continuity contingencies
plans in place before the next meeting.
(0) MMF gave a progress update on Incident Reporting processes.
The Committee asked for an explanation as to what constitutes a
P1, P2 or P3 incidents how they are monitored and the SLA in
place to report and deal with them. The Committee also asked how
the Executive remediate the root cause of problems and challenge
suppliers to change processes.
At the next update, provide a report to define P1, P2 or P3
ACTION:MMF incidents and the SLA in place to report and deal with them. .
Include how the Executive remediate the root cause of
problems and challenge suppliers to change processes.
(p) The Committee discussed the statement made in the Annual
Report & Accounts that the Business complied with the ‘spirit’ of the
UK Corporate Governance Code (Code) and the implications of
changes in the Code. AG recognised that the Business was not
legally caught by the Code and that significant work would need to
be done to continue to state a compliance with the ‘spirit’ of the
code. The key areas where the Business does not comply with the
Code are those concerned with reporting and risk management
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ACTION: GC
(1)
(s)
ACTION: GC/CFO
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maturity, particularly providing evidence of the review of the internal
controls.
The Committee agreed that the Executive should focus on
improving risk management before any public benchmarking
statement. The Committee asked the Executive to work with the
external auditors to set out what a three year roadmap to
benchmark against the Code would look like.
The Executive to work with the external auditors to set out
what a three year roadmap to benchmark against the UK
Corporate Governance Code would look like.
The GC supported the decision to withdraw from making a
statement in the Report & Accounts but recognised the importance
of benchmarking against the best practice of the Code albeit
designed for public companies.
The Committee agreed that the Business should pull back from a
reference to the Code in the Report & Accounts but agreed that a
statement was necessary to explain the Business was still
maintaining high standards.
The Executive would discuss how it would reference the
Corporate Governance Code in the Report & Accounts, and
revert to the Committee by email before discussing with the
Board Chairman
After providing feedback on its elements, the Committee noted the
Risk Update.
POLARC 16/04 INTERNAL AUDIT UPDATE
(a)
POL ARC, 22" January 2016
GH introduced the Internal Audit Update focussing on the following
key points:
Contract Management. Significant progress has been made with
50% of actions now complete and the other 50% on track for
completion by the end of March. A further report would be provided
at the March ARC.
Property and Health & Safety compliance. Good progress with a new
Head of Property Compliance now in place and although there are
still actions to complete GH believed the controls were improving.
Open Actions. A detailed revised report would be provided for the
March ARC. The Committee recognised the number of internal
audits and reports due in the last quarter and asked for assurance
that the internal audit team had enough resource to complete the
work. GH gave assurance that the plan would be delivered. The
Chair asked for reports to include feedback on closure of high rated
actions.
Included post audit assurance in the ARC report in relation to
audit actions rated as high.
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ACTION: GH GH circulated a paper detailing the Internal Audit Planning Process
(b) and the Draft Audit plan proposed for 2016/17. The Committee were
asked to feedback any comments to GH who would collate and share
with the Chair in February before returning to the Committee with a
final proposal
ACTION: Committee members to feedback to GH on the audit plan
Committee proposal
members
Committee members agreed that all audit reports with a red report
(c) rating would be circulated in full the Committee as soon as the report
was available. Audit reports with an amber or green report rating
would be summarised and reported at the subsequent ARC meeting.
GH to ensure that all reports with a red rating are circulated to
the Committee and to the Chair of the POL Board.
ACTION:
GH Having taken all the discussion points into consideration, the
Committee noted the outcomes of the recent audits and reviews and
(d) further noted the current and upcoming work.
POLARC 16/05 FINANCIAL CONTROLS PROGRESS REPORT
(a) The CFO introduced the Financial Controls Progress Report and
recognised the importance of the work to give the Executive and the
Board the confidence to sign the 2015/16 Accounts. He explained
that the project had started by testing its methodology by checking
the fixed assets, as this was a relatively easy task. The next
reconciliation would be the income numbers, as this was the most
complex area and material to the accounts. The CFO explained the
interfaces between the systems involved which complicated the
reporting process. He did not believe that systematic errors existed
as these would lead to complaints from customers and clients, but
could not yet prove this was the case.
(b) The Chair asked the CFO to focus on ensuring the systems were
secure and providing the correct information, with a plan to automate
as soon as possible.
(c) The Chair asked for progress reports at every ARC and for Financial
Reporting to be flagged in the risk reports.
ACTION:CFO Provide Financial Reporting progress reports at every ARC and
include in the risk reports.
(d) Having taken all the discussion points into consideration, the
Committee noted the Financial Controls Progress Report.
POLARC 16/06 POSTMASTER COMPENSATION ISSUE / SIGNING OF INTERIM
ACCOUNTS
Postmaster compensation
(a)
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The CFO introduced the Provisions for Compensation paper and
explained the background to the understatement of the provision.
The error had arisen because agreements with subpostmasters had
not been captured accurately, and the provisions based on this
information had been wrongly calculated. After significant work the
provisions had been increased by £67m in September 2014 and
£87m in March 2015. Adjustments to both accounts were supported
by EY.
(b)
The CFO stressed that there were no implications for payments to
subpostmasters or adjustments to the EBITDAS in the reports.
(c)
The Post Office Interim Reports and Accounts for September 2015
and the Post Office Holdings Company Report & Accounts could now
be signed and published.
(d)
The Chair asked why the mistake had not been discovered sooner
by the Business or EY, and if both the CFO and AG were now
absolutely sure of the accuracy.
The CFO stressed that the compensation provision would always by
its nature be an estimate as individual branch details change, but
that he was now comfortable that the provision was prudent and
would cover the right level of compensation. AG agreed and
emphasised that the provision was an estimate as individual
contracts changed during the process. The Chair pointed out that the
recording and aggregating of information had been completed
incorrectly and asked for assurance from AG that the provision was
now accurate. AG explained that the auditors had checked the last
nine months of actual payments and that a lot of work had been done
to check the manual processes with a branch by branch analysis,
and that they were now comfortable with the provision as restated.
(f) The Committee asked why EY had not identified the problem during
the original External Audit. AG explained that they had done limited
testing and with hindsight should have focussed more on the manual
processes. This was being addressed in this year’s external audit
plan.
(g) The Committee asked what other provisions were made in the
Balance sheet and how they were tested.
ACTION: CFO The CFO was asked to provide the next meeting with an
analysis and assurance of the provisions on the balance sheet.
The CFO to agree with EY the audit approach for each financial
ACTION: CFO/JAG statement area.
Having taken all the discussion points into consideration, the
(h) Committee noted the progress and the next steps.
Interim Report
The Interim Report for the six months ended 27 September 2015,
(i) had been circulated to the Committee.
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The Committee challenged whether the provision was a true ‘timing
(j) error’ as reported in the narrative to the interim report. The CEO
promised to check the narrative before the accounts were signed on
Monday 25" January.
The CEO promised to provide a briefing pack including; the
ACTION: interim report; the press statement; and Qs & As to the Board
CEO before publication of the interim accounts.
The Committee asked for clarification about a second restatement in
(k) the accounts concerning cash and debtors. The CFO explained that
this was a technical classification which EY had requested at the end
of 2014/15, and was not a new issue. The Committee asked for this
issue to be included in the Qs & As circulated as it would be easy to
conflate the two issues.
Richard Callard explained that the mistake had knocked the
(Il) Minister's confidence in the Business and its reporting.
Having taken all the discussion points into consideration, the
(m) Committee noted the Interim Report.
POLARC 16/07 REPORT FROM POMS ARC
(a) The Chair welcomed Amanda Bowe, Post Office Management
Services Limited Non-Executive Director and Chair of ARC, to the
meeting by conference call.
(b) AB introduced the Report from Post Office Management Services
ARC and explained that work was underway to establish a risk
framework and risk appetite for POMS.
(c) AB highlighted two key risks:
« the role of Post Office as the Appointed Representative of
POMS, and
e¢ POMS oversight of branch compliance.
(d) AB stressed the importance and risks to both Post Office and POMS
of poor branch compliance and its mitigation through 1° and 2" line
oversight arrangements.
(€) AB acknowledged that POMS was at an evolutionary stage in its
development and had resource and capacity risk especially in its
Risk and Compliance function.
(f) AB explained that she was meeting the External Auditors in February
and currently waiting to agree the POMS audit plan.
It was agreed that the POL and POMS audit plans should be
ACTION: GH aligned.
(g) The Committee thanked AB for the POMS ARC report, which
contained the right level of detail from the wholly owned subsidiary
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(h) The Committee noted the report.
(i) AB left the meeting.
POLARC 16/08 ANY OTHER BUSINESS
(a) There being no further business the meeting was closed.
POLARC 16/09 DATE OF THE NEXT MEETING
(a) It was noted that the next meeting of the Committee would be 17"
March 2016.
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Post Office Limited Board
Status Report as at: 16/05/2016
REFERENCE [ACTION Action Owner [Due Date [STATUS Open/Closed
(GE Member)
anuary 2016 ICEO Report and Transformation Update CEO September Open
POLB 16/2 (c) IHow should the Business recognise exceptional Board Meeting
contribution by individuals. Consideration to be
given to Chairman's awards or best Post Office
awards.
anuary 2016 [Project Trinity General Duly Board Open
POLB 16/14 (I) ITo undertake a review of the initial procurement —_ICounsel
process leading up to the decision to award the
contract to IBM, to ensure that any lessons from
that review were captured. The findings of the
review are to be reported to the ARC.
January 2016 ICEO Report and Transformation Update Neil Hayward IMay Board — [Action point closed, noting paper [Closed
POLB 16/2 (g) ITo provide a paper explaining the rationale behind provided and appended to status
ithe NFSP funding and the move to a trade report.
association to assist new Board members.
March 2016 [Status Report CFO July This should be covered as part of [Open
POLB 16/17 (d)IThe CEO proposed that a supplier strategy be the IT Strategy.
presented at a future ARC covering the Top 20
Supplier relationships and Supplier compliance.
March 2016 [Post Office Advisory Council (POAC Update) Company Ongoing Closed
POLB 16/23 (d)ITo circulate the POAC minutes to the Board Secretary
March 2016 [Project Iris, z Mark Ellis Closed
16/20 (i) ITo include thé IRRELEVANT I in the Iris stakeholder indertaken by Mark
plan. as fEllis“aiia “Cris Doutney.
March 2016 [CEO Report CEO May Board [Completed Closed
POLB 16/18 (b)IThe Board asked the CEO to pass on their Meeting
congratulations to Kevin Gililland and the Network
Transformation team for the excellent result.
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March 2016 [CEO Report CEO July Board IT strategy on July Board. (Open
POLB 16/18 (g)IThe IT Strategy would be presented as a topic for
discussion at the July Board meeting.
March 2016 CEO Report Neil Hayward 1VH and Natasha Wilson caught up IClosed
POLB 16/18 (e INeil Hayward to consult Virginia Holmes on and NW explained process and
) Pathfinder in light of Iris, and to opine on how the rationale.
[Trustee is likely to respond.
March 2016 ‘Status Report ‘CFO Done. Closed
POLB 16/17 (d)
Provide a list of the Top 20 suppliers to the ARC
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POST OFFICE BOARD UPDATE PAPER
NFSP Grant Agreement update
Author: Nick Beal Sponsor: Neil Hayward Meeting date: 24 May 2016
Executive Summary
Context
The Grant Agreement with NFSP, which funds the NFSP’s day to day operation, grants
for support projects (value p.a. £1.5m +£1m) and their transition to a Trade
Association, was approved by the board in June 2015. In advance of the end of the
first year of the agreement, this paper is an update on how the agreement is working,
key areas that have benefitted from NFSP support and a summary of the background
to the agreement.
Questions addressed in this report
1. What progress NFSP have made in their transition to a Trade Association?
2. What activity in Post Office has benefited from NFSP support?
3. What was the rationale in establishing the agreement?
Conclusion
Progress since establishing the agreement has been good but there have inevitably
been occasional tensions that have meant that NFSP have been challenged to
reconcile the reality of being funded by Post Office vs their traditional role that they
have yet to fully move away from.
But the agreement is a strong basis for both organisations working together and we
will expect an approach over the next 12 months that will reinforce this opportunity
and see some very different initiatives between us.
Strictly Confide
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The Report
What progress NFSP have made in their transition to a Trade Association?
What activity in Post Office has benefited from NFSP support?
Looking Back
1. NFSP have transitioned to a company limited by guarantee and therefore
legally adopted the framework of a Trade Association.
2. All postmasters are entitled to free membership and subscriptions have ceased
— NFSP are therefore fully dependent upon the funding from Post Office
3. NFSP have widened their focus on supporting postmasters’ retail business
— NFSP are having to (and are beginning to) improve their expertise in this area
and the structure of the recent annual conference was much more weighted
towards retail than in previous years — both in terms of the content of the
conference sessions and the seminars run by Post Office teams
4. As well as the retail focus, the NFSP conference (8"" to 11°" May) demonstrated
good progress in their transition.
— Overall conference format
— Small but growing number of younger & newer postmasters attending
— Presence of external retail industry experts
— Overall messaging that a Post Office is a great asset to a retail business and
that, when retail and post office is run well together, can be very successful
5. There have been a number of key initiatives in Post Office that have benefited
from the support of NFSP
— the successful deployment of the final phase of NT
— the increased response rate to the engagement survey
— internalisation of challenges made relating to remuneration reductions (i.e. we
have kept our differences out of the public domain)
— development of the Apprenticeship Programme
6. The leadership still occasionally displays behaviours which reflect the historical
role
— This has given rise to some tensions between the organisations where
decisions and changes made by Post Office eae ay related to
0
remuneration) have not been accepted (but challenge to this has been had
behind closed doors rather than in the public domain)
7. Linked to above, NFSP continue to face challenges from some members (and
external agitators e.g. CWU) relating to their future direction whereby they
have been challenged to reconcile the reality of being funded by Post Office vs
their traditional role that they have yet to fully move away from
— There remains an attitude that occasionally they need to “win” something
from the Post Office
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Looking Ahead
8. Supported by the grant project funding, NFSP will continue to develop their role
in supporting postmasters’ retail
— This should improve the viability of branches and make them less dependent
upon revenue from the Post Office
9. NFSP can support Post Office in improving our engagement with postmasters
— Postmasters will perform better
10.We will work closely on developing other initiatives e.g. using our resource to
support retail development (funded by the project grants), developing a wider
range of support services to improve other areas of the postmaster lifecycle
e.g. business planning
— Outcomes will have a better chance of buy in by postmasters and our
investment challenges can be supported by the grant funding
ity of very difficult future changes e.g. remuneration/network re-
structuring, will challenge NFSP’s ability to accept change within the framework
of the agreement
— NFSP reaction causes the agreement to be breached and terminated
12.New/young/retail orientated members fail to exert enough influence to rapidly
change the organisation further
> NFSP’s focus remains weighted disproportionality to Post Office “issues” rather
than growth and retail
In Conclusion
13.My confidence in the plan overall is 14. I will be looking to develop the
medium. I remain convinced that relationship further, funded by the
restructured NFSP have a role to project grants, supported by
play in supporting our network — external, neutral facilitation to
our mutual challenge will be to ensure a better understanding of
maintain a good, productive the role NFSP can play, both within
relationship when some business Post Office and the NFSP itself.
changes that impact postmasters
are not well received and NFSP
reactions to this are in conflict with
our expectations.
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Appendix
1. What was the rationale in establishing the agreement
Context
Post Office wishes to ensure that there is effective engagement between its branch
operators and the management structures within the organisation — it is a very large,
complex organisation made up of more than 8,000 separate businesses.
We believe a transformed NFSP can support this - a strong and credible body that is
the voice of the UK’s Post Office branch operators which can reflect views that add
value to the overall Post Office customer proposition through effective challenge,
contribution to business/operational/product development and also provide a range of
benefits to operators.
Post Office’s view is that supporting, via grant payments, the NFSP to transform itself
and securing a future will be commercially beneficial to both Post Office and
operators, by helping to drive the development of products and services which are
more attractive and relevant to our customers and identifying opportunities to do
things more efficiently and effectively.
Background
The current activity re-structuring the network (and the last decade’s closures) has
had a major impact on the NFSP - for many new operators, membership of what has
been seen as a quasi-trade union is not particularly important. For many branches,
the post office aspect will not be the prime part of their business, unlike for the
majority of traditional subpostmasters, and therefore their inclination to view paid
membership of NFSP as value for money will be lowered and membership was
predicted to decline.
NFSP recognised this was a threat to the future of their organisation and in the main
accepted that their traditional role would not exist in the future. They were therefore
looking to move from a quasi-Trade Union role to a Trade Association type of
organisation - representing the totality of the agency network and also have role in
the wider retail interest of members rather than just the post office aspects.
Developing the Grant Agreement
Tied primarily to their agreement to a revised Network Transformation approach that
includes mandated change for some aspects (the previous programme being
voluntary), Post Office agreed to develop a approach with them that would provide
long term funding and hence stability.
This has evolved into the completion of the Grant Agreement between Post Office and
NFSP (see below for a summary of features) - the provision of annual and project
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grant payments to support the operation and development of NFSP whilst providing
free membership for all postmasters.
Whilst in the past they have asserted a fairly typical trade union position of trying to
negotiate as much as possible for their individual members without really recognising
the bigger picture of the business as a whole, the Grant Agreement is seen as a
significant opportunity for both organisations to introduce a new type of relationship -
although this will not happen overnight and current ways of working can still be
unpredictable
e The Grant Agreement was formally approved by the Board in June 2015 and
signed in July 2015
« Free membership for postmasters on the new models was launched in October
2015 and to all postmasters from April 2016
e First payments for the Annual Plan were made in January 2016
Key Features
e The GA is based upon the principles brought to and endorsed by the Board
initially in October 2013.
e This provides a 15 year funding arrangement (£1.5m pa annual grant +
discretionary £1m pa project specific grants) for the NFSP and commits them to
supporting Network Transformation, including acceleration of the final phase of
Network Transformation. The project specific grants can only be accessed via
business cases submitted against existing POL processes i.e. funding is not
guaranteed.
e The annual grant enables the provision of free membership to all postmasters
e The agreement sets out specific activities NFSP can and cannot undertake,
defining clear activities that would represent a breach of the GA which Post
Office could then, if it chose, seek to rely on to terminate. This includes,
amongst other things, any public activity which may prevent Post Office from
implementing any of its initiatives, policies or strategies or other activities
which may be materially detrimental to Post Office.
e It also ensures that the NFSP must become representative of the whole network
- they must achieve and maintain a minimum membership of 50% of each
operating model (Main, Local etc).
e In line with the original principles, the 15 year term does not have a “for
convenience” break clause. However, the specific detail of termination events
and the detailed definition of the last phase of NT built into the agreement are
based on the principles brought to the board in October 2013 and the level of
detail achieved through negotiation has strengthened Post Office’s position.
The agreement can be terminated in the event of the NFSP breaching the clear
criteria as defined above.
e Therefore, whilst we envisage a 15 year agreement, we can and will terminate
it against the specific requirements we've defined as termination events if it's
not working - the 15 years is not guaranteed and expenditure beyond the
annual grant will only be made on a case by case basis.
e The GA is intended to assist the NFSP on their journey from a trade union to
trade association and enables a relationship between the organisations that
supports the engagement, development and growth of thousands of small
businesses.
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POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: May 2016
Executive Summary
Context
Our goal for 2016-17 is to achieve Our 3 year goals are:
EBITDAS of (£10m). 1. To establish the foundations of a
successful independent business.
2. To accelerate the transformation
of Post Office and reach
breakeven.
3. To secure commercial
sustainability for the long term.
In summary, our strategy is to stabilise our income in mails and grow in
financial services by focusing on the customer, moving up the value chain where
suitable; modernise our physical and digital channels; streamline our support
services; build a simpler, more cost effective operating model; alongside
improving our colleague and network engagement.
Questions this paper addresses
1. What is on my mind? (successes, challenges, opportunities and risks)
2. What are the implications for our outlook and plans?
Conclusion
1. Building on a strong year end, we have had an encouraging start to this
financial year with EBITDAS and income ahead of target.
2. Our transformation is on track and we have delivered some significant
milestones in recent weeks, including completing separation from Royal Mail
and opening our 6000" modernised branch.
3. We are entering a critical period in the restructuring of Post Office Ltd with
multiple, associated industrial relations challenges.
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
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The Report
Looking Back
¢ Financial Performance - P1
— EBITDAS in P1 is £2.5m favourable driven by income from Financial Services
and Government Services. It is £5m higher than a year ago.
— Performance was particularly strong in P1 on Credit Card and Home
Insurance. Life Insurance, Banking, Identity and Passports also performed
well.
— Total Expenditure was in line with budget, with Postmaster costs being
£(1.1)m adverse (simply the flow down of improved income), offset by non-
staff costs (£0.5m favourable) and Project Opex (£0.6m favourable).
— As it is P1, we have not provided a full financial report. A summary of P1
performance is attached at annex A. Al Cameron will provide an update at the
Board meeting.
¢ Transformation
— As highlighted in the Transformation Update accompanying this report, we
completed technical and contractual IT separation from Royal Mail Group at
the end of March.
— There was some minor disruption but nothing significant or ongoing.
— This represents the conclusion of four years of hard work and collaboration
across both businesses and major investment in the Post Office infrastructure.
— In addition, I accompanied Tim Parker to open our 6000" transformed branch
in Nyetimber, West Sussex in early April. An outstanding achievement by the
Network Transformation Team.
¢ NFSP Conference
— Last week Tim and I attended the NFSP’s annual conference, along with other
colleagues from Post Office Limited.
— The event was well-attended and the debate was lively; with a strong theme
of creating a sustainable proposition for agents based on Post Office within a
retail environment coming through.
— Feedback was very positive and the conference represented a significant
milestone in the transformation that the NFSP is going through alongside POL.
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« Financial Performance - P1
-» Despite a strong overall performance in Financial Services, Mortgage,
Savings, Travel Money and Travel Insurance were all below target for P1.
— Telecoms and Lottery were also behind target.
> Marketing plans are in place for Mortgage, Travel and Telecoms. We have also
launched new mortgage products with some market-leading rates.
¢ Horizon
—> As reported last week, we were subject to a significant incident with Horizon
on 9'* May.
— Between 8.55 am and 10.15 am, approximately 65% of transactions on
Horizon failed to complete as the system began to degrade owing to memory
issues. The system was brought back to full trading capacity by 10:30.
— This incident occurred following a week’s live proving of the secondary system
and following transfer back to the primary system which, with no changes to
configuration, had run without incident for a year. It had also run on low
volumes on the Sunday without incident.
> The incident was wholly unacceptable and has been the subject of a formal,
contractual escalation with Fujitsu, who are working through the root cause.
— There was some media coverage on the day itself and the following day but
this was relatively low-key and short-lived.
-» Aconfiguration change enabled the system to start operating effectively and
no further issues have been experienced. However, we do not yet understand
why that change had the impact it did and until we do we will not be
switching between primary and secondary servers.
> We will revert to the ARC with a full root cause analysis and steps undertaken
when our work is complete.
Looking Ahead
e Strategy
— The Group Executive and I dedicated two days earlier this month to discussing
the future strategy for Post Office.
— These were highly productive discussions centred on how we become a
consistently profitable business so we can invest from a position of strength;
cement our position as the number one retailer of letters and parcels;
continue to grow our financial services business; complete the restructuring of
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POL to be a much smaller, lower cost business that is aligned to the needs of
retailers in our agency network.
— Further work is now underway to prepare for the Board’s strategy days next
month.
e Project Paddington
igning the Paddington deal with IRRELEVANT
which is in line with the outline case signed off by the Board.
— The business case payback period remains at 2.8 years although there have
been small movements in investment costs and benefits.
jincrease on the pre-contract signature
assumption. This arises from updated branch build and redundancy costs
following detailed costing work. The total EBITDAS benefits now stand at
{ an improvement ot ni owing ti
* Industrial Relations
— We have entered into a critical period in delivering our restructuring with the
associated challenges in industrial relations across the Crown network, Supply
Chain, Customer Support Centres, pay and pensions.
-» We continue to have discussions with both CWU and Unite but the risk of
industrial action across the business remains significant.
* Reorganisation
— Last week we briefed the trade unions and colleagues in Finsbury Dials
Customer Support Centre and Financial Services Sales teams about a number
of proposed changes across the business.
— These entail 105 redundancies alongside the removal of a significant number
of vacancies.
« Iris
— Following discussions with the trade unions yesterday, we informed colleagues
today of our decision to withdraw from the external market and refocus
Supply Chain on serving the needs of post offices.
~» This entails 594 redundancies and the closure of 9 operational units.
At the time of writing, it had received limited media coverage; we are
monitoring this closely and will keep the Board informed.
+
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>» Colleagues continue to appear to understand the bu
eee nee but ore retary concorned ap,
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Annex A
Period 1 — Financial Performance
P1
£m Actual Budget Variance
TOTAL GROSS INCOME 90.4 88.1
Cost of Sales (10.6) (10.8)
TOTAL NET INCOME 79.8 77.3
Staff Costs (21.4) (21.5)
Postmaster Costs (37.2) (36.1)
Non- Staff Costs (27.3) (27.8)
Total Expenditure (pre Project OpEx) (86.0) (85.4)
FRES - Share Of i fi 3, 3.
Ie
Project OpEx
Depreciation
Network Pi
Jonfidentiat
Yfice Board-24
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MAY BOARD MEETING
Transformation Update
Author: Michael Brown Sponsor: David Hussey Meeting date: 24"” May 2016
Executive Summary
Context
The Post Office is undertaking a complex transformation programme, designed to
modernise our network and IT infrastructure, simplify our cost base and create the
platform for customer-led growth. The core objective is to create a commercially
sustainable business equipped to cope with lower levels of government funding after
March 2018.
Questions this paper addresses
1. Overall, are we on track to deliver our key Transformation programmes?
2. What are the implications of any variance, for our outlook and plans?
Conclusion
1. Following a strong finish to 2015-16 we are on track to deliver our transformation
plans:
+ We achieved key Transformation year end targets including modernising 1,904
branches, Crown Break-even, separation from Royal Mail and delivery of £63m
of benefits vs a target of £51m, including and £54m of cost efficiencies.
* The risk profile has improved and remains stable following conclusion of Trinity.
+ Automation of Post Office Card Account transactions in the Crown network is
delayed.
2, The latest view of costs and benefits have been included in the three year plan.
+ We are on track to deliver Transformation financial benefits that are included in
the three year plan.
+ The delay to automation of the Post Office Card Account transactions in Crown
branches creates a £1.5m gap in the programme’s benefits in 2016-17. Options
to accelerate Crown Network Change activity to close the gap are being
considered.
Input Sought
The Board are asked to note the progress made, key challenges faced and actions
taken to address them.
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The Report
Looking Back
+ Network Transformation
+ In 2015-16 we opened 1,904 modernised branches against a target of
1,850.
+ As at 9"*May we have 6,155 modernised branches open (3,009 Local and
3,146 Mains).
+ From our modernised network we have:
+ Contributed an extra 192,150 hours in the network which is the
equivalent of 4,177 extra Post Offices operating core hours.
+ Reducing fixed pay to postmasters by £23m in 2015/16 and are
forecast to save £31m in 2016/17.
+ Crown Network Development
+ Subject to audit, the Crown network is forecast to exceed the break even
target.
* We have signed an agreement with WH Smith to franchise 28 Post
Offices, have a further 33 Crowns hosted in their stores and extended
existing contracts to protect continuity of service.
+ These are key milestones in achieving our ambition of a Crown network
going from break-even to a £10m profit run-rate by March 2018.
+ Point-of-Sale Software (Trinity)
+ There have been no legal challenges following the termination of the
Front Office contract with IBM and the extension of the Fujitsu contract
for provision of the Horizon Point-of-Sale system.
+ Separation
+ The programme to technically and contractually separate Post Office Ltd
from Royal Mail has successfully completed.
+ Delivery of Benefits
+ Transformation initiatives have delivered £63m of benefits in 2015-16
against a target of £51m.
+ £53.9m from cost efficiency savings including Crown and IT
savings
+ £4.8m from project Hawk.
+ £4.6m from Network Transformation
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* Support Services Transformation
+ The new Call Centre in Chesterfield has been operational from 25th April,
delivered 8 days early.
+ Delivery of benefits on track to start in July 2016, which enables delivery
of annualised savings of £3.3m benefits in 2016/17 in line with the
business case.
* Crown Network Development
+ Adelay to the automation of Post Office Card Account (POCA)
transactions in Crown branches has put £1.5m benefits at risk in 2016-
U7,
* This is due to issues with the technical interfaces between suppliers to
verify the POCA PIN number. Resolving the issue requires significant
development.
+ Options to accelerate Crown Network Change activity to close the gap
are being considered with the Industrial Relations Steering Group.
Looking Ahead
+ Support Services Transformation
+ Chesterfield Call Centre to increase operational capacity from 20 desks to
95 by the end May.
+ Closure of St Helens and Leeds sites with the work transferring to
Chesterfield due at the end May.
+ One third of colleagues will transfer from the existing call centre in
Dearne, and two thirds will be newly recruited and trained.
+ Defined Benefit Pension Scheme
* The consultation period has been extended to 31% May to allow
employees and their representatives to take the potential for
redundancies into account when responding to the proposed changes to
pensions.
* Group Executive session on 24" May will review progress with
consultation.
* Project IRIS (Supply Chain Transformation)
+ Plans for Supply Chain will be communicated to colleagues on 17° May
* The programme plans are subject to consultation. Timelines and
business case are currently on track.
Confidential
POST OFFICE
+ Simple To Run Network
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* This programme’s objective is to deliver an attractive retail proposition
which is commercially sustainable for the Post Office.
+ A hypothesis to achieve this objective has been presented to the Group
Executive and further detailed analysis is being undertaken ahead of the
June Board.
+ Transforming Agents Proposition
* This programme has an objective to complete an integrated strategic
review of our commercial model and relationship with our Agents.
+ The programme is currently in a design phase.
* Currently, we are not reporting any ‘red’ risks and are confident that delivery risks
continue to be tightly controlled and managed.
+ Risks are regularly reviewed within and across Transformation programmes, clear
mitigation actions are agreed and broken down into manageable deliverables
ensuring we are regularly reducing the probability and impact of these risks.
+ There are three Transformation Programmes (Iris, Paddington and Pathfinder)
which are entering a phase which will significantly increase the likelihood of
industrial action. The IR Risk is well documented and managed by P&E, who work
closely with the IR Steering Group to ensure this is managed, controlled and the
impact is minimised.
In Conclusion
Our confidence in delivering
Transformation continues to increase due
to:
1, Achievement of key Transformation
year end targets.
2, The risk profile remaining stable
following conclusion of Trinity.
3, Progress across Transformation
programmes is in line with plans.
Confidential
We are on track to deliver
Transformational financial benefits that
are included in the three year plan.
We need to continue to closely manage
and mitigate risks in line with risk
appetite.
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Risks do exist across the portfolio and
there is an increased risk of industrial
action as a result of Transformation
activity.
Appendix - Programme Dashboard
Network
Transformation
Delivered 2015-16 targets, on track for 2016-17
targets.
Subject to audit, the Crown network is forecast to
exceed the break even target. WH Smiths’ contract
has been signed. Amber status is due to a delay to
automation of POCA transactions, putting £1.5m
2016-17 benefits at risk. Options to accelerate other
activity to close benefits gap are being considered.
Crown Network
Development
The project remains at Amber status whilst we work
through the commercials and confirm the end state
support model for the Simple To Run Network
environment.
EUC Branch
Good progress is being made against the delivery
schedule for release 1 of Horizon improvements.
Amber status pending baselining of plan and business
case.
Point of Sale
Software
On track for delivery in September 2016. Amber
status due to delays in agreeing exit plans with
incumbent vendors.
Back Office IT
Transition
On track to deliver a rationalised, consolidated
Support Services operation into Chesterfield by the
end of July 2016 and annualised savings of £3.3m.
Support Services
Transformation
Simple To Run
Network
Further detailed analysis required ahead of the June
Board.
Transforming On track.
Agents Proposition
Defined Benefit
Pension
Project will remain on amber until the outcome of the
consultation period is known.
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BOARD DECISION PAPER
The Post Office Advisory Council
Author: Jane Hill Sponsor: Mark Davies Meeting date: 24 May 2016
Executive Summary
Context
The Post Office Advisory Council (the Council) has been in existence for two years.
This paper is to update the Board on the background to its formation, the benefits it
has brought and its future purpose.
Questions addressed in this report
This paper seeks to address the question: why is the Council important to the Post
Office? The answer is twofold:
« it has developed and matured into a forum that makes a positive contribution.
« it symbolises a shift to more mutual ways of working by the Post Office. As the
potential for mutual ownership of the Post Office is still part of the legislative
framework in which we operate, the continuation of the Council supports this
strand of public policy.
Conclusion
The Council is an essential conduit between the Board and its key stakeholders,
providing a ready forum for engagement, feedback and discussion around key policy
changes and future plans.
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The Report
What is the opportunity?
The Post Office Advisory Council (the Council) was established in March 2014 to
provide a mechanism for the Post Office to engage stakeholders and to provide advice
and feedback on business issues. (It is not part of the formal governance
arrangements for the Post Office.) Terms of reference are in Annex 1.
Membership comprises employees, postmasters, representatives from the unions the
NFSP and other businesses including Google and Unilever. Short biographies of
members are in Annex 2. Members are not paid. The Council meets three times a
year - in March, July and November - and is chaired by Non-Executive Director Tim
Franklin.
The Public Affairs team acts as secretariat and also provide strategic oversight and
delivery. Our approach during the first year was to bring all members up to the same
level of knowledge about the Post Office, our strategy and the challenges we face.
During the Council’s second year we have moved to a more output-focussed
approach, seeking input and insights from members on current issues. The Council is
now starting to make a valuable contribution.
Business rationale for the Council
Two years on and seven meetings in, the Council has developed and matured into a
forum that has the potential to make a positive contribution to the Post Office at an
important time in its evolution. It acts as a critical friend, without being dominated
by the interests of either the unions or the NFSP, while bringing the customer
perspective as well as insights and experience from other sectors. The Council has
become a useful sounding board on current business issues and for testing emerging
thinking. Furthermore, members are an engaged and increasingly trusted group.
They are also keen to continue with their roles.
Public policy rationale for the Council
The Council was established during the 2010-15 Coalition Government when
mutualising the Post Office was a policy objective of Liberal Democrat ministers. A
“path to mutualisation” was set out in the Government's response to a public
consultation in 2012 - Building a Mutual Post Office. A number of pre-requisites
were identified, the most important being “achieving commercial sustainability” and
“building a mutual culture”’. On the latter, “the input of those with an interest in the
Post Office will be an essential ingredient in that cultural shift’?. The creation of the
Building a Mutual Post Office: The Government's response, -
* Building a Mutual Post Office: The Government's response.
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Post Office Advisory Council was to be a mechanism for achieving this cultural shift
and there was an initial emphasis on the Council’s stakeholder engagement role.
While mutualisation of the Post Office has slipped down the Government's agenda, the
potential for mutual ownership is still part of the legislative framework in which we
operate. The 2011 Postal Services Act provides for only two ownership models: to
remain in government ownership or to become a mutual. Today the Council remains
the biggest symbol of this mutualism strand of policy in which policymakers have a
residual interest. Disbanding the Council at this point in time could be seen as a
deliberate move against this strand of public policy.
Our current approach
Experience from recent meetings tells us that the Council adds most value when there
is a clear live issue, or work in progress, on which we are asking for input, and the
relevant business lead participates in the session. Over the past year we have
aimed to have at least one such item on the agenda at each meeting.
Recent examples of these sessions have been:
Post Office Vision (March 2015): Council members challenged the purpose and
clarity of an early draft, presented by the Communications Team, leading to a review
of the purpose and content of the Vision.
Social purpose of the Post Office (November 2015): the Council was asked to
consider how the social purpose of the Post Office should evolve in a commercially
sustainable way, to help inform the businesses approach to negotiations with
Government on future funding and strategy. Discussions during the session
highlighted the importance of the economics for the agent — with differing
perspectives from both the multiple represented on the Council, as well as
independent postmasters. The session also underlined the role of agents as guardians
of our social purpose, and the need for a more joined-up approach with their own
initiatives to be part of their local communities.
Future approach to network design (March 2016): the Council was asked to
consider how the Post Office could become a more attractive proposition for agents, to
inform development of the Simpler to Run Network. The session provided some very
clear areas for the Network team to focus on. For example, the need to simplify our
products and operation, integrate better with a retailer, align online and store, and do
more to promote opening hours.
Through its membership, the Council has also allowed us to foster closer links with,
and to learn from, other businesses and sectors. Last year colleagues from People &
Engagement were invited by Andrew Moys to attend the John Lewis Partnership
Council, the organisation’s main democratic body which represents partners and
ensures the business is run on their behalf.
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We have also benefitted from Google’s membership of the Council with Google
organising a workshop for Post Office colleagues to look at the opportunity for
harnessing the benefits of technology.
Individual Council members have also supported commercial teams, with both their
professional expertise and perspective as customers. For example, Marcus Buck, who
joined Unilever as a marketing management graduate trainee and is now responsible
for one of their global brands, has been working with the Post Office Head of Brand.
And Rebecca Glenapp, who runs a successful e-Commerce business, took part in some
consultation work that has helped us refine our offer to SMEs.
What do we need to do next to progress?
We intend to develop our approach to the Council, utilising the skills and experience of
members to benefit the business.
Each Council meeting agenda will have at least one “work in progress” item, on which
we ask for input, with the relevant business lead participating in the session. We will
do so by working with the Strategy team to set each agenda, and with the business
lead for each agenda item setting clear objectives for the session.
The Council’s Terms of Reference set out that, in addition to the Chairman, a second
Non-Executive Director would become a member. Neil McCausland took on this role
until he stood down from the Post Office last year. Rather than replace him, we
propose to invite non-executive members of the Board to attend Council meetings on
a rotating basis instead. A list of future Council meeting dates is at Annex 3.
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Appendix
1. Terms of Reference
2. Members’ biographies
3. Future Council meeting dates
1. Terms of Reference
PURPOSE
The Post Office Advisory Council (Council) exists to provide a forum for Post Office stakeholders
and other experts to discuss issues of interest and importance that impact on customers,
stakeholders and their communities.
The Post Office Board of Directors provides the primary governance of Post Office Limited (Post
Office).
ROLE
The role of the Council is to:
e provide a two-way channel of communications between the Post Office and its
stakeholders
provide a mechanism for stakeholders and experts to offer views and advice to Post Office
Board and the Group Executive on subjects brought to it
* increase understanding and strengthen relationships between Post Office, its stakeholders
and wider interest groups
* provide a community for advocacy and communication of Post Office issues
The Council
e — is not part of the formal governance arrangements of the Post Office
e is not a representative body
e has no decision-making authority
e may provide advice and views on matters brought before it but neither the Post Office
Board nor the Group Executive is required to act on that advice or those views
MEMBERSHIP
The Chairman will be appointed by the Post Office Board and will be one of the Board Non-
Executive Directors.
There shall be about twenty members plus two Non-Executive Directors of Post Office. Other
attendees will be members of the Group Executive (as required by the agenda), and guests as may
be invited from time to time at the discretion of the Chairman.
In the absence of the Chairman, a Council meeting may be chaired by any Post Office Non-
Executive Director in attendance who is appointed to act as Chair by the members.
Members will be selected to provide a diverse and balanced mix of skills, experience and stakeholder
representation. Selection will be through a mix of invitations for nominations from key stakeholder
groups and advertised competition, with interviews to ensure the membership has a strong mix of
skills, and fully reflects the geographical, stakeholder, social, community and commercial interests.
The aim is to ensure members represent views from the following broad categorisation of areas.
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Geography Diversity Experience
England Young Commercial
Scotland Later life Financial Services/Banking
Wales Carers Marketing
Northern Ireland Ethnic groups Retail
Rural areas SME
Urban areas Social
Disadvantaged areas Community
Affluent areas Government
Mails
Initial appointments will be for periods of two, three or four years to ensure continuity of membership.
Thereafter members will generally be appointed for a term of four years, renewable upon application
for further terms of one year at the discretion of the Chairman.
There is no right to renew membership and renewal may be refused on any reasonable grounds
including the need to refresh membership in order to stimulate fresh debate.
Membership will be terminated if a member misses two meetings within the term of their
appointment.
CONDUCT OF MEETINGS
All members will be given reasonable written notice of meetings.
Meetings will be held three times a year, and will last a full morning.
Members cannot send deputies except in the case of corporate members whose attending member
is unavailable. No deputy shall be allowed to attend unless approved in writing in advance by the
Post Office.
Members cannot bring guests unless approved in writing in advance by the Post Office.
All meetings shall be treated as confidential unless otherwise specified.
Recording of meetings on any form of media is not permitted.
Any member may be requested to leave a meeting if in the absolute discretion of the Chairman he
believes the member's conduct is or is likely to be detrimental to the purpose of the Council and the
overriding objective of a constructive exchange of views and debate.
The Chairman will feed back the views of the Post Office Board and Group Executive at each
meeting.
Following each Council meeting, the Chairman will provide feedback to the Post Office Board and
Group Executive as appropriate.
EXPENSES
Members will not be paid, but will be reimbursed reasonable out of pocket expenses for attending
meetings upon production of written receipts for the expenses incurred. If there is any dispute as to
the extent of any expenses to be recovered, the Chairman's decision will be final and binding.
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GOVERNANCE
The Post Office Secretariat will attend all meetings, and take a note of proceedings and discussions
at meetings.
Agendas and a summary of minutes of Council meetings will be published, redacted where
appropriate to protect confidential information and circulated to members.
The agenda will be set by the Post Office. Requests for items to be included on the agenda should
be made to the Chairman in writing (including email). The Chairman is not obliged to accept any item
on to the agenda.
If the Chairman does accept an agenda item, he may request that the point under discussion be
supplemented or supported by an accompanying document or documents. Failure to supply any
supporting documents reasonably requested by the deadline given will lead to withdrawal of the item
from the agenda.
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2, Members’ biographies
Elizabeth Armstrong
Elizabeth has a background in customer services for Nationwide Building Society
where she was also National Executive Officer and Individual Cases Officer for the
Nationwide Group Staff Union. Now retired Elizabeth is involved in local politics and is
@ parish councillor. Not only does she bring a background of working in the financial
services area she also has a keen interest in enhancing services for rural
communities.
Theo Bertram
Theo Bertram is Head of Public Policy and Government Relations at Google UK. Prior
to joining Google in 2011, Theo was Head of Public Affairs at Telefonica 02. Between
2006 and 2010, he was a Special Adviser to the Prime Minister for both Tony Blair and
Gordon Brown and was Head of the Research and Information Unit at 10 Downing
Street.
Marcus Buck
Marcus was born and grew up in Liverpool. After graduating from Cambridge
University with a degree in History he worked for a large advertising agency on
campaigns for Radox, Santander and Boots. He then joined Unilever as a graduate
trainee in their Marketing function, he has also been the Brand Manager for Dove
Men+Care.
Andy Burrows
Andy Burrows is the Head of Post Office Policy for CITA. He leads the organisation's
work to promote the consumer interest in all aspects of Post Office services, including
the quality, accessibility and sustainability of the branch network. His work
programme also explores potential new services which could be offered through the
Post Office, including government services, credit unions and banking solutions for
low-income consumers,
Andy previously worked for a predecessor body, Postwatch, managing its consumer
scrutiny and research programme; and before that undertook research projects for
think tanks.
Tim Coomer
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Tim has a background in rural retailing and has worked for a FMCG wholesaler before
spending some time working for Community First where his work involved managing
successful support, advisory and training programmes tailored for rural retailers and
postmasters across the south west. Tim has a wide range of experience with both
independent and community retail coupled with an extensive knowledge of issues
faced by both rural communities.
Pardeep Duggal
Pardeep is Head of Digital Marketing at E.ON. Pardeep’s team manage the E.ON
website, mobile app and email campaigns, as weil as digital marketing including
social, paid activity and working with third parties.
Prior to joining E.ON, Pardeep worked in retail and financial services, always in
marketing, and moved into digital during its infancy.
Chris Feliciello
Chris is an Area Manager for a high street chain and has worked for them for over 20
years, hoiding a variety of positions in Yorkshire, Greater Manchester and North
Wales. Chris sits on Community Pharmacy Wales, supporting the interests of
community pharmacies in Wales.
Tim Franklin (Chair)
Tim Franklin joined the Board of Post Office Limited as a Non-Executive Director on 19
September 2012, He has 30 years experience working at board level in a variety of
financial services businesses in both the mutual and private sectors.
David Foley
David is the Chief Executive of three Chambers of Commerce, an Industrial Professor
at East Kent College and a Director of Academy FM, Dover People’s Port Trust and
Thames Capital Ltd. He sits on the board of a variety of community organisations and
private companies in different sectors of the economy.
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Rebecca Glenapp
Rebecca Glenapp launched LUX FIX with Alice Hastings-Bass in the summer of 2012.
Rebecca started her career in strategy consulting before leaving to work in business
development for digital start-ups for several years. The aim behind LUX FIX was to
build a business that offered an alternative to mass-market brands, working with
independent designers who provide the quality in materials and design without the
normal "designer" price tag. They now have over 150 designers on the site and have
launched e-shops for the Telegraph, Independent and Evening Standard fashion
teams.
Farida Iqbal
Farida has been working with Post Office Ltd for 18 years in a variety of different roles
and has seen the business adapt to the changing needs of its customers. Farida’s
experience includes working as a counter clerk at Crown branches, supporting teams
in the agency network, working with payment services on tenders for energy and
water utilities and she now works on the Network Transformation Programme.
Nilesh Joshi
Nilesh Joshi, is the National Executive Officer of the National Federation of
Subpostmasters. He has been an active member of the Federation for the last 15
years and joined the executive team after taking various roles at branch and regional
level.
In November 1990, Nilesh became the postmaster of the Forest Hill Road branch in
East Dulwich, which he still runs. In 2009 the branch won the Asian Trader
Independent Retailer of the year.
Marc Kidson
Marc is the Chair of the British Youth Council, a national youth campaigning charity,
and has been a researcher at the Institute for Government, a cross-party think tank
helping to improve the effectiveness of government. He served on the Post Office's
Stakehoider Forum from October 2011 to December 2013, looking at how the Post
Office defines its public purpose as an organisation.
Ben Lucas
Ben Lucas has a background as Chair of Public Services at the RSA. He is a public
policy and communications entrepreneur and has worked at the heart of the public
policy world for over three decades. He was previously founding Director of the 2020
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Public Services Trust. He began his working life as the research officer for the
construction union, UCATT; before becoming Jack Straw’s adviser during the mid-
1990s. Following this, he co-founded and became Managing Director of LLM
Communications, which became the leading independent public affairs advisory firm in
the UK, Ben is a founding Trustee of the think tank, New Local Government Network,
and an adviser to the Joseph Rowntree Foundation.
Ismail Loonat
Ismail has around twenty years’ experience as a postmaster and over the years has
built a strong rapport with the local community and businesses. Ismail’s efforts were
acknowledged when he was one of finalist for the Royal Mail Chair excellence award in
2009.
More recently, his Post Office obtained funding from the Post Office Community
Enterprise Fund. Ismail is an active community worker and has been a volunteer for
numerous charities.
Andrews Moys
Andrew has recently moved on from his role of Director of Communications at John
Lewis Partnership. He managed the Partnership's communications team of 25 with
responsibility for government and media relations, internal communications including
the Partnership's weekly magazine, The Gazette and the John Lewis Partnership
website.
Andrew started his career in management consultancy, before specialising in
corporate communications working for BAA, the world’s largest airports company, and
then at Cadbury, the global confectionery brand.
Brian Scott
Brian Scott is the Unite Officer for the CMA Sector of Unite. His responsibilities are for
all Unite members in the postal sector. Other areas for which Brian is responsible are
the European Social Dialogue and the Uni-Europa Postal Committee.
Brian has been a member of the Labour Party for over 30 years and is currently chair
of the Tywford branch. He joined the Post Office in 1974 and worked in BT fora
number of years before taking on his current role. He was a member of the CMA
Executive Council from 1984 to 1991 and held the position of National Vice-Chair for
three years and was Chairman of the Telecom Executive Committee for 4 years during
this period. He was made a National Honorary Member of the CMA in 1992.
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Lynn Simpson
Lynn fs a full time union representative for the Commu $ Union, This
year she was elected onto the Pos!
Office to hold this position
tal Executive of the CWU, the first woman from Post
Other positions she has held include Area Health and Safety, Industrial R:
Representative and Territorial Chair of the Southern Territory, She has been involved
in various joint working programmes including several National Duty reviews and a
new way of working trial which had staff engagement, customer satisfactio:
increased income at the heart of the pilot,
tions, Area
and
Nicholas Stuart
Nicholas is an NHS Consultant Cancer Specialist working in North Wales as a Professor
of Cancer Studies at the University of Bangor. Nicholas has worked in North Wales for
the past 21 years having previously trained in Southampton, Birmingham and Oxford.
Previously Nicholas has been Lead Cancer Clinician for North Wales Cancer Network
and Chair of the Welsh Forum of Local Negotiating Committees. He is involved with a
number of charitable groups including those that raise funds to help local cancer
services in North Wales and with the Northwest Cancer Research Fund based in
Liverpool.
Kevin Twynholm
Kevin is a lifelong retailer with a passion for innovation and meeting the ever-
changing needs of customers. He currently works for One Stop Stores Ltd overseeing
Retail Projects, Store Productivity and Services.
He has been involved with the Post Office Network Transformation programme since
the days of Post Office Essentials and has led the conversion of over 100 branches to
the new Local and Mains models.
Donna Underhill
Donna joined the Post Office in 2004 as a counter clerk and has worked in various
roles in the Crown Network before becoming Branch Manager 6 years
ago. Previously Donna has worked with First Friday and has been influential on all
aspects of the Crown Leadership Excelience Programme which has underpinned the
whole vision strategy.
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3. Future Council Meeting Dates
6" July 2016
2" November 2016
15" March 2017
5 July 2017
8" November 2017
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POST OFFICE Ltd. Board SUBSI
Meeting date: May 2016
Executive Summary
I oS =A
proposed that a Summary of this strategy is presented to the Post Office Board in 1 July.
Questions this paper addresses
1. What progress was made in 2015/16 towards delivering the strategic objectives?
2. What return on investment Will earevae achieve?
3. What is the strategic plan fof-rerts and will this deliver the long term growth
anticipated in the FS strategy plan?
4, What are the key risks to the delivery of the Plan and what is the level of confidence
for its delivery?
Conclusion +
1. In 2015/16: rompleted many of the key building blocks as anticipated in the
long term sti yy and the value opportunity from the business model is being
realised; core board, risk and governance structures are operational.
2. After a slow start, with; completing later than originally budgeted, 201
EBITDA (excluding exceptional costs) wa: eeding Q2 forecast by':
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Input Sought
The Board is asked to note the progress made and confirm support to the strategic
direction and business intent set out.
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The Report
Looking Back
1. -The.owerarchino.strateaw.and_cationale.in_estahlishina.
IRRELEVAN
2. Overview of 2015/16
"WHAT HAS GONE WELL? _
the Q2 EBITDA forecast following a strong focus on income recovery and cost
control.
re
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Mm:
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3. In particular following has established clear oigeneationsI @ and
governance processes and controls, including: r
— Organisation structure complete, integrating existing Post Office POI; 'RRELEVANT:
and selected recruits (in particular risk, strategy and product) into a singlé;”
focused team;
— Board structure complete with the addition of a second INED, as Chair of the
POMS Audit, Risk and Compliance Committee;
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— Executive management structures in place in accordance with FCA principals,
with Executive, Risk & Compliance and Product Committees operational;
— Operational processes established with Post Office to drive sales, marketing,
digital and se~“-~---~" ; Post Office insurance team disbanded and
integrated into: IRRELEVANT ;
4. Projects to buil apability to deliver the long term strategy are well
advanced_and.willdalivaein 2016472
IRRELEVANT
5. In Q3 and Q4 General Insurance sales have been strong, with Home Insurance
generating record annual sales and life having strong year-end momentum:
— Sales momentum hi inued into P1.
— As at March 2016 had sufficient capital and funding to meet its
operational and r quirements. As at March 2016, the regulatory
capital was, IRRELEVANT
6. In conclusion, is well established to deliver the opportunities forecast in
the original busifiésS plan:
— Financial and operational momentum are established;
nagement and governance processes are in place;
‘iprevevants gaining control of customer proposition and process design from third
parties;
— Initial capability acquired to deliver long term strategic objectives.
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> ae act centre costs have been brought down and we are working with our
provider (WebHelp) to bring this down further;
>» Consultancy costs have been cut, in particul. compliance services, as third
party team have been replaced by specialist) men; staff.
Looking Ahead
STRATEGY OVERVIEW & OPPORTUNITY
1. The 2016/17 budget targets an EBITDA
IRRELEVANT
ith income!
3. In 2016/17 we will continue to build the capabilities required to realist
potential
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There are a number of risks that need to be reviewed and managed accordingly,
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IRRELEVANT
—
— Post Office is unable to support the digital or data agenda;
7 Comorate services resources ale Unavailable of Insufficient to supporr the plan
In Conclusion
OverajirrevevanrS well positioned to Failure to deliver will impact POMS
deliver-urrure-iong term growth plan. financial growth and return on
Key strategic deliverables in 2016/17 investment.
are critical and will provide the
structure for the future.
focused on working with Post
Office to build confidence that is it able
deliver 2016/17 plan is good and on
the long term plan is balanced.
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to deliver in-branch sales targets
compliantly, effective marketing
support and digital capability.
May 2016
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Data Dashboard
2016/17 Plan
~-The.nronased.2016/17. Plan is. for.
Gross income
Cost of Sales
“— IRRELEVANT
Non-staff Costs i i
POL Commission { i
Total Expenditure f i
EBITDA
eT H
The mid-year 2015/16 acquisition of the: business from; IRRELEVANT ;has a distorting
effect on year-on-year comparisons. To remove that distérti6r,%
comparator has been calculated on a current run rate basis, excluding any unique one-
offs, to give a like-for-like view.
Against this restated comparator, I
with
total
~setting increased
than the post Peon
és to include an unallovaceu~*
} (actions have been identified in
‘gal
H than the latest Q3 2015/16 forecast an
adjusted forecast,
income stretch of;
The plan profit increase: c.evanT2XC@SS capital.
I IRRELEVANT I
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Annual Report and Accounts 2015/16
Author: Dave Carter Sponsor: Alisdair Cameron Date: May 2016
Executive Summary
Context
1. The draft 2015/16 Annual Report and Accounts (ARA) is presented to the Board for review.
2. POL usually signs and publishes its ARA at the end of June or the first week of July. This
timetable has been maintained, giving an extended post balance sheet review period to
provide further assurance over the completeness and accuracy of the results.
3. The papers comprise a draft ARA, a briefing book setting out details of the financial results
and a report from Ernst & Young on their findings to date.
4. This draft of the ARA has been slightly updated for individual comments from the version
sent to the ARC but has not benefited from the debate at the ARC which meets on 19", It
is proposed that the Chairman of the ARC presents a verbal update for the Board
summarising the ARC’s discussions. However, if there are material re-writes proposed, we
will let you know.
5. The Board is being asked to delegate authority to the ARC to approve the ARA on its
behalf. It is proposed that a short ARC call is arranged for the end of June to confirm the
completion of the work, review any findings and agree that the ARA can be signed and
published, within the Board’s delegated authority.
Questions
6. The following questions are addressed:
« In summary, what were POL's financial results for 2015/16?
« What is the status of the work to support the ARA?
« What issues are we drawing to the Board's attention in their review?
The Main Report
Financial Results
7. Post Office made an operating profit of £105m and an EBITDAS loss of £24m in 2015/16.
This represented a significant improvement in EBITDAS from a loss of £57m in the previous
year. Commercial turnover was broadly flat at £981m, with total revenue declining with the
planned reduction in the Network Support Payment. Progress towards break-even has been
made by reducing net costs, especially through the impact of Network Transformation on
agents’ pay and in spite of higher pensions and bonus costs.
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8. Overall, in line with our plans and budgets, POL is in a temporary period when we are
spending more on transformation than we receive through the declining Government
Grant. As a result, we uses more of our facility with government, increasing borrowings by
£155m to £465m, against a limit of £950m.
Audit Status
9. As previously discussed with the ARC, given the need to strengthen the financial control
environment, additional accounting and audit procedures are being carried out. The bulk of
this work is finished.
10. No significant issues have been identified in the work to date. Internal POL reviews have
identified a number of small adjustments, netting at a £1.2m reduction in EBITDAS, which
have been adjusted for in this draft of the ARA. The ARA also reflects some judgemental
adjustments agreed with EY and summarised in their report: these net to a £0.1m
reduction in profit, with no impact on EBITDAS.
11. As agreed with the ARC, procedures will be completed during the next few weeks and
updated with ongoing reviews of post year end transactions.
Matters for the Board's attention
Basis of preparation
12. The financial statements have been prepared on a basis that is consistent with prior years,
including the assumption that POL is a going concern. The logic underpinning this
assumption is set out in section 12 of the Briefing Book.
13. Nonetheless, the Board has recognised that the longer term financial stability of POL is
uncertain, with no funding or facilities guaranteed after March 2018. We have therefore
continued to impair the bulk of our capital expenditure and intangible assets in the year in
which it is incurred. The amount written off in 2015-16 was £136m (2014-15 £140m) and
further details are set out in section 19 of the Briefing Book.
14. The exceptions to this policy have been freehold property and long leasehold property and
land, reflecting their long term economic value independent from business activities.
15. In addition, we have concluded that it is appropriate to capitalise the goodwill incurred on
the acquisition of the remaining 50% of the joint insurance business from Bank of Ireland
without immediate impairment. The value is £44m. POMs is a separate, profitable Cash
Generating Unit, will generate future revenues and has an economic life of its own: in
2015/16 only 6% of the sale and renewal income of the acquired business was generated
by the POL network (14% of new sales). The business therefore has considerable resale
value and could continue to trade without POL. The carrying value of the goodwill will be
reviewed at each reporting date for any impairment, with no loss in value observed at
March 2016.
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Restatement
16. As disclosed in the Interim report and accounts, the comparative figures for the year ended 29
March 2015 have been restated. The provision for postmasters’ compensation, included in
Network Transformation, has now been fully recognised in the results for the year ended 29
March 2015. The restatement affects exceptional costs, provisions and retained earnings as set
out in the table below. Within this report, the comparative income statement, statement of
comprehensive income, balance sheet and statement of changes in equity for the year ended
29 March 2015 have been restated. There has been no effect on the cash flow statement.
Total provisions (63) (87) (150)
Shareholders’ funds (retained earnings) (72) (87) (159)
Profit/(loss) for the year (54) (87) (141)
Discontinued Operation
17. Prior to the year end the business took the decision to discontinue the Mobile telephony
operation. In consultation with EY, this has been treated as a Discontinued Operation in the
financial statements, reported below EBITDAS and Operating Profit.
18. The net impact is a £2.8m increase in 2015-16 EBITDAS (2014/15: £3m) as operating
costs of £3m and income of £0.16m are removed. Within Discontinued Operations, the
total impact is a £10m cost, additionally reflecting £3.7m of balance sheet write-offs
(2014/15: £1m) and £3.5m of provisions relating to estimates of exit and termination
costs.
Disclosures
19. In the draft ARA, we have made some reductions in the amount of disclosure. The ARC
previously took the view that we should no longer be seeking to comply with the Combined
Code as an objective in itself, given the associated costs and bureaucracy. As a result,
some disclosures are optional.
20. In summary, we have removed the segmental reporting note as the key information is
already stated in the Financial and Business Review. We have retained a section on Risks.
We have removed the very detailed report on Directors’ Remuneration. However, on the
advice of our shareholder, we have put more disclosure around directors’ remuneration in
the notes to the accounts than is required by legislation, including a table of individual
earnings and a brief explanation of the incentive plans.
21. In the note on Commitments (Note 19 to the Group Financial Statements), we have
included a general statement headed “Contingent Liabilities”, noting that from time to time
we may face legal claims and concluding that “The Directors do not consider the outcome
of any current claim or action will have a material adverse impact on the consolidated
position of the Group.”
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22. We have been notified by a law firm of a claim on behalf of a group of 91 Postmasters. The
claim has been filed in the High Court, but has not been formally served on us. Among the
claimants are individuals who we believe may not participate in a class action, either
because they are time limited, have criminal convictions or have previously reached a full
and final settlement with us. The claim is not valued and no new information has been
provided.
23. Clearly, no provision has been raised as we think the chances of making a payment that we
can reliably estimate is remote. In addition, we have concluded that to disclose the
existence of the claim would give it a spurious importance. EY are keen that the ARC and
the Board debate this point and have recommended it is disclosed. Potential, additional
wording might be: "A High Court Claim has been issued on behalf of a number of Sub-
postmasters against Post Office in relation to various legal, technical and operational
matters. Full Particulars of Claim have not yet been received by Post Office.”
Input Sought
24. The Board is requested:
«to review and comment on the draft Annual Report and Financial Statements for 2015-16;
e give delegated authority to the ARC to approve the Annual Report and Financial
Statements; and
e give delegated authority to the Chairman, the Chief Executive and the Chief Financial
Officer to sign the Annual Report and Financial Statements following approval by the ARC.
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The Post Office
2015/16 Annual Report and Financial Statements
Contents
1. Overview
1.1 Chairman's foreword
1.2 Chief Executive's statement
2. Financial and Business Review
3. Governance
3.1 Board Biographies
3.2 Corporate Governance
3.3 Directors' report
4. Financial Statements
4.1 Statement of Directors’ responsibilities
4.2 Independent Auditor’s report
4.3 Consolidated income statement
4.4 Consolidated statement of comprehensive income
4.5 Consolidated statement of cash flow
4.6 Consolidated balance sheet
4.7 Consolidated statement of changes in equity
4.8 Notes to the financial statements
4.9 Parent Company financial statements
4.10 Corporate information
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Chairman’s Foreword
I was delighted to be appointed Chairman of the Post Office in September 2015, and I have very
much enjoyed getting to know the business over the last few months. In the first place the job of the
Post Office is to provide some essential services to our customers, and we are very conscious of our
obligation to ensure that 90 per cent of the population has a post office within a mile of where they
live. This amounts to operating the largest retail network in the UK with over 11,600 branches
dedicated to meeting the needs of a myriad of different communities throughout the country. I am
proud to be part of this long tradition of service to the public. But we are also a commercial
business, and in this report we have sought to provide a clear view of how we are performing, and
the challenges that lie ahead. For many years the Post Office has relied on a subsidy from the
Government and has also received a considerable amount of investment from public sources to
modernise the network. As a result of this investment, and thanks to the efforts of postmasters and
our staff to improve our business in many areas, the public subsidy has declined steadily and
EBITDAS, our key measure of performance before subsidy, has improved from a loss of £57m last
year to a loss of £24m in 2015/16.* Considering that the EBITDAS three years ago was a loss of
£116m, this demonstrates the substantial progress made in recent years. During 2015/16 the actual
Network Subsidy Payment received from the government reduced from £160m to £130m.
Ina time of straightened public finances, we cannot expect to call on the taxpayer indefinitely, and
the time has come for the Post Office to take on the challenge of becoming a fully sustainable
profitable business, whilst at the same time maintaining its public service obligations. If we are to be
successful over the medium term, we need to be capable of generating sufficient resources
internally so that we can invest in business development and growth in the future. The Post Office is
a national brand, trusted by consumers across a range of activities: postal services, cash
transactions, financial services and telecoms. Whilst we may need a small element of Government
funding over the medium term to maintain 3,000 or so community branches, there is no reason why
we cannot achieve positive financial results from the rest of our business. In particular the Post
Office has significant potential in the financial services market, but that will require substantial
investment behind our brand in what is a competitive marketplace.
Over the last few years there has been significant investment in the Network Transformation
Programme, and this is now bearing fruit in terms of a business model that is more flexible and
meets the needs of our customers. I was very pleased to open the 6000" branch to be modernised
in Nyetimber in West Sussex earlier this year. Now operating from a bright refurbished local
convenience store, it is open an extra 25 hours a week, including Sunday. It seemed to me that the
postmaster, Than Thevarajah, epitomises the energy, entrepreneurial spirit and customer focus that
lies at the heart of the modern Post Office. Whilst maintaining a comprehensive service offer, the
post office till fits well into a thriving retail business, creating footfall, and an opportunity to enhance
a personal service to customers.
At the same time as we have invested in our sub post offices, we have also made good progress with
our own operated post offices: self service kiosks have proved popular, and have helped to reduce
queues at peak times. To operate post offices in expensive prime retail town centre locations with
limited commercial add-on activity, can be a financial challenge, although considerable progress has
been made on stemming the losses in this area.
* Please see the Financial and Business Review on Page 7 for the calculation of EBITDAS.
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As Paula’s report explains, several of the markets we operate are experiencing some turbulence, but
it can be done; the post office can still be a very attractive business proposition in an appropriate
retail setting.
This year has seen some changes to our Board, I would like to thank three of our members who
retired last year for their contribution to the revitalisation of the Post Office: Alice Perkins, my
predecessor, Neil McCausland and Alastair Marnoch. I very pleased to welcome two new members
of the Board — Carla Stent who is chairing our Audit and Risk Committee, and Ken McCall, who is,
chairing our Remuneration Committee. I would also like to acknowledge the supportive role of our
shareholder, the Department of Business, innovation and Skills, in the continuing development of
the Post Office. Similarly, I would like to record my appreciation of the work done by our Post Office
Advisory Group, chaired by Tim Franklin.
I have been struck by the diversity of our branches around the country, and yet there is a common
thread: they are places where all people and businesses can, and do, use a range of services that are
important to them in their everyday lives. This combination of commercial focus and community
involvement is exemplified by local postmasters such as Bryan Hewson at Amble in Northumberland.
Bryan has fully modified his branch which contains a community hub where people can come in and
use computers and get online. He is actively expanding his business and is a key part of the
community that won the coastal town section of the Great British High Street awards this year.
Bryan and his team are great examples — but they are not unique. So most of all, I would like to pay
tribute to everyone looking after our customers in the front line or in support, for their hard work
and their dedication to the highest service standards. All of these men and women make a
difference every day of the week to the lives of the many people who depend on the Post Office:
thank you.
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Chief Executive’s Statement
The Post Office results for 2015/16 show continued progress towards commercial sustainability and
reduction in reliance upon Government. In 2015/16 we have reduced our operating loss before
subsidy by £33 million and financial support from Government by £50 million.
I am pleased we have increased our commercial turnover from £976 million to £981 million, in the
face of very challenging market conditions. We have grown revenue in our Financial Services and
Telecoms markets and maintained our Mails market position; our Government Services revenue has
declined. We have also delivered a £28 million reduction in cost across the business.
In 2015/16 we posted a loss of £24 million in our key EBITDAS measure maintaining a trend of steady
improvement:
Operating loss before depreciation amortisation,
exceptional items and Network Subsidy
Payment (£million)
The cash position of the company continues to be sound. It operates well within its facilities to meet
its own trading needs as well as enabling its network of Post Offices to pay and receive money on
behalf of the range of partners with whom we operate.
Our strategy is to build profitability whilst at the same time reducing year on year funding from
Government, thereby creating the potential to re-invest to secure the future of our nationwide
network. This enables around 60,000 of our Post Office colleagues in 11,600 communities to
undertake around a billion transactions a year on behalf of our customers — increasingly essential
services to local communities as banks and other businesses withdraw.
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The implementation of this strategy is reflected in our performance;
a
ts)
EBITDAS, £ million
140
2012/13 _2m13/14 201s 2015/16 2016/17 _ 2017/18
seat Investment funding matttid Network Subsidy Payment (NSP) __—*— EBITDAS.
Funding from Government, £
To continue this progress, the Post Office needs to enhance its competitiveness and customer
service in the fast changing Mails, Financial Services, Government Services and Telecoms markets in
which we operate. And our central and support services need to become simpler - and cheaper - to
run, thus creating the conditions for postmasters to trade profitably and sustainably.
This requires:
- continued investment in the transformation of the branch network, and in IT and digital
capabilities to promote convenience to customers and flexibility in meeting their needs.
- Agreater focus on simplifying our central and support functions, enabling a more ambitious
reduction in costs
- ongoing development of profitable own brand products in Financial Services and continued
effective long term relationships with both the Royal Mail and others for whom we are a
trusted distributor.
In 2015/16 we have made progress in each of these areas. Working with postmasters across the UK,
we have passed the milestone of modernising 6000 branches, adding 190,000 extra opening hours
and improving adjacent retail/convenience offers too. I'm delighted these postmasters and their
staff have achieved over 95% customer satisfaction. We have started to restore the financial position
of our larger branches where we faced particularly high operating costs: my thanks to colleagues in
the Crown Post Offices who over a four year period have moved from a £46 million annual loss to a
breakeven position. We have completed the separation of our IT infrastructure from that of Royal
Mail Group. We have made our first acquisition, buying our joint insurance business from the Bank
of Ireland. We have commenced the restructuring and simplification of our central support functions
and service centres that support our branch network and its service to our customers.
These are important milestones and, combined with our improving financial results, they provide
confidence in our capabilities for the future. I am grateful to all those who work in Post Offices and
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those who support them in various centres across the UK for their huge commitment, their
professionalism and their delight in serving customers.
Looking forward, I am in no doubt that the Post Office has a bright future. But at present our reality
is that we still make a loss. Some of our product markets are in structural decline — particularly in
Government Services where the shift online has reduced turnover by 9.2%. And where we have
identified significant potential growth in areas such as Financial Services and Telecoms, these
markets are intensely competitive with well established incumbents. The mails market is evolving
rapidly and success will demand ongoing innovation and flexibility. Our Government funding is only
in place until 2018 and is reducing significantly.
Our overriding objective is to support a sustainable and thriving network of Post Offices, from a low
cost support structure. There remains further work to do before we make enough money in
competitive and changing markets to reinvest sufficiently and sustainably in our systems, branches
and customer propositions. That means continuing to ask the hard questions of ourselves and being
resolute in implementing the answers.
To that end we have launched consultations with our people on closing our defined benefit pension
scheme to future accrual and [on reducing the operating cost of providing cash to Post Offices].
Further changes will follow but I am determined that, as we implement change, we stay true to our
values. The trust in the Post Office brand is built on its people; and especially as we go through
change we will take care to ensure everyone is treated with respect.
The prospect of further and potentially difficult change can be a hard message on the back of the
real progress that has been made during 2015/16. But it is the right thing to do and the only way we
can ensure that Post Offices remain open in every community and have a bright future serving our
customers and delivering our public purpose, ensuring services are available across the UK for
another generation.
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Financial and Business Review
Summary results
The Post Office has maintained its commercial turnover with growth in Financial Services and
Telecoms offsetting a planned decline in the Royal Mail fixed fee in Mails and decreases in
Government Services and lottery turnover.
Our total revenue decreased by £25 million (2.2%) because of the planned reduction in the
Network Subsidy Payment (NSP) from Government. In spite of that, cost reduction and the
benefits accruing from continued high levels of investment enabled operating profit before
exceptional items to increase by 1.9%. Moreover, the critical measure of EBITDAS (operating loss
before interest, taxation, depreciation, amortisation, subsidy and exceptional items) which strips
out the Network Subsidy Payment showed significant improvement reducing the loss from £57
million to £24 million.
Key Financial Performance Indicators
2015
2016 Restated Change
Turnover £981m — £976m £5m
Operating profit before exceptional items £105m = £103m £2m
Operating loss before, depreciation, amortisation, exceptional items
and Network Subsidy Payment (EBITDAS) (£24m) (57m) £33m
Net cashflow (£109m)__£184m__(£293m)
Profit and Loss Summary
2015
2016 Restated Variance Variance
£m £m £m %
Turnover 981 976 5 0.5
Network Subsidy Payment 130 160 (30) (18.8)
Revenue 1111 1,136 (25) (2.2)
People costs (233) (238) 5 24
Other operating costs (808) (831) 23 28
Total costs (1,041) (1,069) 28 2.6
Share of profit from joint ventures and associates 35 36 (1) (2.8)
Operating profit before exceptional items from continuing operations 105 103 2 19
Add: Depreciation 1 oO 1
Less: Network Subsidy Payment. (130) (160) 30 (18.8)
EBITDAS (24) (57) 33 57.9
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Revenue
The Post Office’s total revenue decreased by £25 million (2.2%) to £1,111 million due to a decrease
of £30 million in the Network Subsidy Payment (government grant revenue put towards the costs of
maintaining the Post Office network). The Post Office segments income into four pillars: Mails and
Retail, Financial Services, Government Services, and Telecoms. This commercial turnover increased
by £5 million to £981 million. The pillars and their performance are detailed on the next pages:
2015
2016 Restated Variance Variance
ém ém £m %
Mails and Retail 380 388 (3) (2)
Financial Services 303 290 B 45
Government Services 28 141 (13) (9.2)
Telecoms 130 120 10 83
Other income 40 37 3 Bl
Turnover 981 976 5 as
Network Subsidy Payment 130 160 (30) __(18.8)
Revenue zi 1136 (25) (2.2)
Mails and Retail
Mails and Retail includes the sale of parcels and other Mails products provided by Royal Mail and
Parcelforce. It also includes Lottery and Retail services such as sales of collectibles as well as
packaging and stationery. Revenue decreased in the year by £8 million (2.1%) whilst transactional
volumes in mails increased slightly.
2016 2015 Variance
£m £m %
Mails services 334 340 (1.8)
Retail and Lottery 46 48 (4.2)
Mails and retail 380 388 (2.1)
Overall mails services revenue reduced by £6 million (1.8%) to £334 million. However, this was
driven by a planned reduction of £7 million in the fixed fee part of the contract with Royal Mail
Group. Product sales improved slightly by £1 million in the year. This position was underpinned by
a good sales and service performance over the Christmas peak period (year on year trading
income was 3.6% higher) and by growth in areas related to online shopping (Home shopping
returns grew by 25%). The mails market remains competitive and fast changing as it continues to
shift towards package related activity and premium tracked products like Special Delivery.
The £2 million reduction in turnover from Retail and Lottery services was primarily driven by a
reduction in Lottery sales due to fewer rollovers and lower prizes.
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Financial Services
The Financial Services pillar includes Post Office Money personal financial services products such as
mortgages, credit cards, insurance, savings, ATMs and travel products as well as traditional services
such as bill payment and over-the-counter banking transactions.
On 30 September 2015, Post Office Limited acquired from Bank of Ireland UK plc the business and
assets of our joint insurance business. Immediately following acquisition, Post Office Limited
transferred the business to its subsidiary Post Office Management Services Limited, a FCA regulated
entity, which operates the business alongside its existing travel insurance activities.
2016 2015 Variance
£m £m %
Personal Financial Services 152 27 19.7
Bill payment, banking and other financial services 151 163 (7.4)
Financial Services 303 290 45
Across Financial Services in aggregate, turnover increased by £13 million to £303 million (2015: £290
million), a 4.5% rise. This performance was the aggregate of strong growth in personal financial
services such as insurances and mortgages and a decline in more traditional services such as bill
payments.
Personal Financial Services turnover increased by £25 million (19.7%). This was primarily driven by
increased turnover from new insurance intermediation activities undertaken by Post Office
Management Services Limited, and through growth in savings and International money transfers.
Turnover from traditional Financial Services products declined by £12 million. Bill payment turnover
fell by £4 million reflecting a continuing shift from paper-based to electronically-delivered products.
and the increasing use of alternative payment methods. NS&d premium bonds turnover fell and
ceased to be available from Post Offices from 1 August 2015.
Offsetting this reduction within traditional products was an increase in banking revenue of £3
million with a 10% growth in banking transactions. Enhanced agreements with Barclays and HSBC
to add business customers were made during the year. 95 % of all personal bank accounts in the
UK are now accessible via post offices as work continues with the banks to secure an overall
framework for universal access. In an era of closures by the major banks, the Post Office network
maintains its position as the provider of a national infrastructure which meets community banking
needs across the UK.
Government Services
The Government Services pillar covers services provided under contract to Government
departments. This includes services in relation to the work of the Department for Work and
Pensions (DWP), the Driver and Vehicle Licensing Agency (DVLA) and the Home Office including Her
Majesty's Passport Office (HMPO) and UK Visas and Immigration (UKVI).
2016 2015 Variance
fm £m %
Dwp 75 87 (13.8)
Home Office 34 30 13.3
DVLA 10 20 (50.0)
Other Government Services 9 4 125.0
Government Services 128 141 (9.2)
Government Services turnover of £128 million decreased by £13 million (2015: £141 million). DVLA
turnover decreased by £10 million as customers increasingly use the online channel for motor
vehicle licence payments, a trend which has accelerated since the paper disc was withdrawn in
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October 2014. DWP turnover also decreased, by £12 million to £75 million due to a decline in the
number of active Post Office Card Accounts and new contractual terms. This however remains a
significant market and Post Office service remains important to a substantial number of customers
of Government services.
Counteracting the structural decline in the more traditional parts of the market, identity related
services posted strong growth. Home Office revenue has increased by £4 million, driven by
passport check and send services and biometric enrolment services. Other Government Services
turnover has increased by £5 million largely due to the identity related services, including Cabinet
Office’s new Verify online identity service where Post Office has the highest market share and best
first time success rate.
Telecoms
The Telecoms pillar includes Post Office HomePhone and Broadband services as well as e-top up
services and phonecards.
2016 2015 Variance
£m £m %
HomePhone and Broadband 126 115 9.6
E top-ups and phonecards 4 5 (20.0)
Telecoms 130 120 8.3
Telecoms turnover of £130 million (2015: £120 million) increased by £10 million. This was driven
by a strong performance in our Homephone and Broadband services with a £11 million (9.6%)
increase in annual revenue to £126 million. E top ups and phonecard revenue fell by £1 million ina
generally declining market.
In the competitive Telecoms market an increase of 36,000 additions to the broadband customer
base were achieved and pricing adjustments in November 2015 improved revenue per customer
whilst maintaining our position as one of the best value providers in the market.
Our approach is characterised by tight management and effective margin control enabling strong
performance against market incumbents. Development of this business however needs to be
managed carefully to maintain these characteristics and in March 2016 Post Office made the
decision to withdraw from the development and roll out of a proposed mobile offer in order to
focus on its Homephone and Broadband activities.
Other income
Other income increased by £3 million to £40 million largely due to a change in the amortisation of a
historical agreement. Other income is generated primarily from the Supply Chain business that.
manages and distributes cash for Post Offices and for third parties. The revenue generated by the
Supply Chain business has fallen by £3 million as the relatively high cost base made it difficult to
attract and retain external revenue.
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Costs
Total costs decreased by £28 million to £1,041 million (2015: £1,069 million).
£m Costs- Prior Year to current Year
a
' £ I
an
2015 People Costs Other Operating 2016
Costs
People costs of £233 million (2015: £238 million) decreased by £5 million net of an increase to pension
costs of £2 million reflecting efficiency savings. Other operating costs decreased by £23 million to £808
million largely due to postmaster remuneration costs being lowered by £22 million arising from the
Network Transformation programme. The fixed element of postmaster remuneration cost has fallen
by £20 million in the year in addition to a reduction in indirect tax of £2 million. The variable element
has remained flat year on year.
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Discontinued operations
The decision to withdraw from the development and roll out of a mobile offer has been disclosed in
the Financial statements as a discontinued operation, showing a loss for the financial year after tax
from discontinued operations on the consolidated income statement of £10 million.
Exceptional Items
Exceptional items are shown below:
2016 2015
Restated
fm £m
Operating exceptional items:
Restructuring costs including postmasters' compensation (283) (301)
Impairment of intangible assets, property, plant and equipment (136) (140)
Government grant 150 170
Net exceptional items (269) (271)
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 programmes and recognised to match the associated costs. The Government grant
funding for 2015-16 of £150 million (2014: £170 million) was received on 1 April 2015 and was fully
recognised in the year.
As disclosed in our Interim Report for the six months ended September 2015, an error was identified
in the calculation for postmasters’ compensation within the Network Transformation programme on
the balance sheet and exceptional items charged in the 2014/15 half year and full year. The March
2015 exceptional charge has been restated by £87 million. This was a timing error related to
recognition of the liability. It has not impacted payments to postmasters or the overall cost of the
programme.
Restructuring costs
Restructuring costs are shown below:
2016 2015
Restated
£m fm
Network Transformation programme
-Postmasters' compensation 102 154
-Programme costs 75 73
Crown Transformation programme 23 10
IT Transformation programme 30 16
Business Transformation programme 9 12
Redundancy costs 29 25
Business Transformation payments 4 1
Other exceptional items 11 10
Restructuring costs 283 301
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Impairment
Due to ongoing operational losses (excluding the 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.
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration
transferred and the amount recognised for non-controlling interests, and any previous interest
held, over the net identifiable assets acquired and liabilities assumed. After initial recognition,
goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested for
impairment annually as well as when there are any indicators of impairment. As noted above
Goodwill relates to the business combination and there are no indicators of Goodwill impairment at
the balance sheet date.
Government grants
In addition to the Network Subsidy Payment, the Post Office receives Government grant funding
towards the transformation programme. Government grant funding of £150 million was received in
the year (2015: £170 million). The additional government grant funding is included within operating
exceptional items to match the associated costs.
The grant was allocated to cover £31 million capital expenditure (2015: £59 million), £66 million
network transformation related postmasters’ compensation (2015: £43 million) and £53 million
network and IT transformation programme costs (2015: £68 million).
The level of grants will continue to reduce as set out in the current funding agreement with the
Government. State Aid approval for the funding from 2015/16 to 2017/18 was received on 19 March
2015.
Cash Flow and Net Debt
Post Office Limited operates a Treasury function and manages its own financial assets (including
network cash) and financial liabilities (mainly Government loans).
The Treasury function derives its authority from the Board and has the authority to undertake
financial transactions relating to the management of the underlying business risks, however, it does
not engage in speculative transactions and does not operate as a profit centre. The principal financial
instruments utilised are deposits and borrowings.
The cash and cash equivalents amounted to £712 million (2015: £821 million) at the year end.
There was a net cash outflow during the year of £109 million (2015: inflow £184 million). Net debt
(excluding cash in the Post Office network) increased by £209 million year on year as shown in the
table below. As planned, Government Grants, which are not expected to cover all of the costs of
Transformation, were received ahead of the associated spend. As a result we are in a period of net
expenditure.
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2016 2015
£m £m
Net cash (outflow)/inflow from operating activities (123) (15)
Income tax recovered 9 11
Net cash outflow from investing activities (145) (116)
Net cash (outflow)/inflow before financing activities (259) (120)
Add/(deduct) movement in cash in the network included in net cash
inflow 5S (51)
Finance costs paid (5) (3)
Net (increase)/decrease in net debt (209) (174)
Net debt brought forward at the beginning of the year (197) (23)
Total net debt carried forward at the end of the year (406) (197)
Post Office Limited’s borrowing facility from the Government and the associated Framework
Agreement imposes constraints on the availability of external borrowing and limits the purposes for
which the facility can be used to fund the cash and near cash items held within the Post Office
Limited network.
Post Office Limited’s treasury policy is to minimise the amount drawn down on the loan in order to
reduce its interest cost. The facility is limited to a maximum of £950 million, the unused but
available facility at the end of the year was £485 million. The maximum drawn down under the
facility during the year was £509 million on 6 January 2016. The facility is available at two days’
notice and has an end date of 31 March 2018.
Pensions
Post Office Limited is a participating employer within the Post Office Section of the Royal Mail
Pension Plan (RMPP), and until 31 March 2015 was a participating employer within the Royal Mail
Defined Contribution Plan (RMDCP).
Royal Mail plc is the principal employer of the Royal Mail Senior Executives’ Pension Plan (RMSEPP)
and Post Office Limited is a participating employer within RMSEPP. RMPP and RMSEPP are both
defined benefit plans. The Post Office operates a Defined Contribution Scheme - the Post Office
Pension Plan.
On 1 April 2012 - after the granting of state aid by the European Commission on 21 March 2012 -
almost all of the pension liabilities and pension assets of the Royal Mail Pension Plan (RMPP), built up
until 31 March 2012, were transferred to HM Government.
On this date, the RMPP was also sectionalised, with Royal Mail plc and Post Office Limited each
responsible for their own sections from that point. This pensions transfer left the RMPP fully funded
on an actuarial basis in respect of historic liabilities at this date.
The balance sheet pension position moved from an asset of £205 million at March 2015 to an asset
of £196 million at March 2016. The movement in the surplus is primarily due to an increase in the
long term liability partly offset by an improvement in the asset values.
Valuation of the RMPP scheme is carried out triennially with the next valuation being performed as at
1 April 2015. The valuation has not yet been completed due to the current consultation on proposals
to close the RMPP scheme to future accrual.
Both defined benefit plans closed to new members in March 2008, and RMSEPP closed to future
accrual on 31 December 2012. New employees were offered membership of the RMDCP following
this date. With effect from 1 April 2015 new employees were offered membership of the Post Office
Pension Plan, previous to this they were offered membership of the RMDCP.
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The future funding of ongoing pension contributions into RMPP and deficit payments into RMSEPP
was agreed with the respective pension trustees during the year and payments were made in
accordance with the agreements. The net cash payments made are detailed below:
2016 2015
fm £m
Regular pension contributions (20) (22)
Funding of the pension deficit - RMSEPP (1) (1)
Payments relating to redundancy (3) (2)
Net cash payments (24) (25)
The income statement charge for the year was £3 million (2015: £3 million) in relation to the
defined contribution scheme and £27 million (2015: £25 million) in relation to the defined benefit
scheme.
The regular future service contributions cash rate for RMPP expressed as a percentage of
pensionable pay remained at 17.1% (2015: 17.1%). The regular rate of employee contributions for
the RMPP remains unchanged at 6%.
Events after the reporting period
In accordance with the funding agreement with government announced on 27 November 2013, for
which State Aid approval was received on 19 March 2015, Post Office Limited received £220 million
of funding on 1 April 2016, £80 million of which was the Network Subsidy Payment and £140 million
other Government Grant funding towards the transformation programme.
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Corporate Governance
Good corporate governance continues to support Post Office’s iournev
Legal Ownership Structure
Insert
Post Office is a wholly owned subsidiary of Postal
Services Holding Company Limited. The Secretary of Corporate
State for Business, Innovation and Skills (BIS) holds a
special share in Post Office and the rights attached to Structure chart
that special share are enshrined within Post Office
Articles of Association.
Neither Postal Services Holding Company nor BIS,
through its Shareholder Executive (ShEx), have any day
to day involvement in the operations of Post Office or
the management of its branch network and staff.
However, Richard Callard, the ShEx representative, sits
on the Post Office Board as a Non-Executive Director.
Corporate Governance Overview 2015/16
At Post Office we maintain standards of corporate governance appropriate for our ownership structure, our
commitment to social purpose and our strategy to achieve commercial sustainability. We regularly review
these standards to ensure they continue to deliver at the appropriate level for our developing business needs
and relevant legal and regulatory advances. As a Government-owned entity we are committed to acting in
accordance with the Nolan Principles of Public Life, namely: selflessness; integrity; objectivity; accountability;
openness; honesty; and leadership. The Board is mindful of these principles both in its decision making and in
its responsibility for organisational culture
IRRELEVANT
During 2015/16 the Board reviewed its committee structure. The proposals resulting from this review
were to dissolve two committees: Financial Services; and Pensions.
Following dissolution, financial services and pensions risk is now considered by the ARC as part of a
consolidated risk approach. In considering the implementation of these changes, the Board reviewed
and revised the ARC’s terms of reference and membership to ensure that members had sufficient
expertise and experience, particularly in financial services. A formal arrangement was also put in place
for the POMS ARC to report into the Post Office ARC.
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Board of Directors (as at 27 March 2016)
The Board is responsible for setting the business’ strategic aims, putting in place the
leadership to deliver them, supervising the management of the business and reporting to
the Shareholder and determining the Post Office vision, values and organisational culture.
During 2015/16 there was a 50 per cent change in non-executive Board membership but gender
diversity was maintained with 37.5 per cent women. This figure is in excess of Lord Davies’
recommendation for FTSE Boards of 25 per cent women and significantly ahead of the 19.6 per cent
on FTSE 250 boards, as stated in Lord Davies’ five year review published in October 2015.
Diversity in terms of time served is important for good succession planning and to maintain an
effective level of corporate knowledge and understanding. An appropriate spread of time served
ensures freshness of approach combines with knowledge and experience to deliver the most effective
strategic leadership for Post Office.
Time Served on Post Office Board
elis {CEO}
ginia Holmes
Tim Franklin
Richard Catlard
Alisdair Cameron {CFO}
(Chairman)
Ken Metall (sib)
Cariastent
0.06 1.00 4.08 5.00 6,00
tt Time Served (Years}
The Board is comprised of an independent Non-Executive Chairman, the Chief Executive, the Chief
Financial Officer, five Non-Executive Directors (one of whom is designated the Senior Independent
Director) and the Company Secretary. Further information on the Board roles and responsibilities
can be found on page XX. Non-Executive Directors are not employees of Post Office but provide
services under the terms of an individual letter or appointment, signed at the commencement of
their directorship.
Directors’ statutory duties are set out in the Companies Act 2006. The primary duty of the directors
is to promote the success of Post Office Limited as a Company for the benefit of its Government
shareholder and the wider stakeholder community.
Three new Non-Executive Directors were appointed to the Board in 2015/16 and the process
followed for their recruitment is set out in more detail in the Nominations Committee report on
pages XX. Post Office seeks the most suitable candidates as directors and considers diversity in its
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appointments, including diversity of skills and experience. This is in keeping with the belief of Post
Office that a varied balance of backgrounds, experience and insights and a culture of inclusivity
across the entire workforce is in the best long-term interests of Post Office and should reflect the
communities it serves. In April 2015, Post Office was included in The Times’ top 50 employers for
women.
Tim Parker
Independent Chairman
Joined the Board 1 October
2015
PHOTO
Ken McCall
Senior independent Director
Joined the Board 21 January
2016
PHOTO
Paula Vennells
Chief Executive
Joined the Board 18 October
2010
PHOTO
Post Office Annual Report and Financial Statements I Page : 18
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Richard Callard
Non-Executive Director
Joined the Board 26 March 2014
PHOTO
Alisdair Cameron
Chief Financial Officer
Joined the Board 28 January
2015
PHOTO
Tim Franklin
Non-Executive Director
Joined the Board 19 September
2012
PHOTO
Virginia Holmes
Non-Executive Director
Joined the Board 4 April 2012
PHOTO
Carla Stent
Non-Executive Director
Joined the Board 21 January
2016
PHOTO
Alwen Lyons
Company Secretary
Appointed as Company
Secretary 4 July 2011
PHOTO
Post Office would like to thank the following previous members of the Board who served as Non-
Executive Directors during the year 2015/16: Alice Perkins who stood down as Chairman on 31 July
2015; Neil McCausland who stood down as Senior Independent Director on 30 September 2015; and
Alasdair Marnoch who stood down on 31 July 2015.
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Group Executive (as at 27 March 2016)
The Group Executive is the most senior management body and is comprised of the Chief Executive,
each of her direct reports and the Company Secretary
Membership
The Group Executive is chaired by Paula Vennells, Chief Executive and the other members are:
Alisdair Cameron Chief Financial Officer
Martin George Commercial Director
Kevin Gilliland Network and Sales Director
Neil Hayward Group People Director
David Hussey Business Transformation Director
Nick Kennett Financial Services Director
Alwen Lyons Company Secretary
Jane MacLeod General Counsel
Other members of the Group Executive during 2015/16 were:
David Ryan Group Business Transformation Director (left the Post Office in May
2015)
Role of the Group Executive
The Group Executive implements the strategy agreed by the Board and monitors business
performance and development at a day to day level. It meets regularly to discuss latest
developments, to discuss proposals for new business development, to receive financial and other
performance reports and to monitor business transformation and commercial development. It will
also address any urgent issues that have arisen within the business and which require senior level
resolution. Twice yearly, it reviews the results of personal performance assessments undertaken
throughout the organisation.
The Chief Executive, Chief Financial Officer and the Company Secretary also attend meetings of the
Board which facilitates and strengthens the communication channels between the senior leadership,
the Board and its Committees.
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Board
Role and responsibilities
The Board is accountable to the Secretary of State for BIS for the performance of Post Office and is
required to notify the Shareholder of certain actions, as set out in the Articles of Association.
The Board is also responsible for ensuring compliance with all legal and regulatory requirements,
supervising the management of the business, providing constructive challenge to the Group
Executive and communicating with the Shareholder. It has a schedule of matters reserved for its
decision and has approved terms of reference for its committees which are provided on the Post
Office website.
The Board approves the annual budget and business plan each year and did so last in March 2016.
The Board regularly reviews reports on performance against that Plan, together with receiving
periodic business reports from senior management. Directors are briefed on matters to be
discussed at Board and Committee meetings by papers distributed in advance, as well as by
management presentations.
In setting the risk appetite for Post Office and establishing a framework to manage and mitigate risk,
the Board takes guidance from its Audit, Risk and Compliance Committee, to which it delegates
oversight of risk management. This committee receives reports from the Group’s Head of Risk and
from the internal and external audit teams. Further detailed information on the management of risk
within Post Office, together with identification of principal risks, their impacts and mitigation can be
found in the Management of risk section on pages XX to YY.
Accountability
The Board is accountable to its Shareholder and to the large and diverse group of stakeholders of the
Post Office.
Key focus and achievements in 2015/16
During the year to 27 March 2016 the Board oversaw further significant progress in network
transformation, with another 1,904 branches modernised, bringing the total so far to 6,001 and
delivering a better service to customers. The Board also considered the development of the
financial services strategy including the approval to acquire the business and assets of our joint
insurance business from Bank of Ireland (UK) plc. Owning 100 per cent of the insurance business,
through the subsidiary Post Office Management Services Limited, was a significant development
contributing to the 19.7 per cent growth in personal financial services to £152m in 2015/16.
In 2015/16 the Board went through a period of transition with a change in 50 per cent of its Non-
Executive Directors. This refreshed Board will focus in 2016/17 on driving forwards efficiency and
ensuring that all support services are optimised to deliver the ongoing transformation journey
towards a sustainable and thriving network of Post Offices.
Post Office Annual Report and Financial Statements I Page : 21
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Non-Executive Directors’ Terms of Office at 27 March 2016
Non-Executive Date of appointment Term of Unexpired term at I Committee
Director office 27 March 2016 memberships
Tim Parker 1 October 2015 3 years 2years6 months 5 I Nominations
days (Chairman)
Remuneration
Richard Callard 26 March 2014 Until N/A Audit, Risk and
removal Compliance
Tim Franklin® 19 September 2012 4 years Smonths, 23 days I Audit, Risk and
Compliance
Virginia Holmes 4 April 2012 3 years? 2 years, 8 days? Nominations
Remuneration
Ken McCall 21 January 2016 3 years 2years,9 months, I Remuneration
25 (Chairman)
Audit, Risk and
Compliance
Nominations
Carla Stent 21 January 2016 3 years 2years,9 months, I Audit, Risk and
25 Compliance
(Chairman)
1. Tim Franklin is also Chairman of the Post Office Advisory Council
2. Virginia Holmes began a second three year term on 2 April 2015
Post Office Annual Report and Financial Statements I Page : 22
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Board Meetings
During 2015/16 the Board met ten times (including extraordinary meetings in person or by
telephone for time critical issues). A record of Directors’ attendance is set out in the table below.
COMMITTEE ATTENDENCE TO BE INCLUDED IN THIS TABLE.
Director Meetings Extraordinary Meetings
(attended/eligible (attended/eligible to
to attend) attend)
Alice Perkins? 2/2 2/2
Tim Parker? 4/4 1/1
Richard Callard 77 3/3
Tim Franklin 77 3/3
Virginia Holmes 7/7 13
Alasdair Marnoch? 2/2 1/2
Neil McCausland* 3/3 2/2
Paula Vennells 7/7 3/3
Alisdair Cameron 7/7 3/3
Carla Stent® 2/2 0/0
Ken McCall® 2/2 0/0
1, Alice Perkins resigned 31 July 2015
2. Tim Parker was appointed to the Board 1 October 2015
3. Alasdair Marnoch resigned 31 July 2015
4, _ Neil McCausland served as interim Chairman from 1 August 2015 until his resignation on 30
September 2015
5. Carla Stent was appointed to the Board 21 January 2016
6. Ken McCall was appointed to the Board 21 January 2016
Conflicts of Interest and Independence
The Board may, in the furtherance of its duties, seek independent professional advice at the expense
of Post Office. During the period, no director sought independent professional advice. The Articles
give the directors power to authorise conflicts of interest. The Board has adopted a procedure by
which situations giving rise to potential conflicts of interest are identified to the Board, considered
for authorisation and recorded.
During the period, none of the directors had a material interest in any contract of significance with
Post Office or any of its subsidiaries. There was careful management of any potential conflicts of
interest for Alisdair Cameron during the period up to 30 October 2015 when he served as a Non-
Executive Director on the Board of Post Office Management Services Limited.
At all times during the periods of their appointments in 2015/16, the independent directors met the
criteria for independence set by the Board .
Post Office has arranged appropriate insurance cover in respect of legal action against directors of
Post Office and its subsidiaries.
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Committees
To assist in the execution of its corporate governance responsibilities, the Board has established a
governance structure of three committees which deal with specific topics requiring independent
oversight, specifically: audit, risk and compliance; nominations; and remuneration. Each committee
is chaired by a Non-Executive Director and the Board delegates certain authorities to these
committees which operate within their own agreed, documented Terms of Reference.
Post Office Annual Report and Financial Statements I Page : 24
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Nominations Committee
Introduction from the Committee Chairman
During 2015/16 the Committee has been key in bringing new
capability to the Board to ensure the right talent is in place to
support the Post Office during its ongoing transformation. To do so
we have used a combination of external search capability coupled
with internal resourcing to ensure that we are able to access
specialist expertise relevant to each role. The Committee is mindful
of the value which diversity brings to the Board and considers this
when making any proposals for appointments.
While the focus in 2015/16 has been on external appointments,
going forward the Committee will focus on ensuring that we begin to
build a strong internal talent pipeline to create a sustainable
organisation.
Tim Parker
Membership and Attendance
The Committee is chaired by Tim Parker, Chairman and the other
members are Virginia Holmes and Ken McCall, the Senior
Independent Director. During 2015/16 Tim Parker and Ken McCall
joined the Committee, replacing Alice Perkins and Neil McCausland
who stood down from the Board.
The Committee operates in accordance with its Terms of Reference,
which were last approved by the Board in March 2015and reviewed
in November 2015.
The Committee’ key responsibilities are to:
* keep under review the structure, size and complexity of the
Board, together with the balance of skills, experience and
diversity available within the Board and each of its committees;
. “make recommendations to the Board regarding any changes in
Board membership;
manage the process for recruiting and replacing Board —
Directors (excluding the non-executive director nominated by
_the Shareholder as their representative), members of the I
Group Executive, the Company Secretary and Directors of Post
Office Management Services Limited;
«actively manage succession planning for the Board and the
Group Executive;
* review the process for the engagement of external search
agents for senior appointments;
* — ensure Directors’ appropriate disclosures of other business
interests and any potential conflicts of interest; and
oversee the process for Bo
evaluation.
rd and Committee performance
Post Office Annual Report and Financial Statements I Page : 25
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Work carried out by the Committee in 2015/16
During the period the Committee oversaw the recruitment and appointment process for three new
Non-Executive Directors. Using a skills matrix the Committee ensured the Board was comprised of
Members with the requisite skills and experience, including: PLC Board experience; non-executive
experience; financial services exposure; retail exposure; public sector and government exposure; IT
and digital knowledge; business transformation expertise; and experience of mails and logistics. The
use of this matrix was key in ensuring that all skills were represented, securing a strong and effective
Board for the future. The Committee also oversaw the process to appoint to the Board of Post Office
Management Services Limited an independent Non-Executive Director to chair its Audit, Risk and
Compliance Committee.
The Committee used the services of Russell Reynolds Associates to undertake market searches for
executive and non-executive appointments and to advise on succession planning. This firm did not
have any other connection with Post Office.
In 2015/16 the Committee also made recommendations to the Board for membership of its
committees and considered succession planning (in particular for the Group Executive) and talent
management. The Committee noted the formation of the L300, a forum for the top 300 leaders of
Post Office, to foster senior accountability and to develop the internal talent pipeline.
Post Office Annual Report and Financial Statements I Page : 26
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Remuneration Committee
Introduction from the Committee Chairman
Having joined the Post Office Board as Senior Independent
Director and Chairman of the Remuneration Committee in
January 2016, I would like to thank my predecessor, Neil
McCausland, for his chairmanship.
In 2015/16 the Committee has effectively delivered against its
objectives to provide oversight for senior level remuneration
across Post Office Group and to use benchmarking as one
measure to ensure the appropriateness of this remuneration.
It has also provided oversight of the short term and long term
incentive plans.
Two of the three Committee members have changed during
the year. I am grateful for the consistency Virginia Holmes’
continued membership brings and am confident that the
refreshed Committee will discharge its duties effectively in the
coming year and with fairness and transparency.
Ken McCall
Membership and Attendance
The Committee is chaired by Ken McCall, Senior Independent
Director and the other members are Tim Parker, Chairman,
and Virginia Holmes. During 2015/16 Tim Parker and Ken
McCall joined the Committee, replacing Alice Perkins and Neil
McCausland who stood down from the Board.
The Chief Executive may attend meetings, at the invitation of
the Chairman, to discuss matters relating to the remuneration
of the Chief Financial Officer and members of the Group
Executive. However, the Committee is careful to recognise
and manage any potential conflicts of interest when receiving
views from the Group Executive and upholds the principle
that no individual may be involved in discussions concerning
their own remuneration.
The Committee operates in accordance with its Terms of
Reference, which were last approved by the Board in March
2015 and reviewed in November 2015.
Any changes in remuneration for directors of Post Office must
be approved in advance by the Shareholder, while the
remuneration of the Chairman and of the Non-Executive
Directors is set by the Shareholder. Also, no material changes
can be made to Directors’ base salaries, benefits or incentives
without Special Shareholder consent.
Post Office Annual Report and Financial Statements I Page : 27
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Work carried out by the Committee in The Committee’ key responsibilities are to:
2015/16 .
*® make recommendations to the Board on the
During the year, the Committee reviewed and remuneration strategy and any changes to individual
made recommendations for the 2014/15 elements of the remuneration package for Executive
payments against the short and long term Directors; members of the Group Executive who
report directly to the Chief Executive; and other
senior level appointments with comparable
remuneration;
incentive plans and the targets, scorecard
measures (including stretch targets) and
objectives for 2015/16.
provide an oversight function for the remuneration
of the Directors of Post Office Management Services
long term incentive plan, the remuneration for Limited;
the Chief Executive and the Chief Financial
Officer and the fees paid to Non-Executive
The Committee also reviewed the rules of the
¢ — obtain information on salary levels across the
business and within external organisations of
Directors. with ‘
comparable size, in order to set remuneration levels
Prior to the acquisition in October 2015 of the within an appropriate context, while being mindful
insurance arm of Post Office via its wholly that any remuneration increases should correspond
with corporate and individual performance
improvements; and
owned subsidiary Post Office Management
Services Limited, the Committee reviewed,
and recommended for approval, the © have oversight of, approve and make
Remuneration Policy for the subsidiary. recommendations to the Board in respect of
remuneration levels for new senior executive
appointments. In doing 50, it liaises and works
external consultants and in the year under closely with the Nominations Committee.
review, advice was primarily obtained from
New Bridge Street Consultants on market
practice and benchmark development. New Bridge Street Consultants is part of the Aon Consulting
Group that, under its Aon Hewitt brand, acts as investment adviser to the Post Office section on the
Royal Mail Pension Plan. Post Office is satisfied that these two provisions of advice, from different
parts of the Aon Consulting Group are managed separately and therefore present no compromise of
independence.
The Committee is permitted to engage
Directors’ Remuneration Report
Statement by the Chair of the Remuneration Committee
This is my first statement on behalf of the Remuneration Committee. The executive remuneration
strategy and framework within Post Office Ltd is structured to support improvement in profita
and reduction in reliance upon Government funding and subsidy. This is to create a sustainable
business which can deliver its public purpose.
During 2015/16 progress has been made in these areas despite challenging market conditions. Most
of the targets for progress in the year have been achieved but it remains clear that the Post Office is
still only part way through its corporate transition. Targets will continue to be stretching in
recognition of the challenges ahead.
The bonus performance outturn in 2015/16 reflects the progress made in reducing our EBITDAS
loss, pace and extent of transformation of the network, high levels of customer service and
significant financial improvement in the performance of our Crown branches.
Post Office Annual Report and Financial Statements I Page : 28
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For 2016/17 our long term incentive plan will continue the focus on significant and sustained
EBITDAS improvement and the maintenance of the unique access that people across the United
Kingdom have to Post Office branches.
The short-term incentive plan will continue to focus on financial improvements in a challenging
commercial environment in line with our business strategy and transformation objectives.
The Remuneration Committee is confident that the current policy maintains the strong link between
reward and demonstrable performance against the measures which drive the financial and
structural transformation of the Post Office to become a sustainable commercial business able to
deliver its public purpose.
The Remuneration Committee will continue to monitor and benchmark external best practice and
apply the highest standards of governance.
Details of directors’ remuneration can be found at XX
Ken McCall
Chair, Remuneration Committee
Post Office Annual Report and Financial Statements I Page : 29
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Audit, Risk and Compliance Committee
Introduction from the Committee Chairman
Having joined the Post Office Board as Chairman of the Audit, Risk and
Compliance Committee near the end of 2015/16 I would like to thank
my predecessors for their chairmanship of the Committee.
In addition to its regular cycle of business, during the year the
Committee has also supported the further development of the Group-
wide Risk Management and the General Controls Frameworks.
Reviewing Group-wide risk oversight has been an important
development, ensuring that risk is appropriately managed as the
organisation undergoes transformation.
Looking forwards to 2016/17, the Committee will continue to build on
the good work of 2015/16 and will particularly ensure appropriate
oversight of financial services risk and the consideration of any impact
of prospective regulatory changes on this developing area for Post
Office.
I am confident that the revised membership of the Committee
encompasses a strong set of relevant skills and experience and will
Membership and Attendance
The Committee is chaired by Carla Stent, and the other members are Ken
McCall, the Senior Independent Director, Richard Callard and Tim Franklin,
both Non-Executive Directors. During 2015/16 Richard Callard, Ken
McCall, Tim Parker (until 20 January 2016) and Carla Stent joined the
Committee, with Alasdair Marnoch and Neil McCausland both leaving as
they stood down from the Board.
The Head of Internal Audit attended all meetings of the Committee and
also met the Committee Chairman, as required, through the year. The
external auditor was also invited to attend meetings of the Committee as
appropriate.
The Board considers that the Committee’s members have broad
commercial knowledge and extensive business leadership experience and
that this constitutes a broad and suitable mix of business and financial
experience and expertise.
The Committee operates in accordance with its Terms of Reference, which
were last reviewed by the Committee and approved by the Board in
September 2015.
Further detailed information on the management of risk within Post
Office, together with identification of principal risks, their impacts and
mitigation, can be found in the Management of Risk section on pages XX.
Post Office Annual Report and Financial Statements I Page : 30
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Work carried out by the Committee in fh ittee’ additional
2015/16 The Committee’ additional responsi
ities are to:
* provide governance of the auditing services, which
includes reviewing and making recommendations to
the Board on the nomination or discharge of the
external auditors;
During the year, the Committee reviewed and
recommended that the Board approve the
annual report and financial statements for
2014/15 and the interim report for 2015/16,
including consideration of principal and * review and agree the annual audit plans for both
strategic risks. It also approved the annual internal and external audit;
audit plans for both the internal audit function
* ensure the appropriateness of the Post Office
and the external auditors, Ernst & Young LLP.
relationship with the external auditor is managed,
The Committee reviewed the work carried out including consideration of the external auditor’s
by internal audit and by the external auditor, independence and endorsement of its remuneration
further details of which can be found below. and terms of engagement for approval by the Chief
Financial Officer;
As part of an holistic review of risk
management and internal controls, the
Committee supported and provided guidance
© review the provision of any non-audit services
provided by either internal or external audit;
on the further improvement of the Risk © devote specific time to the consideration and
Management Framework and clarification of overview of risks relating to the financial services
our general controls. This work included the businesses of the Group and to any risk relating to
development of a framework of key policies, existing and new pension schemes; and
reviewing business continuity procedures and
increasing the clarity and robustness of
accountabilities. The Committee’s review of
cyber risk during the year will continue into
2016/17.
consider the impact of any new legislative, regulatory,
market or other developments which could materially
or adversely affect Post Office and its subsidiaries.
Following the rationalisation of the committee structure to ensure comprehensive oversight of
Group-wide risk at the Committee, there was a formalisation of the reporting procedures between
the Committee and the equivalent committee for Post Office Management Services Limited. The
Committee also scheduled regular deep dives on financial services and pensions risk. In the year,
financial conduct risk was considered and a review was carried out on the Anti-Money Laundering
and Counter Terrorist Financing Framework on which the Committee will receive regular follow up
reports.
Internal Audit
The Committee received assurance from Internal Audit over Post Office’s key risk areas. To maintain
independence, the Head of Internal Audit reports functionally to the Chairman of the Committee
and operationally to the General Counsel. Assurance is achieved through a mixture of in-house
auditors, with skills and experience relevant to Post Office operations, supplemented by a co-
sourcing arrangement currently with PwC for more specialist, one-off expertise and Deloitte LLP for
business transformation assurance.
The annual plan is developed by Internal Audit across the risk universe with input from
management. It is approved by the Committee and may be updated, with the Committee’s consent.
Updates and findings are provided by the Head of Internal Audit at each meeting of the Committee.
Any significant findings or identified risks are closely examined so that appropriate action can be
taken.
Post Office Annual Report and Financial Statements I Page : 31
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During the year, Internal Audit conducted 11 mainstream reviews, two financial services reviews and
facilitated a further seven on Business Transformation.
Business Area Audits Conducted
Mainstream Treasury Operational Risk, Social Media, Contract Management, Financial
Crime, Common Digital Platform, Agents Remuneration, Data Protection,
Mobile Proposition, Drop and Go, Property Regulatory Compliance, Travel
Expenses
Financial Services FS Conduct Risk, POMS Regulatory Readiness
Business Transformation Portfolio Design, End to End Financial Management, Benefits Management
Framework, Cross Towers Governance Structure, Programme Assurance
Authority, End User Computing, IT Separation from Royal Mail
At the end of the year, Internal Audit conducted a self assessment of compliance with the Internal
Audit Charter, which was reviewed by the Committee. Next year, this process will incorporate
feedback from auditees and Committee members on Internal Audit’s effectiveness.
External Audit
The external auditors are engaged to express an opinion on the financial statements. They review
and test the systems of internal financial control and the data contained in the financial statements
to the extent necessary to express their audit opinion. They discuss with management the reporting
of operational results and the financial condition of the Post Office and present their findings to the
Committee.
During the year the external auditors met once with the Committee in the absence of the executive.
The Committee agreed the external audit fee and considered the external auditors to have an
appropriate level of independence. Prior to the end of year a change in the external audit partner
provided enhanced levels of independence.
During the year XX% of the total fees paid to Ernst & Young were for non-audit services, an
increase/decrease on the 29% paid in 2014/15.
Annual Assessment
During the year, the Committee reviewed and recommended that the Board approve the
effectiveness of the:
e risk management framework, by reviewing evidence of risk assessment activity and the
summary of the material risks and action plans, via the Group Risk Profile
systems of internal control, primarily through agreeing the scope of the internal audit plan
and reviewing its findings, but also from reports from Management and external advisors
* preparation of the annual and interim financial statements and a review of the nature and
scope of the external audit.
In consequence, the Board, through the Committee, confirmed that there is a regularly reviewed
ongoing process of identifying, evaluating and managing the principal risks faced by Post Office and
their related controls. The process is continuing to evolve, but has been in place for the year under
review and up to the date of approval of the annual report and financial statements. The Board has
reviewed its effectiveness.
Post Office Annual Report and Financial Statements I Page : 32
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Subject to acknowledgement of the reinstatement referred to on page XXX, the Board considers the
risk management, internal control systems and processes appropriate for Post Office activities and
designed to manage rather than eliminate the risk of failure to achieve Post Office strategic
objectives, protect our reputation and comply with regulatory standards. They provide reasonable,
but not absolute assurance, against material misstatement or loss.
Post Office Annual Report and Financial Statements I Page : 33
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Management of Risks
Our Approach to Risk
We define risk as anything that can adversely affect our ability to meet the Post Office’s objectives, maintain its reputation and
comply with regulatory standards. Risk is an inherent part of how the PO seeks to grow and create value. We seek to
understand and harness risk in the pursuit of our aims and business plan objectives. As we progress, our aim is to operate
within an acceptable level of risk taking, in accordance with risk appetite parameters set by the Board. All staff are expected to
be aware of risks in their areas of responsibility and manage those risk intelligently in their day-to-day activities.
Risk Management Governance
The Board is accountable for the risk management and internal control systems in the Post Office, for reviewing their
effectiveness and for determining the nature and extent of the principal risks. Responsibility for day-to-day operations rests
with members of the Group Executive. The Risk and Compliance Committee, on behalf of the Group Executive, reviews the
operation of the risk management process and management of the principal risks. The committee is chaired by the General
Counsel, membership includes all of the Group Executive and the output is reported to the Audit, Risk & Compliance
Committee (ARC).
Assurance for the Board over the effectiveness of our risk management and internal controls is provided by the Audit, Risk and
Compliance Committee, through review of reports from Management, particularly the Risk & Compliance Committee (RCC),
Internal Audit, external advisers and External Audit.
Our Risk Management Framework
To improve our ability to consistently identify, manage and monitor risks, and take advantage of opportunities we might
otherwise miss, we have developed a structured framework for assessing, managing and communicating risk. The framework
identifies roles and responsibilities, the policies for how risks are managed, the tools and processes used, a risk appetite
statement and the reporting outputs to inform both Management and the ARC.
Material risks are identified by business areas (bottom up analysis) for their own risk management; Group Executive members
review these and add further strategic and external perspectives (top down review). The scope of risks to consider is facilitated
by a Risk Universe. Impact and likelihood is assessed for evaluating each risk, after consideration of the controls we have in
place. Where the resultant “net” risk profile is considered in excess of our risk appetite, consideration will be given as to how
the risk could be brought back within an acceptable level of risk taking. For other risks we may want to introduce monitoring
procedures. Details of our Principal Risks are included on page ZZ.
Our Control Framework
Our risk management efforts are underpinned by our internal control framework. The Board has put in place an organisational
structure with formally defined lines of responsibility and delegation of authority. Executive Management have established
procedures for setting our direction, planning and controlling the operation of our business, and reviewing and monitoring our
performance and conduct. These include:
* communication of the Group's strategy, objectives and targets
© expectations of standards of conduct by our colleagues as set out in our Code of Business Standards
* definition and review of our social purpose
* annual and three-year operating and capital plans which are reviewed by the Board. This includes the identification
and assessment of risks compared to our appetite
* monthly comparisons actual financial performance with budget by operating divisions, with consideration by the
Board of year end forecasts
* an organisational structure with lines of responsibility and appropriate segregation of duties
* change management approach, resources and governance are used to manage significant projects
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* formally defined delegations of authority, including capital investment limits and a treasury policy
* appointment of employees of the necessary calibre to fulfil their allocated responsibilities, with formal personal
development and appraisal procedures
‘* senior management remuneration designed to align personal and business objectives, as well as to discourage
dishonest, illegal or unethical acts
* a framework of operating, financial and IT policies
* a whistleblowing procedure for colleagues to raise concerns in confidence and if required, anonymously; a complaints
procedure is available to customers and third parties.
Progress during the year and plans for next year
During the year, we have continued to develop our risk management capability. Highlights of what’s been achieved and what is
planned for next year include:
Risk assessment: during 2015/ 16, there has been more
regular use of the risk management framework in business
areas and by RCC, with greater focus on defining further
actions required to manage risks and the introduction of
longer term horizon scanning
Control environment: during 2015/16, we have reviewed the
appropriateness of our Internal Control Framework and our
key policies and identified appropriate remediations
) Risk assessment: for 2016/ 17, we plan to focus our incident
reporting process to provide lessons learnt on our risk
assessments and operationalise our risk appetite further
Control environment: for 2016/17, we plan to formalise our
monitoring mechanisms for both our Internal Control
Framework and our key policies
Our Principal Risks and Mitigations
These are our principal risks, detailed with their potential consequences if they were to crystallise and how the Post Office
manages them. Any of these risks could have a material impact on our results, condition and prospects. However, these
risks should not be regarded as a complete and comprehensive statement of all potential risks; some risks are not yet
known and some that are not considered material could later turn out to be material.
Post Office Annual Report and Financial Statements I Page : 35
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Sur ontary
Potential risks Consequences Key Mitigations
STRATEGIC RISKS
A) Competitive threat Crystallisation of these I e Customer perceptions and competitor behaviour are
risks could result in not key inputs to decision making.
Post Office faces both opportunities for and threats I achieving our growth Our strategy focuses on customer requirements,
to income from our competitive market place. objectives, losing market trends and competitor behaviour, working.
market share and with partners where appropriate, to offer customer
- The Mails and parcels market remains intensely revenues. centric propositions, supported by a clear
competitive. distribution strategy.
Each product proposition developed in the context of
a customer strategy which describes target market,
channel of distribution and completing attributes.
- Government Services are impacted by increased use of
digital channels and reduced public spending.
- Financial Services is a challenging market where
responding quickly to different strategies, business models,
and products is essential to growth.
B) Dependency on strategic relationships _ I This could result in not Close working relationships established with our
achieving our growth strategic relationships.
Post Office has strategic relationships which are key I objectives, losing Interactions scheduled with our strategic partners to
to its product offering and growth, for instance with I revenue and market improve the product offering and service to drive
Royal Mail Group and Bank of Ireland (UK) ple. share, growth and profitability for both parties.
Misalignment of the strategic direction or focus with Contractual arrangements monitored and managed
the strategic partner could result in products that do to ensure that they are aligned with commercial
hot support our growth strategy or meet our objectives and that relationships deliver to
customer or market requirements. expectations.
TRANSFORMATION RISKS
C) Benefits from business transformation I This could result in not Programme management office established, with
not realised achieving our growth assurance oversight.
objectives, loss of * Detailed plans in place to manage the
revenue and cost transformation, and identify risks to ensure
Budgeted savings from our transformation savings, reduced transformation activities are delivered within budget
programme may be delayed or not achieved, or and on time.
customer satisfaction
and damage to
reputation with
stakeholders.
overall service compromised, due to pressures on
capability, capacity and the scale of change
Flexible resource augmentation model implemented
to ensure supply of people with the right capabilities,
skills and experience.
Benefits tracked from inception to delivery and into
business as usual operations through formalised
reviews during the lifecycle.
Strategy and Integrated Service model developed
D) IT transformation not delivered in full I This could result in
systems and and monitored.
Our programme of IT transformation may not be infrastructure that are I # Programme teams and operational business teams
delivered in full due to the level of complexity of not fit for purpose, may work closely to ensure that the objectives of the
replacing legacy IT and simultaneously implementing I add costs and lead to strategy are delivered.
new integrated service model business interruption, I # Business and Technology Transformation
governance, assurance and oversight plan in place
and operational.
E) Industrial action This could result in © Well defined agreements with relevant unions.
business disruption * Comprehensive engagement programme in place
leading to loss of with staff, unions and postmasters so as to ensure
The withdrawal of support from staff or revenue, reduced that there is alignment with our vision and strategy
postmasters to the ongoing implementation of Z
customer satisfaction around transformation.
Post Office transformation has the potential to
damage the business in terms of both reputation
and financial performance particularly if industrial
action takes place.
Contingency planning in place to minimise the impact
and brand damage.
of potential industrial action.
Post Office Annual Report and Financial Statements I Page : 36
F) Lack of appropriate capal
The Post Office is dependent on its dedicated work
force to meet the expectations of its customers and
stakeholders. Continuing to attract, motivate,
develop and retain people is key to its success,
This could result in not
achieving our strategic
objectives and loss of
staff engagement.
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Continual review of our organisational structure to
ensure it evolves and supports our requirements.
Key capabilities for our current and future state
needs identified with a capability heatmap,
Investment in developing our people.
G) Decline in customer experience
If we are unable to deliver an attractive customer
experience, via our products, service and channels,
we risk losing the support of our customers.
This could result in
reduced customer
satisfaction and brand
reputation, with
consequential loss of
market share and
revenues.
Customer strategy continually monitored to ensure
that it meets changing customer product and service
expectations and reflects current market and
competitor trends.
Channel strategy ensures we meet the changing
customer requirements for access and utilises
available and emerging technology to reflect,
changing customer needs.
H) Unattractive network proposition
As we transform, there is a risk that the Post Office
may not be able to retain, or attract sufficient new,
retail partners because of the complexity of our
network proposition and relative value to the retail
partner particularly compared to other categories.
‘As well as loss of
revenue, this could
result in shrinkage to
our network and breach
our public purpose
commitment.
New branch model being developed to provide
retailers with an attractive proposition relative to
other categories.
New branch model also ensures that we use modern
technology to drive simplicity of operations,
efficiency and cost reduction for the retailer, as well
as a better customer experience.
Branch model continually reviewed and updated to
respond to ongoing competitive threat and market,
conditions
1) Business interruption and cyber threat
Post Office is dependent on the continued
availability of its information systems and associated
infrastructure, These could be threatened, either
due to internal issues, external events or cyber
attack.
This could result in
disruption of service
leading to negative
customer experience,
breach of contractual
obligations and brand
damage.
Business continuity plans updated through review,
testing and enhancements.
New contracts have provisions covering the security,
resilience and availability of our IT systems and
infrastructure,
Information Security policies in place.
Penetration testing schedule to assess and improve
the security of our systems,
J) Dependency on third parties
Post Office works in partnership with a number of
third parties to deliver high quality services. We
need to successfully select, contract and monitor our
key in-source or out-source relationships and avoid
any unintentional breaches of contractual terms.
K) Stakeholder funding
The cost of delivering the public purpose of the Post
Office and meet the expectations of stakeholders
may exceed current forecasts.
This could lead to
business interruption
and additional costs
through failure to meet
contractual obligations.
This could result in not
achieving our growth
objectives, failing to
meet our public
purpose commitment
and damaging our
reputation with
stakeholders.
Contract management framework to monitor our
contracts and suppliers.
Assessment of risks and monitoring of mitigating
actions.
Defined key policies that we require our suppliers to
comply with and attest compliance.
Proactive engagement with stakeholders to ensure
there is full understanding of, and alignment with, the
strategic goals and the investment case required to
deliver them.
Annual and three-year operating and capital plans
developed and risk assessed.
Scheduled feedback to stakeholders and review.
L) Financial reporting and controls failure
Our financial controls are fundamental to delivering
our fiduciary responsibilities, management
This could result in loss
of revenue, increased
costs, financial
misstatement and
Defined and structured delegation of authority which
is reviewed and approved by the Board,
‘A Financial and Accounting manual and a framework
of supporting general controls ~ see our General
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518
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information, financial reporting and compliance with [damage to reputation Controls Framework on page XXX.
accounting and governance standards. These may _I with stakeholders. © Documented financial controls, with additional
not operate effectively if they are not documented, assurance to be provided from a Control Self-
reviewed and monitored regularly. Assessment process.
M) Pension cost increases This could result in Valuation assumptions and pension funding strategy
material increases in have regular external and internal monitoring and
The cost of servicing the current Defined Benefits required contributions, review.
scheme could become unbearably onerous as a adversely affecting our I ® Options being developed to minimise the impact of an
result of the prolonged low interest rate ability to achieve adverse valuation, with assistance from professional
environment, resulting in substantially increased commercial advisors.
contributions. sustainability. © Consultation process initiated on options for the
future of the Defined Benefit plan.
LEGAL & REGULATORY RISKS
N) Financial regulatory breach This could result in * New regulatory obligations monitored by relevant
regulatory censure, business owners, with support from Corporate
The Post Office operates under an extensive fines, litigation or Services.
regulatory environment, covering areas such as curtailment of trading, I * ©N-80ing training to our staff on legal and regulatory
financial and postal services, telecoms, procurement, I which could impact matters.
competition law and data security. This environment I income and/or damage I ® Regular compliance tests and monitoring are
continues to evolve, particularly in the financial our reputation with conducted.
services arena, and we need to ensure that the customers and © Internal and external assurance programmes are in
changing requirements continue to be identified and_I suppliers. place (including by our regulatory principals) to
met. ensure that we meet financial services regulatory
requirements, including sales practices and conduct,
customer experience and product experience and
delivery.
Post Office Annual Report and Financial Statements I Page : 38.
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Directors’ Report
The Directors present the Group Annual Report and Financial Statements for the year ended
27 March 2016.
Expected future developments
Expected future developments are detailed in pages XX to XX.
Results and dividends
The loss after taxation for the year was £XXm (2015: profit £XXm). The directors do not recommend
the payment of a dividend (2015: £nil dividend).
Political contributions
No political contributions were made in the year (2015: £nil).
Research and development
There was no research and development expenditure during the year (2015: £nil).
Directors and their interests
The following served as Directors during the year:
RJCallard
ACJ Cameron
TA Franklin
V AHolmes
A Marnoch (resigned 31 July 2015)
K S McCall (appointed 21 January 2016)
NW McCausland (resigned 30 September 2015)
TC Parker (appointed 1 October 2015)
A Perkins CB (resigned 31 July 2015)
CR Stent (appointed 21 January 2016)
P A Vennells
No director has a beneficial interest in the share capital of Post Office. The emoluments of Directors
are set out in the Directors’ Remuneration Report which appears on pages XX to XX.
People
Our goal is to ensure that everyone associated with our business — employees and postmasters — are
engaged and involved in the business and are aligned and equipped to meet our shared objectives.
We conduct regular employee surveys, which provide employees and postmasters the opportunity
to express their views and opinions on important issues. This two way communication encourages
all our people to contribute towards improving the business and delivering our strategic objectives.
To engender greater engagement, Post Office has structured and systematic communication
channels in place, ensuring employees and postmasters are informed on matters which impact
them.
As part of our commitment to drive better service for customers we continue to focus on improving
the quality of our leadership, ensuring we have the right skills for today and tomorrow, and
Post Office Annual Report and Financial Statements I Page : 39
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achieving greater involvement from employees, postmasters and their representative bodies.
We have launched a Learning Academy which provides high quality learning for all employees and
postmasters. We will continue to invest in developing the best talent to support our vibrant,
sustainable business, including graduate recruitment and active participation in the new
apprenticeship programme.
Underpinning all of this, is a need for dignity and respect in the workplace, where everybody feels
valued, is treated fairly and equally, and all our people play a full part in helping the business to
achieve its goals.
Corporate responsibility
Details of Post Office corporate responsibility activities are contained within a separate report on
page XX.
Disabled employees
The Post Office policy is to give full consideration to applications for employment from disabled
persons. Employees who become disabled while employed receive full support through the
provision of training and special equipment to facilitate continued employment where practicable.
Post Office provides training, career development and promotion to disabled employees wherever
appropriate.
Post balance sheet events
In accordance with the funding agreement with government announced on 27 November 2013, for
which State Aid approval was received on 19 March 2015, Post Office Limited received £220m of
funding on 1 April 2016. TBC
Going concern
After analysis of the financial resources available and cash flow projections for Post Office, the
Directors have concluded that it is appropriate that the financial statements have been prepared on
a going concern basis. Further details are provided in accordance with the fundamental accounting
concept in note X to the financial statements.
Financial instrument risk
The exposure of the Group to market risk, credit risk and liquidity risk has been disclosed in note X of
the annual report on pages XX-XX.
Audit information
The Directors confirm that, so far as they are aware, there is no relevant audit information of which
the auditor is unaware, that each Director has taken all reasonable steps to make themselves aware
of any relevant audit information and to establish that the auditor is aware of that information.
Auditor
The auditor, Ernst & Young LLP, is deemed to be reappointed under section 487(2) of the Companies
Act 2006.
By Order of the Board
Alwen Lyons
Secretary
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Draft to Board — IN STRICTEST CONFIDENCE —17 May 2016
Post Office Limited
(Company Number 2154540)
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ
X June 2016
Post Office Annual Report and Financial Statements I Page : 41
Yfice Board-24
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Post Office Limited
Registered Number 2154540
Post Office Limited
Financial Statements
2015-2016
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Post Office Limited
DIRECTORS’ RESPONSIBILITIES STATEMENT
The directors are responsible for preparing the Annual Report, which includes the Directors’ Report,
Remuneration Report and Corporate Governance Statement, and the Group and Parent Company
financial statements, in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that
law the directors have elected to prepare the Group consolidated financial statements in accordance
with International Financial Reporting Standards (“IFRSs") as adopted by the European Union ("EU").
The financial reporting framework that has been applied in the preparation of the Parent Company
financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice). Under company law the directors must not approve the
financial statements unless they are satisfied that they give a true and fair view of the state of affairs
of the Group and Parent Company, and of the profit or loss of the Group and Parent Company for that
period.
In Preparing these financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
* make judgments and accounting estimates that are reasonable and prudent;
* state whether IFRS as adopted by the EU, and applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in the Group and Parent
Company financial statements respectively;
* prepare the financial statements on the going concern basis unless it is inappropriate to
presume that the Group and Parent Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and
explain the Company’s transactions and disclose with reasonable accuracy at any time the financial
position of the Company and the Group and to enable them to ensure that the financial statements
and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the
Group’s financial statements, Article 4 of the International Accounting Standards Regulation. They are
also responsible for safeguarding the assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial
information included on the Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors are responsible for preparing the Directors’ report and the Corporate Governance report
in accordance with the Companies Act 2006 and applicable regulations.
The Directors confirm that to the best of their knowledge:
«The Group consolidated financial statements, prepared in accordance with IFRS as adopted by
the EU and in accordance with the provisions of the Companies Act 2006 give a true and fair
view of the assets, liabilities, financial position and profit of the Group;
* The Parent Company financial statements prepared in accordance with United Kingdom
Generally Accepted Accounting Practice including FRS 101 “Reduced Disclosure Framework”,
give a true and fair view of the assets, liabilities, financial position and profit of the Company;
and
* The management report contained in this report includes a fair view of the development and
performance of the business and the position of the Group as a whole and of the Company,
together with a description of the principal risks and uncertainties they face.
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Independent auditor’s report to the members of Post Office
We have audited the consolidated financial statements of Post Office Limited for the 52-week period
ended 27 March 2016 which comprise the Group Income Statement, the Group Balance Sheet, the
Group Statement of Comprehensive Income, the Group Statement of Cash Flows, the Group
Statements of Changes in Equity, the Parent Company Statement of Comprehensive Income, the
Parent Company Balance Sheet, the Parent Company Statement of Changes in Equity and the related
notes 1 to 26. The financial reporting framework that has been applied in the preparation of the group
financial statements is applicable law and International Financial Reporting Standards (IFRSs) as
adopted by the European Union (EU). The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom
Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101
“Reduced Disclosure Framework”.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part
16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page [xx], the directors
are responsible for the preparation of the financial statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the Annual Report and Financial Statements.
to identify material inconsistencies with the audited financial statements and to identify any
information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
« the financial statements give a true and fair view of the state of the Group’s and of the Parent
Company's affairs as at 27 March 2016 and of the group’s loss for the 52-week period then
ended;
* the Group’s financial statements have been properly prepared in accordance with IFRSs as
adopted by the European Union; and
* the Parent Company financial statements have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting Practice, including FRS 101 “Reduced
Disclosure Framework"; and
* the Group and Parent Company financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Financial Report and the Directors’ Report for the financial
year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires
us to report to you if, in our opinion:
* adequate accounting records have not been kept by the parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
* the Parent Company financial statements are not in agreement with the accounting records
and returns; or
* certain disclosures of directors’ remuneration specified by law are not made; or
* we have not received all the information and explanations we require for our audit.
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Other matters
* The maintenance and integrity of the Post Office Limited web site is the responsibility of the
directors; the work carried out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any changes that may have occurred
to the financial statements since they were initially presented on the web site.
* Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Peter McIver (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
Date}
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tary Doc
Post Office Limited
Consolidated income statement
for the 52 weeks ended 27 March 2016 and 29 March 2015
2015
2016 (Restated)
Notes £m £m.
Continuing operations:
Turnover 981 976
Network Subsidy Payment 130 160.
Revenue 1,141 1,136
People costs excluding restructuring costs 2 (233) (238)
Other operating costs (808) (831)
Share of post tax profit from joint ventures 10 35 36
Operating profit before exceptional items for continuing operations 3 105 103
Operating exceptional items 4 (269) (271)
- government grant 150 170
- restructuring costs (283) (301)
- impairment (136) (140)
Operating loss from continuing operations (164) (168)
Profit on disposal of property, plant and equipment - =
Loss before financing and taxation from continuing operations (164) (168)
Finance costs 6 (5) (3)
Finance income 6 - 1
Net financing income relating to pensions 17 8 2
Loss before taxation from continuing operations (161) (163)
Taxation credit Zz 4 26
Loss for the financial year from continuing operations. (157) (137)
Discontinued operations:
Loss for the financial year after tax from discontinued operations 22 (10) (4)
Loss for the financial year (167) (141)
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Post Office Limited
Consolidated statement of comprehensive income
for the 52 weeks ended 27 March 2016 and 29 March 2015
2015
2016 (Restated)
Notes £m £m
Loss for the financial year from continuing operations (157) (137)
Loss for the financial year from discontinued operations 22 (10) (4)
Loss for the financial year (167) (141)
Other comprehensive income not to be reclassified to profit or loss in
Future periods
Remeasurements on defined benefit surpluses 17 (9) 54
Income tax effect Z 5 (9)
Total comprehensive income for the year (171) (96)
There are no other comprehensive income items that will be reclassified to the profit and loss in future
periods.
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Post Office Limited
Consolidated statement of cash flows
for the 52 weeks ended 27 March 2016 and 29 March 2015
2016 2015
£m_ _ém
Cash flows from operating activities
Operating profit before exceptional items from continuing operations 105 103
Operating loss from discontinued operations 22 (10) (4)
Total profit before exceptional items. 95 99
Adjustment for:
Share of profit from joint ventures 10 (35) (36)
Pension operating costs 2 30 28
Working capital movements: (81) (17)
Increase in trade and other receivables (14) (34)
( Decrease)/Increase in trade and other payables (61) 10
Increase in provisions for discontinued operations 22 3 -
(Decrease)/increase/ in non-exceptional provisions 15 (9) 2
Pension operating costs paid (23) (23)
Cash payments in respect of operating exceptional items: (109) (66)
IGovernment grant 150 170
Restructuring costs (253) (224)
Other (6) (12)
Net cash outflow from operating acti (123) (15)
Income tax recovered Zz. 9 11
Cash flows from investing activities
Dividends received from joint ventures 10 35 30
Finance income received - 1
Acquisition of insurance business. 21 (44) -
Purchase of fixed and intangible assets (136) (147)
Net cash outflow from investing activities (145) (116)
Net cash (outflow)/inflow before financing activities (259) (120)
Cash flows from financing activities
Finance costs paid (5) GB)
Payments to finance lease creditors - (3)
Proceeds of borrowings from BIS 14 155 310
Net cash inflow from financing activities 150 304
Net (decrease)/increase in cash and cash equivalents (109) 184
Cash and cash equivalents at the beginning of the year 12 821 637
Cash and cash equivalents at the end of the year 12 712 821
Post Office L
Consolidated balance sheet
at 27 March 2016 and 29 March 2015
imited
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2015
2016 (Restated)
Notes £m —m
Non-current assets
Intangible assets 8 44 -
Property, plant and equipment 9 9 10
Investments in joint ventures 10 67 67
Retirement benefit surplus 17 196 205
Trade and other receivables 11 12 10
Total non-current assets 328 292
Current assets
Inventories 6 6
Trade and other receivables it 409 397
Cash and cash equivalents. 12 712 821
Total current assets 1,127 1,224
Total assets 1,455 1,516
Current lial jes
Trade and other payables 13 (653) (718)
Financial liabilities - interest bearing loans and borrowings 14 (465) (310)
- obligations under finance leases 20 (8) -
Provisions 15 (151) (144)
Total current liabi (1,277) (1,172)
Non-current liabi
Other payables 13 (25) (30)
Provisions 15 (16) (6)
Total non- current liabi (41) (36)
Net assets 137 308
Equity
Share capital 18 - -
Share premium. 18 465 465
Retained earnings (330) (159)
Other Reserves 18 2 2
Total equity 137 308
The financial statements on pages XX to XX were approved by the Board of Directors on XXX 2016 and
signed on its behalf by:
P A Vennells
Chief Executive
A Cameron
Chief Financial Officer
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Post Office Limited
Consolidated statement of changes in equity
for the 52 weeks ended 27 March 2016 and 29 March 2015
Share Retained Other ‘Total
premium — earnings reserves equity
Notes £m £m £m £m
At 30 March 2015 (restated) 465 (159) 2 308
Loss for the year - (167) - (167)
Remeasurements on defined benefit surplus 17 - (9) - (9)
Income tax effect Zz : 5 2 5
At 27 March 2016 465 (330) 2 137
Share Retained Other Total
premium earnings _reserves equity
Notes £m £m ém ém
At 31 March 2014 465 (63) 2 404
Loss for the year (restated) - (141) - (141)
Remeasurements on defined benefit surplus 17 - 54 54
Income tax effect 2 : (9) (9)
At_29 March 2015 (restated) 465 (159) 2 308
10
ard 24,
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Notes to the financial statements
1. Accounting Policies
Financial year
The financial year ends on the last Sunday in March and for this reason these financial statements are made up
for the 52 weeks ended 27 March 2016 (2015: 52 weeks ended 29 March 2015).
Basis of preparation
The Group financial statements on pages XX to XX have been prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS. Unless otherwise stated in the accounting policies below, the
financial statements have been prepared under the historic cost accounting convention.
The Company is incorporated and domiciled in the United Kingdom. The Group consolidated financial statements
are presented in Sterling and all values are rounded to the nearest £million except where otherwise indicated.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary
undertaking as at 27 March 2016. Subsidiaries are consolidated from the date of acquisition, being the date on
which the Group obtains control, and continue to be consolidated until the date such control ceases. A dormant
set of financial statements for Post Office Management Services Limited (subsidiary) were prepared to 30
November 2014, The subsidiary began trading in January 2015 and the first set of financial statements have been
prepared for the 16 month period to 27% March 2016. The year end date is in line with the Company. The subsidiary
uses consistent accounting policies where appropriate and a its results have been consolidated into the group
financial statements. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group
transactions are eliminated in full.
New standards, amendments and interpretations issued not yet effective for the current year
The following standards and interpretations, which have been issued by the IASB and are relevant for the Group,
subject to EU ratification, become effective after the current year-end and have not been early adopted by the
Group:
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments was first issued in November 2009 and had since been amended several times. A
complete version of the standard was issued in July 2014 and is a replacement of IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 covers the classification, measurement and derecognition of financial assets
and financial liabilities, together with a new hedge accounting model and a new expected credit loss model for
calculating impairment. The new standard becomes effective for annual periods beginning on or after 1 January
2018, subject to EU adoption expected in first half of 2016. It is anticipated that the application of this amendment
will have no significant impact on the Group's income statement or balance sheet.
IFRS 15 Revenue from Contracts with Customers
The IASB issued IFRS 15 Revenue from contracts with customers in May 2014. The new standard provides a
single, five-step revenue recognition model, applicable to all sales contracts, which is based upon the principle
that revenue is recognised when control of goods or services is transferred to the customer. It replaces all existing
revenue recognition guidance under current IFRS and becomes effective for annual periods beginning on or after
1 January 2018, subject to EU adoption expected in 2016. The Group is currently considering the impact of IFRS
15 on its consolidated results and financial position.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
The amendments clarify the principle in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets that
revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset
is a part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-
based method cannot be used to depreciate property, plant and equipment and may only be used in very limited
circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods
beginning on or after 1 January 2016, with early adoption permitted. The Group is currently considering the impact
of these amendments on its consolidated results and financial position.
Amendments to IAS 27: Equity Method in Separate Financial Statements
The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint
ventures and associates in their separate financial statements. Entities already applying IFRS and electing to
change to the equity method in their separate financial statements will have to apply that change retrospectively.
First-time adopters of IFRS electing to use the equity method in their separate financial statements will be required
to apply this method from the date of transition to IFRS. The amendments are effective for annual periods
beginning on or after 1 January 2016, with early adoption permitted. The Group is currently considering the impact
of these amendments on its consolidated results and financial position.
Annual Improvements 2012-2014 Cycle
These improvements are effective for annual periods beginning on or after 1 January 2016, They include:
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IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Assets (or disposal groups) are generally disposed of either through sale or distribution to owners. The amendment
clarifies that changing from one of these disposal methods to the other would not be considered a new plan of
disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of
the requirements in IFRS 5. This amendment must be applied prospectively.
IAS 19 Employee Benefits
The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in
which the obligation is denominated, rather than the country where the obligation is located. When there is no
deep market for high quality corporate bonds in that currency, government bond rates must be used. This
amendment must be applied prospectively.
Amendments to IAS 1 Disclosure Initiative
The amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. The amendments
clarify:
« The materiality requirements in IAS 1;
That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may
be disaggregated;
« That entities have flexibility as to the order in which they present the notes to financial statements;
« That the share of OCI of associates and joint ventures accounted for using the equity method must be presented
in aggregate as a single line item, and classified between those items that will or will not be subsequently
reclassified to profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the
statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for
annual periods beginning on or after 1 January 2016, with early adoption permitted. The Group is currently
considering the impact of these amendments on its consolidated results and financial position.
There are no other standards and interpretations in issue but not yet adopted that the Directors anticipate will
have a material effect on the reported income or net assets of the Group.
The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet
effective,
Fundamental accounting concept - going concern
The Group has net assets of £137 million at 27 March 2016 (2015: £308 million). A 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) with a limit of £950 million from 30 March 2015 up to 31 March 2018 (it was
previously £1.15 billion)
At 27 March 2016 £485 million of the working capital facility was undrawn (2015: £840 million).
State Aid approval for the funding from 2015/16 to 2017/18 was received on 19 March 2015.
This funding takes the form of a Government Grant, enabling 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 which could not support a commercial retail outlet. New main and local branches are currently
being rolled out across the United Kingdom. Customers are benefitting from a much better retail experience
including very significantly 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 is a modernisation
programme and not a branch closure programme.
The Directors are satisfied with the continued progress made towards modernisation during 2015/16 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 and is not without.
risk.
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 next 12 months. Accordingly, on that basis, the
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Directors consider that it is appropriate that these financial statements have been prepared on a going concern
basis.
Prior year restatement
In preparing the financial statements for the current year, the comparative figures for the year ended 29 March
2015 have been restated. The provision for Postmasters’ Compensation, included in network transformation, had
not been fully recognised in the financial statements for the year ended 29 March 2015. The nature of the
provision is described in more detail in the accounting policies on page XX. The restatement affects exceptional
costs, provisions and retained earnings due to the loss in the year changing as a result of a restatement to the
exceptional charge. This represents an acceleration of an expected cost and there has been no impact on the
Group's funding position or on payments to Postmasters’. Within this report, the comparative income statement,
statement of comprehensive income, balance sheet and statement of changes in equity for the year ended 29
March 2015 have been restated. There has been no effect on the cash flow statement.
Total provisions (63) (87) (150)
Shareholders’ funds (retained earnings) (72) (87) (159)
Operating exceptional items - restructuring (214) (87) (301)
Profit/(loss) for the year (54) (87) (141)
Critical accounting estimates and judgements in applying accounting policies
The Group makes certain estimates and assumptions regarding the future. Estimates and assumptions are
continually evaluated based on historical experience and other factors. In the future, actual experience may
differ from these estimates and assumptions. In addition the Group has to make judgements in applying its
accounting policies which affect the amounts recognised in the accounts. The most significant areas where
judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Group are determined using methods relying on
actuarial estimates and assumptions. These pension figures are particularly sensitive to changes in assumptions
for discount rates, mortality and inflation rates. The Group exercises its judgement in determining the
assumptions to be adopted, after discussion with its Actuary. Details of the key assumptions are set out in note
17.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a
rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term.
Judgement has been applied in determining that for these purposes a high quality corporate bond constitutes AA
rated or equivalent status bonds.
Provisions
The Group has recognised provisions where a present legal or constructive obligation exists as a result of a past
event, where it is probable that an outflow of resources will be required to settle the obligation and a reliable
estimate of the amount can be made. Severance provisions are recognised for business reorganisation where
the plans are sufficiently detailed and well advanced and where appropriate communication to those affected has
been undertaken at the balance sheet date. Postmasters’ compensation provisions are recognised when either
Postmaster’s agree to terminate their existing contracts or sign the new format contracts under Network
Transformation. The total provision for Postmasters’ compensation at the yearend date represents
management's best estimate of the future obligation. Provisions are detailed in note 16. Due to the nature of
provisions the future amount settled may be different from the amount that has been provided.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate the risks specific to that liability.
Impairment of non-current assets
The Group assesses whether there are any indicators of impairment for all non-currents assets at each reporting
date as well as if events or changes in circumstances indicate that the carrying value may be impaired. Where
appropriate, an impairment loss is recognised in the income statement for the amount by which the carrying
value of the asset (or cash generating unit) exceeds its recoverable amount, which is the higher of an asset’s
net realisable value and its value in use. Due to on-going operational losses (excluding the Network Subsidy
Payment) the carrying value of some assets are impaired to zero on acquisition. Each asset category is
described below:
Property, plant and equipment excluding freehold property, long leasehold property and land:
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into
working condition for its intended use. These assets have a relatively short useful life and due to on-going
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operational losses (excluding Network Subsidy payment) they are impaired to zero on acquisition. If they were
not impaired they would be depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Piant and Machinery 3 - 15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2 - 15 years
Freehold property, long leasehold property and land:
As with other property, plant and equipment this is recognised at cost, including attributable costs in bringing
the asset into working condition for its intended use. These assets have a long useful life and a fair market
value, therefore these assets are not impaired on acquisition but would be considered for impairment if
indicators existed in line with Group policy noted above. They are instead depreciated on a straight-line basis
over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining
useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted where applicable on a
prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. These assets are
impaired to zero for the reasons noted above. If they were not impaired they would be amortised on a straight
line bases via a charge to income statement over the following period:
Software 1 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with Group policy noted above but are not
automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets
acquired and liabilities assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested
for impairment annually as well as when there are any indicators of impairment.
Non-current assets within subsidiaries
Subsidiaries are considered separate cash generating units and the need for impairment of assets is considered
within the subsidiary and is dependent on whether indicators of impairment exist within that subsidiary. At a
Group level the impairment is adjusted on consolidation to be in line with Group policy.
Revenue
Turnover from Government Services, Financial Services, Mails and Retail and Telecoms comprises the value of
services provided from the Group’s principle activities in providing a whole range of services through its physical
and digital channels. Turnover from Financial Services and some Retail services comprises the commission
received. Turnover relating to line rental for telecoms services is recognised evenly over the period to which the
charges relate and revenue from calls is recognised at the time the call is made. Turnover from all other
transactions is recognised when the transaction is completed. All turnover is derived wholly from within the United
Kingdom.
Turnover within the subsidiary Post Office Management Services Limited comprises the value of commissions
received from providing insurance intermediary services.
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The Network Subsidy Payment is Government grant revenue recognised to match the related costs of making
available the network of public Post Offices that the Secretary of State for Business, Innovation and Skills considers
appropriate.
Operating exceptional items
Operating exceptional items 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 in the year and in comparison to prior years.
Items classified within here will be material either because of size or nature and relate to the transformation of
the business rather than ordinary trading. This separate reporting of exceptional items helps to provide a better
picture of the Company’s underlying performance.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have
passed to the Group are capitalised at the inception of the lease with a corresponding liability recognised for the
fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease
term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are
classified as operating leases and rentals are charged to the income statement over the lease term. The aggregate
benefit of incentives are recognised as a reduction of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures
Investments in joint ventures within the Group’s financial statements are accounted for under the equity method
of accounting. Under this method the investment is carried in the balance sheet at cost plus post-acquisition
changes in the Group’s share of the net assets of the joint venture less any impairment in value. The income
statement reflects the Group’s share of post-tax profits from the joint venture.
Inventories
Inventories include stationery, retail and lottery products and are carried at the lower of cost and net realisable
value after adjusting for obsolete or slow-moving stock.
Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed
or are disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by
the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and
unused tax assets and losses except:
- initial recognition of goodwill
~ the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit and loss
= taxable temporary differences associated with investments in subsidiaries and interest in joint ventures, where
the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future and
- deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available
against which they can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the
tax asset is realised or the liability is settled, based on tax rates that have been substantively enacted at the
balance sheet date. Deferred tax balances are not discounted.
Current and deferred tax is recognised in the income statement, except to the extent that it relates to items
recognised in other comprehensive income or directly to equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Company. All
members of defined benefit schemes are contracted out of the earnings-related part of the State pension scheme.
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of
return on a high quality corporate bond of equivalent currency and term. The resulting defined benefit asset or
liability is presented separately on the face of the balance sheet. Full actuarial funding valuations are carried out
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at intervals not normally exceeding three years as determined by the Trustees and, actuarial valuations are carried
out at each balance sheet date and form the basis of the surplus or deficit disclosed. When the calculation at the
balance sheet date results in net assets to the Group, the recognised asset is limited to the present value of any
future refunds of the plan or reductions in future contributions to the plan (the asset ceiling).
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service
costs and any gains and losses arising from settlements, curtailments and past service costs. The net difference
between the interest costs and the expected return on plan assets is recognised as net pensions interest in the
income statement. Actuarial gains and losses are recognised immediately in the statement of comprehensive
income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the
statement of comprehensive income.
For defined contribution schemes, the Group’s contributions are charged to operating profit, as part of staff costs,
in the period to which the contributions relate.
Foreign currencies
The functional and presentational currency of the Group is sterling (£).
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of
the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from
the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates
are recognised in profit or loss.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectible
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad
debts are written off when identified.
Borrowing costs
Borrowing costs in relation to the working capital loan facility are recognised as an expense when incurred unless
they are directly attributable to the construction or development of a qualifying asset, in which case they are
capitalised using the weighted average cost of borrowing for the period of construction/development.
Government grants
Government grants are shown separately in the income statement to match the expenditure to which they relate.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past
event, it is probably that an outflow of resources will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at an appropriate pre-tax rate.
Financial instruments
The classification of financial instruments included on the balance sheet is set out below:
Financial assets
Financial assets are measured at fair value at the balance sheet date. They are classified into the following
categories loans and receivables or available for sale as appropriate based on the purpose for which they were
required. Financial liabilities are measured at either fair value at the balance sheet date or as financial liabilities
measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at
amortised cost.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the
balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent
arm’s length market transactions; reference to the current market value of another instrument which is
substantially the same; and discounted cash flow analysis and pricing models.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or
expires.
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All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised
within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair
value measurement as a whole:
* Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities
* Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable
* Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines
whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the
lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand, including cash in the Post
Office network and short-term deposits (cash equivalents) with an original maturity date of three months or less.
In addition the Group uses Money Market funds as a readily available source of cash and these funds are also
categorised as cash equivalents. Cash equivalents are classified as loans and receivable financial instruments.
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents
as defined above, net of bank overdrafts.
The subsidiary Post Office Management Services Limited holds some fiduciary cash balances, there are held on
trust on behalf of insurance third parties, see note 12 for details.
2. Staff costs and numbers
Employment and related costs were as follows:
2016 2015
People costs excluding restructuring costs: £m £m.
Wages and salaries 184 191
Social security costs 19 19
Pension costs (note 17) 30 28
Total 233 238
Period end employees _Average employees
1
Total employees 6,605 6,876 6,667 7,281
Total employee numbers can be categorised as follows:
2016 2015
Administration 1,261 1,324
Crown Offices 3,344 3,406
Supply Chain 1,360 1,524
Network and Crown transformation programmes 640 622
Total 6,605 6,876
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3. Operating profit from continuing operations before exceptional items
Operating profit from continuing operations before exceptional items is stated after charging:
2016 2015
£m ém
Postmasters’ fees 413 435
Bureau de Change foreign currency exchange losses - 1
Depreciation 1 -
Cost of inventories recognised as an expense 3 4
Operating lease charges - Land and buildings 17 20
Fees payable to the group's auditors for audit and other services: £000 £000
- parent company and group audit 346 391
-audit of subsidiary 70 -
-audit related assurance services 40 40
other non-audit services 106 173
Operating exceptional items
2016 2015
£m (Restated)
ém
Government Grant 150 170
Restructuring:
Business transformation* (13) (13)
Network transformation including Postmasters’ compensation (note 15) (177) (227)
Crown transformation (23) (10)
IT transformation (30) (17)
Restructuring - severance (29) (25)
~ other (11) (9)
Total restructuring (283) (301)
Impairment:
Impairment of intangible assets (note 8) (93) (56)
Impairment of property, plant and equipment (note 9) (43) (84)
Total impairment (136) (140)
Total operating exceptional items (269) (271)
Restructuring:
Restructuring costs are those incurred in order to implement the major transformation programmes primarily the
Crown and Network programmes which are discussed further in the Financial Review on page XX. Network
transformation includes the costs of Postmasters’ compensation (2016: £102 million, 2015: £154 million) which
are payments made to Postmasters’ as a result of the ongoing programme.
*Business transformation costs include £2 million of acquisition costs, see note 21 for further details on this
acquisition.
Impairment:
See the accounting policies on page XX for details.
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5. Directors’ emoluments
The Directors received the following emoluments:
2016 2015
£000 £000
Emoluments, excluding pension contributions and LTIP* TBC 1,234
Contributions to pension schemes TBC -
Amounts receivable under Long-Term Incentive Plans TBC 157
“Figures include any cash supplements received in lieu of pension and any payments in lieu of notice.
Directors accruing pension entitlements during the period under: 2016 2015
Number Number
Defined benefit schemes - -
Defined contribution schemes - 2
The highest paid Director received the following emoluments:
2016 2015
£000 £000
Emoluments and LTIP, excluding pension contributions but including cash
supplements received in lieu of pensions TBC 522
Company contributions to pension schemes : :
Remuneration for each director for the financial year 2015/16
Name Annualised I Actual Benefits I Cash in lieu smIp LTP Total Total
salary/fees I salary/fees 2015/16 I ofpensionI 2015/16 I 2015/16 I 2015/16 I 2014/15
2015/16 2015/16 2015/16
(note 1)
Non Executive Directors
Tim 40,000 40,000 - - - - 40,000 40,000
Franklin
Virginia 40,000 40,000 - - - - 40,000 40,000
Holmes
Alasdair 45,000 15,000 - - - - 15,000 45,000
Marnoch
(note 2)
Ken McCall 50,000 12,500 - - - - 12,500 NWA
(note 3)
Neil 50,000 25,000 - - - - 25,000 50,000
McCausland
(note 4)
Tim Parker 75,000 37,500 - - - - 37,500 N/A
(note 5)
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Alice 100,000 I 33,333 - - - - 33,333 I 100,000
Perkins
(note 6)
Carla Stent 45,000 8,831 - - - - 8,831 N/A
(note 7)
Richard O 0 - - - - 0 0
Callard
(note 8)
Executive Directors
Paula 250,000 I 250,000 9,900 62,500 TBC 143,500 TBC 521,987
Vennells
Alisdair 240,000 240,000 13,919 56,189 125,002 - 510,110 90,124
Cameron +75,000
(note 9)
Note 1: The annualised fees are shown as at 27" March 2016 or at the date of leaving.
Note 2: Alasdair Mamoch resigned from the Board and left on 31% July 2015
Note 3: Ken McCall was appointed to the Board on 21% January 2016
Note 4: Neil McCausland resigned from the Board and left on 30" September 2015
Note 5: Tim Parker was appointed to the Board on 1% October 2015. Mr. Parker donates the after tax value of his
Board fees to charity.
Note 7: Alice Perkins resigned from the Board and left on 31% July 2015
Note 7: Carla Stent was appointed to the Board on 21* January 2016
Note 8: Richard Callard is an employee of the Shareholder Executive of the Department for Business, Innovation,
and Skills.
Note 9: Alisdair Cameron received a bonus of £75,000 in October 2015; this is shown separately in the STIP
column. This was compensation for the variable pay which Alisdair gave up to join Post Office and was payable
after six months’ service depending upon performance conditions being met. The inclusion of this amount in
Alisdair’s contract and its payment against the performance conditions were agreed by the Remuneration
Committee and the Special Shareholder.
Remuneration Policy Summary
The table describes the STIP and LTIP available for the Executive Director's.
The remuneration framework for the Executive Directors requires consent from the Special
Shareholder each year.
Short-Term Incentive I The STIP drives and rewards performance over the single financial year
Plan (STIP) against a key financial and operational targets taken from the business
scorecard. Metrics and targets are determined and set each year
according to business priorities.
80% of the STIP plan is determined by business targets, with the
remaining 20% linked to the achievement of personal performance
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objectives.
The target opportunities for the Chief Executive and Chief Financial
Officer are 48% and 40% respectively.
Long-Term Incentive I The LTIP is designed to reward and retain key executives and senior
Plan (LTIP) managers on the achievement of strategic longer term targets linked
to the development and growth of a sustainable business.
The specific performance targets are determined for each LTIP cycle
with reference to the three-year plan which is agreed with the Special
Shareholder.
The target opportunities for the Chief Executive and Chief Financial
Officer are 70% and 50% respectively.
Differences in remuneration policy for the Executive Directors and employees generally
The remuneration policy for the Executive Directors takes account of their level of responsibility and
their influence over Post Office’s performance. Accordingly, a higher proportion of their total
remuneration package is at risk and subject to performance (under the STIP and LTIP). The incidence
and potential amounts payable under such incentives across the workforce are determined by their
role and grade within the organisation.
Claw-back provision
Executive Directors have claw-back clauses in their contracts, as well as the STIP and LTIP rules,
which provide for the return of any over-payments in the event of misstatement of the accounts, error
or gross misconduct on the part of an Executive Director. These provisions are structured in line with
market best practice.
6. Net finance costs
2016 2015
£m —£m
Interest receivable . 1
Interest payable on loans (2) (1)
Finance charges (3) (2)
Total (5) (2)
7. Taxation
(a) Taxation gains recognised in the year
2016 2015
£m —m
Corporation tax credit for year (9) (10)
Tax _under provided in previous years - (7)
Current tax (9) (17)
Deferred tax credit relating to the origin and reversal of temporary differences 2 (9)
Effect of change in tax rate 3 :
Income tax credit reported in the consolidated income statement (4) (26)
Deferred income tax of £5 million (2015: £9 million) has been credited (2015: debited) to other comprehensive
income relating to actuarial movements in the retirement benefit surplus. This offsets the deferred tax debit of £5
million (2015 (credit): £9 million) that has been reported in the consolidated income statement.
(b) Factors affecting current tax credit on profit on ordinary activities
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 20% (2015: 21%).
The differences are explained below:
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2016 2015
£m Restated
£m
Loss on ordinary activities before tax from continuing operations (161) (163)
led operations nl AE A)
Accounting loss before taxation (171) (167)
Loss on ordinary activities multiplied by the standard rate of corporation tax in
the UK of 20% (2015: 21%) (34) (35)
Net decrease in tax charge as a result of recognition of deferred tax assets 8 (16)
Expenditure disallowable for tax 1 2
Adjustment in respect of prior period - (7)
Effect of unutilised losses carried forward 28 36
Joint venture profit after tax included in Group pre-tax profit (2) (6)
Total current tax (see above) (4) (26)
(c) Deferred tax
Deferred tax assets relate to the following:
Balance sheet Income statement
2016 2015 2016 2015
£m —m £m ém
Pensions temporary differences (25) (30) (5) 9
Losses available for offset against future
taxable income 25 30 : :
Total deferred tax asset : - (5) 9
Income statement (5) 9
(d) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £166 million (2015: £141 million), comprising £78 million
(2015: £74 million) relating mainly to fixed asset timing differences, £1 million (2015: £1 million) relating to
timing differences on provisions and £87 million (2015: £66 million) relating to tax losses that are available to
offset against future taxable profits. The Group has rolled over capital gains of £2 million (2015: £3 million); no
tax liability would be expected to crystallise should the assets into which the gains have been rolled be sold at
their residual value, as it is anticipated that a capital loss would arise.
The Finance Act 2013 reduced the main rate of corporation tax to 19% with effect from 1 April 2017 and 18%
with effect from 1 April 2018. Following these changes, deferred tax balances were reduced from 20% to 18%.
The impact of this change on deferred tax balances is included in these financial statements.
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8. Intangible assets
Software Goodwill Total
2016 2015 2016 2015 2016 2015
£m ém —m ém £m —m
Cost
At 30 March 2015, 31 March 2014 297 243 - - 297 243
Reclassifications - (3) - - - (3)
Additions 93 57 44 - 137 57
Disposals (1) - - - (1) -
At 27 March 2016, 29 March 2015 389 297 44 - 433 297
Amortisation and impairment
At 30 March 2015, 31 March 2014 297 243 - - 297 243
Reclassifications - (3) - - - (3)
Amortisation and impairment 93 57 - - 93 57
(see note 4)
Disposals (1) 7 ; - (1) -
At 27 March 2016, 29 March 2015 389 297 - - 389 297
Net book value
At 27 March 2016, 29 March 2015 . . 44 - 44 .
Goodwill relates to the acquisition from Bank of Ireland of the business and assets of the joint insurance business.
The goodwill sits within Post Office Management Services Limited. See note 21.
The impairment figure for intangible assets in 2015 includes £1 million for discontinued operations, see note 22
for details. Note 4 only includes figures for continuing operations which explains the £1 million difference. These
assets were disposed of in the current year as shown above.
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9. Property, plant and equipment
Land and Bi gs.
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m ém £m £m £m £m £m
Cost
At 31 March 2014 100 17 113 44 1 739 1,014
Reclassification* (31) 26 6 - - 2 3
Additions 16 12 - 1 - 55 84
Disposals (2) : (4) (5) 2 (13), (24)
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 - - 4 - 38 43
Disposals (1) - (3) (1) - (3) (8)
At 27 March 2016 77 58 90 43 1 843 1,112
Depreciation and
impairment
At 31 March 2014 91 16 113 44 1 739 1,004
Reclassification* (31) 26 6 - - 2 3
Depreciation and
impairment 16 12 - 1 - 55 84
Disposals (2) - (4) (5) - (13) (24)
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification (6) 3 (22) - - 25 -
Depreciation and
impairment
(see note 3 and 4) 2 - - 4 - 38 44
Disposals (4) = (3) (1) a (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Net book value
At 27 March 2016 8 1 - - - : 9
At 29 March 2015 9 1 : : : : 10
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land,
which represents £3 million (2015: £3 million) of the total cost of properties.
* Reclassifications have been done in the year between freehold, long leasehold, short leasehold and fixtures and
equipment in relation to Postmaster’s branches. Reclassification between freehold, long leasehold and short
leasehold asset categories is due to the fact that all land and building assets are classified as freehold whilst they
are an asset under construction, then once works are complete and lease contracts are confirmed, the asset is
moved into the correct respective category.
10. Investments in joint ventures
The following entity has been included in the consolidated financial statements using the equity method:
Joint ventures
During 2015/16 and 2014/15, the Group’s only joint venture investment was a 50% interest (1,000 £1 ordinary
A shares) in First Rate Exchange Services Holdings Limited, whose principal activity is the provision of Bureau de
Change. First Rate Exchange Services Holdings Limited is a company registered in the United Kingdom. The
registered address of First Rate Exchange Services Holdings Limited is Great West House, Great West Road,
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Brentford, Middlesex, TW8 9DF. The financial statements of the joint venture are prepared for the same reporting
period as the Group.
2016 2015
Joint venture Joint venture
£m —m
Share of net assets
Total net investment at 30 March 2015, 31 March 2014 67 et
Share of post tax pre dividend profit 35 36
Dividend (35) (30)
Total net investment at 27 March 2016, 29 March 20 67 67
2016 2015
Joint Joint
venture venture
Share of assets and lial £m —m
Current assets 205 191
Non-current assets 6 6
Share of gross assets 211 197
Current liabilities (144) (130)
Share of net assets. 67 67,
Share of revenue and profit:
Revenue 79 82
Profit after tax 35 36
11. Trade and other receivables
2016 2015
£m £m
Current:
Trade receivables 93 101
Prepayments and accrued income 73 106
Client receivables 229 162
Other receivables ee
Total 409 397
Non-current:
Prepayments 12 10
The Group receives and disburses cash on behalf of Government agencies and other clients to customers through
its branch network. Amounts owed from/to government agencies and other clients are disclosed separately as
client receivables (as above) and client payables (see note 13).
As at 27 March 2016 trade receivables of £16 million (2015: £14 million) were impaired and fully provided for.
During the year £4 million (2015: £6 million) of the provision has been utilised and an additional £6 million (2015:
£3 million) has been provided for. Trade receivables of £21 million (2015: £21 million) were past due but not
impaired. The aging analysis of the trade receivables are as follows:
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2016 2015
£m £m
Not yet overdue 72 80
Past due not more than one month 12 8
Past due more than one month and not more than two months 3 3
Past due more than two months. 6 10
Total 93 101
The fair value of trade and other receivables is not materially different from the carrying value.
12. Cash and cash equivalents
2016 2015
£m —m_
Cash in the Post Office Limited network 653 708
Short-term bank deposits 57 93
Fiduciary cash balances held on behalf of
insurance third parties 2 -
Money market fund investments. : 20
Total cash and cash equivalents 712 821
Where interest is earned it is at a floating or short term fixed rate. The fair value of cash and cash equivalents is
not materially different from the carrying value.
The fiduciary cash balances are held within Post Office Management Services Limited and are held on trust on
behalf of insurance third parties and cannot be called upon should the Company become insolvent.
13. Trade and other payables
2016 2015
£m £m
Current:
Trade payables 51 30
Accruals 161 160
Deferred income 39 29
Social security 8 9
Client payables 375 454
Capital payables 16 25
Other payables 3 ii
Total 653 718
Non-current:
Other payables 25 30
The fair value of trade and other payables is not materially different from the carrying value.
14. Financial liab interest bearing loan and borrowings
2016 2015
£m £m
Department of Business, Innovation & Skills loan
drawn down 465 310
26
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The loan under the facility is short dated on a programme of liquidity management and matures on average 1 day
after the year end (2015: 1 day). The fair value of borrowings approximate their carrying value due to the short
term maturities of the loan. On maturity it is expected that further loans will be drawn down under this facility,
which expires in 2018. The undrawn committed facility, in respect of which all conditions precedent had been met
at the balance sheet date, is £485 million (2015: £840 million). The average interest rate on the drawn down
loans is 1.0% (2015: 1.0%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited
network,
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and
a negative pledge over cash and near cash items. The negative pledge is an agreement not to grant security over
the assets or to set up a vehicle that has the same effect.
15. Provisions
Network
Transformation Other Total
ém £m £m
At 29 March 2015 (restated) 127 23 150
Acquired through the business . 1 1
combination (note 21)*
Charged in operating exceptional
items 123 54 177
Charged in operating costs - 6 6
Charged for discontinued . 3 3
operation
Utilisation (95) (47) (142)
Unused amounts in the year -
operating exceptionals (21) @) (26)
Unused amounts in the year —
operating costs a : @) @
At 27 March 2016 134 33 167
Disclosed as:
At 27 March 2016
Current 132 19 151
Non - current 2 14 16
134 33 167
At 29 March 2015
Current 126 18 144
Non-current 1 5 6
127 23 150
The Network Transformation provision relates to payments due to postmasters in relation to the major
transformation programme, see the accounting policies note on page XX for further details of this provision..
Other provisions of £33 million (2015: £23 million) include £30 million for continuing operations, this includes £19
million onerous lease obligations, £3 million severance and £8 million of smaller provisions including £1 million for
personal injury claims and £1 million which sits within the subsidiary Post Office Management Services Limited
and relates to the repayment of commission received in the event of the cancellation of insurance policies. It also
includes £3 million in relation to the discontinued operation as disclosed in note 22.
*A provision was acquired as part of the acquisition from Bank of Ireland of the business and assets of the joint
insurance business, see note 21.
27
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16. Financial assets and liabilities
a. Financial assets and liabilities by category
The breakdown of the Group’s financial instruments at 27 March 2016 and 29 March 2015 is shown below:
2016 2015
Current Non Total = Current Non Total
current Current
£m £m___ £m £m £m
Financial assets
Trade and other receivables 394 - 394 378 - 378
Cash and cash equivalents 712 - 712 821 - 821
Financial liabilities
Trade and other payables (606) (4) (610) (680) (2) (682)
BIS loan (465) - (465) (310) - (310)
Finance leases obligations (8) - (8) : : -
Total financial assets/
(liabilities) 27 (4) 23 209 (2) 207
Except for prepayments, social security and deferred income, which have been excluded from the table above, all
of the Group’s financial assets and liabilities by nature and classification for measurement purposes are considered
loans and receivables.
The fair value of the Group’s financial assets and liabilities approximate their carrying value due to the short term
maturities of these instruments. The fair value of financial assets and liabilities is defined as the amount at which
the Group would expect to receive upon selling an asset or pay to transfer a liability in a transaction between
market participants at the measurement date.
The nature of the inputs used in determining the values of the financial assets and liabilities is quoted prices
(unadjusted) in active markets for identical assets and liabilities, All of the Group’s financial assets and liabilities
are therefore considered as Level 1 in the fair value hierarchy.
The Group has no Level 2 and Level 3 financial instruments and there have been no transfers between the levels
of fair value hierarchy during the period.
b. Financial risk management objectives and policies
The Group is exposed to a variety of financial risks: market risk (including foreign currency risk, interest rate risk),
credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of
financial markets and aims to minimise potential adverse effects on the Group's financial performance.
Interest rate risk
The Group is exposed to changes in interest rate on floating rate debt, cash deposits and money market fund
investments. Interest rate risk on borrowings is managed through determining the right balance of fixed and
floating debt within the financing structure. Market conditions are considered when determining the desired
balance of fixed and floating rate debt. Had there been a 50 basis point increase in interest rates, there would
have been a £5m favourable impact on the Group’s equity and income statement. A 50 basis point decrease would
have resulted in a £5m adverse impact on the Group’s equity and income statement.
Foreign currency risk
The Group is exposed to foreign currency risk resulting from balances held to operate Bureau de Change services.
The currencies which these transactions are primarily denominated are the US dollar and Euro. The Group’s foreign
currency risk management objective is to minimise the impact on the Income Statement of fluctuations in the
exchange rates. The Group hedges its foreign currency risk principally through external forward foreign currency
contracts to cover near-term future revenues with a number of providers including First Rate Exchange Services
Holdings Limited.
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The following table demonstrates the sensitivity of financial instruments to a reasonably possible change in the
US dollar and Euro exchange rates, assuming they are unhedged and with all other variables held constant, on
profit/(loss) before tax and equity.
Strengthening Effect on Effect Strengthening Effect on Effect
/ (weakening) profit onequity — / (weakening) profit on equity
in US dollar rate —_ before tax in euro rate before tax
per cent £m £m per cent £m £m
Increase / Increase / Increase / Increase / Increase /
Increase / (decrease) (decrease) (decrease) (decrease) (decrease) (decrease)
2016 10 2 2 10 4 4
(10) (2) (2) (10) (4) (4)
2015 10 1 1 10 3 3
(10) (1) (1) (10) (3) (3)
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss
to the Group. Financial credit risk arises from cash balances (including bank deposits and cash and cash
equivalents) held by the Group and business credit risk arises from exposures to customers. Business risk includes
commission receivable and client related settlements for amounts paid out of the Post Office network on their
behalf.
The Group aims to minimise its financial credit risk through the application of risk management policies approved
by the Board. Counterparties are limited to major banks and financial institutions. The policy restricts the exposure
to any one counterparty by setting appropriate credit limits. The maximum exposure to credit risk is limited to the
carrying value of each class of asset summarised in note 11.
Business credit risk is monitored centrally. The level of bad debt provision is less than 2% (2015: less than 2%)
of turnover.
Capital management
The Group's objectives when managing capital (defined as the net of borrowings and amounts due under finance
leases and cash and cash equivalents excluding cash in the Post Office Network) are to safeguard its ability to
continue as a going concern and to maintain an optimal capital structure in order to support the business and
maximise stakeholder value. In managing the Group’s capital levels the Board and the Group Executive regularly
monitor the level of debt in the Group, the working capital requirements and the forecast cash flows. The Board
and Group Executive plan accordingly following this review process in order to meet the Group’s capital
management objectives.
Liquidity risk
The Group’s primary objective is to ensure that the Group has sufficient funds available to meet its financial
obligations as they fall due. This is achieved by aligning short-term investments and borrowing facilities with
forecast cash flows. Typical short-term investments include short term bank deposits with approved
counterparties. Borrowing facilities are regularly reviewed to ensure continuity of funding.
The Group has adequate cash reserve to meet operating requirements in the next 12 months.
At 27 March 2016 the Group has unused facility of £485 million (2014: £840 million). The facility expires in 2018.
The tables below analyses the Group’s financial assets and liabilities into relevant maturity groupings based on the
remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table
are the contractual undiscounted cash flows and include interest, where applicable.
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12 1-2 2-5 > Total
Months Years Years 5 Years
At 27 March 2016 £m
Financial assets
Trade and other receivables 394 7 - . 394
Cash and cash equivalents 712 - - - 712
Financial liabi
Trade and other . -
Pavables (614) 4) (618)
Interest bearing loan (465) 7 - ~ (465)
Finance leases obligations (8) 7 - - (8)
Total financial assets/ 19 (4) - - 15
(liabilities)
12 1-2 2-5 > Total
Months Years Years 5 Years
At 29 March 2015 £m
Financial Assets
Trade and other receivables 378 - - . 378
Cash and cash equivalents 821 - - - 821
Financial Liabilities
Bank overdraft - - . ° -
Interest bearing loan (310) - - - (310)
Finance leases obligations . . . i -
Total financial assets/ 200 (2) . - i98
(liabilities)
17. Pensions
The disclosures in this note reflect the two defined benefit schemes: Post Office Limited sectionalised RMPP
scheme which is independently operated by the Group and the 7% share of the RMSEPP scheme. Royal Mail
Group Limited is the principal employer in Royal Mail Senior Executive Pension Plan (RMSEPP) and Post Office
Limited became a participating employer with effect from 1 April 2012. It also includes the defined contribution
scheme Post Office Pension Plan.
The disclosures in this note show how the value of the assets and liabilities has been calculated at the balance
sheet date.
The Group participates in pension schemes as detailed below.
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Name Eligibility
Royal Mail Pension Plan (RMPP) UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Post Office Pension Plan* UK employees Defined contribution
*From 1 April 2015 the Post Office Pension plan replaced the Royal Mail Defined Contribution Plan.
Defined Contribution
The charge in the income statement for the defined contribution schemes and the Group contributions to these
schemes was £3 million (2015: £3 million) during the year. New recruits joining from 31 March 2008 are able to
begin paying contributions to the new plan after they have worked for the Group for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The
latest full actuarial funding valuation of RMPP was carried out as at 1 April 2012 using the projected unit method.
For RMPP, this valuation was concluded at £135 million surplus. The latest full actuarial funding valuation of
RMSEPP was carried out as at 31 March 2012 using the projected unit method. For 100% of the RMSEPP plan, the
valuation was concluded at £83 million deficit. Valuations are carried out triennially and the next one is being
performed as at 1 April 2015. The valuation has not yet been completed due to the current consultation on
proposals to closing the scheme to future accrual. RMPP includes sections A, B and C each with different terms
and condition:
* Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
* Section B is for members (or beneficiaries of members) who joined after 1 December 1971 and before 1
April 1987 or to members of Section A who chose to receive Section B benefits;
* Section C is for members (or beneficiaries of members) who joined after 1 April 1987 and before 1 April
2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008.
The changes encompassed:
* the Plans closed to new members from 31 March 2008;
* all pensions and benefits earned before 1 April 2008 are linked to final pensionable salary, but
defined benefits built up from 1 April 2008 are earned on a “career average pensionable salary”
basis;
* from 1 April 2014, pensionable salary was amended to the amount in force at that date, increasing
each 1 April thereafter in line with RPI (up to 5% each year), with allowance for certain promotional
increases. This change resulted in a one-off exceptional gain of £102 million for the 2013/14
financial year;
* employees can continue to take their pension on reaching 60 but the normal retirement age increased to
65 for benefits earned from 1 April 2010;
* from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age at 55,
and continue working while still contributing to the Pension Plan until the maximum level of benefits has
been reached; and
« RMSEPP was closed to future accruals on 31 December 2012.
Payment of £17 million (2015: £19 million) was made by the Group during the year in respect of regular 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% (2015: 17.1%), effective from April 2010. This rate is
not expected to change materially during 2016/17. However, in February 2016, Post Office went out to formal
consultation with active members (and their representatives) of the Post Office section of the Royal Mail Pension
Plan regards to the potential closure of the RMPP to future accrual with effect from 1 September 2016. The closure
is subject to the outcome of the pensions consultation and no final decision will be until the formal consultation
has been completed. The proposed closure will also require consent of the Trustee of the RMPP. This closure if it
occurs could affect the rate paid in 2016/17.
The Group pays 7% of the total deficit payment required to fund the deficit in RMSEPP and a payment of £1 million
(2015: £1 million) was made by the Group during the year. No RMPP deficit payments were made during 2014/15
or 2015/16. For RMSEPP, deficit recovery payments will be £1 million per annum, from 1 April 2010 to 31 January
2024.
A current liability of £nil (2015: £1 million) has been recognised for payments to the pension schemes relating to
redundancy. During the year, payments of £3 million (2015: £2 million) relating to redundancy were made.
The weighted average duration of the RMPP fund is 26 years, and for the RMSEPP fund is 21 years. Over the next
financial reporting period to 27 March 2016 it is expected that employer contributions to the plans will be £17
million and £1 million for RMPP and RMSEPP respectively.
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The following disclosures relate to the gains/losses and surplus/deficit in the scheme recognised for RMPP and
RMSEPP defined benefit plans in the financial statements of the Group:
a) Major long-term assumptions
The size of the RMPP pension surplus, which is large in the context of the Group and its finances, is materially
sensitive to the assumptions adopted. Small changes in these assumptions could have a significant impact on the
surplus and overall income statement charge. The major long-term assumptions in relation to both RMPP and
RMSEPP were:
At 27 March 2016 = At 29 March 2015
% pa % pa
Rate of increase in salaries 2.8 2.8
Rate of pension increases - RMPP sections A/B 1.8 1.9
Rate of pension increases - RMPP section C 2.8 2.8
Rate of pensions increases - RMSEPP members transferred
from Section A or B of RMPP 1.8 19
Rate of pension increases - RMSEPP all other members 2.8 2.8
Rate of increase for deferred pensions - RMSEPP members
transferred from Section A or B of RMPP 1.8 1.9
Rate of increase for deferred pensions 1.8 1.9
Discount rate 3.5 3.5
Inflation assumption (RPI) - RMPP & RMSEPP 2.9 3.0
Inflation assumption (CPI) - RMPP & RMSEPP 1.8 19
The ultimate cost of the RMPP plan to the Group will depend upon future events rather than the assumptions
made. The assumptions made may not be borne out in practice and as such the cost of the plan may be higher
(or lower) than disclosed.
In common with other defined benefit schemes, the main risk in relation to the arrangements is the value of the
assets does not keep pace with the increase in the value of the liabilities. This can arise for many reasons, but
the most significant risks are as follows:
Investment risk: If the assets of the arrangements fall short of expectations, this will lead to a decrease in the
funded status.
Asset volatility: The arrangements hold return seeking assets (including equities and property) which are
expected to outperform corporate bonds in the long term but give exposure to volatility and risk in the short
term. RMPP does, however, invest in liability driven investment (LDI) assets, for example Corporate Bonds, which
mitigates the impact of interest rate and inflation volatility on the funded status.
Inflation risk: Higher inflation rates than expected will act to increase the plan liabilities as benefits will increase
to a higher level than assumed. The arrangements have a maximum pension increase (generally 5% per annum)
written into the rules which limits the increase for many benefits, so limiting the impact of high inflation. This
includes pensionable pay in RMPP, which was amended with effect from 1 April 2014. In addition, the arrangement
holds assets that increase in value as price inflation expectations rise, so mitigating the impact of rising inflation
expectations. These assets include LDI assets in respect of RMPP.
Changes in bond yields: A decrease in corporate bond yields will increase the plan liabilities, although this will
be partially offset by an increase in the value of the bond holdings and, to some extent, the LDI assets.
Pensioner longevity: If members live longer than expected, the liabilities would increase because pensions would
be paid for a longer time.
Liabilities accrued in the Royal Mail Pension Plan to 31 March 2012 were transferred to the Royal Mail Statutory
Pension Scheme. These liabilities are substantially no longer an obligation of the Group and consequently the
transfer resulted in a significant removal of pension risk from the Group.
The following table shows the potential impact on the RMPP assets and pension surplus of changes in key
assumptions:
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2016 2015
£m £m
Changes in RPI and CPI inflation of +0.1% pa (5) (4)
Changes in discount rate of +0.1%pa 5 4
Changes in real salary growth of +0.1% pa (2) (1)
Changes in CPI assumptions of +0.1% pa (1) (4)
An additional 1 year life expectancy (6) (5)
The sensitivity analysis has been prepared using projected benefit cashflows as at the latest full actuarial valuation
of the plan. The same method was applied as at the previous reporting date. The accuracy of this method is limited
by the extent to which the profiles of the plan cashflows have changed since those valuations although any change
is not expected to be material in the context of the above sensitivity analysis.
Mortality: The mortality assumptions for the RMPP sectionalised scheme are based on the latest self-administered
pension scheme (SAPS) mortality tables with appropriate scaling factors (106% for male pensioners and 101% for
female pensioners). For future improvements the assumptions allow for ‘medium cohort’ projections with a 1.25%
floor. These are detailed below:
Average expected life expectancy from age 60:
For a current 60 year old male RMPP member
For a current 60 year old female RMPP member
For a current 40 year old male RMPP member
For a current 40 year old female RMPP member
2016 2015
27 years 27 years
30 years 30 years
29 years 29 years
32 years 32 years
b) Plans’ assets
The assets in the plans for the Group were:
Market value 2016 Market value 2015
Sectionalised RMPP £m —m
UK equities - 1
Overseas equities - 10
Corporate bonds* 233 217
Property 11 8
Private Equity 10 12
Cash and cash equivalents aL 6
Bond/fixed interest funds 41 50
Index-linked funds. = 10
Other loan/debt funds 28 20
Alternative asset funds 43 11
Equity funds - 34
Fair value of RMPP assets 407 379
Surplus in plan before asset ceiling adjustment 223 229
Less effect of asset ceiling (29) (27)
Surplus in plan after asset ceiling adjustment 194 202
*£15 million relates to UK Government Bonds. £215 million to an LDI investment containing UK Government
Bonds, it is a liability driven investment and £3 million to an infrastructure debt holding which is EUR
denominated and fixed interest.
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Market value 2016 Market value 2015.
Share of RMSEPP £m £m
UK equities 1 1
Overseas equities 10 1
Government bonds 15 16
Alternative asset funds 2 -
Property 2 2
Other assets - 1
Fair value of share in plan assets for RMSEPP. 30 31
Present value of share in plan liabilities for RMSEPP. (27) (26)
Surplus in plan for the share of RMSEPP before asset ceiling 3 5
adjustment
Less effect of asset ceiling (1) (2)
Surplus in plan for share of RMSEPP after asset ceiling 2 3
adjustment
A retirement benefit surplus of £196 million is disclosed on the balance sheet, representing the surplus in plans
of £223 million and £3 million for RMPP and RMSEPP respectively, and net of tax of £30 million at a rate of 35%
on the element of the surplus which is recoverable through a refund from the plans.
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded. All
RMPP and RMSEPP assets are securities with a quoted price in an active market.
c) Movement in plans’ assets and liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Assets Sectionalised Sectionalised
RMPP 2016 £m__RMPP 2015 £m
Assets in sectionalised RMPP at beginning of period 379 260
Contributions paid 19 24
Employee contributions paid 6 7
Finance income 14 12
Actuarial (losses)/gains (8) 81
Benefits paid to members (3) (2)
Assets in sectionalised RMPP at end of period 407 379
Share of Share of
Assets RMSEPP 2016 RMSEPP 2015
Share of assets in RMSEPP at beginning of period 31 26
Contributions paid 1 1
Finance income 1 1
Actuarial (losses)/gains (2) 4
Benefits paid to members (2) q)
Share of assets in RMSEPP at end of period 30 31
34
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Changes in the present value of the defined benefit pension obligations are analysed as follows:
Sectionalised
Sectionalised
RMPP 2016 RMPP 2015
£m ém
Liabilities in sectionalised RMPP at beginning of period (150) (90)
Current service cost (27) (25)
Curtailment costs* (1) (1)
Finance cost (6) (5)
Employee contributions (6) (7)
Actuarial loss - (23)
Experience adjustments on liabilities 3 (1)
Benefits paid 3 2
ies in sectionalised RMPP at end of period (184) (150)
es Share of Share of
RMSEPP 2016 RMSEPP 2015
£m £m
Share of liabilities in RMSEPP plans at beginning of period (26) (24)
Finance cost (1) (en)
Actuarial loss (1) (2)
Benefits paid 1 1
Share of liabi 's in RMSEPP at end of period (27) (26)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated
compensation costs, Estimates of both are included, for example, in any redundancy provisions raised. The
curtailment costs above represent the costs associated with those people paid compensation in respect of
redundancy during the accounting period. Such payments may occur in an accounting period subsequent to the
recognition of costs in the income statement.
427 of
Post Office Limited
d) Recognised charges
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An analysis of the separate components of the amounts recognised in the performance statements of the Group
is as follows:
Sectionalised
RMPP 2016 £m
Sectionalised
RMPP 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptior
items:
Current service cost 27 25
Total charge to operating profit before exceptional items 27 25
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments 1 1
Total charge to operating profit 28 26
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 6 5
Interest income on plan assets (14) (12)
Net pensions credit to financing (8) (2)
Net charge to the income statement before deduction for tax 20 19
Analysis of amounts recognised in the statement of comprehens
income:
Actual return on plan assets 6 93
Less: expected interest income on plan assets (14) (12)
Less: taxation on surplus recoverable through plan refunds (2) (4)
Actuarial (losses)/gains on assets (all experience adjustments) (10) 77
Experience adjustments on liabilities 3 (1)
Effects of changes in actuarial assumptions on liabilities - (23)
Actuarial losses on liabilities 3 (24)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (7) 53
Share of RMSEPP
Share of RMSEPP
2016 £m 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to net pensions interest:
Interest on plan liabilities 1 1
Interest income on plan assets (1) (1)
Net pensions credit to financing - -
Net charge to the income statement before deduction for tax : :
Analysis of amounts recognised in the statement of comprehens'
income:
Actual return on plan assets (1) 5
Less: expected interest income on plan assets (1) (1)
Less: taxation on surplus recoverable through plan refunds 1 (1)
Actuarial (losses)/gains 0 (all experience adjustments) oo A)
Experience adjustments on liabilities -
Effects of changes in actuarial assumptions on liabilities (2) (2)
Actuarial losses on liabilities (2) (2)
Total actuarial (losses) /gains recognised in the statement of
comprehensive income (2) 1
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18. Equi
Called up share capital:
2016 2015
£ £
Authorised
Ordinary shares of £1 each 51,000 51,000
Total 51,000 51,000
Allotted and issued and fully paid
Ordinary shares of £1 each. sen SOEOOB nn (003...
Total 50,003 50,003
Other reserves:
Other reserves of £2 million relate to First Rate Exchange Services Holdings Limited, the joint venture entity.
Share premium:
On 7 August 2007 1,000 ordinary shares of £1 each were issue in return for £313 million cash paid by the the
Secretary of State for Business, Enterprise and Regulatory Reform. A share premium of £312,999,999 resulted
from this subscription. In April 2008 two ordinary £1 shares were issued in return for £152 million cash paid by
the Secretary of State for Business, Innovations and Skills Reform. A share premium of £151,999,998 resulted
from this subscription.
19. Commitments
Capital commitments contracted for but not provided in the financial statements amount to £62 million (2015:
£96 million).
The Group is also committed to the following minimum lease payments under non-cancellable operating leases:
Land and buildings
2016 2015
£m £m
Within one year 14 17
Between one and five years 35 43
Beyond five years 29 27
Total 78 87
Contingent liabilities: As a large, nationwide retailer operating in dynamic and competitive markets, we may be
subject to regulatory investigations and may face damage to our reputation and legal claims.
From time to time, we may be named as a defendant in legal claims or be required to respond to regulatory actions
in connection with our activities. This may include claims for substantial or indeterminate amounts of damages
from customers, employees, consultants and contractors, or may result in penalties, fines, or other results adverse
to us. Like any large company, we may also be subject to the risk of potential employee or agent misconduct,
including non-compliance with policies and improper use or disclosure of our assets or confidential information.
The Directors do not consider the outcome of any current claim or action will have a material adverse impact on
the consolidated position of the Group.
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20. Finance lease liabilities
2016 2015
Present
value Present value
of minimum of minimum
Minimum lease Minimum lease
payments Payments payments payments
£m £m £m —m
Within one year 8 8 - -
Between one and five years - - - :
Total minimum lease payments. 8 8 - -
Less amounts representing finance
charges - : : :
Present value of minimum lease
payments - -
Of which:
Current 8 8 - -
Non-current, - - : aa
The aggregate finance charges allocated for the period in respect of finance leases was £nil (2015: £211,078).
The fair value of finance lease liabilities is not materially different from the carrying value.
The Group has finance lease contracts for equipment.
21. Business combinations
On 30 September 2015, the Group acquired the remaining 50% of its former insurance joint undertaking from the
Bank of Ireland, The consideration of £43,900,000 was settled in cash.
The fair values of the identifiable assets and liabilities of the business as at the date of acquisition were:
Fair Value
£m
Cash 1
Provision @)
Net Assets :
Goodwill arising on acquisition 44
Consideration paid 44
The full acquisition cost is recognised as goodwill due to there being no separately identifiable assets and liabilities
other than the cash and provision noted above. The acquisition costs and therefore the Goodwill were based on
an independent external valuation provided to both parties. Goodwill has been reviewed for impairment at
acquisition and at year end and at both times the amount is considered to represent fair value. There are no
indicators of impairment. The Goodwill sits within Post Office Management Services Limited.
From the date of the acquisition to 27 March 2016, the additional 50% of the former joint insurance undertaking
of Post Office Limited and Bank of Ireland has contributed £17 million of revenue and £1 million to profit before
tax.
38
Post Office Limited
22. Discontinued Operation
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In March 2016 the Group decided to discontinue its mobile operation. The results of this operation are disclosed
below:
2016 2015
£m £m
Revenue - -
Expenses (10) (4)
Loss before taxation (10) (4)
Taxation - -
Loss for the year from discontinued operation (10) (4)
Balances on the balance sheet at year end for project closure costs and termination charges are as follows:
2016 2015
£m ém
Provisions 3 -
Total Liabilities (note 15) 3 -
Write down of intangible assets and prepayments
Intangible assets for mobile amounted to £2 million in the year (£1 million in prior year) and these were impaired
at acquisition in line with Group policy so no further write down was required on closure of the operation. The
impairment is included in the £10 million above (£4 million above prior year). There were prepayments on the
balance sheet of £2 million prior to the decision to discontinue this operation and these have been written down
to £nil as the costs included in the £10 million expenses noted above.
23. Related party disclosures
Joint venture
The following company is a joint venture of the Group:
Company Country of incorporation % Holding Principal activities
First Rate Exchange
Services Holdings Limited United Kingdom 50 Bureau de Change
All shareholdings are equity shares.
Related party transactions
During the year the Group entered into transactions with the following related parties. The transactions were in
the ordinary course of business. The transactions entered into and the balances outstanding at the financial year
end were as follows:
Amounts owed from
Amounts owed to
Sales/recharges to Purchases/recharges related party related party
related from including outstanding including outstanding
party related party loans loans
2016 2015 2016 2015 2016 2015-2016 2015
£m £m £m £m £m £m £m £m
First Rate Exchange
Services Holdings
Limited 26 26 122 129 10 Z 7 6
The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the
yearend are unsecured, interest free and settlement is made by cash. First Rate Exchange Services Holdings
Limited is a joint venture of the Group.
The Group trades with numerous Government bodies on an arm's length basis. Transactions with these entities
are not disclosed owing to the significant volume of transactions that are conducted.
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Separately:
* the Group has certain loan facilities with Government (note 14);
* the Group has received a Government Grant of £150 million, all of which was recognised through the
income statement; and
* the Group has received the Network Subsidy Payment from Government (note 1).
Key management comprises Executive and Non-Executive Directors of the Post Office Limited Board and the
members of the Group Executive at 27 March 2016. The aggregate remuneration of the key management
personnel of the Post Office Group is set out below:
2016 2015
£000 £000
Short-term employee benefits* TBC 3,380
Post-employment benefits TBC 68
Other long-term benefits TBC 307
Total TBC 3,755
*Payment in lieu of notice has been included in short-term employee benefits. Please refer to the
Director's Remuneration Report on page XX for further details.
24. Post balance sheet events
In accordance with the funding agreement with government announced on 27 November 2013, for which State
Aid approval was received on 19 March 2015, Post Office Limited received £220 million of funding on 1 April
2016.
25. Immediate and ultimate parent company
At 27 March 2016, the Directors regarded Postal Services Holding Company Limited as the immediate and ultimate
parent company. The largest group to consolidate the results of the company is Postal Services Holding Company
Limited, a company registered in the United Kingdom. Postal Services Holding Company Limited financial
statements can be obtained from Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Post Office Limited
Parent Company Financial Statements
2015-2016
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Company statement of comprehensive income
At 27 March 2016
2015
2016 Restated
Notes. £m £m
Loss for the financial year from continuing operations (157) (143)
Loss for the financial year from discontinued operations (10) (4)
Loss for the financial year (167) (147)
Other comprehensive income not to be reclassified to profit or loss in
future periods
Remeasurements on defined benefit surplus 11 (9) 54
Income tax effect. 5 (9)
Total comprehensive income for the year (171) (102)
There are no other comprehensive income items that will be reclassified to the profit and loss in subsequent
periods.
42
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tary Doc
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Company balance sheet
at 27 March 2016
2015
2016 (Restated)
Notes £m £m
Non-current asset
Intangible assets 2 - :
Property, plant and equipment. 3 9 10
Investment in subsidiaries 4 50 -
Investments in joint ventures 5 1 1
Retirement benefit surplus ai 196 205
Trade and other receivables 6 12 10
Total non-current assets 268 226
Current assets
Inventories 6 6
Trade and other receivables 6 411 399
Cash and cash equivalents 2 698 817
Total current assets 1,115 1,222
Total assets 1,383 1,448
Current liabilities
Trade and other payables 8 (648) (716)
Financial liabilities - interest bearing loans and borrowings 9 (485) (310)
- obligations under finance leases 13 (8) -
Provisions 10 (150) (144)
Total current liabilities (1,271) (1,170)
Non-current liabilities
Other payables 8 (25) (30)
Provisions 10 (16) (6)
Total_non-current liabilities (41) (36)
Net assets 71 242
Equity
Share capital 12 - -
Share premium 12 465 465
Retained earnings (394) (223)
Total equity 71 242
The financial statements on pages XX to XX were approved by the Board of Directors on XXX 2015 and
signed on its behalf by:
P A Vennells A Cameron
Chief Executive Chief Financial Officer
Post Office Limited
Company statement of changes in equity
at 27 March 2016
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Retained
Share earnings Total
premium —m equity
Notes £m £m
At 30 March 2015 (restated) 465 (223) 242
Loss for the year - (167) (167)
Remeasurements on defined benefit
surplus 11 - (9) (9)
Income tax effect - 5 5
At 27 March 2016 465 (394) 71
Retained
Share earnings Total
premium £m equity
Notes £m £m
At 31 March 2014 465 (121) 344
Loss for the year (restated) - (147) (147)
Remeasurements on defined benefit
surplus 1 - 54 54
Income tax effect : (9) (9)
At 29 March 2015 (restated) 465 (223) 242
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Notes to the financial statements
1. Accounting Policies
The accounting policies which follow set out those which apply in preparing the financial statements for the year
ended 27 March 2016.
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are made up to
the 52 weeks ended 27 March 2016 (2015: 52 weeks ended 29 March 2015).
Authorisation of financial statements
The parent company financial statements of Post Office Limited (the ‘Company’) for the year ended 27 March 2016
were authorised for issue by the Board of Directors on XX xxx 2016 and the balance sheet was signed on the
Board’s behalf by P A Vennells and A Cameron. Post Office Limited is a limited company incorporated and domiciled
in England and Wales.
Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (FRS 101). Theses financial statements are prepared under the historical cost convention.
As permitted by Section 408 of the Companies Act 2006 Post Office Limited has not presented its own income
statement. The result dealt with in the accounts of the company amounted to £167 million loss (2015 (restated):
£60 million loss).
The results of Post Office Limited are included in the consolidated financial statements of Post Office Group which
are available from Companies House.
The Company has taken advantage of the following disclosure exemptions under FRS 101:
(a) the requirements of IFRS 7 Financial Instruments: Disclosures
(b) the requirements of paragraphs 91-99 of IFRS 13 Fair Value Measurement
(c) the requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative
information in respect of:
i. paragraph 73(e) of IAS 16 Property, Plant and Equipment
i. paragraph 118(e) of IAS 38 Intangible Assets
(d) the requirements of paragraphs 10(d), 10(f), 39(c) and 134-136 of IAS 1 ‘Presentation of Financial
Statements’
(e) the requirements of IAS 7 Statement of Cash Flows
(f) the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and
Errors’
(g) the requirements of paragraph 17 of IAS 24 ‘Related Party Disclosures’
(h) the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into
between two or more members of a group, provided that any subsidiary which is a party to the transaction is
wholly owned by such a member.
Fundamental accounting concept - going concern
In making an assessment of the Company’s ability to continue as a going concern, the Directors have considered
the going concern assessments made in relation to the Group (see note 1 on page XX) and are of the view that it
is appropriate that these financial statements have been prepared on a going concern basis.
Prior year restatements
In preparing the financial statements for the current year, the comparative figures for the year ended 29 March
2015 have been restated. The provision for postmasters’ compensation, included within network transformation
had not been fully recognised in the financial statements for the year ended 29 March 2015. The nature of the
provision is described in more detail in the accounting policies. The restatement affects exceptional costs,
provisions and retained earnings due to the loss in the year changing as a result of a restatement to the
exceptional charge. This represents an acceleration of an expected cost and there has been no impact on the
Group's funding position or on payments to Postmasters’. Within this report, the comparative statement of
comprehensive income, balance sheet and statement of changes in equity for the year ended 29 March 2015
have been restated. There has been no effect on the cash flow statement.
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As previously Restatement 29 March 2015
reported Restated
Total provisions (63) (87) (150)
Operating exceptional items - restructuring
costs (214) (87) (301)
Shareholders’ funds (retained earnings) (136) (87) (223)
Profit/(loss) for the year
(87) (147)
Critical accounting estimates and judgements in applying accounting policies
The Company makes certain estimates and assumptions regarding the future. Estimates and assumptions are
continually evaluated based on historical experience and other factors. In the future, actual experience may
differ from these estimates and assumptions. In addition the Company has to make judgements in applying its
accounting policies which affect the amounts recognised in the accounts. The most significant areas where
judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Company are determined using methods relying
on actuarial estimates and assumptions. These pension figures are particularly sensitive to changes in
assumptions for discount rates, mortality and inflation rates. The Company exercises its judgement in
determining the assumptions to be adopted, after discussion with its Actuary. Details of the key assumptions are
set out in note 11.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a
rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term.
Judgement has been applied in determining that for these purposes a high quality corporate bond constitutes AA
rated or equivalent status bonds.
Provisions
The Company has recognised provisions where a present legal or constructive obligation exists as a result of a
past event, where it is probable that an outflow of resources will be required to settle the obligation and a
reliable estimate of the amount can be made. Severance provisions are recognised for business reorganisation
where the plans are sufficiently detailed and well advanced and where appropriate communication to those
affected has been undertaken at the balance sheet date. Postmasters’ compensation provisions are recognised
when either Postmaster’s agree to terminate their existing contracts or sign the new format contracts under
Network Transformation. The total provision for Postmasters’ compensation at the yearend date represents
management's best estimate of the future obligation. Due to the nature of provisions the future amount settled
may be different from the amount that has been provided.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate the risks specific to that liability.Impairment of non-current assets
The Group assesses whether there are any indicators of impairment for all non-currents assets at each reporting
date as well as if events or changes in circumstances indicate that the carrying value may be impaired. Where
appropriate, an impairment loss is recognised in the income statement for the amount by which the carrying
value of the asset (or cash generating unit) exceeds its recoverable amount, which is the higher of an asset’s
net realisable value and its value in use. Due to on-going operational losses (excluding the Network Subsidy
Payment) the carrying value of some assets are impaired to zero on acquisition. Each asset category is
described below:
Property, plant and equipment excluding freehold property, long leasehold property and land:
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into
working condition for its intended use. These assets have a relatively short useful life and due to on-going
operational losses (excluding Network Subsidy payment) they are impaired to zero on acquisition. If they were
not impaired they would be depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Piant and Machinery 3-15 years
Motor vehicles and trailers 2-12 years
Fixtures and equipment 2 - 15 years
Freehold property, long leasehold property and land:
As with other property, plant and equipment this is recognised at cost, including attributable costs in bringing
the asset into working condition for its intended use. These assets have a long useful life and a fair market
value, therefore these assets are not impaired on acquisition but would be considered for impairment if
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indicators existed in line with Group policy noted above. They are instead depreciated on a straight-line basis
over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining
useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted where applicable on a
prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. These assets are
impaired to zero for the reasons noted above. If they were not impaired they would be amortised on a straight
line bases via a charge to income statement over the following period:
Software 1 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with Group policy noted above but are not
automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets
acquired and liabilities assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested
for impairment annually as well as when there are any indicators of impairment.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have
passed to the Company are capitalised at the inception of the lease with a corresponding liability recognised for
the fair value of the leased item or, if lower, at the present value of the minimum lease payments, Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease
term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor are
classified as operating leases and rentals are charged to the income statement over the lease term. The aggregate
benefits of incentives are recognised as a reduction of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures
Investments in joint ventures within the Company's financial statements are stated at cost less any accumulated
impairment losses.
Investments in subsidiaries
Investments in subsidiaries within the Company’s financial statements are stated at cost less any accumulated
impairment losses. The carrying value relates solely to the Company's investment in Post Office Management
Services Limited, a 100% subsidiary of the Company and is less than £1m.
Inventories
Stocks, which include printing and stationery, retail and lottery products, are carried at the lower of cost and net
realisable value after adjusting for obsolete or slow-moving stock.
Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed
or are disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by
the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and
unused tax assets and losses except:
- initial recognition of goodwill
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= the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit and loss.
- taxable temporary differences associated with investments in subsidiaries interest in joint ventures, where the
timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference
will not reverse in the foreseeable future and
- deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available
against which they can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the
tax asset is realised or the liability is settled, based on tax rates that have been substantively enacted at the
balance sheet date. Deferred tax balances are not discounted.
Current and deferred tax is recognised in the income statements, except to the extent that it relates to items
recognised in other comprehensive income or directly to equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Company. All
members of defined benefit schemes are contracted out of the earnings-related part of the State pension scheme.
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of
return on a high quality corporate bond of equivalent currency and term. The resulting defined benefit asset or
liability is presented separately on the face of the balance sheet. Full actuarial funding valuations are carried out
at intervals not normally exceeding three years as determined by the Trustees and, actuarial valuations are carried
out at each balance sheet date and form the basis of the surplus or deficit disclosed. When the calculation at the
balance sheet date results in net assets to the Company, the recognised asset is limited to the present value of
any future refunds of the plan or reductions in future contributions to the plan (the asset ceiling).
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service
costs and any gains and losses arising from settlements, curtailments and past service costs. The net difference
between the interest costs and the expected return on plan assets is recognised as net pensions interest in the
income statement. Actuarial gains and losses are recognised immediately in the statement of comprehensive
income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the
statement of comprehensive income.
For defined contribution schemes, the Company’s contributions are charged to operating profit, as part of staff
costs, in the period to which the contributions relate.
Foreign currencies
The functional and presentational currency of the Company is sterling (£).
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction (or at the contracted
rate if the transaction is covered by a forward foreign currency contract). Monetary assets and liabilities
denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date (or
the appropriate forward contract rate). All differences are taken to the income statement.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad
debts are written off when identified.
Borrowing costs
Borrowing costs are recognised as an expense when incurred unless they are directly attributable to the
construction or development of a qualifying asset, in which case they are capitalised using the weighted average
cost of borrowing for the period of construction/development.
Government grants
Government grants of a revenue nature are recognised to match costs in relation to the performance of certain
specified activities.
Provisions
Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past
event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at an appropriate pre-tax rate.
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Financial instruments
Financial assets
Financial assets are measured at fair value at the balance sheet date. They are classified into the following
categories as appropriate loans and receivables or available for sale as appropriate based on the purpose for which
they were required. Financial liabilities are measured at either fair value at the balance sheet date or as financial
liabilities measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at
amortised cost.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the
balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent
arms length market transactions; reference to the current market value of another instrument which is
substantially the same; and discounted cash flow analysis and pricing models.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or
expires.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash
equivalents) with an original maturity date of three months or less. In addition the Company uses Money Market
funds as a readily available source of cash, and these funds are also categorised as cash equivalents.
Auditor’s remuneration
The remuneration paid to auditors is disclosed in the Group financial statements (note 3).
Director's emoluments
The emoluments paid to Directors are disclosed in the Group financial statements (note 5).
2. Intangible assets
2016 2015
At 30 March 2015, 31 March 2014 297 243
Reclassifications - (3)
Additions 91 57
Disposals - -
At 27 March 2016, 29 March 2015 388 297
Impairment
At 30 March 2015, 31 March 2014 297 243
Reclassifications - (3)
Impairment (see note 5 in the 91 57
Group financial statements)
Disposals : -
At 27 March 2016, 29 March 2015 388 297
Net book value
At 27 March 2016, 29 March 2000
The above intangible assets relate to software.
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3. Property, plant and equipment
Land and Bi gs.
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m ém £m £m £m £m £m
Cost
At 31 March 2014 100 17 113 44 1 739 1,014
Reclassification* (31) 26 6 - - 2 3
Additions 16 12 - 1 - 55 84
Disposals (2) : (4) (5) 2 (13), (24)
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 - - 4 - 38 43
Disposals (1) = (3) (1) = (3) (8)
At 27 March 2016 77 58 90 43 1 843 1,112
Depreciation and
impairment
At 31 March 2014 91 16 113 44 1 739 1,004
Reclassification* (31) 26 6 - - 2 3
Depreciation and
impairment 16 12 - 1 - 55 84
Disposals (2) - (4) (5) - (13) (24)
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification (6) 3 (22) - - 25 -
Depreciation and
impairment
2 - - 4 - 38 44
Disposals (1) : (3) (4) = (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Net book value
At 27 March 2016 8 1 - - - : 9
At 29 March 2015 9 1 : : : : 10
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land,
which represents £3 million (2015: £3 million) of the total cost of properties.
* Some reclassifications have been done in the year between freehold, long leasehold, short leasehold and fixtures
and equipment in relation to Postmasters’ branches. Reclassification between freehold, long leasehold and short
leasehold asset categories is due to the fact that all land and building assets are classified as freehold whilst they
are an asset under construction, then once works are complete and lease contracts are confirmed, the asset is
moved into the correct respective category.
4. Investment in subsidiaries
The carrying value of £50,000,100 relates solely to the Company's investment in Post Office Management
Services Limited, a 100% subsidiary of the Company. It relates to 50,000,000 shares with a nominal value of £1
and 1 share with a nominal value of £100. The registered address of Post Office Management Services Limited is
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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5. Investments in joint ventures
2016 2015
—m £m
Investment in joint ventures 1 1
Joint ventures
During 2015/16 and 2014/15, the Company’s only joint venture investment was a 50% interest (1,000 £1 ordinary
A shares) in First Rate Exchange Services Holdings Limited with a carrying value of £0.6 million (2015: £0.6
million), whose principal activity is the provision of Bureau de Change. First Rate Exchange Services Holdings
Limited is a company registered in the United Kingdom. The registered address of First Rate Exchange Services
Holdings Limited is Great West House, Great West Road, Brentford, Middlesex, TW8 9DF.
6. Trade and other receivables
2016 2015
£m £m.
Current:
Trade receivables 93 101
Amounts owed by group undertakings 6 2
Prepayments and accrued income 68 106
Client receivables 229 162
Other receivables 15 28
Total 411 399
Non-current:
Prepayments and accrued income 12 10
7. Cash and cash equivalents
2016 2015
£m £m
Cash in the Post Office Limited Network 653 708
Short-term Bank Deposits 45 89
Money market fund investments - 20
Total 698 817
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8. Trade and other payables
2016 2015
ém £m
Current:
Trade payables 51 29
Accruals 157 159
Deferred income 39 29
Social security 8 9
Client payables 375 454
Capital payables 16 25
Other payables 2 41
Ot tn 848. 216.
Non-current:
Other payables 25 30
9. Financial liabilities - interest bearing loans and borrowings
2016 2015
Department of Business, Innovation & SI
drawn down 465 310
The loan under the facility is short dated on a programme of liquidity management and matures on average 1 day
after the year end (2015: 1 day). The fair value of borrowings approximate their carrying value due to the short
term maturities of the loan. On maturity it is expected that further loans will be drawn down under this facility,
which expires in 2018. The undrawn committed facility, in respect of which all conditions precedent had been met
at the balance sheet date, is £485 million (2015: £840 million). The average interest rate on the drawn down
loans is 1.0% (2015: 1.0%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited
network.
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and
a negative pledge over cash and near cash items. The negative pledge is an agreement not to grant security over
the assets or to set up a vehicle that has the same effect.
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10. Provisions
Network
Transformatio Other
n £m Total
£m. £m.
At 29 March 2015 (restated) 127 23 150
Charged in operating exceptional
items 123 54 177
Charged in operating costs - 5 5
Charged for discontinued . 3 3
operation
Utilisation (95) (46) (141)
Unused amounts in the year -
operating exceptionals (21) (6) (26)
Unused amounts in the year - .
operating costs (2) (2)
At 27 March 2016 134 32 166
Disclosed as:
Current 132 18 150
Non - current 2 14 16
134 32 166
The Network Transformation provision relates to payments due to postmasters in relation to the major
transformation programme, see the accounting policies note on page XX for further details of this provision.
Other provisions of £32 million (2015: £23 million) include £29 million for continuing operations, this includes £19
million onerous lease obligations, £3 million severance and £7 million of smaller provisions including £1 million for
personal injury claims. It also includes £3m in relation to the discontinued operation as disclosed in note 19.
11. Pensions
The disclosures in this note reflect the two defined benefit schemes: Post Office Limited sectionalised RMPP
scheme which is independently operated by the Company and the 7% share of the RMSEPP scheme. Royal Mail
Group Limited is the principal employer in Royal Mail Senior Executive Pension Plan (RMSEPP) and Post Office
Limited became a participating employer with effect from 1 April 2012. It also includes the defined contribution
scheme Post Office Pension Plan.
The disclosures in this note show how the value of the assets and liabilities has been calculated at the balance
sheet date.
The Company 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
Post Office Pension Plan* UK employees Defined contribution
*From 1 April 2015 the Post Office Pension plan replaced the Royal Mail Defined Contribution Plan.
Defined Contribution
The charge in the income statement for the defined contribution schemes and the Company contributions to these
schemes was £3 million (2015: £3 million) during the year. New recruits joining from 31 March 2008 are able to
begin paying contributions to the new plan after they have worked for the Company for a year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate trustee administered funds. The
latest full actuarial funding valuation of RMPP was carried out as at 1 April 2012 using the projected unit method.
For RMPP, this valuation was concluded at £135 million surplus. The latest full actuarial funding valuation of
RMSEPP was carried out as at 31 March 2012 using the projected unit method. For 100% of the RMSEPP plan, the
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valuation was concluded at £83 million deficit. Valuations are carried out triennially and the next one is being
performed as at 1 April 2015. The valuation has not yet been completed due to the current consultation on
proposals to close the scheme to future accrual. RMPP includes sections A, B and C each with different terms and
conditions:
* Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
* Section B is for members (or beneficiaries of members) who joined after 1 December 1971 and before 1
April 1987 or to members of Section A who chose to receive Section B benefits;
* Section C is for members (or beneficiaries of members) who joined after 1 April 1987 and before 1 April
2008.
A series of changes to RMPP and RMSEPP began to take effect on 1 April 2008.
The changes encompassed:
«the Plans closed to new members from 31 March 2008;
* all pensions and benefits earned before 1 April 2008 are linked to final pensionable salary, but
defined benefits built up from 1 April 2008 are earned on a “career average pensionable salary”
basis;
* from 1 April 2014, pensionable salary was amended to the amount in force at that date, increasing
each 1 April thereafter in line with RPI (up to 5% each year), with allowance for certain promotional
increases. This change resulted in a one-off exceptional gain of £102 million for the 2013/14
financial year;
* employees can continue to take their pension on reaching 60 but the normal retirement age increased to
65 for benefits earned from 1 April 2010;
* from 1 April 2010 it is possible to draw pension earned before the change to normal retirement age at 55,
and continue working while still contributing to the Pension Plan until the maximum level of benefits has
been reached; and
* RMSEPP was closed to future accruals on 31 December 2012.
Payment of £17 million (2015: £19 million) was made by the Company during the year in respect of regular 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% (2015: 17.1%), effective from April 2010. However, in
February 2016, Post Office went out to formal consultation with active members (and their representatives) of the
Post Office section of the Royal Mail Pension Plan regards to the potential closure of the RMPP to future accrual
with effect from 1 September 2016. The closure is subject to the outcome of the pensions consultation and no
final decision will be until the formal consultation has been completed. The proposed closure will also require
consent of the Trustee of the RMPP. This closure if it occurs could affect the rate paid in 2016/17.
The Company pays 7% of the total deficit payment required to fund the deficit in RMSEPP and a payment of £1
million (2015: £1 million) was made by the Company during the year. No RMPP deficit payments were made
during 2014/15 or 2015/16. For RMSEPP, deficit recovery payments will be £1 million per annum, from 1 April
2010 to 31 January 2024.
A current liability of £nil (2015: £1 million) has been recognised for payments to the pension schemes relating to
redundancy. During the year, payments of £3 million (2015: £2 million) relating to redundancy were made.
The weighted average duration of the RMPP fund is 26 years, and for the RMSEPP fund is 21 years. Over the next
financial reporting period to 27 March 2016 it is expected that employer contributions to the plans will be £17
million and £1 million for RMPP and RMSEPP respectively.
The following disclosures relate to the gains/losses and surplus/deficit in the scheme recognised for RMPP and
RMSEPP defined benefit plans in the financial statements of the Company:
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b) Major long-term assumptions
The size of the RMPP pension surplus, which is large in the context of the Company and its finances, is materially
sensitive to the assumptions adopted. Small changes in these assumptions could have a significant impact on the
surplus and overall income statement charge. The major long-term assumptions in relation to both RMPP and
RMSEPP were:
At 27 March 2016 = At 29 March 2015
% pa % pa
Rate of increase in salaries 2.8 2.8
Rate of pension increases - RMPP sections A/B 1.8 1.9
Rate of pension increases - RMPP section C 2.8 2.8
Rate of pensions increases - RMSEPP members transferred
from Section A or B of RMPP. 1.8 1.9
Rate of pension increases - RMSEPP all other members 2.8 2.8
Rate of increase for deferred pensions - RMSEPP members
transferred from Section A or B of RMPP. 1.8 1.9
Rate of increase for deferred pensions 1.8 1.9
Discount rate 3.5 3.5
Inflation assumption (RPI) - RMPP and RMSEPP 2.9 3.0
Inflation assumption (CPI) - RMPP and RMSEPP. 1.8 1.9
The ultimate cost of the RMPP plan to the Company will depend upon future events rather than the assumptions
made. The assumptions made may not be borne out in practice and as such the cost of the plan may be higher
(or lower) than disclosed.
In common with other defined benefit schemes, the main risk in relation to the arrangements is the value of the
assets does not keep pace with the increase in the value of the liabilities. This can arise for many reasons, but
the most significant risks are as follows:
Investment risk: If the assets of the arrangements fall short of expectations, this will lead to a decrease in the
funded status.
Asset volatility: The arrangements hold return seeking assets (including equities and property) which are
expected to outperform corporate bonds in the long term but give exposure to volatility and risk in the short
term. RMPP does, however, invest in liability driven investment (LDI) assets, for example Corporate Bonds, which
mitigates the impact of interest rate and inflation volatility on the funded status.
Inflation risk: Higher inflation rates than expected will act to increase the plan liabilities as benefits will increase
to a higher level than assumed. The arrangements have a maximum pension increase (generally 5% per annum)
written into the rules which limits the increase for many benefits, so limiting the impact of high inflation. This
includes pensionable pay in RMPP, which was amended with effect from 1 April 2014. In addition, the arrangement
holds assets that increase in value as price inflation expectations rise, so mitigating the impact of rising inflation
expectations. These assets include LDI assets in respect of RMPP.
Changes in bond yields: A decrease in corporate bond yields will increase the plan liabilities, although this will
be partially offset by an increase in the value of the bond holdings and, to some extent, the LDI assets.
Pensioner longevity: If members live longer than expected, the liabilities would increase because pensions would
be paid for a longer time.
Liabilities accrued in the Royal Mail Pension Plan to 31 March 2012 were transferred to the Royal Mail Statutory
Pension Scheme. These liabilities are no longer an obligation of the Company and consequently the transfer
resulted in a significant removal of pension risk from the Company.
The following table shows the potential impact on the RMPP assets and pension surplus of changes in key
assumptions:
2016 2015
£m £m
Changes in RPI and CPI inflation of +0.1% pa (5) (4)
Changes in discount rate of +0.1%pa 5 4
Changes in real salary growth of +0.1% pa (2) (1)
Changes in CPI assumptions of +0.1% pa (1) (1)
An additional 1 year life expectancy (6) (5)
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The sensitivity analysis has been prepared using projected benefit cashflows as at the latest full actuarial valuation
of the plan. The same method was applied as at the previous reporting date. The accuracy of this method is limited
by the extent to which the profiles of the plan cashflows have changed since those valuations although any change
is not expected to be material in the context of the above sensitivity analysis.
Mortality: The mortality assumptions for the RMPP sectionalised scheme are based on the latest self-administered
pension scheme (SAPS) mortality tables with appropriate scaling factors (106% for male pensioners and 101% for
female pensioners). For future improvements the assumptions allow for ‘medium cohort’ projections with a 1.25%
floor. These are detailed below:
Average expected life expectancy from age 60! 00000 20M 2018
For a current 60 year old male RMPP member 27 years 27 years
For a current 60 year old female RMPP member 30 years 30 years
For a current 40 year old male RMPP member 29 years 29 years
For a current 40 year old female RMPP member 32 years 32 years
b) Plans’ assets
The assets in the plans for the Company were:
Market value 2016 Market value 2015
Sectionalised RMPP —m £m
UK equities - 1
Overseas equities - 10
Corporate bonds* 233 217
Property 1 8
Private Equity 10 12
Cash and cash equivalents 41 6
Bond/fixed interest funds 41 50
Index-linked funds - 10
Other loan/debt funds 28 20
Alternative asset funds 43 it
Equity funds : 34
Fair value of RMPP assets 407 379
Present value of RMPP liabilities (184) (150)
Surplus in plan before asset ceiling adjustment 223 229
Less effect of asset ceiling oe a ee C-) ne CL) ee
Surplus in plan after asset ceiling adjustment 194 202
*£15 million relates to UK Government Bonds. £215 million to an LDI investment containing UK Government
Bonds, it is a liability driven investment and £3 million to an infrastructure debt holding which is EUR
denominated and fixed interest.
Market value 2016 Market value 2015,
Share of RMSEPP ém ém
UK equities 1 1
Overseas equities 10 1
Government bonds 15 16
Alternative asset funds 2 -
Property 2 2
Other assets : 1
Fair value of share in plan assets for RMSEPP 30 31
Present value of share in plan liabilities for RMSEPP (27) (26)
Surplus in plan for the share of RMSEPP before asset ceiling 3 5
adjustment
Less effect of asset ceiling (1) (2)
Surplus in plan for share of RMSEPP after asset ceiling 2 3
adjustment
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A retirement benefit surplus of £196 million is disclosed on the balance sheet, representing the surplus in plans
of £223 million and £3 million for RMPP and RMSEPP respectively, and net of tax of £30 million at a rate of 35%
on the element of the surplus which is recoverable through a refund from the plans.
There is no element of the above present value of liabilities that arises from plans that are wholly unfunded. All
RMPP and RMSEPP assets are securities with a quoted price in an active market.
c) Movement in plans’ assets and liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Sectionalised
Sectionalised
Assets
RMPP 2016 £m__RMPP 2015 £m
Assets in sectionalised RMPP at beginning of period 379 260
Contributions paid 19 21
Employee contributions paid 6 7
Finance income 14 12
Actuarial (losses)/gains (8) 81
Assets in sectionalised RMPP at end of period 407 379
Share of Share of
Assets RMSEPP 2016 RMSEPP 2015
£m —m
Share of assets in RMSEPP at beginning of period 31 26
Contributions paid 1 1
Finance income 1 1
Actuarial (losses)/gains (2)
Benefits paid to members. nC)
Share of assets in RMSEPP at end of period
30
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabilities Sectionalised Sectionalised
RMPP 2016 RMPP 2015
—£m —m
Liabilities in sectionalised RMPP at beginning of period (150) (90)
Current service cost (27) (25)
Curtailment costs* (1) (1)
Finance cost (6) (5)
Employee contributions (6) (7)
Actuarial loss - (23)
Experience adjustments on liabilities 3 (1)
Benefits paid 3 2
Liabilities in sectionalised RMPP at end of period (184) (150)
Liabilities Share of Share of
RMSEPP 2016 RMSEPP 2015
—£m ém
Share of liabilities in RMSEPP plans at beginning of period (26) (24)
Finance cost (1) (1)
Actuarial loss (1) (2)
Benefits paid 1 1
Share of liabilities in RMSEPP at end of period (27) (26)
*The curtailment costs in the income statement are recognised on a consistent basis with the associated
compensation costs. Estimates of both are included, for example, in any redundancy provisions raised. The
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curtailment costs above represent the costs associated with those people paid compensation in respect of
redundancy during the accounting period. Such payments may occur in an accounting period subsequent to the
recognition of costs in the income statement.
d) Recognised charges
An analysis of the separate components of the amounts recognised in the performance statements of the Company
is as follows:
Sectionalised Sectionalised
RMPP 2016 £m RMPP 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit before exceptioi
items:
Current service cost 27 25
Total charge to operating profit before exceptional items 27 25
Analysis of amounts charged to operating exceptional items:
Loss due to curtailments 1 1
Total charge to operating profit 28 26
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 6 5
Interest income on plan assets (14) (12)
Net pensions credit to financing (8) (7)
Net charge to the income statement before deduction for tax _
Analysis of amounts recognised in the statement of
comprehensive income:
Actual return on plan assets 6 93
Less: expected interest income on plan assets (14) (12)
Less: taxation on surplus recoverable through plan refunds oo 2).
Actuarial (losses)/gains on assets (all experience (10)
adjustments)
Experience adjustments on liabilities 3 (1)
Effects of changes in actuarial assumptions on liabilities - (23)
Actuarial losses on liabilities 3 (24)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income
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Share of RMSEPP = Share of RMSEPP
2016 £m 2015 £m
Analysis of amounts recognised in the income statement
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 1 1
Interest income on plan assets (2) (1)
Net pensions credit to financing : :
Net charge to the income statement before deduction for tax : :
Analysis of amounts recognised in the statement of comprehens:
income:
Actual return on plan assets (1) 5
Less: expected interest income on plan assets (1) (1)
Less: taxation on surplus recoverable through plan refunds 1
Actuarial (losses)/gains on assets (all ex
Experience adjustments on liabilities -
Effects of changes in actuarial assumptions on liabilities () (2)
fence adjustments
Actuarial losses on liabilities () (2)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (2) i
12. Equity
Called up share capital:
2016 2015
£ £
Authorised
Ordinary shares of £1 each 51,000 51,000
Total 51,000 51,000
Allotted and issued
Ordinary shares of £1 each 50,003 50,003
Total 50,003 50,003
Share premium:
On 7 August 2007 1,000 ordinary shares of £1 each were issue in return for £313 million cash paid by the the
Secretary of State for Business, Enterprise and Regulatory Reform. A share premium of £312,999,999 resulted
from this subscription. In April 2008 two ordinary £1 shares were issued in return for £152 million cash paid by
the Secretary of State for Business, Innovations and Skills Reform. A share premium of £151,999,998 resulted
from this subscription.
13. Commitments
Capital commitments contracted for but not provided in the financial statements amount to £62 million (2015:
£96 million).
Details of the Company commitments under non-cancellable operating leases are disclosed in the Group financial
statements (note 19).
14.
Details of the Company’s finance lease liabilities are disclosed in the Group financial statements (note 20).
nance lease Ii ies
15. Related party disclosures
Details of transactions with related parties are disclosed in the Group financial statements (note 23).
16. Operating exceptional items
Details of operating exceptional items are disclosed in the Group financial statements (note 4).
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17. Taxation
Details of the taxation gains recognised in the year are disclosed in the Group financial statements (note 7a).
18. Business combinations
Details of the business combination which arose in the year is included in note 21 in the Group financial
statements.
19. Discontinued operations
Details of the discontinued operation are included in note 22 in the Group financial statements.
20. Post balance sheet events
In accordance with the funding agreement with government announced on 27 November 2013, for which State
Aid approval was received on 19 March 2015, Post Office Limited received £220 million of funding on 1 April
2016.
21. Immediate and ultimate parent company
At 27 March 2016, the Directors regarded Postal Services Holding Company Limited as the immediate and ultimate
parent company. The largest group to consolidate the results of the Company is Postal Services Holding Company
Limited, a company registered in the United Kingdom. Postal Services Holding Company Limited financial
statements can be obtained from Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Corporate information
Registered Office Actuary
Post Office Limited Towers Watson Limited
Finsbury Dials Watson House
20 Finsbury Street London Road
London REIGATE
EC2Y 9AQ Surrey
RH2 9PQ
Auditor Consumer Body
Ernst & Young LLP Consumer Focus
1 More London Place 4th Floor
LONDON Artillery House
SE1 2AF Artillery Row
London
SW1P 1RT
Solicitor
Linklaters LLP
One Silk Street
LONDON
EC2Y 8HQ
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Audit, Risk and Compliance Board Sub-
Committee
Year ended 27 March 2016
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
19. Impairment
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13
17
19
22
24
25
27
28
29
35
36
38
39
1.
Glossary
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Below is a listing of key abbreviations used throughout this document with the full
meaning given:
Abbreviation I Meaning
AEI Application, Enrolment & Identity
AT™ Automated Teller Machine
BACS Bankers’ Automated Clearing Services
BAU Business As Usual
BIS Department for Business, Innovation & Skills
BOI Bank of Ireland
CPI Consumer Price Index
DVLA Driver & Vehicle Licensing Authority
DWP Department of Work & Pensions
Eagle Deal in August 2012 to sell Post Office Financial Services (POFS)
to the Bank of Ireland, restructure commission rates for personal
financial services and extend the contract to 2023
EU BRP European Union Biometric Residents’ Permit
FRES First Rate Exchange Services
Gamma Accontract 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 Goods Received Not Invoiced
HPBB Homephone and Broadband
Horizon Horizon Next Generation- IT Counter system in branches
NBV Net Book Value
NS&I 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
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2. Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for the
year ended 27 March 2016. It is a summary of the key data, trends and analyses which
readers may find useful to further their own understanding of the results for 2015-16. It
is to be read in conjunction with the Report & Accounts.
Most of the analysis is based on the comparison of 2015-16’s actual results to those of
the prior year.
Comparison against budget is discussed in the Monthly Performance Report presented to
the Post Office Limited Board.
3. Accounting Policies
Post Office Limited Group report its results under International Financial Reporting
Standards (IFRS). Post Office Limited Company and Post Office Management Services
Limited report under Financial Reporting Standard 101 Reduced Disclosure Framework
(FRS 101).
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4. Primary Statements
4.1 Consolidated Income Statement
2015
2016 (Restated)
£m —m
Continuing operations:
Turnover 981 976
Network Subsidy Payment 130 160
Revenue 1,111 1,136
People costs excluding restructuring costs (233) (238)
Other operating costs (808) (831)
Share of post-tax profit from joint ventures 35 36
Operating profit before exceptional items for continuing operations 105 103
Operating exceptional items (269) (271)
- government grant 150 170
- restructuring costs (283) (301)
- impairment (136) (140)
Operating loss from continuing operations (164) (168)
Profit on disposal of property, plant and equipment - :
Loss before financing and taxation from continuing operations (164) (168)
Finance costs (5) (3)
Finance income - 1
Net financing income relating to pensions 8 7
Loss before taxation from continuing operations (161) (163)
Taxation credit 4 26
Loss for the financial year from continuing operations (157) (137)
Discontinued operations:
Loss for the financial year after tax from discontinued operations (10) (4)
Loss for the financial year (167) (141)
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4.2. Consolidated statement of cash flows
2016 2015
£m £m
Cash flows from operating activities
Operating profit before exceptional items from continuing operations 105 103
Operating loss from discontinued operations (10) (4)
Total profit before exceptional items 95 99
Adjustment for:
Share of profit from joint ventures (35) (36)
Pension operating costs 30 28
Working capital movements: (81) (17)
Increase in trade and other receivables (14) (34)
(Decrease)/Increase in trade and other payables (61) 10
Increase in provisions for discontinued operations 3 -
(Decrease)/increase/ in non-exceptional provisions (9) 7
Pension operating costs paid (23) (23)
Cash payments in respect of operating exceptional items: (109) (66)
Government grant 150 170
Restructuring costs (253) (224)
(Other (6) (12)
Net cash outflow from operating activities (123) (15)
Income tax recovered 9 11
Cash flows from investing activities
Dividends received from joint ventures 35 30
Finance income received - 1
Purchase of business combination (44)
Purchase of fixed and intangible assets (136) (147)
Net cash outflow from investing activities (145) (116)
Net cash (outflow) /inflow before financing activities (259) (120)
Cash flows from financing activities
Finance costs paid (5) (3)
Payments to finance lease creditors - (3)
Proceeds of borrowings from BIS 155 310
Net cash inflow from financing activities 150 304
Net (decrease)/increase in cash and cash equivalents (109) 184
Cash and cash equivalents at the beginning of the year 821 637
Cash and cash equivalents at the end of the year 712 821
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4.3. Consolidated balance sheet
2015
2016 (Restated)
£m £m
Non-current assets
Intangible assets 44 -
Property, plant and equipment 9 10
Investments in joint ventures 67 67
Retirement benefit surplus 196 205
Trade and other receivables 12 10
Total non-current assets 328 292
Current assets
Inventories 6 6
Trade and other receivables 409 397
Cash and cash equivalents 712 821
Total current assets 1,127 1,224
Total assets 1,455 1,516
Current liabilities
Trade and other payables (653) (718)
Financial liabilities - interest bearing loans and borrowings (465) (310)
- obligations under finance leases (8) -
Provisions (151) (144)
Total current liabilities (1,277) (1,172)
Non-current liabilities
Other payables (25) (30)
Provisions (16) (6)
Total non- current liabilities (41) (36)
Net assets 137 308
Equity
Share capital - -
Share premium 465 465
Retained earnings (330) (159)
Other Reserves 2 2
Total equity 137 308
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5. Operating Profit before exceptional items.
5.1 Operating profit bridge analysis
ém
105
(25) @)
2015 Revenue Share of Profit People Costs Other Operating Subpostmasters 2016
from Joint Costs Costs
Venture
5.2 Explanations for key movements are as follows:
* Revenue - section 6
« People costs - section 7.2
« Postmasters costs - section 7.3
« Other Operating Costs — section 7.4
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6. Revenue
27 March 29 March
2016 2015 ~~ Variance
£m £m Em
Mails 334 340 (6)
Retail & Lottery 46 48 (2)
Financial Services 303 290 13
Government Services 128 141 (13)
Telecoms 130 120 10
Other 40 37 3
Turnover 981 976 5
Network Subsidy Payment 130 160 (30)
Revenue 1,111 1,136 (25)
The decrease in year on year total revenue of £25m (2.2%) to £1,111m (2015
£1,136m) is driven by the £30m decrease in the Network Subsidy Payment, partially
offset by an increase of £5m in turnover.
The following commentary gives further detail on the turnover variances by category:
6.1.1 Mails
A summary of the £5.5m (2%) decrease in Mails turnover is set out below. After
adjusting for a planned decrease in the fixed fee and an element of back billing the
underlying trading variance shows a decrease of £1m.
—m
Total reduction (5.5)
Less: planned decrease fixed fee 6.4
Add: one off (back billing) (1.9)
Underlying trading variance (1.0)
The key movements within the underlying trading variance are:
e« £1.3m reduction in stamps and labels income (1%)
« £1.7m reduction in special mails including international (2%)
« £0.5m net decrease in other products
Offset by
« £2.5m increase in Home Shopping Returns (27%)
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6.1.2 Retail & Lottery
Retail and Lottery turnover has decreased by £2.4m:
¢ Lottery is £1.7m lower than last year, £1.6m of the fall is due to Camelot income and
the remainder to Health lottery. This is a combination of a poorly performing games
and a shift online and represents a trend expected to continue into 2016-17.
¢ Retail is £0.7m lower than prior year as a result of smaller retail square footage post
refurbishments.
6.1.3 Financial Services
Financial Services income has increased by £13.2m year on year. Overall PFS
(MoneyGram, Post Office savings, insurance, travel, lending and current accounts) is
up by £24.4m (19.7%) year on year. Revenue from traditional products has declined
by £11.2m.
By product the main drivers of the PFS £24.4m increase are:
+ £4.4m increase in Savings products.
co £5.5m increase in Travel Insurance revenues driven by the new POMS
subsidiary and £0.2m for Travel money card, offset by
o £1.5m decrease in Bureau income due to the travel sector having seen a
general decline and the supermarkets expanding their networks and marketing
investment.
« £4.1m increase from Moneygram as we have gained market share. Transfers to
certain Eastern European countries is up 50% and we have increased our network
« £0.6m increase in Lending revenue from:
o £0.8m increase in credit cards
o £0.2m decrease from mortgages and personal loans
Other Financial Services revenue decreased by £11.2m:
« A £6.1m decrease in Postal Order income. This is due to a prior year change in
policy resulting in write back to revenue of uncashed postal orders over 12 months
old (a change from 24 months previously).
« A £1.9m decline from bill payments resulting from a warmer winter, as well as
utilities and other bill payment clients continuing to migrate customers to other
payment methods such as direct debit and online. We have also lost clients such
as Derby City Council to Paypoint and travel ticketing clients such as West
Yorkshire ticketing scheme.
« £2.5m decrease in Payment services due to a declining market.
« £4.0m decrease in NS&I as the product ceased in June 2015.
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The above decreases were partially offset by:
« £1.1m increase in ATM revenue driven by the increased volumes as machines
reach maturity
« £2.7m net increase in Banking
o anincrease of £3.6m in personal banking because of higher volumes, specifically
cash withdrawals and the impact of other banks closing their branches, offset
by
o a£0.8m decrease in business banking revenues due to a fall in corporate deposit
rates from the Santander contract.
6.1.4 Government Services
2016 2015 Variance Variance
£m =m —£m %
DwP 75 87 (12) (14)
Home Office 34 30 4 13
DVLA 10 20 (10) (50)
Other Government Services 9 4 5 125
Total 128 141 (13) (9)
The £12.9m (9.2%) decrease in Government Services revenue is due to:
« £9.7m lower DVLA revenues from a fall in volume as a result of the paperless car
tax.
« DWP turnover, which arises from POCA accounts has declined by £12.2m. £8m is due
to new contractual terms and the remainder is due to falling numbers of live POCA
accounts due to natural attrition and migration to bank accounts.
The decline from DVLA and DWP has been partially offset by:
« £0.7m increase in Check & Send revenues driven by higher volumes.
« £8.3m from ID related products, split:
o £3.1m increase in UKVI due to the introduction of Nationality and EU BRP
enrolments and introduction of Secure Collection service, (both in April 2015)
o £3.9m from new products (Verify), and
o £1.3 from existing products such as Environmental Agency.
6.1.5 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 £130.0m (2015 £119.8m) has increased by £10.2m. This
has been driven by the line rental price increase of £2 introduced in January 2015 and
a further increase of £1 in November 15.
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Income from mobile top-ups was £0.7m 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.
HPBB 2015/16 2014/15 Variance
Average customer base 459,356 452,094 7,262 i
ARPU £22.85 £21.23 £1.62:
In March 2016 the decisions was taken to withdraw from the development and roll out
of a proposed mobile offer in order to focus on its core Telecoms activities. The income
and expenditure in relation to mobile has been disclosed as a discontinued operation on
the consolidated income statement and is a loss of £10m (2015 £4m).
2016 2015
Gross Income 0.2
Operating Expenses (3.0) (2.9)
EBITDAS Impact (2.8) (2.9)
Supplier Termination Costs (2.5)
Project Shutdown Costs (1.1)
Balance Sheet - Capex (1.7) (1.0)
Balance Sheet - Prepayment (2.0)
Discontinued Operations (10) (4)
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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 full year ending 27 March 2016
compared to the full year ending 29 March 2015
2016 2015 Variance
£m Em £m
Expenditure - (pre- exceptional) Notes
Wages & Salaries (154) (167) 12 8%
Pensions (31) (29) (2) (7%)
Overtime (8) (10) 2 20%
Bonus & Productivity (15) (7) (8) (114%)
Employers’ NI (19) (19) 0 0%
Temporary Resource (6) (6) 0 0%
PEOPLE COSTS 7.2 (233) (238) (5) 2%
Postmasters' costs 7.3 (413) (435) 22 5%
Legal Costs 7.4.1 (5) (3) (2) (67%)
Staff & Agent Related Costs (10) (10) 0 0%
Consultancy & Advisory Services (4) (3) (1) (33%)
Brand & Marketing 7.4.2 (25) (34) 9 26%
Property & Facilities Management 7.4.3 (53) (61) 8 13%
IT Infrastructure & IT Services 7.4.4 (102) (92) (10) (11%)
Finance & Losses 7.4.5 (25) (4) (21) (525%)
Cost Of Sales 7.4.6 (110) (106) (4) (4%)
Other Operating Costs 7.4.7 (56) (76) 20 26%
Vehicles (5) (7) 2 29%
Total Other Operating Costs 7.4 (395) (396) 1 0%
TOTAL EXPENDITURE (Pre Exceptionals) (1,041) (1,069) 28 3%
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7.2 People Costs (2016 £233m vs 2015 £238m)
7.2.1 People costs (2016 £233m vs 2015 £238m)
People costs have decreased by £4.8m (2.0%) to £233.1m, representing 22.3% (2015
22.2%) of the cost base.
The number of people employed also decreased, by 271 net to 6,605 at 27 March 2016
(2015 6,876), primarily due to redundancies arising from the Crown and Transformation
Programmes.
The people cost movement comprises:
e Wages and Salaries have decreased by £11.9m (7.1.%), a £10.1m reduction in basic
pay driven by fewer people and cost control and £1.8m relating to reduced staff project
costs
e Pension costs have increased by £2.2m (8.1%), reflecting an increase in the RMPP
IAS19 service cost rate to 28.5% (2015:23.0%)
e Productivity costs have increased by £7.9m (114.1%), due to increase in management
bonus accrual to 87% reflecting current performance levels compared to 50% bonus
booked in prior year, and the release of over accrual of 13/14 in the prior year.
¢ Overtime has decreased by £2.0m (20.5%).
7.2.2 People Numbers
The People numbers were as follows:
Period end
employees Average employees
2016 2015 2016 2015
Total employees 6,605 6,876 6,667 7,281
CT & NTP 640 622 616 609
Average Employees (excl. CTP &
NT) 6,051 6,672
Staff Cost (excl. overtime & temporary
resource) (£219,191) (£221,331)
Average Cost per employee (£36,225) (£33,175)
7.2.3 Average Cost per Employee
The average number of employees for year ending 27 March 2016 was 6,667 (2015
7,281). The average annual cost per employee, (excluding exceptional costs and
exceptional heads: CT & NTP), has increased by £3,050 (9.2%) to £36,225 (2015
£33,175). This is largely due to the prior year bonus accrual which anticipated 50%
bonus pay out compared to current year bonus anticipation of 87% bonus pay out.
14
7.3
7.341
7.4
7.41
7.4.2
7.4.3
7.4.4
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Postmaster costs (2016 £413m vs 2015 £435m)
Total postmasters costs decreased by £21.9m (5.0%). This reduction was largely made
up of £19.7m reduced fixed costs as a result of Network Transformation and £2.1m
lower National Insurance as postmasters move to new contracts. Variable costs were
flat with the prior year.
The average annual cost per postmaster branch (excluding VAT and NI) is £39,952
(2015 £41,713). This is a 4.2% decrease on the prior year. The decrease is as a result
of the reduced fixed income payments through the Network Transformation
Programme.
2016 2015
Agency Branches (incl. Mains and
Locals) 10,127 I 10,172
Outreach 1,175 1,136
Crown 316 326
Total Branches 11,618 11,634
Other Operating Costs (2016 £395m vs 2015 £396m)
Legal Costs have increased by £2.0m, £1.2m is driven by legal support of strategic
projects, primarily Sparrow and £0.5m is due to risk and compliance related work.
The remaining £0.3m is due to other smaller legal costs.
Brand & Marketing Costs have decreased by £9.4m (26%) year on year. £8.5m in
relation to reduced creative agency fees, £3.9m to decreased market research costs
and £1.2m reduced corporate communication. These savings are offset by £3.9m
increase in advertising costs.
Property & Facilities Management costs have decreased by £7.4m. £3.8m is due to
the change in the Facilities Management contracts as a result of separation, Norland
and Servest are now our providers whereas previously it was Romec/Royal Mail at a
higher cost. £2.6m is due to reduced estates charges including rent, rates and service
charges reflecting fewer Crowns branches (339 to 312). In addition there have been
several rent reviews and lease expiries where re -negotiations have taken place. £1m
less was spent on property BAU project investment.
IT Infrastructure & IT Services costs have increased by £10m (10%) mainly due to
£16.2m of increased Computer Infrastructure costs for licences on separation from
the Royal Mail IT systems. £5.7m of the IT increase relates to new costs for POMS
including the contact centre costs of £2.9m. A further increase of £7.8m for business
telephony costs as they were acquired through Royal Mail, so were previously billed
through Other operating costs (Managed Services) (see 7.4.7 below). These were
offset by reduced Horizon terminal services of £15.4m.
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7.4.5 Finance costs have increased by £20.7m, mainly driven by a one off lump sum of
£15.6m VAT rebate in the prior year, which also covered prior years. Current year
central rebate figure is £1.8m with most of the VAT recovery now appearing against
the individual cost lines. Credit and debit card processing charges have increased by
£1.5m and Telecoms losses were £1.3m higher than last year, customer bad debt
increased by £3.7m partially offset with other smaller favourable movements.
7.4.6 Cost of Sales has decreased by £4m (4%), detailed below:
2016 2015 Variance Variance
£m Em —m % Comments
Decrease due to decision to
Mails & Retail (3) (4) 1 15% restrict product range to higher
margin items
Financial 9 i
Services (4) (1) (3) (270%) Increase is due to POMS
Increase of £0.8m is due to
Government £2m related to Verify service
Services (29) (28) () (3%) offset by £1.2m lower POCA
volumes
Increase of £1.5m due impact
9
Telecoms (74) (73) (1) (2%) oF higher customer numbers
Total (110) (106) (4) (4%)
7.4.7 Other Operating costs have decreased by £19.5m. The prior year included £10.8m for
client compensation relating to the historical overcharges relating to ‘death notified
accounts’ (DWP), and £10.4m for project expenditure as all was recorded against this
line in the old finance system, (project expenditure is now recorded across the
relevant categories above). The remaining variance is driven by lower managed
service costs, specifically costs to Royal Mail (offsets increase in 7.4.4 above) and
telecommunication cost reductions.
7.4.8 Project expenditure is now reported within the appropriate cost categories and has
decreased by £11.3m to £12.0m and is detailed below:
2015-16 Project Expenditure £m
Eagle — contractual commitment to £4m pa sales capability (4.0)
investment
Mobile (Wave) (0.7)
Invest to Grow FS (0.4)
Sparrow (2.8)
Other Invest to Grow (3.4)
People & Organisation (0.5)
Digital (0.2)
Grand Total (12.0)
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8. Quality of Earnings
As in previous years, we look at the impact of any one-off items in EBITDAS as set out in the
table below. We do not believe that these items change the users’ understanding of the
accounts or require additional presentation.
2016 2015 Change Change
—m Em —m %
Post Office Limited (consolidated)
Reported profit before other exceptional items 105 103 2 2%
Network Subsidy Payment (130) (160) 30 (19%)
Add back depreciation 1 0 ie} ie}
Reported EBITDAS (24) (57) 33 (58%)
Gamma one-off income release* (5)
Billing corrections re 2014-15 2
Back-billing to RM for Certificates of Posting work (2)
Fujitsu compensation for poor service in 2013-14 (4)
Change in Telecoms bad debt policy 1
Client compensation relating to prior years 10
ATM rates provision release (2)
Bonus outturn lower in 2013-14 than accrued (2)
Bank of Ireland cost recovery debt provision 1
VAT and NI recovery re earlier years (15)
Total adjustments (8) (8)
Total (32) (65) 33 (51%)
* Individually disclosed
Each item in the table is explained further below:
8.1 Gamma one-off income release
Gamma refers to a contract with BOI which generates income in relation to the sales
of financial services products at branch. The income under the contract has been
deferred and is recognised over the life of the contract on a systematic basis. As a
result of the purchase of the insurance business from BOI the profile of the income
release over the life of the contract was changed to recognise that the acquisition had
been made and an additional £5.1m of deferred income, the element which related to
the insurance business was recognised in the year to March 2016.
8.2 Billing corrections and back-billing
Corrections of £0.8m were made to year end revenue estimates early in 2015-16
relating to 2014-15. £1m of additional cost was recognised in the year which related
to overbilling in previous years. In September 2015, Royal Mail were back-billed £2m
for Certificates of Posting services in prior years and not previously invoiced.
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8.3 Fujitsu compensation
Compensation of £3.7m was received in 2015-16 relating to poor service during the
migration of the Telecoms service from BT to Fujitsu in 2013.
8.4 Telecoms bad debt policy
During the year the bad debt policy was revised in two ways which in aggregate led to
a one-off increase in cost. Firstly it was amended to provide for all debt over 90 days
from a policy of providing for all debt over 60 days. Secondly the policy is now to
provide for the gross amounts owed rather than net of customers who have made
early payments.
8.5 Client compensation
An error was identified that has led to a client being overcharged for approximately 5
years and a provision was booked for compensation for the overcharges in 2014-15.
8.6 VAT and NI recovery re earlier years
In 2014-15 there were additional VAT recoveries relating to earlier years when the
recovery rates were confirmed with HMRC, in addition NI recovery was recognised in
2014-15 relating to the decision by HMRC that the new postmaster contracts for
Mains were subject to VAT rather than NI.
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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 UK senior Defined benefit
Pension Plan (RMSEPP) executives (closed)
Post Office Pension Plan* UK employees Defined
contribution
* From 1 April 2015 the Post Office Pension plan replaced the Royal Mail Defined
Contribution Plan. Royal Mail Pensions Trustees Limited manages the main defined benefit
scheme Royal Mail Pension Plan (RMPP) which has circa 3,503 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 year to 27 March 2016 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 29 March 2015 and 27 September
2015.
March March
2016 I 2015
% pa RMPP Post Office Section I
Inflation (RPI) 2.9 i 3.0
Inflation (CPI) 1.8 i 1.9
Discount rate (i.e. bond rate) 3.5 I 3.5
Rate of increase in Pensionable 2.8 i 2.8
salaries I
Rate of pension increases - RMPP A/B 1.8 I 1.9
Rate of pension increases - RMPP C 2.8 I 2.8
Rate of increases in deferred pensions 1.8 i 1.9
Demographic assumptions, for example mortality, remain aligned with the assumptions
used for the actuarial valuation and unchanged from those made in March 2015.
9.3 Movements in the defined benefit surplus
The movement in the RMPP defined benefit surplus during the year to 27 March 2016 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.
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Year ended Year ended
27 March 29 March
2016 2015
£m Em
Opening sectionalised RMPP net retirement bene 229 170
surplus
Current service cost (27) (25)
Curtailment costs (1) (1)
Net financing credit 8 7
Employers contributions 19 21
Actuarial gains/(losses) (5) 57
Closing RMPP net retirement benefit surplus 223 229
RMSEPP surplus 3 5
Total net retirement benefit surplus 226 234
Effect of asset ceiling (30) (29)
Closing net retirement benefit surplus 196 205
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 2015-16 service cost,
expressed as a percentage of pensionable pay is 28.5% for RMPP (March 2015 - 23%).
Payments of £17m were made in respect of RMPP future service contributions at a rate
of 17.1% (March 2015 - 17.1%) and £2m was paid in relation to 2015/16 in respect of
enhancements on redundancy in early retirement (a further £1m was paid in respect of a
balance accrued at the end of 2014/15). There has been a reduction in the surplus due
to a £10m difference between the service cost and payments made in respect of RMPP
future service contributions.
The net financing credit of £8m, 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 £5m during the year arose primarily due
to a decrease in the value of assets which resulted in an actuarial loss of £8m; this was
as a result of changes in market conditions. This actuarial loss was partially offset by an
actuarial gain on the Defined Benefit Obligation of £3m, has been caused by an ‘experience
adjustment of liabilities’ due to early leavers and lower than expected benefit increases.
The RMSEPP surplus has decreased to £3m due to actuarial losses of £3m (£2m loss on
assets, £1m loss on liabilities) offset by contributions paid of £1m.
The charge in the income statement and cash contributions for the defined contribution
scheme were £3m in the year to 27 March 2016.
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. Royal Mail took
legal advice both before and after sectionalisation. This confirmed that Post Office Limited
and Royal Mail Pic have absolute rights to the assets left over in their individual sections
after benefits have been secured if the RMPP terminates. There is no trigger for termination
in the Trust Deed but that does not mean that the RMPP cannot terminate. It would be
wound up by the courts, or the Regulator, or when the last beneficiary dies.
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Towers Watson has calculated that Post Office Limited would be able to recover £139m of
the £223m surplus in RMPP through lower contributions and the remaining £84m could
therefore be recovered through a refund together with the £3m surplus in RMSEPP. The
element of surplus that is recoverable through a refund would be subject to a 35%
withholding tax charge. Therefore the overall surplus on the balance sheet, (made up of a
£223m surplus for RMPP and £3m surplus for RMSEPP), has been reduced by £30m to
£196m. The element that is recoverable through lower contributions has resulted in a
reduction to the deferred tax balance from £30m at 29 March 2015 to £25m at 27 March
2016. This has resulted in a credit directly to equity of £5m offset by a debit of £5m
reported in the consolidated income statement.
ai
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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 years ended 27 March 2016 and 29 March 2015.
2015-16 = 2014-15
Exceptional items £m £m
Government Grants 150 170
Restructuring costs including postmasters’ compensation (283) (301)
Impairments (136) (141)
Total operating exceptionals (269) (272)
Non-operating exceptionals:
Profit on disposal of property : -
Net Exceptional gain/ (loss) (269) (272)
Government Grants - In April 2015 the Post Office received grants totalling £150m from
the Government, (April 2014 £170m) to fund capital projects and transformation. The
larger amounts utilised in the full year to March 2016 are: £66m against postmasters’
compensation, £31m against capital spend and £53m against network transformation
and IT transformation programme costs.
Restructuring costs - £200m of restructuring costs relate to Network and Crown
Transformation. These programmes are being implemented to achieve a major change in
the network. They include the introduction of new style agency offices and seek to
improve the profitability of the Crown network. The overall figure includes £82m (broken
down in the table below) - Network Transformation and Crown Transformation
programme costs, £16m onerous property lease costs and £102m postmasters’
compensation.
Redundancy costs for the full year amount to £29m and include £16m admin (“Wave”)
severance costs, £8m Crown severance and £5m Supply Chain severance costs.
Remaining restructuring costs include the following. IT Transformation programme costs
of £30m have increased from £16m in the prior year largely due to £21m of costs
incurred around the termination of the IBM contract. The remaining costs relate to
finalising the IT infrastructure and are now decreasing due to the programme reaching
the next phase where most related costs are being capitalised.
£10m of exceptional costs relate to the business separation programme, costs incurred
in the current year are due to the set-up of new support services and short term support
contracts. Business transformation programme costs of £9m have been incurred and
relate to achieving the overall transformation strategy, including the costs of the
business transformation team and £2m in relation to the Hawk acquisition, £1m of which
was incurred within the subsidiary company POMS. Additionally costs of £4m relate to
business transformation payments, £2m for Crown staff for meeting the Crown P&L
break-even run-rate and £2m for Supply Chain staff for completing transformational
depot reviews.
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Network and Crown Transformation costs (other than Postmasters’ compensation) to
March 2016 were made up as follows:
Network Transformation —£m
Programme Costs 22
Investments (e.g. enabling works) 22
Fixtures and equipment, non-capital 25
Other (Legal, Communications, consultation, IT projects) 6
Total Network Transformation 75
Crown Transformation 7
Total 82
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11. Interest, Cash, Debt, Funding and Hedging
11.1 Net finance costs March 2016 £5m vs March 2015 £3m
26 March 29 March
2016 2015
Finance costs & investment income £m =m
Interest received on investments - UK = 1
Total finance income - =
Interest charged on Government borrowings (2) (1)
Other finance costs (3) (2)
Total finance costs (5) (3)
Net finance cost (5) (2)
Interest payable on the BIS Loan has increased year on year (2015/16 £2m, 2014/15
£1m) due to higher draw-down.
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
26 March 29 March
2016 2015
Net cash/debt analysis Section £m £m
Cash in the Post Office Limited network 11.3 653 708
Short term bank deposits 59 93
Money market fund investments Ed 20
Total cash and cash equivalents 712 821
Loans, repayable on demandorlessthani year 11.4 (465) (310)
Total 247 511
11.3. Cash within the Post Office Limited network (March 2016 £653m vs March 2015 £708m)
The decrease in Post Office network cash from March 2015 levels can be chiefly attributed
to the cessation of NS&I products, and associated lower holdings of both cheques and
debit card transactions.
11.4 Loans and borrowings (March 2016 £465m vs March 2015 £310m)
Total cash and cash equivalents decreased by £109m which, ceteris paribus, would have
decreased the loan by that amount. This decrease is made up of a reduction in network
cash of £55m (see above) and decrease in cash at bank and Money Market Funds of
£54m due to more efficient treasury function.
Government funding of £280m was received on April 1st 2015 which would further offset
the loan.
However both these factors were more than offset by Capital Expenditure of £(138)m
and Exceptional spend of £(276)m due to the transformational projects, so the loan
increased as outlined above. The remaining difference is working capital movements and
miscellaneous.
11.5 Loan facilities
At the year end the Post Office had external borrowings of £465m.
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12. Going concern
Post Office Limited has net cash and cash equivalents of £712m and a borrowing facility
of £950m of which £465m was drawn down at 27 March 2016.
12.1. Background
On 27 November 2013, a funding agreement was announced providing:
e Funding of £280m for 2015-16 (received 1 April 2015)
e Funding of £220m for 2016-17 (received on 1 April 2016)
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 was received on 19 March
2015.
On 28 March 2012 it was recognised that the working capital facility was no longer
deemed State Aid.
The going concern analysis is based on the recent three year plan.
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. 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 2016-17 budget and three year 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 in the past but has now been extended, as it has always been
allowed under the Working Capital Facility agreement, to include uncleared debit/credit
card payments, short term bank deposits and money market fund investments which
also meet the definition. Downside scenarios have been overlaid reflecting the lower
cash flows if the three year operating plan does not materialise. 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.
12.3. Summary conclusion
Based on the analysis, there is available borrowing headroom until March 2019. 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
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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.
Post Office Limited Funding Analysis
Table 1: March 2016
£m (cumulative apart from free cash flow) 2015-16 2016-17 2017-18 _- 2018-19
Opening Funds (197) (406) (526) (548)
Borrowing facilities 950 950 950 950
Restriction due to level of network cash and other security (100) (100) (100) (100)
Borrowings from other sources - finance leases, bank overdraft etc
Latest plan free cashflow before assumed non NSP grant injection (359) (260) (92) 9
Non NSP grant injection per October 2013 plan 150 140 70
Closing Funds Headroom 444 324 302 Bit
Remove NSP beyond 2018 funding agreement (60)
Adjusted Headroom pre risk 444 324 302 251
Table 2: Risks, with management actions
£m (cumulative) 2015-16 2016-17 2017-18 __ 2018-19
Headroom pre risk (as above) 444 324 302 251
Risks
Income growth in 3 year plan does not materialise (20) (64) (148)
Cost savings from income shortfalls (at 50% assumed) 10 32 74
Cost savings don't materialise (29) (79) (63)
Income decline 100% faster than plan (22) (63) (121)
Cost savings from income shortfalls (at 50% assumed) 11 32 61
Headroom post risks pre management actions 444 274 160 54
Management actions 59 92 100
Sell Corporation tax losses to FRES 9 17
Reduce or postpone investment and discretionary opex 50 75 100
Headroom post risk and management actions 444 333 252 154
Table 1
This table shows the budget and plan projections for 2016-17 and beyond. It demonstrates
positive headroom throughout the plan period.
Table 2
This table sets out the impact of theoretical downside scenarios if the plan does not generate
the income streams anticipated or the anticipated cost savings do not materialise.
There are further actions that could be taken but are not required. These include the sale of
property.
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13. Property, plant and equipment and non-current assets held for sale
13.1 Net Book Values
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The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed
assets at March 2016 was £53m (March 2015 £10m). All assets are impaired on
acquisition except land and buildings and POMS assets. Movements during the year
were as follows:
Movement in NBV
NBV at 29 March 2015
Add capital expenditure
Less disposals
Less depreciation
Less impairment
NBV at 29 March 2016
Land Vehicles,
and plant Intangible
buildings and fixtures __ fixed assets
£m —£m Em
10 - -
1 41 137
(1) - -
(1) (41) (93)
9 - 44
Total
£m
10
179
(1)
(135)
53
Intangible fixed assets includes £44m goodwill in connection with the acquisition during the
year of the general insurance business from the Bank of Ireland.
13.2 Capital expenditure
The table below summarises the larger capital items by category:
£m
Hawk insurance business 44
EUC programmes 39
IT Risk & Resilience 29
Network Transformation 20
Front Office IT 17
IT Networks 6
Digital 4
Separation 3
Other 17
Total 179
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14. Goodwill, investments and intangibles
14.1 Investments in joint ventures and associates
27 March 29 March
2016 2015
£m Em
Investment in joint ventures 67 67
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.
Post Office Limited’s share of FRES’ 2015-16 post tax profit was £35m, the same amount
being received as a dividend during the year, hence no overall movement in the carried
value in the balance sheet.
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15. Working capital
15.1 Inventories (March 2016 £6m vs March 2015 £6m)
27 March 29 March
2016 2015
£m —m
Scratchcards 4
Retail 2
Total
15.1.1 Inventory written off
The provision for stock write downs and discrepancies is £0.6m (March 2015 £0.5m).
Shrinkage and obsolete stock written off at year end was £0.4m.
15.2. Trade receivables (Current)
Receivables are tabulated below, followed by a detailed explanation of the various
balances.
Receivables
27 March 29 March
2016 2015
Section £m £m
Trade receivables 15.2.1 93 101
Client receivables 15.2.2 229 162
Prepayments and accrued
income 15.2.3 73 106
Other receivables 15.2.4 14 28
Total 409 397
15.2.1 Trade receivables: Current (due within one year)
Trade receivables
27 March 29 March
2016 2015
ee Emo Em
Sales ledger 35 22
Homephone debtors 8 6
Postmaster debt 5 7
Uncleared debit, credit cards 35 53
Bank of Ireland, FRES cost recovery 8 12
Other 2 1
Total 93 101
The largest decrease relates to uncleared debit and credit card receivables which have
been reclassified from Cash into receivables for both the current and prior years. This
balance has decreased on account of the cessation of NS&I products.
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IRRELEVANT
The increase in sales ledger chiefly reflects a higher debtor in respect of BOI (March
2016: £18m, March: 2015 £8m).
A profile of the sales ledger within trade receivables is as follows:
Trade receivables
27 March 29 March
2016 2015
£m Em
18 8
: 7 4
Others 10 10
Total 35 22
Ageing of Trade receivables:
Debtors over 60 days overdue: March 2016 Enil (March 2015: Enil).
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.
15.2.2 Client receivables
Analysis of client balances at year end is as follows:
Client receivables
27 March 29 March
2016 2015
£m —£m
ATM (Bank of Ireland) 128 100
Card Account (JP
Morgan) 62 28
Partner banks 32 25
Others 7 9
Total 229 162
The main increases year on year are within Card account and ATM balances. The
increase in ATMs is due to period end coinciding with Easter weekend, increasing
banking activity. Card account increased as customers were able to claim a week's
withdrawals in advance due to the bank holiday.
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15.2.3 Prepayments and accrued income at 27 March 2016 total £74m (March 2015 £106m)
Prepayments and accrued income
27 March 29 March
2016 2015
£m £m
Accrued income 58 87
Prepayments 15 19
Total 73 106
Accrued income represents the majority of this amount, the larger decreases are due the
opening balance including £12m retrospective income for POCA relating to 2014/15 and
which was billed in April 2015, and also opening included £2m for NS&I products.
Prepayments of £15m represent the remainder of the £74m total. The prepayment of
telephony take-on costs with Fujitsu is £3m at March 2016 (March 2015: £6m), and
additionally there is £5m of Computacenter prepaid licence costs (March 2015: £5m).
Also at March 2016 there is £4m of property cost prepayments, (March 2015 £5m) and
other prepayments of £3m (March 2015 £3m).
15.2.4 Other receivables at 27 March 2016 total £14m (March 2015 £28m)
Other receivables have decreased from £28m (March 2015) to £14m as at March 2016.
The reduction is made up of: £4.7m debtor for sale of tax losses was received from Royal
Mail, the £3.8m debtor for NI paid in respect of agency offices transferring to VAT-based
contracts was received, and the £7m "Ultra" debtor was released and offsets an
equivalent release in payables.
Remaining at March 2016 is: tax debtor for losses to be sold to FRES £10m and VAT
recoverable £4m.
15.2.5 Non-current receivables at 27 March 2016 £11m (March 2015 £10m)
This represents prepayments in respect of telephony contracts with Fujitsu.
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15.3. Payables: amounts due within one year
27 March 29 March
A summary of payables categories is: 2016 2015
Section £m Em
Trade payables 15.3.1 51 30
Accruals and deferred income 15.3.1 161 160
Client payables 15.3.2 375 454
Advance customer payments 39 29
Capital payables 15.3.1 16 25
Social security 8 9
Government grant deferred income
(NSP) 15.3.4 - -
Other payables 3 11
Total 653 718
15.3.1 Trade payables and accruals
Trade payables and general,
capital accruals
27 March 29 March
2016 2015
£m —m
Trade payables 51 30
Accruals, GRNI 86 89
Postmaster, employee pay
balances 53 53
Productivity, bonus schemes 15 12
Others 7 6
Accruals and deferred income 161 160
Capital accruals 16 25
Total Trade payables and
accruals 228 215
The increase in Trade payables is driven by an adjustment for uncleared BACS
payments of £14m which is transferred from Client payables (March 15 £22m, not
transferred from Client).
The remaining Trade payables amount comprises of supplier invoices awaiting
payment, the largest of which was Fujitsu £4m (March 15 £1m).
Postmaster and employee pay balances are stable and remain at £53m.
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General expense accruals, GRNI (goods received, not invoiced) and capital accruals
typically reflects project throughput of the business. Always a significant amount,
GRNI accounts for £36m (March 15 £37m) of the total. Finally the reduction in capital
accruals reflects the slower pace of capital additions in 15/16.
15.3.2 Client payables
27 March 29 March
2016 2015
£m £m
Santander 145 127
NS&I - 30
DVLA 18 27
Utility companies 10 10
Bank of Ireland 13 17
BACS 27 74
Royal Mail 25 29
Ne EB 40
Total 375 454
The cessation of NS&I’s products is the main reason for decrease in Client Payables, with a
further £30m of NS&I included in the March 2015 BACS value, a combined £60m decrease.
The remainder of the BACS reduction is due to £14m of the BACS adjustment being included
in trade creditors at the half year and a general reduction in Client Payables.
The decrease in the DVLA balance represents the decline in payments to the DVLA in branch.
Customers are increasingly moving towards purchasing directly from the DVLA online.
The increase in the Santander balance reflects Easter customer transactions, in particular
business banking.
15.3.3 Advanced customer payments
This category also includes specific, non-client, creditors as follows:
Advanced customer payments
27 March 29 March
2016 2015
£m Em
Advanced customer payments 7 1
Postal order liability 11 12
Drop and Go 1 1
Gamma 4
Telephony credit balances 4 4
Homephone line rental advance
payments 10 7
Other 2 -
Total 39 29
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The largest movement in advanced customer payments (£5m) relates to an increase in Bill
payments driven by the timing of invoicing to customers and correction of Transcash
invoices. Additionally Homephone Line rental advance payments have increased by £3m due
to higher customer numbers, price increases and re-phasing of billing.
The Postal order liability reflects a creditor for uncashed Postal orders. Postal orders are
valid for 6 months but the liability has been retained at 12 months reflecting that they would
normally be honoured up to this date.
15.4 Payables: amounts due after one year
Payables due after one
year
27 March 29 March
2016 2015
£m £m
Rent-free incentives 4 2
Bank of Ireland deferred
income (Gamma) 21 28
Total 25 30
The rent free incentive creditor relates to buildings with an initial rent free period where the
cost are over the life of the lease is spread evenly. Over half of the balance relates to
Finsbury Dials (£1.6m).
jeferred income concludes in financial year 2022-23 and is recognised in
“Tiné with an agreed amortisation schedule. The final instalment of £2m was received early in
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16. Provisions
Provisions (March 2016: £163m vs March 2015: £150m)
Crown
Conversion Network
Vacant/ Transformation Other
Onerous Em —m
leases Total
Em £m
At 29 March 2015 7 127 16 150
Transferred 1 1
Charged/ (released) in
operating exceptional items 16 102 33 151
Charged as discontinued
operation 3 3
Charged/ (released) in
operating costs 4 4
Utilisation (5) (95) (42) (142)
At 27 March 2016 18 134 15 167
Disclosed as: Current 151
Disclosed as: Non-current 16
The Network Transformation provision relates to compensation payments due to
postmasters' who have signed up to the new contract terms or for a termination payment.
However due to an error being identified in the calculation the opening provision was
restated to £127m (formerly £40m).
Crown conversions at March 2016 relate to leasehold property costs for Crown branches
franchised, mainly to WH Smith, and which have been vacated. The exceptional charge
taken at half year is due to a fresh tranche of such properties which will be franchised at
some point in the foreseeable future —- a recent communication identified WH Smith as
the partner for the majority of these properties - but which are not currently vacated
and where the property costs are considered onerous.
Included within Other provisions is a severance provision of £3m (March 2015: £2m),
Bank of Ireland sales capability investment (Eagle provision) £2m (March 2015: £1m),
personal injury and motor accident claims of £1m (March 2015: £1m), a NFSP liability of
£1m (March 2015: £nil), and a POMS provision of £1m (March 2015: Enil).
POL’s mobile product was treated as a discontinued operation and a provision in respect
of supplier termination and project closure costs was charged exceptionally at £3m.
Finally the total for Other provisions includes £1m for a legacy dilapidations liability
(March 2015: £1m). The main reason for the balance being down on opening is due to
the provision for DWP historical overpayment of £11m being settled in full in the year.
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17. Litigation and Claims- Potential Claims regarding Horizon
Background
17.1 Post Office Ltd has received various claims from postmasters (PMs) alleging defects in
the Horizon system and Post Office’s internal processes.
17.2 Following discussions with James Arbuthnot MP and the “Justice for Subpostmasters
Alliance” (JFSA), in July 2012 independent investigator Second Sight Support Services
Ltd (Second Sight) was appointed to carry out a review of these claims.
17.3 On 8 July 2013, Second Sight published a Report finding shortcomings in Post Office’s
internal training and support to PMs 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 launched a
Complaint Review and Mediation Scheme aimed at understanding and resolving
individual complaints made about Horizon.
Mediation Scheme
17.5 The Scheme received 150 applications, 136 of which were investigated in detail (the
remainder being either ineligible or swiftly resolved). The cases have now all
progressed through the Scheme, which was formally closed on 31 March 2016.
Political Activity
17.6 The Scheme and allegations concerning Horizon have been the subject of
Parliamentary debate, most notably the Westminster Hall Debate on 17 December
2014 and BIS Select Committee hearing on 3 February 2015.
17.7 There has been no recent significant political activity. Post Office teams continue to
work closely with BIS officials and ministers to keep them appraised of developments.
Legal Activity
17.8 A Claim Form in Bates & 90 Others v. Post Office Limited, Claim No. HQ16X01238,
was issued the in the High Court, Queen’s Bench Division on 11 April 2016. The first
named Claimant is Alan Bates of the JFSA.
17.9 Post Office is not yet required to take any action in response - the Claim Form has not
been served on Post Office, and no Particulars of Claim have been provided. The
Claimants have until 11 August 2016 to serve the Claim Form.
17.10 The Claim Form sets out the name of the 91 Claimants and brief details of the claims.
Beyond asserting multiple legal causes of action and that the Claimants “expect to
recover more than £200,000”, very little information has been provided about the:
- factual basis for the claims;
purported commonality between the claimants; or
damages sought and how they are to be quantified.
17.11 Further detail of the claims have been provided in the “Letter of Claim”, which Post
Office received on 28 April 2016. The legal team are currently reviewing the
document.
17.12 The Claimants’ solicitors (Freeths LLP) have offered to mediate the disputes. Post
Office is reserving its positon on this until it better understands the claim.
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17.13 Post Office agents may seek to rely on the Bates action to dispute repayment of
shortfalls in branch cash holdings, e.g. in defence to BAU debt recovery action.
Media Activity
17.14 The Scheme and allegations concerning Horizon have been the subject of significant
media coverage, most notably the BBC Panorama programme “Trouble at the Post
Office” broadcast on 17 August 2015.
17.15 There has been no recent significant media activity. Post Office teams continue to
manage media and communications activity.
Regulatory Activit
17.16 Post Office is engaging with the Criminal Cases Review Commission (CCRC) in relation
to 24 applications made by former PMs seeking a review of their convictions. The
CCRC can refer a case to the Court of Appeal if its review identifies new evidence or
legal argument which gives rise to a “real possibility” that the conviction would be
overturned on appeal.
17.17 Post Office’s Legal team is liaising with the CCRC so as to comply with its statutory
obligations under the Criminal Appeals Act 1995, and continues to provide very
substantial documentation to the CCRC for review. Although the CCRC has said it is
nearing the end of its investigations, there is no estimated date for completion.
17.18 Post Office also received 49 simultaneous “Data Subject Access Requests” (DSARs).
Post Office has substantively responded to all these DSARs and concluded this work
stream. DSAR applicants can formally complain to the Information Commissioner's
Office if they are not satisfied with the response they receive. To date, no such
formal complaint has been made.
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18. Taxation
18.1 Income statement
A breakdown of the tax credit for the year is shown below:
2016 2015
£m —£m
Corporation tax credit for year (9) (10)
Tax under provided in previous years : (7)
Current tax (9) (17)
Deferred tax credit relating to the origin and reversal of tempora
differences 2 (9)
Effect of change in tax rate 3 :
Income tax credit reported in the consolidated income statement (4) (26)
A deferred tax credit of £25m was recognised in the year to March 2015 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 year to March 2016 the proportion of the surplus recoverable
through future contributions decreased and therefore a deferred tax debit of £5m has
been recognised to account for the deferred tax effect of this.
The corporation tax credit for the period of £9m represents the losses that we expect
to surrender to FRES through consortium relief for the period.
POL 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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19. Impairment
Post Office Limited (POL) was loss-making at its inception in 2001 and has impaired the
majority of non-current assets in all years since 2002/3. POL has continued to impair
assets on the basis of operating losses (excluding Network Subsidy Payment), net cash
outflows and the reliance on Government support and funding.
IAS 36 requires annual impairment tests where there is any indicator of impairment. The
principle is that the assets are carried at no more than their recoverable amount (the
higher of the amount which can be realised through the asset’s use or sale.) An asset's
recoverable amount represents the greatest value to the business in terms of the cash
flows that it can generate.
As noted above, since the inception of POL some assets have been impaired as a
combination of ongoing losses, cash outflows, and reliance on the government have
meant that value in use is Enil i.e. that the assets are not generating cash flows, and fair
value less costs to sell are £nil as the assets are not considered to be readily saleable due
to their use being specific to POL (for example Horizon system and cash collection
vehicles).
This approach is consistent with IAS 36 which includes a number of indications of
impairments including forecasted operating losses or net cash outflows as well as any
indicators that are relevant to specific business circumstances.
Asset categories are considered separately below:
19.1 Property, plant and equipment excluding freehold property, long leasehold property and
land
These assets have a relatively short useful life (between 2 and 15 years) and are impaired
in full.
19.2 Freehold property, long leasehold property and land
These assets have a long useful life and have a clear market value and could be sold,
these assets are not impaired but are instead depreciated on a straight line basis over
their useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the
estimated remaining useful life
19.3 Intangible assets with a finite useful life
In POL all of these assets are software, the have a short useful life of between 1 and 6
years and are impaired to zero.
19.4 Intangible assets arising on acquisition or with an indefinite useful life
These assets are considered for impairment individually but are not automatically
impaired. Goodwill is considered separately below.
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19.5 Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the
consideration transferred and the amount recognised for non-controlling interests, and
any previous interest held, over the net identifiable assets acquired and liabilities
assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment
losses. Goodwill is tested for impairment annually as well as when there are any
indicators of impairment.
Goodwill held by POL Group at 27 March 2016 relates to the Hawk acquisition, a full
impairment review has been carried out and due to Post Office Management Services
(within which this Goodwill sits) being profit making, cash generative and forecast to
continue to be so no impairment is considered necessary. Further to this the Goodwill is
based on purchase price which was based on an external valuation, purchase was within
the second half of the financial year.
19.6 Non-current assets within subsidiaries
Subsidiaries are considered separate cash generating units and the need for impairment
of assets is considered within the subsidiary and is dependent on whether indicators of
impairment exist within that subsidiary. At a Group level the impairment is adjusted on
consolidation to be in line with Group policy.
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Supplementary Documents
Building a better
~ working world
496 of S57 Post Office Board-24/05/16
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working world
Private and confidential 12 May 2016
Audit and Risk Committee
Post Office Limited
20 Finsbury Street
London
EC2Y 9AQ
Dear Members of the Audit and Risk Committee
Audit Results Report
We are pleased to present our Audit Results Report for the forthcoming meeting of the Audit
and Risk Committee. This report summarises our preliminary audit conclusion in relation to
Post Office Limited’s financial position and results of operations for the 52 week period ended
27 March 2016 (“the period’).
The audit is designed to express an opinion on the Post Office Limited (“Post Office”) Group
and Company financial statements for the period ended 27 March 2016 and address current
statutory and regulatory requirements. This report contains our findings related to the areas of
audit emphasis, our views on Post Office’s accounting policies and judgments and material
internal control findings.
This report also contains our preliminary summary of audit differences, communications
regarding our independence and a summary of communications we are required to make to
you.
This report is intended solely for the information and use of the Audit and Risk Committee,
Board of Directors and Management. It is not intended to be and should not be used by anyone
other than these specified parties.
We welcome the opportunity to discuss the contents of this report with you at the Audit and
Risk Committee meeting scheduled on 19 May 2016.
Yours faithfully
Peter Mclver
Engagement Partner
For and on behalf of Ernst & Young LLP
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-. CO NR . Cs
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Contents
Overview
Status of the audit
Significant accounting and auditing matters
Summary of audit differences
Control themes and observations
Appendices
A-— Independence report
B — Management representation letter
C — Required communication to those charged with governance
ts Report
498 of 557
Office Board:
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Overview
This overview is intended for use as an outline agenda for our discussion at the Audit and Risk Committee meeting to
be held on 19 May 2016 and includes a summary of our principal findings. Further details are contained within the main
body of this report.
We conducted our audit for the 52 week period ending 27 March 2016 in accordance with International Standards on
Auditing (UK and Ireland) in order fo provide reasonable assurance that your financial statements are free of material
misstatement, as set out in our engagement letter dated 22 January 2016.
Status of the audit (page 10)
A status of our work is included on page 10. We will provide the Audit and Risk Committee with a verbal update on the
progress and conclusion of our audit at its meeting on 19 May 2016.
Materiality
We have recalculated our materiality based on 1% of actual revenue as per draft Group Consolidated Financial
Statements. We did not identify significant changes compared to the materiality communicated to you in our Audit
Planning Report dated 17 March 2016.
The overall materiality used remained at £10.8m. Our performance materiality was set at 50% of overall materiality
and was £5.4m. Our reporting threshold for audit differences remained at £542k.
Scope update
There were no changes in our audit scope compared fo that which was communicated in our Audit Planning Report
dated 17 March 2016. As explained in our Audit Quality Enhancements paper dated 19 April 2016, we re-considered
our audit approach in response to the identified significant risks.
Significant accounting and auditing matters (page 12)
We focused on accounting and auditing matters identified as significant for 2016 audit. We summarised the key areas of
focus and preliminary findings from our audit procedures performed as of 12 May 2016 below.
Significant risks (page 13)
» Completeness of Postmasters Compensation Provision (£134m): As a result of our audit procedures, we
identified an understatement of Postmasters Compensation provision by £1.0m. This understatement relates to 56
Post Office branches which are currently “being engaged”, based on the average compensation of £17,396 per
branch being forced to leave the network. This judgmental adjustment has been recorded by Management. No other
significant differences were identified
» Revenue recognition across diverse range of revenue streams (£1,111m): As a result of our audit procedures,
we are satisfied that revenue for the group is materially correct and has been recognised in compliance with group
policy and IFRS.
» Classification of exceptional items relating to Transformation (£283m) and utilisation of Government Grant
{£150m): As part of our audit procedures, we concurred with Management's classification of exceptional items being
consistent with group policy and IFRS. As part of our test of details we identified the following judgmental
differences:
~ an understatement of a provision related to the IT Support services provided by Royal Mail Group to Post Office post
separation under Master Services Agreement. The total amount of understatement is £0.8m. This adjustment has
now been recorded by Management;
- an overstatement of accrual balances related to Network Transformation: Project Enabling Works (£2.7m) older
than 12 months and Operational Business Change OBC”) (£1.2m) older than 6 months. Based on previous
experience and historical data we would have expected these balances are utilised within respective period,
therefore proposed to reverse these accruals. These have both been adjusted by Management.
®» Risk of management override around estimates and judgments: We have performed various procedures to
address the risk of fraud and management override throughout our audit focussing on revenue recognition,
completeness of Postmasters’ compensation provision, areas susceptible to judgements and estimates and unusual
transactions. No issues were identified.
Office Linite
adit Results Rewort
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Overview (cont'd)
Other areas of audit focus (page 22)
Horizon Subpostmasters Claim: As part of our discussion with the Group Chief Financial Officer and the Group
Legal Counsel we understand that Post Office Limited have received a formal Letter of Claim from Freeths
Solicitors on behalf of 91 applicants on 28 April 2016. We have received the copy of this letter. It contains a number
of allegations made against Post Office. We understand that there is no quantification of the claim for damages at
this point of time. At the date of this report Management are in the process of reviewing this letter and will prepare
the necessary response and the litigation strategy. There is no provision recognised as at 27 March 2016 for this
claim. The financial statements now include a generic contingent liability note regarding receipt of such claims,
stating no material impact is expected. We will update our assessment as part of subsequent events review
procedures performed up to our sign-off date.
IRRELEVANT
Pension valuation and accounting (net surplus £196m): As part of our audit procedures, we are satisfied with
Management's assumptions used for pension liability valuation, being within the acceptable range. At the date of
writing this report we are yet to finalise our audit procedures in relation to pension plan assets valuation. in
February 2016, Post Office commenced a formal consultation with active members (and their representatives) of
the Post Office section of the Royal Mail Pension Plan (“RMPP”) with regards to the potential closure of the RMPP
to future accrual with effect from 1 September 2016. The closure is subject to the outcome of the pensions
consultation and no finai decision will be made until the formal consultation is completed. The proposed closure will
also require consent of the Trustee of the RMPP. This closure, if it occurs, could affect the pension average pay in
the 2016/17 financial year.
IT and SAP CFS (Core Finance System): We engaged our EY ITRA team to assist us in testing of IT General
controls over in-scope IT applications for 2016 audit. This includes HNGX, POLGAP, SAP CFS and SAP HRP. We
identified user access issues for POLSAP and SAP CFS. We instructed Management to perform alternative
procedures to validate whether access maintained by the users of these two applications was appropriate
throughout 2015/16 year. As at the date of this report this analysis is yet to be finalised.
Supply Chain Restructuring (Project Iris): We discussed with the Supply Chain Director and the Network &
Sales Finance Director the timing of the Supply Chain Restructuring project. Post Office Limited Management is
preparing a detailed restructuring plan and consultation which is to be completed by 19 May 2017. We reviewed the
Project iris timetable and the Board of Directors minutes. Based on our audit procedures performed we are satisfied
with Management's conclusion that there is no restructuring provision obligation as at 27 March 2016.
Our detailed comments and the results of our audit procedures on these items are included on pages 22 to 25.
POL00030888
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Overview (cont'd)
Summary of audit differences (page 27)
As at the date of this report, we have not identified any unadjusted audit differences above our reporting threshold of £542k
for the year ended 27 March 2016. We summarised the audit adjustments identified as part of our audit which have been
now recorded by Management on page 27.
Control themes and observations (page 29)
Our preliminary control observations and recommendations have been documented on page 29. These are currently being
discussed with Management. We will be summarising our final observations in Management letter as there continues to be
opportunities for further consistency and efficiency of processes and controls across the business.
Independence (page 32)
We consider ourselves to remain independent and objective. Please refer to our independence report in Appendix A.
Audit Opinion
Subject to finalisation of our audit work, we expect to issue unmodified audit opinion.
/
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The audit is well progressed with our procedures now primarily focussed on the audit of the financial statements and
certain balances. Our audit work in respect of the opinion on Post Office Limited consolidated financial statements is
substantially complete. The following items relating to the completion of our audit procedures were outstanding at
the date of drafting this report. We will provide the Committee with a verbal update at its meeting on 19 May 2016.
fem Actions to resolve __ Responsibility
+ Review of the final version of ‘front end’ of the annual report including review of
aspects of the Directors’ Remuneration Report, Chairman's and CEO's
statements and completion procedures thereon;
+ Review of directors’ emoluments disclosures once final bonus outturns
confirmed;
Annual report and Management and
accounts + Review of the final version of ‘back half including comments on financial EY
statements and disclosure notes; and
+ Detailed review of subsequent events;
+ Financial statements to be approved by Management and the Audit Report to be
signed by EY.
Postmasters’ + Finalisation of audit documentation upon receipt of remaining supporting Management and
Compensation Provision documentation as part of our sample selected for testing. EY
Exceptional items Finalisation of audit documentation upon receipt of remaining supporting Management and
documentation as part of our sample selected for testing. EY
Pension plan assets + Follow up remaining pension plan assets confirmations; Management and
confirmations + Review and follow up the differences with confirmations received (if any). EY
+ Finalisation of alternative procedures to support the appropriateness of user
IT Audit access for SAP CFS and POLSAP; Management and
+ EY to review analysis prepared by Management.
+ Follow up on comments provided to date;
Corporate tax + Review of final corporation tax supporting files and corporate tax financial Management and
statement disclosures.
To be completed through to the date of our audit opinion on the Group and
Subsequent events Company financial statements (matters to be updated include: enquiries of Management and
procedures Management, review of latest management accounts, unrecorded liabilities testing EY
and board minute review to date of signing).
To be signed/ dated cont ith our audit opinion on the G a latagement and
‘on To be Signed/ dated contemporaneous with our audit opinion on the Group an ‘Audit committes
Letter of representation Co pany financial statements, which is anticipated to be in June/July 2016.
+ Finalisation of audit documentation upon receipt of remaining supporting
documentation as part of our sample selected for testing; Management and
Journal entries testing . : agement al
Follow up on queries to Company in relation to journal entties selected for EY
testing.
+ Follow up on final signed deliverables from PwC FRES component audit team;
FRES - Interoffice + Review of PwC component team’s working papers for FRES audit. ey
reporting deliverables
Goodwill impairment Fialistion of EY review of Management's assumptions for analysis of CGU's Management and
analysis identification and impairment of goodwill. EY
Going concem EY to finalise the review the Management's going concem assessment Management and
assessment EY
Pest Oifoe
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Significant accounting and auditing matiers
Introduction
Where there are significant transactions or matters arising during the year we have performed our audit
procedures on these items as they arise. Our year end report only deals with new and open items. We have
summarised below the key financial reporting matters that we have previously considered and reported to you
during FY2016.
Accounting and auditing matters subject to significant judgements and
estimates
Management is required to disclose significant estimates and judgements in the financial statements. The
following outlines the basis for our assessment of the level of subjectivity involved in accounting matters reported
to you
Level of subjectivity
This rating applies only to significant estimates and indicates the level of subjectivity in the estimate as well as the
reliability of the underlying data used fo develop the estimate.
Description
Estimate involves significant judgement and is made with litte verifiable historical experience,
current trend information or market and industry comparative information.
Medium Estimate still involves some judgement and is made with verifiable historical experience.
current trend information, or market industry comparative information.
Low Estimate involves limited judgement and is made with verifiable historical experience, current
trend information, or market industry comparative information.
The following ‘dashboard’ summarises the significant accounting and auditing matters set out in this report. If
seeks to provide the Audit Committee with an overview of the subjectivity involved based on the above criteria.
The detail of each accounting matter is set out after the dashboard.
Level of
Subjectivity
Areas of audit emphasis: 2016
Completeness of Postmasters Compensation Provision* (page 13) High
Revenue recognition across diverse range of revenue streams" (page 14) Medium
Classification of exceptional items relating to Transformation and utilisation of High
Government Grant" (page 15)
Impairment of fixed assets and intangible assets, including goodwill (page 19) Medium
Pension valuation (page 22) Medium
* identified as a significant risk under International Standards on Auditing and communicated in our Audit Planning Report in March 2016
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Significant accounting and auditing matiers
(con d)
Significant risks
in our Audit Planning Report we identified four areas of audit risk that we deemed to be significant in the context of
our audit of Post Office Limited. Auditing standards define significant risks as those with a high likelihood of
occurrence and, if they were fo occur, could result in a material misstatement of the consolidated financial
statements. These significant risks are discussed below.
1. Completeness of Postmasters Compensation Provision of £133m (2015: £127m)
in August 2015 Management of Post Office Limited (“POL") identified that the Provision for Postmasters’
Compensation had not been fully recognised in the financial statements for the half year ended 28 September 2014
and for the year ended 29 March 2015. The total amount of restatement recognised was £87 million and £67
million for the year ended 29 March 2015 and the half year ended 28 September 2014 respectively. We concurred
with the accounting treatment of prior year adjustment and the amount of restatement recognised.
We have assessed the completeness of Postmasters Compensation Provision as a fraud risk (as defined by
auditing standards) and thus as a significant risk (as fraud risks are also significant risks). Our foous has been
specifically on the completeness of the provision recorded as at 27 March 2016. As part of our audit procedures we
noted that Management recorded a £123m additional charge, which was offset by £95m payments made during
the year and a release of provision totalling £21m (as explained below). The net provision now stands at £134m.
In order to address this risk we performed our planned audit procedures as follows
To ensure that every branch has been accounted for and that the Postmasters’ compensation provision is
complete, we have performed an independent reconciliation of 100% of the branch population. This involved
checking the status of each of the 12,471 branches at 27 March 2016 and understanding the journey they have
made since the half year. We compared this to Management's results and used this to identify anomalies and
challenge the provision analysis provided by Management. We have satisfied ourselves that the movement in
the journey of the branches is reasonable.
To ensure that every branch in the Post Office Network is classified correctly, we have independently
categorised each branch into their categories into a specific type of journey at 27 March 2016, based on their
individual attributes and challenged Management's assessment by comparing results. No exceptions were
identified.
To vouch the attributes and classification of the branches in the network we selected a sample of 594 branches
and checked supporting documentation to check that where a provision is applicable, it has been recognised
in the correct period by obtaining the signed contracts and checking that the dates of the signed agreements.
We checked that branches selected for testing are not duplicated in any other category. Where we identified
unusual items or categories, these were communicated to Management and adjusted where necessary.
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Significant accounting and auditing matiers
(con d)
14. Completeness of Postmasters Compensation Provision of £134m (2015: £127m)
(cont'd)
To check the validity and accuracy of POL’s records we selected a sample of 50 Conditional Resignation Pack
(CRP) contracts and checked dates for correct cut off and sign off. We also traced the contracted amounts of
these CRPs per POL’s records to POL's cash utilisation reconciliation and bank statements, showing the
amount being settled post year end.
To further gain assurance on the completeness of the exceptional items charge we have challenged
Management's charge by performing a reasonableness test on each category of the Postmasters compensation
elements by comparing costs incurred to date against budgeted costs and estimated costs to complete for the
various programmes. This involved understanding the number of open projects and how the estimated costs to
complete are computed. At the date of this report this work is still in progress.
We have had held discussions with the Director of Network (Sharon Bull) and other senior non finance members
of the organisation to improve our knowledge and understanding of developments that could impact the
Postmaster compensation provision and the progress the transformation is making against its planned targets,
this enabled us to corroborate our testing results and Management explanations.
We have performed an unrecorded liabilities test on 100% of the subsequent cash payments to Postmasters
made post year end (for April 2016). This was done by checking that ali payments to Postmasters made post
year end are included in the provision at year end and we are now independently sampling 25 selected
payments for May and June months post year end to actual bank statements. At the date of this report this work
is still in progress.
We have not identified any material differences as part of our test, with the exception of the following
As a result of our audit procedures, we identified an understatement of the charge for Postmasters
Compensation provision of £1.0m. This understatement relates to a group 56 Post Office branches identified by
Management as currently “being engaged”. Following discussions with Management we understood these
branched are likely to result in compensation once engagement concludes and therefore should be provided for
as at 27 March 2016. We determined the £1.0m balance based on the average compensation of £17,396 per
branch included within Fixed Pay Compensation (FPC). The FPC branches are those branches which had not
confirmed to POL that they were to convert nor leave the Network and so were being forced out of the Network
by POL. This judgemental adjustment has now been recorded by Management. No other significant differences
were identified and this has been corrected by Management and is included in the provision of £134m.
As part of our audit procedures, we identified that in the second half of the year following a detailed analysis and
new information received, Management released part of the provision totalling £21m.
» This represents Management's best estimate of the release to account for Post Office branches now unlikely to
convert. These branches were advertised as leavers in the previous period and the Post Office has now not been
able fo find a replacement. The Postmaster’s resignation obligation is conditional on Post Office finding a
replacement. This detailed analysis was performed by Management and resulted in 501 branches identified as
being unlikely to convert.
» This is in tine with Management's expectation as the original programme was set out to transform up to 8,000
branches (non-community and non-pilot branches), which has been subsequently revised down to 7,500
branches due to Management's expectation that they will not be able to find a replacement for 500 branches.
Management have put together a task force for the first half of FY2017 to further assist in finding replacements
for these branches. At this stage, Management has predicted that it would sensible to reduce the provision for
leavers payments by around 250 leavers, even considering a high success of the task force, management
expects there to still be at least 250 unplaced branches.
» We acknowledge that this is an area of judgement and it illustrates the difficulty to assess this Postmasters’
Compensation Provision. We recommend that Management performs regular review of the assumptions applied
and revise accordingly when new information become available. For the purposes of 2016 audit we concurred
with Management's assumptions to assess the amount of provision release. We will update our testing of the
reasonableness of this assumption as part of subsequent events procedures.
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(con d)
2. Revenue recognition across diverse range of revenue streams (£1,171m)
The Company continues to sell a large variety of products/services across a number of revenue streams. 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 defined in the specific underlying contracts.
As detailed in our planning board report, the main risk associated with the diverse range of revenue streams is
ensuring the correct contractual terms are being applied to the revenue lines. We also note that reward and
incentive schemes based on achieving profit targets may place undue pressure on Management to achieve
revenue forecasts. We have therefore identified revenue recognition and management override as a significant
and fraud risks both of which impact our revenue testing.
The main focus of our testing to address the risk of revenue recognition is summarised as follows:
We performed system walkthroughs over POL’s revenue lines and also performed detailed test of controls
work on those revenue fines, this testing involved checking correct contractual rates and volumes data in their
calculations, No issue identified and we have taken a controls-based approach to all revenue lines
w
We performed detailed testing on over 19 key customers giving us a coverage totalling 95% of the group
revenue. Our detailed tests included checking that revenue rates and commissions for each revenue line is
being appropriately applied in accordance with the terms of the relevant sales contracts. Further we checked
all revenue transaction with these key customers back to invoice and cash receipts.
Where a revenue estimate is made for a revenue line for a month prior to actual sales volumes and billing
reports being available, we have checked invoices subsequently posted in order to check that adjustments
were made for the estimated revenue figure to reflect the actual sales for all periods tested.
Our audit procedures also considered the accounting treatment for significant products or revenue streams
where applicable by reviewing all new significant revenue contracts and any changes to existing contracts with
customers. We did not identify any exceptions in relation to Management's application of its revenue
recognition policy.
To ensure that revenue has been included in the correct period, in addition to the procedures above, we have
performed detailed cut-off procedures over revenue postings before and after period end, and checked that
the amounts recognised as revenue are appropriate, and that where appropriate they have been correctly
recognised in trade debtors, accrued revenue or deferred revenue in the appropriate period.
We also examined the fluctuations of revenue against budget and prior year by corroborating variances to the
relevant evidence obtained through our other testing procedures. In addition, where appropriate we have
corroborated Management’s explanations for movements using our knowledge of developments in the
industry and business.
Post Office Management Services Limited (‘POMS’) is a full scope component and a fully owned subsidiary
and comprises £30m (3%) of the POL Group revenue. We performed similar audit procedures on the POMS
revenue to the procedures performed above for POL sample, which included 55 key items with a coverage of
99% of total POMS revenue. No issues were identified, The materiality used remained set at £323,000 and the
performance materiality at 50% of overall materiality (£161,500)
Based on the procedures performed, we conclude that revenue, accrued income and deferred income balances.
for the FY16 financial year are appropriately stated.
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant
Post Office is executing a Transformation across its network in order to modernise it as part of the overall
strategy to make the Post Office competitive for the future. This one-off programme 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.
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(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
in addition, the Department of Business, Innovation & Skills (‘BIS’) provides a government grant to POL to
subsidise network transformation expenditure, agents compensation and related capital expenditure. POL offsets
this government grant against the related expenses in the exceptionals section of their Income Statement, in line
with [AS 20 Government Grants.
Please refer to the table below for the details on exceptional items recorded for 2016 year:
3.1 Network Transformation (£75m) and Crown Transformation costs (23m)
The Network Transformation and Crown Transformation costs are attributable to the modemisation of Post
Office’s existing branches as part of the transformation programme.
The network transformation has reached approximately 75% of completion, tracking in line with budget
Management note that the costs of network and crown transformation are exceptional in nature given that a
branch modernisation programme of this scale has not been carried out before and it is not treated as business
as usual within the Post Office. We agree with Management's conclusion that this transformation is significant in
nature, and an one off event, subsidised by the government grant (also an exceptional item) and therefore is
appropriately presented on the face of the income staternent to allow a better understanding of financial
performance in the year.
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(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.1 Network Transformation (£75m) and Crown Transformation costs (23m) (cont'd)
Substantive audit procedures performed:
in additions to discussions held with Management as part of our audit procedures we have also had held
ssions with the Director of Nefwork (Sharon Bull} and other senior non finance members of the
organisation to improve our knowledge and understanding of developments that could impact the both the
Network and Crown transformation and understand how it is tracking fe plan. This has enabled us to
corroborate our testing results and Management explanations.
We selected a sample of 57 transactions giving us a coverage of 49% for Network Transformation cost in the
year and we tested ov: 0% of the Crown transformation costs. Our tests involved obtaining the details and
e of the costs = ihe overall strategy of the programme and we e
transaction to supporting documentation such as invoices and project approvals to validate that they
directly related to transformation costs and not related to routine expenses related to the normal course of the
business.
As a result of our audit procedures, we initially identified two judgemental adjustments relating to the
overstatement of accrual balances with Network Transformation Exceptional items, relating to Project
Enabling Works (£2.7m) and Operational Business Change (OBC) (£1.2m). We identified that the Project
Enabling Works accruals were older than 12 months, these costs relate to costs incurred by Postmasters that
to be reimbursed by POL. For the OBC accrual we hav ‘ified the costs relating to accruals older than.
nths, these accruals are for works that POL have placed with suppliers for equipment services, which we
Sm
would expect fo have been settled. These have both been adjusted by Management now.
Management's overall treatment is consistent with the approach followed in the prior year and the basis on which
the government grant, which partially funds the Post Office Transformation spend, was agreed.
3.2 Agents Compensation expense (£102m)
Postmasters compensation charge continues to be significant in the year. The postmasters continued to be
incentivised and compensated for ensuring their branches take part in the Network Transformation programme
We coordinated our testing approach with the audit procedures we performed to address identified significant risk
in relation to completeness of Postmasters’ compensation provision. Please refer to respective section on page
3.3 Redundancy costs (£29m)
Redundancy costs largely related to the Crown Transformation programme and the redundancy of staff as part of
cost saving initiatives and as such are treated as exceptional.
We reviewed the respective signed conditional resignation notices given to agents and vouched a sample of 17
items to termination payments to notices submitted and concluded the cost is appropriate. We have also obtained
the breakdown of the redundancy plans and checked corroborated the charge against Management's formal
plans.
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Significant accounting and auditing matiers
(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.4 Separation (211m)
Separation costs comprise of costs incurred to achieve separation from Royal Mail. in fine with prior year, POL has
continued to incur separation costs with respect to building internal functional capabilities and implementing new
commercial relationships. Since the separation Royal Mail Group ("RMG'), the Company has had a Master Services
Agreement(MSA) in place which relates to an agreement with RMG to provide IT support services to POL. post-
Separation. These costs are part of a defined programme and are designed to bring about significant changes to the
business. The MSA was supposed to end in September 2015.
However, due to delays in separating out some of the IT services, there was a need to extend this arrangement to
31 March 2016. POL have now formally separated all of the services and the Separation programme has been
formally closed down. POL have estimated internally that the maximum extension costs and penalty charges which
RMG could try to levy on them is approximately £3.0m plus irrecoverable VAT (c£0.3m). POL have accrued for
£2.5m of these costs (including irrecoverable VAT) in exceptional items as it arises as a result of the Separation
Programme, which has been consistently accounted for as exceptional. The costs are still under negotiation with
RMG to finalise a settlement. We proposed to increase the provision by £0.8m which has been recorded by
Management
We would not expect any further costs next year, however have confirmed costs are of the same nature as the prior
year
3.5 IT Transformation Costs (£30m)
The IT transformation was one of Post Office’s key programmes to deliver the commitments made in 2010 in the
Government Funding and Strategic Plan. During the year Management terminated an agreement with IBM who were
contracted to perform iT Transformation work in respect of Front Office software for the POL branches. The
agreement with [BM was terminated for commercial reasons and this work has been contracted to Fujitsu in the
year. Termination costs of £20.7m have been incurred and are included in the exceptional items in the year.
Management's view was that this cost arose as part of the Transformation programme and was fundamental in
achieving the objectives of the POL Transformation.
We selected a sample of 17 transactions giving us a coverage of 79% of IT Transformation cost. Our tests involved
obtaining the details and the nature of the costs incurred against the overall strategy of the programme and we
checked each transaction to supporting documentation such as contracts, invoices and project approvals to validate
that they are directly related to IT transformation costs and not related to routine expenses related to the normal
course of the business.
We have held various meetings across the business with the Heads of the Network and IT Transformation
programmes to corroborate our testing results.
Consistent with prior year, Management treats this specific transformation project as an exceptional cost given the
project results in a fundamental change to the entire Post Office [T model. In our view we would not generally expect
iT upgrades to be considered as exceptional items, however due to the unique IT environment POL finds itself in
post separation from Royal Mail and the IT infrastructure required to create an independent group, we can accept
these IT costs being treated as exceptional. Given the continuing rationale of impairing assets, these costs have
been impaired as an exceptional item. Management noted that the changes in the Network Transformation project
would not be achievable without the IT transformation project. Management continues fo be consistent in its
treatment of IT Transformation costs.
We have revisited the appropriateness of classifying such costs as exceptional and reviewed supporting documents
to satisfy ourselves that these costs link to one-off major IT project costs relating to transformation
We concurred with Management's treatment of these costs in FY16 as exceptional and we have challenged
Management to continue to assess these future costs on a specific basis to determine when they become business
as usual costs.
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3. Classification of exceptional items relating to Transformation and utilisation of
3.6 Business Transformation Programme (£9m)
The Business Transformation Programme is a wide reaching programme tasked with delivering £300m of cost
savings. As such, it is expected to radically transform the structure of the business. The Business Transformation
Programme 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
We checked the nature of the costs that make up the £9m to supporting invoices. We checked £6.2m which is
6.69% of the total vouched that this it consist of consultancy costs related to the Business Transformation
Programme cost saving initiative payable to consultants. We concur with Management's treatment of these costs in
FY16 as exceptional, but we have challenged Management to continue to assess these future costs on a specific
basis to determine when they become business as usual costs.
3.7 intangible and Fixed Asset Impairment
Post Office continue to adopt a policy of fully impairing all intangible and fixed asset and long leasehold additions
made during the year in which they are purchased, except for freehold land and buildings. Management's
justification for adopting this policy is due to the fact that Post Office has historically been, and continues to be a
loss making entity excluding the Network Subsidy Payment and Government grant it receives and in its current
form is not a viable commercial business (without the government support)
As an additional factor in the decision to impair, Post Office has been working on a major programme of network
change thal will cost approximately £500m. We observed the transformation spend and strategy is included within
the current State Aid funding package and investment of this scale will lead to significant cash outflows for the
immediate future. The resulting transformational change is specifically designed to impact the longer term
profitability of the organisation and accordingly Management believes that Post Office will continue fo be loss
making entity in the near to medium term.
We have challenged Management on the appropriateness of this policy. Management's view is that there is no
current evidence to support the profitability of the business without state aid. On the basis of our discussions with
Management we believe Management's approach is appropriate and prudent in 100% impairing all assets on
acquisition, reflecting value in use and cost
The fixed asset impairment charge for the year is £136m {PY £141m). The year on year increase in fixed asset
additions is mainly a consequence of network and crown transformation related capital expenditure to modernise
POL branches.
For the reasons noted above we continue to agree that Post Office’s accounting policy for impairment and
disclosure of the charge as an exceptional item is reasonable, and in line with IAS 36, impairment of Assets.
We discussed with Management the impact on the financial statements and forecasting as it becomes more likely
that Post Office will be cash generative without reliance on government grants. We recommend Management
should continue to review its impairment policy at each reporting period in relation to these assets, produce full
DCF impairment models and ensure the fixed asset registers are appropriately maintained.
We have received a full impairment considerations analysis for Goodwill related to Bank of Ireland insurance
business combinations and we are finalising our review. Based on our discussions with Management we
understood this Goodwill is covered by an individual Cash Generating Unit (CGU) for the insurance business
segment. Based on the preliminary analysis prepared by Management and reviewed by us there is no impairment
required. We will finalise our review once the full analysis is received. Please also refer to “Other areas of focus”
section of this report on page 23.
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(con d)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.7 Government grant - State Aid Funding
On 18 March 2015, POL received confirmation that its application for State Aid funding for 2015/16 to 2017/18
had been approved. This approval entitles POL to receive the following funding from the Department of Business,
innovation & Skills (‘BIS’) by way of grants: FY2015/16 - £280m, FY2016/17 - £220m, FY2017/18 - £140m.
Of the amounts above, £130m (2015/16), £80m (2016/17), and £70m (2017/18) were agreed to be made by way
of a network subsidy payment, which has been regularly paid by the government to POL over the last few years,
enabling the company fo keep branches open that would otherwise not be viable. We have confirmed receipt of
the government grant and reviewed updates to the terms and conditions of the funding agreement, no issues
identified. POL received the full funds for FY2015/16 grant allocation from BIS in April 2015; £130m by way of a
draw down of the network subsidy and an additional £150m to fund capital projects and transformation costs. We
have confirmed receipt of the government grant and have confirmed that there have not been any updates to the
terms and conditions of the funding agreement. The full £150m which is classified as exceptional has been
utilised in the year to date against capital spend, network transformation and {T transformation costs and
subpostmasters compensation.
Based on our procedures performed, we conclude that the government grant has been appropriately recognised
in the income statement in accordance with the contract from BIS.
4. Risk of management override around estimates and judgements
During the normal course of an audit, we are required fo perform procedures to address risks that could result in
material misstatement due to fraud and error including the risk of management override of controls. There are
both specific and tailored procedures performed to ensure that sufficient consideration is given to these risks.
The risk of fraud and management override exists in all businesses and is heightened where the economic
environment is challenging and where there is significant change being implemented across a business
potentially giving rise to the opportunity, pressure or incentive to perpetrate a fraud. Areas of focus from an audit
perspective to address the risk of management override include
» Revenue recognition
» Estimates and judgements, and
» Unusual transactions
The table below highlights the specific areas which we believe are more susceptible to the risk of management
override or bias for Post Office and the procedures we have performed to address the risk.
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Significant accounting and auditing matiers
(con d)
4. Risk of management override around estimates and judgements (cont'd)
Revenue recognition ~ Our focus was on cut off via manipulation of -—_—_—Refer to page 15 for details.
revenue recorded close to yea rend
Impairment of goodwill ~ There is subjectivity relating to the Refer to page 19 for details.
assumptions used to value acquired intangible assets.
Valuation of provisions ~ There is subjectivity in management's Refer to page 13 for details.
determination of their best estimate of amounts provided.
Journal entries ~ By their nature, there is the potential for the risk of We have performed journal entry testing at the group
management override of the financial statements through processing of _ level and at component level focussing on:
journal entries. » Entries made near to the year end;
> Post —ciosing adjustments;
» Entries made in relation to transactions outside the
normal course of business;
> Analysis of journal entries by user profile and the
posting day of the week;
> Entries relating to our fraud risk around revenue
recognition (Refer to page 15).
Entity level controls ~ There is a tisk that controls operating at the We performed various procedures to assess the ‘tone
centre ate not implemented consistently across the group. from the top’ and the design and implementation of
key entity level controls and assessed the overall
control environment to be effective.
During the course of our audit, we found no evidence of material, or potentially material fraud or error in the
financial statements.
We have not been made aware of any further material instances of known fraud within the group in addition to.
those previously reported.
In addition, for provisions we have challenged senior management to understand the material movements in
provisions in the year. We considered the aspects and attributes of each provision individually, assessing
whether its accounting treatment meet the requirements of [AS 37. Material movements within provisions related
mainly to utilisation and charge of severance and agents’ compensation provisions.
We have vouched a sample of provision charges to supporting documents such as formal redundancy and
severance plans for severance provision increases and signed voluntary and/or compulsory redundancy
notifications for increases in agent's compensation provision in the year. This enabled us to check the validity of
charges to provisions in the year. Where provisions have been ulilised in the year we have vouched a sample to
evidence of payment
We concluded that each individual provision meets the criteria of provisions as per the requirements of [AS 37 —
Provisions, and have therefore been appropriately provided for at the end of the year.
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Significant accounting and auditing matters
(contd)
Other areas of audit focus
in addition to the significant risk areas highlighted in the previous section, there were a number of other accounting
and auditing matters which have arisen during the year. Details of each are provided below:
Horizon Subpostmaster claim
As part of our discussion with Group Chief Financial Officer and Group Legal Counsel we understand that Post
Office Limited have received a formal Letter of Claim from Freeths Solicitors on behalf of 91 applicants on 28 April
2016, We have received the copy of this letter. it contains the number of allegation made to Post Office. We
understood that there is no quantification of the claim for damages at this point of time. At the date of this report
Management is in process of reviewing this letter and will be preparing the necessary response and will be
preparing the litigation strategy. There is no provision recognised as at 27 March 2016 for this claim. The financial
statements now include a generic contingent liability note regarding receipt of such claims, stating no material
impact is expected. We will update our assessment as part of subsequent events review procedures performed up
to our sign-off date.
Pensions valuation and accounting
Pensions accounting can be a highly subjective area given the impact that relatively minor changes in assumptions
can have on the valuation of the defined benefit liability. Based on current calculations, Post Office has a net surplus
at the year end of £196m (2015: £205m) as follows:
oo Le vo RMPP == RMSEPP- ss RMPP=sRMSEPP
Fair value of pension plan assets 407 30 379 3
“Pension liabilities mea eer eo ee
‘Surplus in plan before assets ceiling adjusimont 223 3 229 5
“Effectofassetsceling ao Wo tan oe
‘Surplus in plan after assets ceiling adjustment 194 2 202 3
We have confirmed that the approach and methodology applied by Management are consistent with previous
reporting periods. We have reviewed and challenged Management's calculations, specifically with respect to the
pension assumptions. The key assumptions are noted in the table below along with our assessment of where these
assumptions are within our acceptable range of outcomes.
Financial assumptions [Prudent Central Optimistic I
Discount rate
Price inflation (RPI)
Price inflation (CFI}
payt (above inf) Cp
Pens incs def (above CPI)”
Demographic Prudent Central Optimistic
Males
Mortality in
retirement
Females
Ratrement age
Commutation”
Consistent with prior years, we used an EY actuarial specialist to evaluate these assumptions and we consider them
to be within an acceptable range, albeit the inflation assumption continues to be at the upper end of the acceptable
range
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VAT Considerations
The business has been fairly stable over the past year in terms of service offerings and the market. In light of this,
the VAT processes and systems have not had any major changes in the year.
The work carried our by our VAT specialists included;
Review of POL process notes for Accounts Payable and Accounts Receivable and VAT return compilation
Review of the quarterly VAT records throughout the year, including the January - March 2016 VAT submission
and the reconciled the draft (unsubmitted) VAT figures to the year end VAT ledger balance
Understand and review of any changes to the VAT group during FY16.
Check of any VAT assessments and disclosures to HMRC, along with confirmation that there are no
outstanding issues.
Enquiring about any complex, unusual or significant transactions that have ocourred during FY16
The above work was carried out by reviewing the relevant documentation, taking part in detailed discussions with
Carl Nielsen (Head of VAT) and ian Lakin (Tax Compliance Manager), and walking through the AP/AR processes
with the relevant POL finance staff.
We have also reviewed correspondence with HMRC on other complex, unusual, or significant transactions or
issues with VAT, and note that there are no outstanding queries with HMRC or other VAT provisions.
Management has also confirmed that there are no further unusual transactions or VAT planning arrangements
apart from those disclosed to us
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Significant accounting and auditing matiers
(con d)
VAT Considerations (cont'd)
Based on the work performed, including by our VAT experts, no errors were identified on the returns in respect of
POL’s inputs and outputs compared to the overall turnover and expenses figures. The partial exemption recovery
method agreed with HMRC in July 2014 has not been amended in FY16. The method allows for direct attribution
of fully taxable supplies followed by an allocation of the residual input VAT based on the value of POL’s supplies
in relation to ‘mail’ and ‘non-mail’ services for that period. The provisional rate of residual input VAT recovery for
FY16 has been set at 55%. This rate has been hardcoded into the POL’s iT platform (CFS) during the year as
recommended by us in the prior year. Based on the work performed we consider the current VAT processes to be
robust and responsive to changes in the legislation and HMRC’s approach
We would advise Management to continue to assess the VAT recovery rate on a regular basis to ensure VAT is
appropriately monitored and recorded through out the year.
As a result of our work, we believe that the financial statements are free from material misstatement in this area.
Corporation Tax Considerations
Current tax
POL outsource the preparation of their tax computations to Wilkins Kennedy. We have audited the tax charge,
involving experts from our EY tax team where appropriate.
Our testing focused on the following key areas:
»8s)/Profit before. 7 ; (169) Sue aery sea
(26)
“ceness
and correct classifications in accordance with !AS 12 is still in progress
Deferred tax assets and liabilities
At 27 March 2016, the Group has a net deferred tax balance of £nil on the balance sheet (2015: £nil). A deferred
tax liability of £5m in respect of the movement in the pension surplus has been recorded through OCI. This is
offset by the recognition of an equal deferred tax asset in respect of tax losses carried forward at 29 March 2015
which has been recorded in the income statement.
The deferred tax liability referred to above relates to the pension surplus of £226m (before withholding tax)
recognised for accounting purposes. We understand that it is Management's expectation that £139m of the
pension surplus will be recovered solely through a reduction in future pension contributions over the life of the
scheme as advised by actuaries. The reduction in future pension contributions will increase the future current tax
liabilities of Post Office and, therefore, a taxable temporary difference arises in respect of which a deferred tax
liability is recognised. it is Management's intention that the remaining element of the surplus of £87m will be
recovered through refunds from the scheme. Accordingly, the surplus has been shown on the face of the balance
sheet net of a 35% withholding tax of £30m. We agree this treatment is appropriate and in line with EY’s
interpretation of IFRIC 14. Consistent with prior years, no deferred tax assets have been recognised in respect of
losses and other temporary differences for the year ended 27 March 2016 (other than to match the deferred tax
liability arising on the pension surplus), due to uncertainty around the availability of future taxable profits.
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Significant accounting and auditing matiers
(con d)
Supply Chain Restructuring (Project Iris)
We discussed with the Supply Chain Director and Network & Sales Finance Director the timing of Supply Chain
Restructuring project. Post Office Limited Management has prepared a detailed restructuring plan and
consultation which is to be approved by 19 May 2017. We reviewed Project Iris timetable and conducted a Board
of Directors minutes review. Based on our audit procedures performed we are satisfied with Management
conclusion that there was no restructuring provision obligation as at 27 March 2016 as no formal decision was
made pre 27 March 2016 therefore POL was not demonstrably committed to the restructure at year end.
Going concern considerations
POL continues to operate in a net fiability position and continues to experience net cash outflows (excluding
government State Aid funding). POL therefore continues to be reliant on State Aid to remain a going concern
State Aid approval for the funding for 2015-16 to 2017-18 was received on 19 March 2015 as detailed above. in
addition to State Aid approval POL has an existing working capital facility with BIS with a limit of £950 million from
31 March 2015 up to 31 March 2018.This working capital facility is used to finance network cash requirements.
Management's cash flow forecast up to 2020-21 indicates that POL will continue to see cash outflows until
2016/17, even including State Aid. We have received Management's year end going concern assessment. At the
date of this report we are yet fo finalise our review. The draft financial statements include a going concern note
covering the above
is Report 2
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amounis we believe should be recorded in
fe as ‘known’ or igem Known differences represent lems thai be
and relate to a definite set of facts or circumstances. Judgemental differences genera
fate fo facts of eltcumstances thal ate uneertain or open to interpret
courately quanti
involve estimation and
We have ideniified five judgmental audit differences, including Network transformation Project Enabling accrual
older than 12 months and Operation Busir Age over nonths, understatement of Postrnasters
ion Provision, understater is and impairment for
are intangible assets of POMS. All
also identified one
contract costs from accrued
audit di
abilities to provisions which has been corrected by Management
Assets Assets non- Liabilities incomes
Misstatements (¢m) eurrent current current expenses,
Debit’ Debit! Debit! Debit/(Credit)
Judgemental (Credit) (Credit) (Credit) Current period
Corrected misstatements:
‘Network Transformation OBC Acciual- This is a release 72 ay
‘of an accrual where projects have no dates or are over 6
months old. These are for vendor costs where itis
generally expected that the costs should be paid within
2 months.
Network Transformation Project Enabling Works Accrual By @?)
- This relates to an accrual for agents claiming back for
‘work carried out in order to convert branches. This is the
release of any costs greater 12 months old as it would
be expected that these costs are claimed back within
this time frame.
Understatement of Postmasiers Compensation i) To
Provision for ali branches that are currently being
‘engaged (56 branches at an average amount of
£17,396).
Understatement of pravision for the costs related to Cay O8
Royal Mail Separation contract (maximum exposure of
£3.3m) and reclassification from accruals to provisions
tine,
@) 2
Impairment of POMS assets within POL Group accounts
Reclassification audit differenc
Transfer of £2.5m from accruals to provisions for the 25
costs related to Royat Mail Separation contract and o
reclassification from accruals to provisions line. @5)
- @ 2A war
Balance sheet totals
ion: Subject to our ouistanding ders, there are no amounts that we identified that are individually or in
feral fo the ¢ tation and disclosures of Ihe consolidated financial y the year
stalements i
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Control themes & observations
As part of our audit of the financial statements, we obtain an understanding of the internal control and IT
environment sufficient to plan our audit and determine the nature, timing and extent of testing performed.
Although our audit was 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 can confirm that on the basis of our audit work performed, we did not identify any significant deficiencies in
internal controls. However we have identified certain control deficiencies below from this year’s audit cycle. We
anticipate providing a detailed Management Letter incorporating certain recommendations for process
improvements noted by us in the performance of our procedures.
The following is a summary of our considerations:
1. Financial statements implications:
Revenue
We recommend Management maintains robust and detailed analytical review of revenue fluctuations and
deviations during the year in comparison with historical data and industry data on a individual revenue lines
basis. We expect this to cover the precision level and expectations developed by Management. We
understood Management is working on formalising this analysis.
Exceptional items
As part of our audit procedures we noted that the company maintains large volume of information related to
exceptional items in Excel spreadsheets. This may result in manual errors and completeness issues as a
result of various sources of information used. We recommend the Company to develop a uniformed database
and standardised procedures for exceptional items recordkeeping.
2. Observations on the IT Environment
The following IT applications are in scope for our audit’ HNGX, POLSAP, SAP CFS and SAP HRP.
HNGX and POLSAP are supported by third party service providers Fujitsu and Steria. Our audit approach was
to rely on the ISAE 3402 report commissioned by Fujitsu over the controls it operates, and independently test
controls operated by Atos, Steria and POL.
HRP has previously been tested as part of the Royal Mail (RM) audit. With the separation of the RM and POL IT
environments, this year, HRP was tested as part of the POL audit procedures. Due to the separation of IT
infrastructure supporting POL and RM applications, the ISAE 3402 report provided by CSC did not cover the SAP
HRP application. As we were unable to rely on this report for the 2016 audit, we have independently tested the
controls operated by CSC, Steria and POL for this application
CFS is supported by CGI and Steria. As no ISAE 3402 reports were available, we performed independent testing
of controls operated by CGI, Steria and POL.
In respect of Fujitsu-operated controls, no significant findings were noted in the ISAE 3402 report, and we
have therefore been able to rely upon it as part of our audit approach.
Our testing of the Post Office operated controls confirmed that some of the control observations raised last
year have been remediated and/or the risk formally accepted by Management, whilst some of the
observations have recurred.
Although we noted that a periodic review of users’ access rights were implemented in the year for POLSAP
covering Supply Chain (SC) and Financial Service Centre (FSC) POLSAP users, the SC review which was
initiated in September was incompiete as not all line manager responses had been received. Additionally, we
noted that the periodic review had been initiated for CFS users only in January 2016, however such review
was also not completed. We recommend Management should ensure that the access for all application users
is periodically reviewed and evidence retained.
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Control themes & observations (contd)
Observations on the IT Environment (cont’d)
As a result of the incomplete periodic review of users’ access rights, we performed alternative procedures to
validate that access held by users at the time of our testing was appropriate. Although these additional
procedures are currently incomplete, we have observed exceptions that prevent us from being able to fully
rely on the controls around appropriateness of access for the CFS and POLSAP applications. These
exceptions are currently being validated and discussions being heid to determine the effect on the overall
audit approach,
We also observed during our employee leavers testing, that there were a number of active POLSAP, CFS
and SAP HRP accounts belonging to leavers that were not removed in a timely manner. We were however
able to perform additional procedures to validate that these accounts had not been used after the leaving date
and therefore concluded the control deficiency have not significantly impacted our audit of the financial
statements. Management should revoke the access of terminated employees immediately and perform
investigations to identify the root cause of leavers retaining their access.
During our change Management procedures on the CFS and HRP applications, we observed that a number of
changes had been developed and implemented by the same user which violated the principle of segregating
incompatible duties within the change Management process. We are in the process of performing additional
procedures to mitigate the risk of inappropriate changes being implemented into the live environment.
Management should work with the third parties (CGI and CSC) in implementing a control fo segregate
incompatible duties when developing and implementing system changes.
Post Gifioe Landes 23
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We confirm there are no changes in our assessment of independence since our previous confirmation in our
planning board report. We complied with the APB Ethical Standards and in our professional judgement the firm is
independent and the objectivity of the audit engagement partner and audit staff has not been compromised within
the meaning of regulatory and professional requirements.
We consider that our independence in this context is a maiter that should be reviewed by both you and ourselves
it is therefore important that you and your Audit Committee consider the facts of which you are aware and come
to a view. If you wish to discuss any matters concerning our independence, we will be pleased to do so at the
forthcoming meeting of the Audit Committee on 19 May 2016.
Relationships, services and related safeguards
We highlight the following significant facts and matters that may be reasonably considered to bear upon our
objectivity and independence, including the principal threats, if any. We have adopted the safeguards noted below to
mitigate these threats along with the reasons why they are considered to be effective.
Service 4: Fujitsu ISAE 3402 report ~ Performed on continued annual basis Not a prohibited service
ISAE3402 report for the Fujitsu services > Aseparate team from the POL IT team has
supporting the POL aecourt This {gpor wil been engaged for the review of the ISAE3402
provide an assesament of the Figs controls report, and standard ring feneing applied
between two teams.
supporting POL business critical systems. We
have placed reliance on the ISAE3402 as part
of the 2015-156financial statement audit. > Went through review exercise to ensure in line
with EY independence rules
Service 2: ISAE 3000 report on POL Note Performed on continued annual basis» Not a prohibited service
Circulation Scheme related services to the The tandard -upon-procedur
Bank of England for the FY2015-16 period , Where Management instructs us on evactly
\d to be performed in May 2016.
angio pe perrormeg in May the procedures to be performed and we
conclude by issuing a factual findings report
only.
Service 3: Agreed-upon procedures Performed on continued annual basis ~~» Not a prohibited service
performed which relate to testing of
eevonaats lating ta the ean fern the > These are standard agreed-upon-procedures,
Department of Business, Innovation and where Management instructs us on exactly
Skils (1S). the procedures to be performed and we
conclude by issuing a factual findings report
only.
Service 4: Agreed-upon procedures Performed on continued annual basis ~~» Not a prohibited service
performed to ensure that the amount which
is collected by Post Office Limited on behalf > These are standard agres-upon procedures,
Of the DVLA for road tax is subsequently where Management instructs us on exactly
paid over fo the DVLA. the procedures to be performed and we
conclude by issuing a factual findings report
only.
Service 4: Agreed-upon procedures Performed on continued annual basis» Nota prohibited service
performed to ensure that the amount which
eallected by Peat Office Liniiee on behalt » These are standard agreed-upon-procedures,
Of the DVLA for road tax is subsequently where Management instructs us on exactly
paid over to the DVLA, the procedures to be performed and we
conclude by issuing a factual findings report
only.
Overall, we consider that the safeguards that have been adopted appropriately mitigate the principal threats
identified and we therefore confirm that EY is independent and the objectivity and independence of the audit
engagement partner and the audit engagement team have not been compromised
i
Appendix A Independence update (contd)
Fees update
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As part of our reporting on our independence, we set out below a summary of fees for the year ended 27 March
2016.
- DVLA Agreed Upon Procedures Report
Total* 489,000
*Excludes out of pocket expenses incurred
We confirm that none of the services have been provided on a contingent fee basis.
Ernst & Young LLP 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. See below for a
summary of our firm wide policies.
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Supplementary Docu
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Appendix Independence report (contd)
Firm-wide policies
Ernst & Young LLP 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 Ernst & Young LLP for maintaining objectivity and independence.
Further details of the key policies and processes in place within EY for maintaining objectivity and independence
can be found in our annual Ernst & Young LLP Transparency Report which the Firm is required to publish by law.
BY.
The most recent version of this Report i is for the 2015 year and can be found at hiip “www ey oc
{
Financial interests
Trai
Partner rotation
Consultation
Independent partner
reviews
Quality reviews
Business relationships
Ethics
Non-audit services
528 of 5!
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.
All partners and professional staff are required to undergo regular mandatory trai
Ethical policies and processes.
\g on our Independence and
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’.
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.
Before listed company audit opinions are issued, an audit partner independent of the audit team reviews the
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.
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 identity
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 evaluates the system of quality control
operated by the firm for its audit practice.
EY UK 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.
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.
Ernst & Young LLP has also established the EY/Ethies 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.
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.
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Appendix B
Management representation letter for statutory
reporting
June 2016
Erst & Young
1 More London Place
London SE1 2AF
Atin: Peter Melver, Audit Partner
Post Office Limited ~ Financial Statements for the 52 week period ended 27 March 2016
Dear Sirs,
This letter of representations is provided in connection with your audit of the consolidated and parent company
financial statements of Post Office Limited (“the Group and Company’) for the 52 week period ended 27 March
2016. We recognise that obtaining representations from us concerning the information contained in this letter is a
significant procedure in enabling you to form an opinion as to whether the consolidated and parent company
financial statements give a true and fair view of (or ‘present fairly, in all material respects,’} the Group and
Company financial position of Post Office Limited as of 27 March 2016 and of its financial performance and its
cash flows for the 52 week period then ended in accordance with, for the Group, international Financial Reporting
Standards as adopted by EU ("IFRS"), and for the Company , FRS101.
We understand that the purpose of your audit of our consolidated and parent company financial statements is to
express an opinion thereon and that your audit was conducted in accordance with International Standards on
Auditing, which involves an examination of the accounting system, internal control and related data to the extent
you considered necessary in the circumstances, and is not designed to identify - nor necessarily be expected to
disclose - all fraud, shortages, errors and other irregularities, should any exist.
Accordingly, we make the following representations, which are true to the best of our knowledge and belief,
having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves:
A. Financial Statements and Financial Records.
1. We have fulfilled our responsibilities, as set out in the terms of the audit engagement letter dated 22 January
2016, for the preparation of the financial statements in accordance with, for the Group IFRS, and for the
Company FRS 101
2. We acknowledge, as members of management of the Group and Company, our responsibility for the fair
presentation of the consolidated and parent company financial statements. We believe the consolidated and
parent company financial statements referred to above give a true and fair view of the financial position,
financial performance and cash flows of the Group in accordance with IFRS and for the Company in
accordance with FRS 101, and are free of material misstatements, including omissions. We have approved
the consolidated and parent company financial statements.
3. The significant accounting policies adopted in the preparation of the Group and Company financial
statements are appropriately described in the Group and Company financial statements.
4. As members of management of the Group and Company, we believe that the Group and Company have a
system of internal controis adequate to enable the preparation of accurate financial statements in accordance
with IFRS for the Group and FRS 101 for the Company that are free from material misstatement, whether
due to fraud or error.
5. We believe that the effects of any unadjusted audit 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 consolidated and parent company financial statements taken as a
whole.
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Appendix B
Management representation letter for statutory
reporting (continued)
B. Fraud
14. We acknowledge that we are responsible for the design, implementation and maintenance of internal controls
to prevent and detect fraud
2. We have disclosed to you the results of our assessment of the risk that the Group and Company financial
statements may be materially misstated as a result of fraud
3. We have no knowledge of any fraud or suspected fraud involving management or other employees who
have a significant role in the Group or Company's internal controls over financial reporting. In addition, we
have no knowledge of any fraud or suspected fraud involving other employees in which the fraud could have
a material effect on the consolidated or parent company financial statements. We have no knowledge of any
allegations of financial improprieties, including fraud or suspected fraud, (regardless of the source or form
and including without limitation, any allegations by “whistleblowers") which could result in a misstatement of
the consolidated or parent company financial statements or otherwise affect the financial reporting of the
Group or Company.
¢. Compliance with Laws and Regulations
1. We have disclosed to you all identified or suspected non-compliance with laws and regulations whose effects
should be considered when preparing the consolidated and parent company financial statements.
D. Information Provided and Completeness of information and Transactions
1. We have provided you with:
* Access to all information of which we are aware that is relevant to the preparation of the financial statements
such as records, documentation and other matters;
+ Additional information that you have requested from us for the purpose of the audit; and
+ Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit
evidence.
2. All material transactions have been recorded in the accounting records and are reflected in the consolidated
and parent company financial statements.
3. We have made available to you all minutes of the meetings of shareholders, directors and committees of
directors (or summaries of actions of recent meetings for which minutes have not yet been prepared) held
through the 52 weeks ended 27 March 2016 to the most recent meeting on the following date: list date].
4. We confirm the completeness of information provided regarding the identification of related parties. We have
disclosed to you the identity of the Group and Company's related parties and ail related party relationships
and transactions of which we are aware, including sales, purchases, loans, transfers of assets, liabilities and
services, leasing arrangements, guarantees, non-monetary transactions and transactions for no
consideration for the period ended, as well as related balances due to or from such parties at the 27 March
2016. These transactions have been appropriately accounted for and disclosed in the consolidated and
parent company financial statements
5. We believe that the significant assumptions we used in making accounting estimates, including those
measured at fair value, are reasonable.
6. We have disclosed to you, and the Group and Company has complied with, all aspects of contractual
agreements that could have a material effect on the consolidated and parent company financial statements in
the event of non-compliance, including all covenants, conditions or other requirements of all outstanding debt.
7. In accordance with FRS 101 paragraph 5, we have notified our shareholders in writing, in accordance with
reasonable timeframes and format requirements, of our intention to take advantage of disclosure exemptions
in paragraph 8 of FRS 101 {in accordance with paragraphs 6 to 7 of FRS 101) in the company individual
financial statements.
is Report 8
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Appendix B
Management representation letter for statutory
reporting (continued)
E. Liabilities and Contingencies
1. All liabilities and contingencies, including those associated with guarantees, whether written or oral, have
been disclosed to you and are appropriately reflected in the consolidated and parent company financial
statemenis.
2. We have informed you of all outstanding and possible litigation and claims, whether or not they have been
discussed with legal counsel
3, We have recorded and/or disclosed, as appropriate, all liabilities related litigation and claims, both actual and
contingent, and have disciosed in Note 20 to the consolidated and parent company financial statements all
guarantees that we have given to third parties.
4. We confirm that we have disclosed all relevant information relating to the ongoing challenges and actions in
relation to the Horizon Subpostmasters claim to allow an assessment of the financial implications. in addition
we have discussed with you any additional information that has come to light subsequent to 29 March 2015.
The judgments that we have made reflect the most current advice received from external legal counsel
F, Subsequent Events
1. Other than the receipt of funding for the financial year 2016/17 described in Note 25 to the consolidated and
parent company financial statements, there have been no events subsequent to period end which require
adjustment of or disclosure in the consolidated and parent company financial statements or notes thereto.
H. Comparative information ~ comparative financial statements
in connection with your audit of the comparative consolidated and parent company financial statements for the
year ended 29 March 2015, we represent, to the best of our knowledge and belief, the following:
in preparing the financial statements for the current year, the comparative figures for the year ended 29 March
2015 have been restated. The provision for postmasters’ compensation, included in network transformation had
not been fully recognised in the financial statements for the year ended 29 March 2015. The restatement affects
exceptional costs, provisions and retained earnings due to the loss in the year changing as a result of a
restatement to the exceptional charge. Within this report, the comparalive income statement, statement of
comprehensive income, balance sheet and statement of changes in equity for the year ended 29 March 2015
have been restated. There has been no effect on the cash flow statement.
The comparative amounts have been correctly restated to reflect the above matter and appropriate note
disclosure of this restatement has also been included in the current year's consolidated and parent company
financial statements. There have been no significant errors or misstatements, or changes in accounting policies,
other that the matters described above, that would require a restatement of the comparative amounts in the
current year’s consolidated and parent company financial statements.
Other differences in the amounts shown as comparative amounts from the amounts in the consolidated and
parent company financial statements for the year ended 29 March 2015 are solely the result of reclassifications
for comparative purposes.
1. Going Concern
1. Note 1 to the consolidated and parent company financial statements discloses all of the matters of which we
are aware that are relevant to the Group and Company's ability to continue as a going concern, including
significant conditions and events, our plans for future action, and the feasibility of those plans.
J. Equity
1. We have properly recorded or disclosed in the consolidated and parent company financial statements the
share/capital stock repurchase options and agreements, and shares/capital stock reserved for options,
warrants, conversions and other requirements.
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Appendix B
Management representation letter for statutory
reporting (continued)
K, Contingent Liabilities
1. We are unaware of any violations or possible violations of laws or regulations the effects of which should be
considered for disclosure in the Group and Company financial statements or as the basis of recording a
contingent loss (other than those disclosed or accrued in the Group and Company financial statements).
2. We are unaware of any known or probable instances of non-compliance with the requirements of regulatory
or governmental authorities, including their financial reporting requirements, and there have been no
communications from regulatory agencies or government representatives concerning investigations or
allegations of non-compliance.
L. Income and Indirect Taxes
14. We acknowledge our responsibility for the tax accounting methods adopted by the Group and Company,
which have been consistently applied in the current period, and for the current year income tax provision
calculation (and Value added Tax)
2. We also acknowledge our responsibility for the plans with respect to future taxable income, which represent
our estimates as to the outcome of those plans, based on available evidence, and for the significant
assumptions used in our analysis. We would implement such strategies as necessary to prevent a tax
operating loss or credit carryforward from expiring.
3. We have disclosed to you all tax opinions, correspondence with tax authorities, or other appropriate
information that served as support for the accounting for potentially material matters.
M. Use of the Work of a Specialist
1. We agree with the findings of the specialists that we engaged to evaluate the corporate taxation and pension
valuations and have adequately considered the qualifications of the specialists in determining the amounts
and disclosures included in the consolidated and parent company financial statements and the underlying
accounting records. We did not give or cause any instructions to be given to the specialists with respect to
the values or amounts derived in an attempt to bias their work, and we are not otherwise aware of any
matters that have had an effect on the independence or objectivity of the specialists.
N, Estimates
- Completeness of Postmasters compensation provision;
- Classification of exceptional items relating to Transformation and utilisation of Government Grant
impairment of fixed assets and intangible assets, including goodwill
~ Pension valuation
1. We believe that the measurement processes, including related assumptions and models, used to determine
the accounting estimates have been consistently applied and are appropriate in the context of IFRS for the
Group and FRS101 for the Company.
2. We confirm that the significant assumptions used in making the above estimates appropriately reflect our
intent and ability to carry out the specific courses of action in relation to those entities on behaif of the entity.
3. We confirm that the disclosures made in the consolidated and parent company financial statements with
respect to the accounting estimate(s) are complete and made in accordance with IFRS for the Group and
FRS101 for the Company.
4. We confirm that no adjustments are required to the accounting estimates and disclosures in the consolidated
and parent company financial statements due to subsequent events.
O, Retirement benefits
1. On the basis of the process established by us and having made appropriate enquiries, we are satisfied that
the actuarial assumptions underlying the scheme liabilities are consistent with our knowledge of the business.
All significant retirement benefits and all settlements and curtailments have been identified and properly
accounted for.
is Report 38
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Appendix B
Management representation letter for statutory
reporting (continued)
P. Completeness of Postmasters Compensation Provision
14. We have provided to you with access fo all information and additional information you have requested in
relation to Postmasters Compensation Provision and access to persons within the Company involved in
Postmasters Compensation Provision calculation and analysis from whom you determined it necessary to
obtain audit evidence.
2. We have not provided you with signed contracts for 140 Pilot branches as these are not retained by us. Prior
to the launch of the Network Transformation Programme, the concept was tested through a series of Pilot
branches and funded by a separate initial budget and therefore does not need to be provided for within the
Network Transformation provision at 27 March 2016.
3. We believe the £21m release of Postmasters Compensation Provision is the best estimate based on the
most recent assessment of the branches fail to convert
Q. Impairment of fixed assets and intangible assets
1. We confirm we assessed the indicators of impairment for fixed assets and intangible assets as at 27 March
2016. We believe the assumptions used in determining the carrying value of the goodwill recorded on a group
level are appropriate and not impairment is required as at 27 March 2016.
Yours faithfully,
Chief Executive Officer
Chief Financial Officer
is Report 28
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Appencix C
Required communications with the Audit
and Risk Comimiltee
There are certain communications that we must provide to the Audit and Risk Committees. We have detailed
these here together with a reference of where and when they were covered:
—
Communicate one tire!
obec
eo
a lon
534 of SS7
Overview of planned scope and timing of the audit
Refer to our 2016 Audit Planning Report
Major issues discussed with management in connection with v Refer to our 2016 Audit Planning Report
initial or recurring retention
Other information in documents containing audited financial Discussed within this report.
statements
‘Significant audit adjustments Discussed within this report.
Unrecorded misstatements considered by management to be Discussed within this report.
immaterial
Expected modifications to the audit report Not applicable, we do not anticipate any
modifications to our audit report.
Our judgements/views about qualitative aspects of the Discussed within this report.
Company's accounting practices and financial reporting
Disagreements with management v Not applicable, no such instance noted
during our audit.
Consultations with other accountants v Not applicable, no such instance noted
during our audit.
Serious difficulties encountered in dealing with management v Not applicable, no such instance noted
when performing the audit during our audit.
The adoption of, or a change in, an accounting policy v Not applicable, no such instance noted
during our audit
t Of
ts Report
1G Board-24/05/16
Appencix C
Required communications with the Audit
and Risk Commitiee (contd)
‘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
> Anoverview of the type of work to be performed on the
financial information of the components
>» Anoverview 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.
—
er eee
—
Ce icce
—
annual
POL00030888
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Planredinctvsl ining of commoneation
jo the Avail ond Risk Commitee
Discussed within this report.
Not applicable - no such events and
conditions to communicate to the
committee.
Discussed within this report.
Discussed within this report.
No such instances of fraud to
communicate.
Not applicable - no such matters to
communicate to the committee.
No such instances to communicate.
We have attached a draft management
letter of representation in an appendix to
this 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.
Discussed within this report.
No such instances of fraud to
communicate.
st Office Board-24/05/18
536 of S57
Appencix C
Required communications with the Audit
(contd)
and Risk Committee
Audit and Risk Committee pre-approval of services, including
pre-approval of internal control-related services and
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
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fee
Discussed within this report.
Discussed within this report.
Discussed within this report.
Discussed in our Audit Planning report
dated and in this report
Discussed within this report.
Discussed within this report.
Discussed within this report.
1G Board-24/05/16
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entary Doc
1 & Young LLP
Assurance I Tax I Transactions I Advisory
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POST OFFICE PAGE 1 OF 6
POST OFFICE BOARD DECISION PAPER
Crown Network Strategy Update
Author: Julie Thomas — Sponsor: Kevin Gilliland Meeting date: 24 May 16
Executive Summary
Context
In July 2015, the Post Office (POL) Board approved the current strategy for the Crown
network, covering the period 2015-18. This was established with the aim of moving the
Crowns through the breakeven point during FY15/16 and on to sustainable profitability
thereafter. The first year of this strategy has exceeded expectations (with Crowns out-
turning FY15/16 at a £2.7m profit), and the programme team has also gained new
insights which can be used to enhance the strategy. Concurrently the pace of
simplification, cost reduction and profitability improvement sought across the wider
business has accelerated. Furthermore, our wider Network strategy is being refreshed in
advance of the June 2016 Board, together with important aspects of the business’ longer-
term commercial strategy. In this context, opportunities are now being explored to further
enable profitability improvements via changes to Crowns.
Questions addressed in this report
1. Is the 2015 strategy for the Crown Network still a “no regret” approach?
2. What are the opportunities and challenges associated with substantially fewer Crowns?
3. What are the key questions for our long-term Crown strategy?
Conclusion
1. The fundamental themes of the current 2015-18 Crowns strategy are “no regret” and
are being successfully delivered.
2. The Crown Network is now profitable and 100 of our 314 Crowns are classified as
strategically-important, flagship, branches. However the majority of Crowns are still
run under commercially sub-optimal, or loss-making, models. Our target is to make all
branches in the Network cash-generative and the Crowns are no exception. Whilst
direct ownership provides stability and strong brand prominence in our most important
locations, it also consumes significant management time and drives in central costs.
Transition away from Crowns is politically and operationally challenging, and a simple
proposition of like-for-like franchising will not enable us to fully optimise the
profitability of the Crowns. High levels of investment are required for any fundamental
change above that already approved (£100-£150m additional spend) but this must be
balanced with the opportunity cost of sub-optimised branches (c.£18m p.a. EBITDAS).
3. The key questions to address are; how branch models could be re-engineered to
enable easier franchising; what this would mean for our customer proposition and
commercial strategy; what the plan would be to enable Crowns-driven cost reduction
from the wider business; the choices available when engaging Government on any
fundamental Crown network changes; how the costs and risks of transition could be
reduced; and the consequences around people and I.R.
Input Sought Input Received
Does the Board have appetite for a transformation Board endorsement of 2015-18 Crown
programme to much further reduce the Crown Strategy, July 2015. Board approval of
network considering the levels of investment required I Paddington (WH Smith deal), April 2016. GE
and likely return? If so, a fuller business case will be I review of more radical Crown options, April -
developed for a decision at the September Board. May 2016
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The Report
What is the opportunity and why now?
1. The objective is to refresh the Crown strategy in light of new opportunities and
challenges arising since the 2015 Crown strategy was established. This will lead to
the development of an outline business case for a more aggressive reduction in the
size of the Crown branch network than was set out by the 2015 strategy.
2. The 2015 Crown strategy set out the rationale for, and benefits of, a directly-run
flagship network. However it noted that only 100 Crowns have a good fit against the
strategic vision that was set out. For the remainder, the only rationale for retaining
them under a direct ownership model was that the costs and benefits of transition to
any alternative model (or closure) would exceed the 3 year payback period which was
targeted at the time the current strategy was approved.
3. The 2015 strategy looked at the costs and benefits of changes to improve the
profitability of Crown (or replacement Agency) branches, but was deliberately
agnostic to any cost reductions across the wider business which could be enabled by
a much-reduced Crown network. This was a deliberate choice because of the degree
of uncertainty at the time about the business’ intentions and the mechanisms which
would be available for large-scale cost reduction beyond the Crowns area. There is
now increasing clarity about this.
4, During FY15/16 significant progress has been made in terms of delivering change in
Crowns and improving our “flagship” presence on the high street using the WH Smith
branch network:
a) The Project Paddington deal with WH Smith (WHS) has been negotiated and
signed. This will see 28 unprofitable, un-strategic Crown branches franchised; 33
Crown branches hosted in order to reduce their property costs; contracts
extended on 97 of our largest Mains (which are operated by WHS); significantly
up-weighted Post Office brand prominence across the WHS branch estate; and
POL ATMs and Self-Service Kiosks introduced into the WHS estate. This deal has
helped POL gather valuable insights on how the commercial and operational
model for large franchising deals will need to evolve in future in order to be
successful.
b) A further 11 Crown branches have been advertised as franchise opportunities,
and applicants are currently being assessed for their suitability. Demand has
been received from the market for every one of these branches. Preparatory
work has been completed on 42 additional branches, of which 21 are ready to be
advertised for franchise as part of the current strategy.
c) 2.un-profitable, un-strategic branches have closed, where there was surrounding
network capacity in place to absorb demand. Public consultations have
commenced (or are about to commence) for a further 4 closures.
d) Trials of a new retail offer in Crowns have been run with both WHS and VOW
Retail (the incumbent provider) and both trials have seen strong growth in retail
sales. A public procurement exercise is in-flight to select and appoint a new retail
supplier to Crowns. A renegotiation of the Photo Me contract and rollout of
further machines has increased our ability to generate income from otherwise
under-utilised square footage.
e) A project to automate Post Office Card Account transactions on Self-Service
Kiosks has been mobilised, with pilots of the new service planned for the end of
this financial year. (This project is running later than originally planned, which
has introduced a £1.5m in-year benefits gap for 16/17, to be mitigated by
acceleration of other programme activities.)
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5. FY15/16 has also presented new opportunities and challenges for the Crowns strategy,
namely:
a) The business has accelerated its simplification agenda. Progress has been made on
the business’ Target Operating Model and on mechanisms to achieve a Simpler to
Run Network. The business’ capacity to take out wider costs beyond the Crown
network is now both increased and better understood.
b) The Government's introduction of the National Living Wage has made franchising
large, labour-intensive, Crowns onto standard Mains contracts even less profitable
for retailers. However the increasingly intense competitive pressures on the retail
sector have added even more need to guarantee footfall into stores, and so
demand for Crown franchises has still been seen. The quality of this demand has
been variable, however, with WH Smith continuing to be the only national multiple
with both experience of running large Post Offices and an appetite to take more in
any significant numbers.
Cc) The increasing pressures of property cost on retailers, particularly in central
London, mean it is now virtually impossible to franchise a Crown in zone 1 or 2 of
London. The space required from the retailer is simply not available. The same
property cost pressure is being felt by the agency network in central London, and
Crowns which remain are proving essential for continuity of Post Office service.
d) To achieve large-scale franchising deals with retailers, without expensive
inducements or over-scale fees beyond standard Mains terms, it is increasingly
clear that we will need to move away from a standard like-for-like Crown to Main
franchise pattern. Future deals will need to explore different branch models, with
service potentially dissipated across multiple retail partners, and self-service
automation forming a much higher part of the model offered.
e) Considering the array of people changes planned or in-flight in the wider business,
there will be greater opportunities to reduce the cost of transition over future
years (e.g. from adjusted redundancy terms), or to take out cost from the wider
business as a result of changes in the Crown network.
What do we propose to do and why?
The proposal
6. The Crown Network Strategy will be refreshed and presented to the September Board
meeting. In particular the refresh of the Crown Network Strategy will focus on:
a) The updated position of the Crown Network, following progress made in FY15/16.
b) The strategic and economic benefits of the Crown network considering the
commercial needs of the wider business, but also any costs or constraints that the
Crown network's existence imposes on the wider business.
c) Areduced target size and shape for the Crown network for both 2018 and 2020.
This will take into consideration the business’ Target Operating Model, our
ambitions for a Simpler To Run Network, levers available to reduce the costs of
change in the Crown Network, and commercial requirements of the business.
d) The change roadmap, considering the optimised balance of models, optimised
EBITDAS benefits, the best use of investment funds, and co-ordination with other
change activities across the business to manage both opportunities and risks.
ies
Industrial Relations, political and stakeholder reaction to change
7. Further franchising will lead to increased political and public pressures, including
adverse media coverage where transformation of the network is viewed as job losses
and back-door privatisation. For example, as a result of the announcement of POL’s
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intention to Franchise 39 Crown branches, we are now answering Parliamentary
Questions from MPs in the impacted constituencies, Freedom of Information requests
from consumer groups and requests to attend either MP or Union-organised public
meetings. Furthermore, some customers view a Crown as giving their town a
particular status and will campaign against change for that reason. Although this is
resource hungry, POL’s experience through 25 years of Franchising Crowns (from
1500 down to 300 now) and various Network Change programmes impacting Agency
branches, means we know that the negative feedback and press coverage is usually
localised to the area impacted and is short-lived. Once the change has taken place,
the customer experience is generally improved through more modern, accessible
premises and longer opening hours.
8. Long-running industrial action significantly disrupts the Crown Network and or Supply
Chain businesses (due to conflation of issues as a result of CWU representation across
both parts of the business), delaying change and impacting short or medium term
service and profitability. The Crowns team will develop proposals together with the
People and Engagement team and the Industrial Relations Steering Group in order to
establish the right phasing and people approach, before reporting back.
Impact on Post Office commercial strategy & brand
9. There is a risk that during the consultation period for franchises, customers are
dissuaded to buy-in to the proposed change by staff who are negatively impacted
themselves or by trade unions who campaign against the change. This particularly
impacts migration rates of the Travel and Telephony businesses where convenience
and rates are key to customers and competition on the high street for this product is
high. Marketing plans will be developed to attract customers to the new location as
well as capability support at the new location. Experience has shown that the wider
cost savings of franchising more than compensate for this revenue loss.
10. The Personal Financial Services business relies on directly-employed staff generating
business in branches. There is a risk that franchising Crown branches adversely
impacts the wider FS strategy, resulting in reduced income. The FS Strategy will
identify the most important branches based on customer demand / opportunity. The
existing network of branches in WHS stores includes private consultation rooms for
Financial Services sales, and the number of such rooms is increasing with the recent
Paddington deal. The current ‘Hub & Spoke’ trials will need to be developed into more
formal ways of working to ensure the ownership model is less important to meet our
FS growth aspirations. As above, revenue loss is included in all business cases so that
we provide an accurate picture of the business impact of franchising or closure.
The business case
11. The strategy refresh will recommend an outline business case for changes to the Crown
network in terms of further projects to; increase automation, including counter-less
operation of some branches; apply voluntary redundancy; deliver property deals;
better monetise our retail space; and franchise or close branches.
12. Beyond this, the refreshed strategy will also provide guidance on what the
improvements to the outline business case could be in scenarios where more radical
levers were available for use such as; Compulsory Redundancy; major reductions in
Voluntary Redundancy terms; reductions to service provision in urban deprived areas
or conversely use of subsidy to maintain service in those areas; and/or a policy of
active cannibalisation of the Crown network.
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What options did we consider?
13. More radical options for the Crown Network are under review. A policy of wholesale,
or very large scale, franchising or closure would be challenging without; changes to
the commercial and operational proposition for potential franchise partners;
increasing use of compulsory redundancy; and changes to terms available under
voluntary redundancy.
14. Some indicative scenarios are modelled below in order to help frame a common
understanding of the viability of certain radical options. These would require
investment above and beyond that already approved by the Board for the current
Crown strategy. The below scenarios work on the basis of potential changes to the
227 remaining Crown branches which are not subject to franchise or closure under
business cases already approved by the Board:
Indicative economics
Option One-off cost One-off benefit I Recurring EBITDAS Payback
(£m) (£m) (Em p.a.) period (years)
(157) 19 18 77
ts account for £62m of the one off costs
perience during recent chan grammes, C
uctions would ste £1.1m of the recurring E
Franchise all 227 I Settlement a:
branches
this scenario,
19 24
tly reduce staff exit costs without jeopardi:
ja the overall investment cost would drop
umed 45% reduction in this scenario). Increasing central cost
reductions by $0% beyond current assumptions would add another £6m to
recurring EBITDAS,
(56) 7 ? 7.0
tment environment we could teke the tess radica
directly aking at a b -
it but only tackling a smaller amount of
ot optimise the profitability of every branch.
Franchise all 227
branches - best
case
Franchise all 73
remaining loss-
ng branches
It delivering EBITDAS
central cost (£2m). This would
15. A single deal to franchise the entire estate, either via a large scale procurement
exercise or even under a Joint Venture has not been ruled out, however this is
considered unlikely to produce a better economic return than is achievable via other
mechanisms. WH Smith is the only national multiple chain with the experience of
running large ex-Crown Post Offices and a significant geographic reach, however there
are still over 100 Crowns which have no geographic alignment to an existing WH
Smith presence, and in many cases these locations do not align with a local market
which WH Smith wants to enter.
What do we need to do next to progress?
ed option?
16. We will report back to the June Board on how the Network, and the mix of branch
models within it (including Crowns), will support the refreshed commercial strategy
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of the business, the progress made with the Simple to Run Network initiative and our
long term approach for Community and Outreach branches.
17. Subject to Board appetite, a refreshed version of the Crown Network Strategy will be
developed, to cover the timeframe of 2016-2020 and this will be presented to the
September 2016 Board meeting. This will take into account the latest Crown branch
P&L budgets and Paddington (WHS deal) benefits; the medium to long-term roadmap
for our people; and the wider business cost reduction opportunities.
18. Delaying or rejecting a revision of the Crown Network strategy would result in missed
opportunities for further cost reduction from the Crown network.
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BOARD
Postmaster Litigation
Author: Jane MacLeod / Rodric Williams Sponsor: Jane MacLeod Meeting date: 17 May 2016
Executive Summary — Subject to Legal Privilege
Context - Bates & 90 Others v. Post Office Limited
1. On 11 April 2016, 91 (mostly former) postmasters issued a High Court Claim
formally starting a court case against Post Office (the “Claim’”).
2. The Claimants have until 11 August 2016 to “serve” the Claim Form, which will
trigger Post Office’s obligations to respond to the Claim through the Court. We
have however been provided with a copy for information only.
3. The Claim Form contains very little information. However, on 28 April 2016 the
Claimants’ solicitors (Freeths LLP) sent a 53-page “Letter of Claim” setting out the
allegations in more detail (the “Letter”). Court Protocol requires us to respond to
the Letter before the Claim passes to the Court for formal case management.
4. The Claim potentially poses significant legal, financial, operational and reputational
risk to Post Office.
5. This paper:
- summarises the status of and next steps in the Claim; and
- provides an initial overview of timing, costs and affected stakeholders.
Questions addressed in this report
e What are the Claimants alleging?
¢ What process will the Claim follow and over what time frame?
e What are the estimated costs of responding to the Claim?
e What are Post Office’s objectives for the Claim?
* Who are the stakeholders?
What are the Claimants alleging?
6. The Letter sets out the bases on which the Claim will be made. Despite its length,
there is nothing new or surprising in the Letter, and it does not set out how much
the Claimants are claiming or how they propose calculating that amount.
7. Much of the Letter focuses on technical points of law, with the main focus being
the relationship between Post Office and postmasters, seeking to place greater
responsibility on Post Office for branch accounting difficulties.
8. Apart from some generalised statements, there is no allegation that there is a
systemic failure in the Horizon software. Rather, the Letter claims that because
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Horizon has the potential to cause discrepancies in branch accounts, Post Office
should not have relied on it so heavily and done more to investigate it as a possible
source of branch shortfalls.
9. Other familiar allegations include poor training/support, the ability of Fujitsu to
alter remotely branch transactions, improper criminal prosecutions, and putting
undue pressure on postmasters to make up shortfalls.
What process will the Claim follow and over what time frame?
The Letter
10. The Letter asks Post Office to respond to the issues raised and agree in principle
to a “Group Litigation Order” (“GLO”) so issues common to the Claimants can be
efficiently managed through the Court.
10.1. There are practical and tactical implications for agreeing to a GLO which
will substantially influence the way the Claim proceeds. For example, Freeths
may not be able to fund the litigation if we can show the individual claims are
not sufficiently common for a GLO. Equally, an early favourable ruling on an
issue we want to treat as common (e.g. the effect of a criminal conviction or
limitation period) could reduce the number of claimants and thus the economic
viability of the litigation.
10.2. Post Office is therefore entitled to know more about the Claim and the
purported common issues before making any decision about a GLO.
11. Freeths have questioned whether Post Office would be prepared to mediate these
claims. At this stage it is not possible to form a view as to whether mediation
would be viable in some or all of the cases. However we will keep under constant
review whether options to mediate or settle would provide a better outcome for
Post Office.
The Claim
12. Freeths need to decide by 11 August 2016 whether to serve the Claim Form and
start the formal Court procedures.
13. Set out at the Appendix to this Report is an “Estimated Litigation Timetable”, which
sets out the main steps in standard litigation through to trial, assuming the Claim
Form is served during August 2016.
14. The Court's procedures are designed to examine the issues rigorously, and
accordingly take time. Assuming that this case follows standard procedures, the
Claim might not come to trial until November 2018. Whether or not the Claim
proceeds under a GLO could impact substantially this timeframe, e.g. the standard
timetable may not start to run until the GLO issues are finalised, which could take
some months, or the litigation may not proceed at all if no GLO is made.
15. The Court’s procedures provide for regular assessment of the Claim and the risks
and benefits of continuing with it, which ensures that the vast majority of cases
are settled before trial.
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What are the estimated costs of responding to the Claim?
16. The Court actively manages costs due to the resources litigation consumes and the
“loser pays” presumption which requires the unsuccessful side to pay a substantial
portion of the other side’s costs (typically 65% to 90%). The Court’s processes
also require “front end loading” where significant costs are incurred at the
beginning of a claim to narrow down the issues and save costs overall.
17. We estimate that responding to the Letter in a robust and proportionate manner
will incur external legal costs at approximately the same rate as during the Sparrow
Mediation Scheme, i.e. £30,000 to £50,000 per month for the next three to six
months. More detailed costings will be provided and updated as the Claim
progresses.
18. Should the matter proceed to a full trial, Legal costs and expenses for the Claim
could easily exceed £1million, particularly if the performance of the Horizon system
itself becomes a key issue. By way of reference, Post Office successfully defended
at trial a 2006 “Horizon”-related claim brought by one former agent, the costs of
which exceeded £300,000.
What are Post Office’s objectives?
19. The Claim challenges a critical part of Post Office’s business - how we engage with
our postmasters, and how we allocate risk and responsibility for the Post Office
transactions, cash and stock they handle.
20. Even though most of the Claimants are former postmasters, the Claim raises issues
in respect of current and future b.a.u. activities (e.g. branch accounting, agent
contract management, and debt recovery) because it concerns the core branch
accounting principles and systems, including Horizon, currently in use.
21. We therefore see two main objectives in responding to the Claim:
21.1. Proportionately manage Post Office’s legal defence.
21.2. Protect the Network going forward so that Post Office and current agents
have confidence in our systems.
Stakeholders
22. The Claim will have a wide impact on Post Office, affecting Network, Finance and
the FSC, IT (including our relationship with Fujitsu), HR, Legal and
Communications, each of which will help inform Post Office’s defence.
23. Other stakeholders will be interested in the Claim, e.g. BIS and the NFSP.
However, the involvement of external stakeholders should be limited to appropriate
updates provided as part of an agreed communications plan so as to maintain legal
privilege and confidentiality in the legal advice we receive and the strategy and
tactics adopted in our defence of the Claim.
Input Sought
The Board is requested to note the content of this paper.
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Appendix - Estimated Litigation Timetable
Step Estimated Proportion
completion of overall
date work
1. Pre-Action Correspondence: Initial investigations into alleged August 2016 5%
issues and correspondence between the parties to establish the
basis for the claim and the defence
2. Claim Form served: Legal proceedings are formally begun with August 2016
service of the Claim Form on Post Office
3. Statements of Case: Each party produces formal Court January 2017 10%
documents setting out their legal positions. The SPMRs will produce
a Particulars of Claim. Post Office will then produce a Defence. The
SPMRs will then file a Reply to the Defence.
4, Case Management: The Court orders the steps to be undertaken April 2017 5%
before trial and a timetable for their completion. This may require
multiple short Court hearings.
5. Formation of the Group: The SPMRs will apply for formal June 2017 5%
recognition that their claims form a Group Action. The Court will
define the issues common to the Group and set a deadline by which
further Claimants may join the Group.
6. Disclosure: All parties are required to search for relevant November 2017 25%
documents and provide those documents to the other parties
7. Witness statements: All parties must draft and exchange March 2018 15%
statements setting out the evidence to be given by each of its
witnesses.
8. Expert evidence: Parties commission experts to investigate and July 2018 15%
report on technical issues (eg. Horizon). Reports are exchanged
and meetings held between experts to narrow the points of
disagreement.
9. Trial: A trial will likely take several weeks and require several November 2018 20%
months of preparation.
40. Judgment. It will likely take a Judge several months to consider I February 2019
the case and draw up the judgment.
Notes
Step 5: Formation of the Group could occur at an earlier stage and possibly before Step 3: Statements of
Case. This depends on how the SPMRs wish to proceed.
The above timetable assumes that all points of dispute will be considered in one single trial. It is possible
that certain discrete or preliminary points may be dealt with separately at an earlier stage. If there
are any preliminary hearings these will likely occur before Step 6 and will the delay the above
timetable by 3 - 6 months.
Following Step 10: Judgment, there is the possibility of an Appeal and there will also be costs proceedings.
These could take a further 6-12 months.
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POST OFFICE BOARD GOVERNANCE UPDATE
Modern Slavery Statement
Author: Nisha Marwaha Sponsor: Jane MacLeod Meeting date: 5 May 2016
Executive Summary
Context
The Modern Slavery Act 2015 (the Act) challenges slavery, domestic servitude,
forced and compulsory labour and human trafficking. Post Office is required to
produce an annual slavery and human trafficking statement (Statement)
setting out what steps have been taken to ensure its business and supply
chains are slavery free. This paper attaches the Statement which must be
approved by the Post Office Board and signed by a Director.
Questions this paper addresses
1. What specific risks should the board be aware of?
2. What action have we taken so far?
3. What are other businesses doing and how do we compare?
Conclusion
e Post Office has been undertaking due diligence on its business and supply chains
to identify any risk areas.
e Post Office has prepared a Statement which must be published within 6 months of
year end.
e A steering group appointed in January 2016 is responsible for creating a project
plan and undertaking due diligence on Post Office’s and POMS supply chains.
e The steering group has identified that the highest level of risk is within our Agency
network. We will be taking action to address this risk including amending our
contracts with our Postmasters to require compliance with the Act.
e Post Office’s Statement has been prepared using Home Office guidance and in
consideration of other available Statements by UK and international companies.
e Post Office will have to take ongoing action to meet the requirements under the
Act.
Input Sought
The Board is asked to approve the Statement.
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The Report
What specific risks should the board be aware of?
e The requirement to publish a Statement applies to “commercial organisations”
which (a) supply goods or services and (b) have a total turnover of not less than
£36,000,000. It will therefore not apply directly to Postmasters if their turnover is
less than £36 million per year.
— However, Postmasters are part of the Post Office supply chain. Post Office must
state what steps it has taken to ensure that slavery and human trafficking is
not taking place in any of its supply chains or in any part of its business.
e To date we have not identified any direct relationship with an individual or company
registered in a high risk country.
e The due diligence that we have undertaken so far indicates that there is a potential
risk on non-compliance within our agency Network:
— The reason for this is that there are a large number of people employed by
Postmasters (including multiple partners) but who are not employees of Post
Office or POMS. They work directly for the Postmasters (including multiple
partners). We will be taking action to address this risk (see below) including
working to amend our contracts with our Postmasters to require compliance
with the Act and we will be delivering training to Postmasters as and where it
is appropriate.
What action have we taken so far?
1. GE member Neil Hayward delegated responsibility for our Modern Slavery
initiatives to a steering group lead by Hannah Dalton (Head of HR). The steering
group was appointed in January 2016.
2. The steering group has developed a project plan to carry out due diligence of our
business and implement change. Our ongoing work involves a risk analysis of our
core business and its related supply chains.
What are other businesses doing and how do we compare?
1. We looked at statements for international companies with complex supply chains
to get a flavour for content and examples of initiatives.
> For example: Ford
e They have published a statement which is approx. 2 pages long.
e Ford recognise their supply chain is extensive and complicated and that it
presents challenges.
e« Some of Ford's initiatives are similar to ours - this is encouraging given that
Post Office’s business and supply chains are not as extensive as Ford.
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POST OFFICE PAGE 3 OF 5
2. Many companies have not yet published their Statements, but we have looked at
a variety to ensure that our approach is consistent. We are confident that the detail
in our Statement and our project plan is appropriate at this stage, but we will
monitor developments and keep the adequacy of the Statement under review.
3. We also looked at what some of our partners are doing:
WH Smiths
e Statement not yet published.
e They use the Ethical Trading Code of Conduct and Human Rights Policy. It
incorporates the ILO Conventions to scope out the current position on Modern
Slavery related matters.
e The policy specifies a person who takes responsibility for the Code.
Bank of Ireland
e Do not currently have a Modern Slavery statement.
e Publish a Responsible Business Report which currently makes no reference to
Modern Slavery.
e As a key partner, Post Office should investigate directly with BOI as there
appears to be very little in terms of Modern Slavery related matters.
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Post Office Limited (Post Office) & Post Office Management Services Limited (POMS)
Modern Slavery Transparency Statement 2015-2016
May 2016
Executive Summary
This statement sets out the steps we have taken during the last financial year to ensure that
Modern Slavery is not taking place in any of our supply chains or any part of our business, It is
made pursuant to section 54(1) of the Modern Slavery Act 2015 (MSA).
Our business
Post Office is the UK’s largest retail network and the largest financial services chain in the UK
with more branches than all of the UK’s banks and building societies put together. We have
provided services for more than 370 years and currently supply more than 170 products and
services (mails & retail; financial services; governments services; and telephony) from a
Network of more than 11,500 Post Office branches nationwide.
Post Office directly manages currently over 300 of the Network branches. The remainder of the
branches are managed on an agency basis by Postmasters and multiple partners.
Our supply chains
We currently operate throughout the UK, however our supply chains connect with suppliers with
a global reach.
Banking services
Our banking services are provided through a joint venture with the Bank of Ireland (Bol).
Postmasters
Postmasters can operate one or more branches. As agents they have control on how they run
their branches on a day-to-day basis. All those working in an agency Post Office branch are
employees of the Postmaster.
Multiple partners
A large proportion of the agency part of our network is run by multiple partners.
Trade Unions
In our Crown network, we work closely with the Communications Workers Union (CWU) and
Unite (CMA) Communications Managers Association.
Third Party Suppliers/Procurement
We also procure products and services from a wide range of national and international
businesses.
Respon: ity and due igence
Responsibility for our Modern Slavery initiatives currently resides with a steering group which
was appointed in January 2016. It is tasked with the development of a project plan to carry out
due diligence and implement change. Our ongoing work involves a risk analysis of our core
business and its related supply chains.
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Where are the risks of Modern Slavery at Post Office /POMS?
To date we have not identified any direct relationship with an individual or company registered
in a high risk country. The due diligence that we have undertaken so far indicates that there
could be a risk of non-compliance within our agency network because there are a large number
of people employed by Postmasters (including multiple partners) but who are not employees of
Post Office or POMS. They work directly for the Postmasters (including multiple partners). We
will be taking action to address this risk (see below).
What we have done so far
« Our Whistleblowing Policy has been updated to include references to concerns about
Modern Slavery.
« We have adapted the Post Office recruitment policy to address MSA requirements.
« We conducted an assessment of the Post Office procurement process to ensure it aligns
with the MSA. As part of this process we conducted a review of the criteria used by Post
Office to evaluate whether suppliers meet Post Office’s minimum tendering requirements.
Next steps
Our work on Modern Slavery continues and we intend to introduce the following changes in the
near future.
e Updating Postmaster's selection and appointment process to address MSA requirements.
« Amending our standard form procurement contracts.
« Developing a communication and training plan to ensure our suppliers, staff and agents
are aware of Post Office’s obligations in relation to Modern Slaver and informing them
about the Modern Slavery Helpline.
Our policies
We currently operate the following policies that describe our approach to Modern Slavery:
* Code of Business Standards
« Whistleblowing Policy
Further information
If you have any concerns about the issues raised in this statement or if you think you have
identified signs of Modern Slavery then please either contact us or call the Government's Modern
Slavery Helpline on 0800 0121 700.
Signed: eee
Name:
Date:
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POST OFFICE ~ BOARD PAGE 1 OF 4
Post Office Limited Sealings
Author: Alwen Lyons Meeting date: 24 May 2016
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1400 to 1421 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company to the
documents set out against items numbered 1400 to 1421 inclusive in the seal register
is hereby confirmed.
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POST OFFICE LIMITED
Date Register of Sealings Company Number
16 May 2016 21554540
Seal Date of Date of Description of Document Persons Attesting Destination of
Number Sealing Authority To Document Document
1400 07/03/2016 I 04/03/2016 TR1 relating to Ground Floor, 92 Station Road, West I Alwen Lyons Jean Reynolds
Wickham, BR4 OQE between Post Office Limited and
_ Royal Mail Group Limited.
1401 07/03/2016 I 04/03/2016 I TR1 relating to Ground Floor, Kirkby Post Office, ‘Alwen Lyons Jean Reynolds
Newtown Gardens, Liverpool, L32 8RN between Post
Office Limited and Royal Mail Group.
1402 15/03/2016 14/03/2016 Licence to Assign relating to Lease of the Post Office I Victoria Moss Jean Reynolds
forming part of the premises known as Otley Post
Office, 21 Nelson Street, Otley, LS21 1ST between
Post Office Limited, Martin Goldthorpe, Martin
Goldthorpe Limited and Martin Goldthorpe and Pear!
_ Janet Goldthorpe.
1403 15/03/2016 14/03/2016 Rent Deposit Deed relating to the Post Office Victoria Moss Jean Reynolds
forming part of the premises known as Otley Post
Office, 21 Nelson Street, Otley, LS21 1ST between
Post Office Limited, Martin Goldthorpe Limited and
Martin Goldthorpe and Pearl Janet Goldthorpe.
1404 22/03/2016 I 22/03/2016 Deed of Surrender of Part and Deed of Variation Victoria Moss Jean Reynolds
relating to lease of 22-24 South Street, Romford,
RM1 LRA between Golftee Nom A Limited and
Golftee Nom B Limited and Post Office Limited.
1405 23/03/2016 I 17/03/2016 I Deed of Novation between Post Office Limited, NCC I Victoria Moss Jean Reynolds
Group Escrow Limited, 3M Cogent Inc. and 3M
United Kingdom PLC relating to the Single Licence
Software Escrow Agreement dated 11th July 2011
between NCC Escrow International Limited, Post
Office Limited and 3M Cogent Limited.
Two copies sealed. Labelled (a) and (b).
1406 24/03/2016 I 21/03/2016 Deed of Variation for "Safe Haven" Agreement Alwen Lyons Stan Kitchiner
between CSC Computer Sciences and Post Office
Limited.
Two copies sealed, labelled (a) and (b).
Register of Sealings Alwen Lyons Page 2
Date
16 May 2016
POST OFFICE LIMITED
Register of Sealings
Company Number
21554540
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Seal
Number
Date of
Sealing
Date of
Authority
Description of Document
Persons Attesting
To Document
Destination of
Document
1407
06/04/2016
06/04/2016
Underlease between Wildmoor (Hull) Limited and
Post Office Limited relating to Unit 51A The North
Point Shopping Centre, Kingston-Upon-Hull
Humberside.
Victoria Moss
Jean Reynolds
1408
1409
1410
08/04/2016
12/04/2016
12/04/2016
09/03/2016
07/04/2016 ©
12/04/2016
Second Deed of Variation of the Collaboration
Agreement between Post Office Limited, WH Smith
High Street Limited and WH Smith Travel Holdings
Limited.
Lease between Simpsons Paints Limited and Post
Office Limited relating to ground floor and
basement, 354 and 356 Edgware Road London W2
Framework agreement for the operation of Post
Office concessions at WH Smith
Two copies, labelled 1410a and 1410b.
Victoria Moss
Victoria Moss
Paula Vennells
Julie Thomas
Jean Reynolds
Julie Thomas
1411
1412
1413
12/04/2016
12/04/2016
12/04/2016
12/04/2016
12/04/2016 ©
12/04/2016
Master Framework Agreement.
Two copies labelled 1411a and 1411b.
Third deed of variation of collaboration agreement.
Two copies labelled 1412a and 1412b.
“TR1 relating to Balham Post Office, 92a Balham
High Road, London SW1i2 9AF, between Post Office
Limited and RT Incorporated Limited.
Paula Vennells
Paula Vennells
Victoria Moss
Julie Thomas
Julie Thomas
Jean Reynolds
1414
1415
1416
12/04/2016
12/04/2016
12/04/2016
12/04/2016
12/04/2016 ©
12/04/2016
Lease relating to the Post Office forming part of the
premises known as 92A Balham High Road, London
SW12 9AF between RT Incorporated and Post Office
Limited.
Deed of variation relating to 92A Balham High Road,
London SW12 9AF between Post Office Limited and
RT Incorporated Limited.
Pre-emption agreement relating to Balham Post
Office, 92a Balham High Road, Balham SQ12 9AF,
_ between RT Incorporated and Post Office Limited.
Victoria Moss
Victoria Moss
Victoria Moss
Jean Reynolds
Jean Reynolds
Jean Reynolds
Register of Sealings
Alwen Lyons
Page 3
Date
16 May 2016
POST OFFICE LIMITED
Register of Sealings
Company Number
21554540
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Seal
Number
Date of
Sealing
Date of
Authority
Description of Document
Persons Attesting
To Document
Destination of
Document
1417
14/04/2016
19/02/2016
Deed of amendment to the parent company
guarantee between Fujitsu Services Limited and
Post Office limited.
Alwen Lyons
Michelle McMahon
1418
1419
1420
21/04/2016
21/04/2016
03/05/2016
20/04/2016
19/04/2016
15/04/2016
TR1 relating to 121-125 Peckham High Street,
London, SE15 5SF between Post Office Limited and
I Audenfield Limited
TR1 relating to Ground Floor Post Office, 243-245,
Selhurst Road London, SE25 6XR between Post
Office Limited and Agadir Limited
Settlement deed between Post Office Limited and
Jonathan Brenton and Nicholas Sutton in respect of
a dispute between Mr Brenton and Post Office
Limited by which Post Office Limited will make an ex
gratia payment totalling £75,920 without admission
of liability.
Alwen Lyons
Alwen Lyons
Victoria Moss
Jean Reynolds
Jean Reynolds
Jessica Madron
1421
06/05/2016
06/05/2016
TR1 relating to 2-4 Gratton Road, London, SW17
O0SQ between Post Office Limited and Tasklane
Limited.
Victoria Moss
Jean Reynolds
Register of Sealings
Alwen Lyons
Page 4
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POST OFFICE PAGE 1 OF 1
BOARD DECISION PAPER
Project Paddington
Author: Alwen Lyons Sponsor: Alwen Lyons Meeting date: 24 April 2016
Executive Summary
Context
The Board were asked by email on 5 April 2016 to delegate authority to the CEO to
sign a variation to the existing Collaboration Agreement, a Master Franchise
Agreement and a Framework Concession Agreement with WHSmith (WHS) in
connection with Project Paddington.
The Board approved this request by email response and the CEO signed the
agreements on 12 April 2016.
The Board’s delegation now requires formal ratification.
Input Sought
1. The Board is asked to ratify the decision by the Board to delegate authority to the
CEO to sign the Collaboration Agreement, a Master Franchise Agreement and a
Framework Concession Agreement with WHSmith.
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