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Post Office Audit, Risk and Compliance Agenda
Mike Morley-Fletcher (Item 4) Carla Stent
Garry Hooton (Item 5)
+ Peter Mclver, EY
Elena Belyaeva, EY
+ Mounia Mukina, EY
+ Tom Moran (Item 10c)
Steve Norris (Item 10c)
Paula Vennells (Items 1-10)
Al Cameron (Items 1-10)
+ Jane MacLeod (Items 1-10)
Alwen Lyons
Amanda Bowe (Item 2)
Tim Franklin (Chair)
Richard Callard
+ Ken McCall
19t May 2016
10.30hrs 12.30hrs
Room 1.19 Wakefield
Welcome and Conflicts of Interest Chairman
2. Report from POMS ARC For noting To receive a report from the meeting of the POMS Audit, Risk and Amanda Bowe
Compliance Committee held on 10 May 2016.
To note the minutes of the meeting of the POMS Audit, Risk and
Compliance Committee held on 15 March 2016.
3. Minutes of the meetings held on 17th March For approval To approve the minutes of the meeting held on 17th March 2016, note Chairman
2016, Matters Arising and Action List the Matters Arising and update on the Actions
4, Annual Report & Accounts For discussion To review and comment on the draft Annual Report and Accounts. CFO
+ Covering paper
+ Briefing book Peter Mclver EY
+ Report from External Auditors (EY)
* Accounts — Front Half
+ Financial Statements
+ Financial Reporting and Controls Update
Mike Morley-
Fletcher
5, Annual Report and Accounts Disclosures For discussion Approval of disclosures on:
Business Risks, and
governance statements on Risk Management (including risk, control
and assurance)
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6. Risk & Control Update
+ Key Policies
+ BCP
* Executives’ Declaration
7. Internal Audit
* Quarterly Report and follow up actions
* Conclusion of 2015/16 Plan
* Financial Crime Audit
8. AML & CTF audit activity
9. Noting Papers
* Audit Quality Enhancements
* Horizon Scanning
+ Property Compliance Update
10. Private Meeting with External Auditors
CLOSE
For discussion
For discussion
For noting
For noting
For noting
To update the Committee on progress with key components of the
PO Risk Framework Plan, including:
+ Update on Policy project (completion of CS policies and list of
possible other key polices to consider for assessment) and
progress on BCP project
+ Results from Executives’ Declaration
To update the Committee on the PO Internal Audit activity and key
outcomes and to provide an update on the overdue audit actions.
Update the ARC on the actions following the Financial Crime audit
Update on ALM &CTF activity in preparation of the HMRC audit
To note the Audit Quality Enhancements paper prepared by EY.
To note the Horizon Spotting paper.
To note the Property Compliance Update.
Mike Morley-
Fletcher
Garry Hooton
Jane MacLeod
Jane MacLeod
Chairman
Jane MacLeod
Tom Moran
Peter Mclver EY
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POST OFFICE ~ AUDIT, RISK AND COMPLIANCE COMMITTEE (ARC) PAGE 1 OF 2
Report from the 10 May 2016 meeting of the Post
Office Management Services Ltd (POMS) ARC
Author and Sponsor: Amanda Bowe, POMS ARC Chairman Date: 19 May 2016
1. Reporting Arrangements
1.1 The POMS ARC Chairman, Amanda Bowe, provides the Post Office ARC with
a written report from each meeting of the POMS ARC, where timing allows.
1.2 In accordance with the revised terms of reference for the Post Office ARC,
the latest set of approved minutes of the POMS ARC will be provided to each
meeting. Minutes of the 15 March 2016 POMS ARC meeting are now
provided.
1.3. Carla Stent and Amanda Bowe have agreed that going forwards Amanda
Bowe will attend two meetings of the Post Office ARC every year, one in
person and one by telephone. The scheduling of her attendance will align
with the Post Office ARC’s deep dives on Financial Services.
2. Update from the 10 May 2016 POMS ARC
2.1 At its meeting on 10 May 2016, the POMS ARC:
(a) received a report from the internal auditor on: (1) internal audit activities
and the positive progress against the 2016/17 Plan; and (2) the internal
audit findings on the follow up of the Hawk readiness review (undertaken
by PwC). The ARC noted the progress made with firming up the actions and
agreeing a timetable to address these, which fell in the three key areas of:
Appointed Representative risk; complaints processes; and company
policies;
(b) received a presentation from Kevin Gilliland, Post Office Network and Sales
Director and Jonathan Hill, Post Office Head of Financial Services Risk,
Governance and Development, on the oversight of Post Office as Appointed
Representative of POMS, focussing on the regulated financial services
activity conducted within the branch network. The ARC was encouraged by
the progress in Post Office’s management of its oversight of regulated
activity. However, the POMS ARC requested a comprehensive prioritised
action plan to come to the July 2016 meeting of the Board, anticipating that
the actions will address the risk presented by the AR’s activity over the
course of 2016. A further update from Kevin Gilliland will be requested to
the November 2016 meeting of the ARC;
(c) received an update on risk and compliance activities, including: the risk
framework; an update on top risks; regulatory related management
Strictly confidential Post Office ARC, 19 May 2016
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POST OFFICE - AUDIT, RISK AND COMPLIANCE COMMITTEE PAGE 2 OF 2
information including detail on compliance requirements and developments;
information on incident reporting and control failures; and updates on new
business developments and horizon scanning;
(d) approved the company policies framework and requested that the executive
progress the roll out of POMS’ policies over the next quarter. It also agreed
that the policies requiring non-executive level approval would be split
between the Board (for business operation and strategic policies) and the
ARC (for policies concerned with risk management);
(e) noted progress against the compliance monitoring plan and received an
update on any reviews and/or actions since the last meeting;
(f) received a paper providing clarification of the scope of the work of the
Information Security Assurance Group (ISAG) to be provided to POMS going
forwards and highlighting any current issues. It was agreed that the ARC
would receive an annual report from the ISAG;
(g) noted a verbal update on the progress with the external audit which was
underway for the period ending 27 March 2016;
(h) reviewed the information to be used for submission of the FCA end of year
Retail Mediation Activities Return and recommended to the POMS Board that
it approve the use of this information and authorise submission to the FCA;
(i) noted a verbal update on the progress of the Annual Report and Accounts
for the 16 month period ending 27 March 2016 and that due to Group
reporting timing constraints the Annual Report and Accounts would be
considered in detail at the meeting of the POMS Board on 17 May 2016; and
(j) agreed that the Board risk workshop, to be held on 14 June 2016, would
focus on reviewing the top risks and the relevant risk appetite, following the
anticipated approval of the POMS strategy by the POMS Board at its meeting
on 17 May 2016 and the required engagement with the Post Office Board.
3. Input Sought
3.1 The Committee is asked to note the report.
ty Confidential Post Office ARC, 19 May 2016
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Company no. 8459718 ~ Strictly Confidential
PARC 16/01 — 16/15
POST OFFICE MANAGEMENT SERVICES LIMITED
(the Company)
Minutes of an Audit, Risk and Compliance Committee
held at Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ
on Tuesday 15 March 2016 at 11.00am I
Present: Amanda Bowe Non-Executive Director and Committee Chairman
(Chairman)
Stephen Ashton Chairman (SA) I
Jane MacLeod Non-Executive Director (JM)
I
In Attendance: Rob Clarkson Managing Director (RC) I
Susie Hayward Head of Risk and Compliance (SH) I
Garry Hooton Interim Head of Internal Audit, Post Office (GH) I
Nick Kennett CEO (NK) I
Victoria Moss Deputy Company Secretary (VM) I
Colin Stuart Finance Director (CS) I
Apologies: None I
PARC 16/01 WELCOME AND CONFLICTS OF INTEREST
(a) The Chairman welcomed everyone and declared the meeting quorate.
(b) There were no changes to the standard declarations of potential conflicts I
of interest recorded for directors. I
PARC 16/02 MINUTES OF THE MEETING HELD ON 20 NOVEMBER 2015
I
(a) The minutes of the meeting held on 20 November 2015 were approved I
as an accurate record and the Chairman was authorised to sign them. I
I
PARC 16/03 MATTERS ARISING AND ACTIONS LIST
I
(a) The Chairman asked for the tracking of actions which had arisen from the
ACTION: VM Board risk workshop on 19 November 2015 to be evidenced.
(b) The Committee noted that there was an action in relation to the
complaints process at minute PARC 15/17(0) which had not been
correctly identified as an action. RC provided the Committee with an
update, explaining that additional correspondence was being provided to
complainants and the risk identified in the Annual Operating Plan but with
no budget allocated as yet. The issue was being addressed with a full
review of the complaints process and the Committee would be further
updated in due course. It was confirmed that this action would be added
ACTION: VM to the actions list.
(c) Action POMSB 15/87(n) — this action had been deferred from the
November 2015 meeting of the Board. The Committee felt that the
POMS ARC minutes, 15 March 2016 Page 1 of 11
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update provided to close the action was insufficient. SH confirmed that
identification of training and competencies had been included in the risk
paper. The Committee requested that the update be amended to include
ACTION: VM this information.
(d) The Chairman emphasised the importance of providing clarity in updates
which closed actions. If actions were closed through the provision of
information in a paper, an explicit reference was required to the exact
ACTION: All section or paragraph number.
(e) Action POMSB 16/09(i) — NK confirmed that he had intended for
Jonathan Hill, Post Office Head of Risk, Banking Regulation and
Strategy, to attend the meeting but unfortunately he was unable to attend
due to illness. NK added that for any future requests for attendance of a I
Post Office employee, a clear mandate or terms of reference would need
ACTION: NK to be provided, the Committee agreed that NK should develop this. The
Committee formally requested that Paula Vennells, Post Office CEO,
should attend the next meeting of the Committee in May 2016, SA would
ACTION: SA issue this invitation.
(f) The Committee noted the actions list.
PARC 16/04 PWC FOLLOW UP REVIEW - FINDINGS
}
I
(a) SH introduced the paper which set out the key findings from the PwC. I
follow up to its Hawk readiness review conducted in August and I
September 2015. The full draft PwC report had been provided in the I
Committee’s reading room on BoardPad. I
(b) The Executive emphasised the draft nature of the report and explained
that it had been provided to this meeting of the Committee to comply with
the commitment given, but at the time of submission had not been
reviewed by the Executive. The Committee confirmed that in future no
papers should be submitted to meetings of the Board or its committees
ACTION: All/ without first having been reviewed by the Executive Committee or its I
CoSec members. }
(c) The Committee noted that the report should not have been submitted in
its current draft state and agreed that it should be resubmitted to the
Committee’s next meeting in May 2016. This resubmission would include
the agreed findings with appropriate recommendations and a
comprehensive plan to address all actions (including the oversight of
Post Office), against the framework of activities from the original report.
The Committee acknowledged that this was a very active workstream
and some updates might be less relevant by May but that the update
ACTION: SH would address the substance of the report.
(d) Caution was advised over the drafting of future briefs for work, to ensure
clarity of scope and expected outcome to guard against the unnecessary
production of more work. It might also be advisable to establish at the
outset of any similar work that any future work arising from
ACTION: All recommendations would not necessarily be awarded to the same firm.
ACTION: SH/ (e) It was confirmed that any overdue internal audit or red rated actions I
GH would be raised in the CEO’s report to the Board. I
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PARC 16/05 REVIEW OF THE COMPANY’S ARTICLES
(a) VM introduced the paper which set out the proposed amendments to the
Company's Articles. The amendments incorporated changes resulting
from the recommendation of the PwC Hawk readiness review to re- I
examine the Company's governance structure, to manage better the
relationship between the Company as regulated principal and Post Office
as shareholder and appointed representative.
(b) In response to the PwC recommendation, Linklaters had been engaged
to review the Company's Articles and to suggest suitable amendments.
These amendments had also been reviewed by JM, General Counsel for
the Group.
(c) Additional amendments had been made to address a request from the
Board at its meeting on 27 July 2015 and to update the registered office
address and to tidy up the cross referencing to article numbers.
(d) The Committee, having reviewed the proposed amendments,
recommended to the Board that it should approve the specified
amendments to the Company's Articles, as set out in the paper, for
onward submission to the Post Office Board for adoption and filing at
Companies House.
PARC 16/06 EXTERNAL AUDIT
Update on Audit Partner Meeting
(a) The Chairman updated the Committee on the meeting with SA and the
external audit partner from Emst & Young (EY), Peter Mclver, on 25
February 2016.
(b) The Chairman reported that the meeting had gone well and reminded the
Committee that the agenda for that meeting had been provided for
information in the Committee’s reading room on BoardPad. Results of
the discussions were reflected in the external audit plan submitted.
External Audit Plan (year ending 27 March 2016)
(c) CS introduced the external audit plan for the year ending 27 March 2016
and explained that EY would perform the external audit to a timetable
consistent with the Group’s reporting requirements but to a materiality
consistent with the Company as an entity.
(d) CS continued that the plan took a risk based audit approach and in his
opinion was a good and well focused document. CS clarified that while
the plan was not for the Committee to approve, the Committee was
invited to highlight any areas of risk or concern which it felt had not been
sufficiently addressed.
IRRELEVANT
POMS ARC minutes, 15 March 2016 Page 3 of 11
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(9)
. IRRELEVANT
ACTION: CS
(i)
(i) Regarding the overstatement of marketing accruals, CS explained that
there had been a Group-wide exercise on marketing accruals with
purchase order reviews, particularly in the project space. Purchase
orders had been raised through marketing and paid without correct
reconciliations but there was now a much improved process in place.
This was further enhanced with a Company dedicated code now in place
(k) The Committee noted that EY had determined materiality to be £600k
and therefore the level of £30k for reporting corrected and uncorrected
audit misstatements was very low. It was further noted that errors over
£30k would be reported.
()) The Committee noted that EY wished to raise the risk of ‘understanding
regulatory change’. However, since the Company could clearly evidence
the existence of an appropriate process, CS was asked to ensure that
ACTION: CS the issue was not included for future years.
(m)
ome IRRELEVANT
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PARC 16/07 RISK MANAGEMENT AND COMPLIANCE
(a) SH introduced her paper on risk management and compliance which
provided an update on the risk framework and second line compliance
activity in the period, including conduct risk management information.
The Chairman reported that she had discussed and agreed with SH the
revised format of the paper and that supporting papers for key areas
should be appended.
(b) In addressing an action from the Board on information security, SH
confirmed that she had been working with the Post Office ISAG
(information security and governance) dedicated resource for the
Company. A risk register for information security was being built and top
contracts reviewed. A detailed report would be submitted by ISAG to the
May 2016 meeting of the Committee detailing the findings and work being
ACTION: SH undertaken by the team.
«x, IRRELEVANT
(a)
(e) The Committee discussed the update on compliance activity and noted
that this would be prioritised first by risk profile and then by resource
availability.
Add-Ons
(f) The Committee noted the appended paper which provided an update on
the add-ons review and SH’s confirmation that this matter was on track.
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Regulatory Change Log
(g) The Committee noted the appended regulatory change log and
requested that the names of those with first line accountability for each
ACTION: SH action be added to the log.
(h) The Committee noted that the log was designed to track changes but I
asked for confirmation that there was a process in place to deliver any
necessary changes. RC confirmed that regulatory change would be
added to the change delivery roadmap submitted to each meeting of the
ACTION: RC Executive Committee.
Policy Framework
(i) SH introduced the policy framework and confirmed that it was aligned to
the Group policy framework which was also being reviewed. The new
template for Group policies had been developed by JM’s team using a
tisk based approach. Group policies would be accepted by the Company
as a default position unless there was reason for the Company to have
either an amended policy or its own specific policy to comply with, for
example, regulatory requirements.
(j) The Committee discussed the need for a policy on counterparty risk but
ACTION: it was agreed that the Company's contracting principles would address
B Foat this to a large extent.
(m) SA asked about the inclusion of staff vetting arrangements within the
Financial Crime Prevention Policy. JM confirmed that the process for on
boarding staff addressed this point. It was agreed that the Financial I
ACTION: SH Crime Policy would be renamed Financial Crime Prevention Policy.
(n) The Committee agreed that polices should be aspirational and should
state what the Company should be doing, with an acceptance of risk if
current compliance was unachievable and with clarity of the
developments required in order to reach a position of future compliance.
(0) The Committee noted that the current draft policy framework was helpful I
but agreed that a revised version be submitted to the Committee in May
2016 when it should:
* ensure the policies are relevant to the activities of the Company,
rather than being overly generic;
* include a revised table of policies aligned to the key risks of the
Company;
* align to the risk universe, identifying the key policies and clarifying at
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which governance forum these should be approved;
e identify supporting documents; I
identify mitigants in place for identified risks;
clarify the suitability and applicability to the Company of any Group
policies to be adopted;
e identify any gaps; and
set out the plan and timescale for communicating the policies and the
proposed process for how to monitor and assess compliance,
including an annual review, and embed the policies within the culture
ACTION: SH of the Company.
Incident Reporting
(p) SH explained that she had condensed the information to a summary
dashboard. The Chairman noted her concern that there had been a data
breach but that appropriate action appeared to have been taken.
(q) SH reported on the recent technical breach regarding Post Office
appointment of agents requiring multiple principal agreements. This had
resulted from Post Office having arrangements with around 10 to 15
retailers who also had regulated businesses; multiple principal
agreements were required to cover this situation. SH confirmed that for
the Company this was probably notifiable under Principle 11 but was
unlikely to be reportable as there had been no customer detriment. NK
confirmed that the Group was finalising writing to all retailer partners
thought to have other regulated businesses, and a strategy was being
developed as to the appropriate measures to resolve.
() It was agreed that SH would work with the Chairman to clarify definitions
ACTION: SH of what regulatory breaches were reportable.
(s) The Committee noted the risk management and compliance papers and
updates.
PARC 16/08 OVERSIGHT OF POST OFFICE
(a) SH introduced the paper which discussed the relationship between the
Company and Post Office and identified the list of risks associated with
the relationship and mitigating actions. The paper also sought to review
the level of risk across the branch network (in particular the agency
branches) by looking at the level of activity, oversight and conduct
outcomes attributable to agency sales.
(b) The Committee noted the helpful paper and the clarification of Post Office
actions and further noted that the actions for the Company would be
discussed in detail and clarified at the Board risk workshop in June 2016.
(c) Regarding the risk accountability for marketing and distribution, it was
understood that marketing costs were included with the overall fee to
Post Office and were not visible separate to commission. RC would
outline, within the strategy presentation to the Board, how accountability
for the delivery of trading plans would be allocated to areas where
delivery capability exists within Post Office.
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(d) The Committee noted the existing mechanism for reporting at a non-
executive level from the Company to Post Office, specifically that the
Committee Chairman gave a report to the Post Office Audit, Risk and
Compliance Committee and had regular meetings with the Chairman of
that Committee. The Committee requested confirmation of an equivalent
process at the Executive level. NK confirmed that there was a clear line
of reporting for the Company through the financial services line of Post
ACTION: NK/ Office but consideration would be given to whether this was sufficient and
JM the Committee would be given confirmation.
(e) The Committee agreed that risks should be formalised into a list of risks
to sit as a sub category within the risk register. Each of these risks should
have clarity of ownership (both for the Company and for Post Office) with
agreed actions and a confirmed timescale for completion. SH confirmed I
that mapping to the risk register had already been completed and RC
asked that the lack of service level agreements for managed services be
identified as a risk to the effective delivery of the strategy. It was
acknowledged that this work might be covered in the response to the
ACTION: SH PwC follow up review. NK confirmed that financial services compliance
risk was amongst the Post Office’s overall top risks.
ACTION: SH
(i) The Committee noted the papers discussing oversight of Post Office.
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PARC 16/09 UPDATE ON COMPLIANCE MONITORING
(a) SH presented for approval the Compliance Monitoring Plan 2016/17. I
The Chairman assured the Committee that she had discussed the Plan
with SH and GH in some detail and was content to recommend it for
approval.
(b) The Committee approved the Compliance Monitoring Plan 2016/17, as
submitted to the meeting.
PARC 16/10 OTHER ASSURANCE WORK
Audit Activity Update
(a) SH presented the slide which provided the Committee with a brief update
on audit activity for March 2016.
(b) The Committee noted the update provided.
Anti-Money Laundering (AML) and Counter Terrorist Financing
(CTF) Framework Report - Findings and Proposed Responses
(c) JM presented the paper which provided the Committee with an update
on the recommendations and actions following the recent AML and CTF
review and set out any impact on the Company.
(d) The Committee noted the update provided.
PARC 16/11 INTERNAL AUDIT UPDATE
(a) GH presented the internal audit report and reminded the Committee that
for 2015/16 the internal audit work had been limited to a review of
compliance readiness for the standing up of the Company on 1 October
2015.
(b) The Committee noted the update.
PARC 16/12 INTERNAL AUDIT PLAN 2016/17
(a) GH presented for approval the proposed internal audit plan for 2016/17.
The plan had been developed using a risk based approach according to
Internal Auditing Standards and was based on the risks identified by the
Company's management in its risk registers. Input had also been sought
from members of the Committee, members of the Executive and their
teams and consideration had been given to the proposed Post Office
financial services reviews.
(b) RC commented that the third priority area — oversight of outsourced
activities, appointed representative and third parties — was too wide. The
Committee agreed to the suggestion that this area be further broken
down by risks: appointed representative; Master Services Agreement;
ACTION: GH and counterparty risks for third party services.
(c) The Committee noted that some of the sponsors of the proposed reviews
required amendment, for example, the main sponsors for the Post Office
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financial services reviews should be reversed to show Kevin Gilliland with
ACTION: GH NK in brackets.
(d) The Committee discussed the proposed Post Office financial services
reviews which would also address risks to the Company and concluded I
that the four reviews appeared appropriate for Post Office as an I
appointed representative.
(e) An update on how work was being prioritised would be submitted to the
next meeting of the Committee in May 2016, together with information on I
ACTION: GH the budget which had not been available for this meeting. I
(f) The Committee approved the internal audit plan for 2016/17, subject to
the requested changes specified in paragraphs (b) and (c) above and
noted the proposed Post Office financial services reviews.
PARC 16/13 REPORT TO THE BOARD AND TO THE POST OFFICE AUDIT, RISK I
AND COMPLIANCE COMMITTEE
(a) It was agreed that the Chairman’s report from the meeting to the Board
and to the Post Office Audit, Risk and Compliance Committee would
include the following:
¢ the Committee's consideration of the oversight of Post Office and the I
action for the Committee to receive in May 2016 a comprehensive
action plan covering this oversight;
« the Committee's consideration of: the Company's policy framework;
updates on risk and compliance; and the engagement between Post
Office and the Company on both the executive and non-executive
levels;
¢ the Committee's approval of the Compliance Monitoring Plan and the
Internal Audit Plan for 2016/17; and
¢ the Committee's noting of the External Audit Plan for the period
ending 27 March 2016 and the audit fee.
(b) The Committee noted that both these reports would be verbal since the I
timing of the Board (to be held on 15 March 2016) and the Post Office I
Audit, Risk and Compliance Committee (to be held on 17 March 2016)
did not allow for the submission of written reports.
PARC 16/14 ANY OTHER BUSINESS
(a) The Committee noted that the Board’s second risk workshop would be '
held on Tuesday 14 June 2016. The Chairman stated that the workshop i
would focus on refreshing and reviewing the Company's risk appetite
statement, following the scheduled approval of the strategy in May 2016
and confirmation of the Annual Operating Plan.
(b) There being no further business the Chairman declared the meeting
closed at 1.05pm.
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PARC 16/15 DATE OF NEXT MEETING I
(a) The Committee noted that its next meeting would be held on Tuesday 10 I
May 2016 at 2.00pm.
Date
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POL ARC 16/10 — 16/20
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Strictly Confidential
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
Present:
Carla Stent
Tim Franklin
Ken McCall
Richard Callard
In Attendance:
Paula Vennells
Alisdair Cameron
Jane MacLeod
Nick Kennett
Alwen Lyons
Mike Morley-Fletcher
Garry Hooton
Peter Mclver
Mounia Mukina
Elena Belyaeva
Natasha Wilson
Tim Giles
Amanda Bowe
POLARC 16/10
POLARC 16/11
POL ARC, 17" March 2016
held at 2.00pm on 17" March 2016
at 20 Finsbury Street, London EC2Y 9AQ
Chairman (Chair)
Non-Executive Director (TF)
Non-Executive Director (KM)
Non-Executive Director (RC)
Chief Executive, (CEO)
Chief Financial Officer (CFO)
General Counsel (GC)
Financial Services Director, & CEO POMS (NK)
Company Secretary (CoSec)
Head of Risk and Assurance, Corporate Services, (MMF)
Audit Manager (GH)
Ernst & Young (EY) (PM) by conference call
EY (MM)
EY (EB)
Director, Reward & Pensions (NW) (Minute 16/18 only)
Aon Hewitt (TG) (Minute 16/18 only)
Post Office Management Services Limited (POMS) Non-
Executive Director and Chair of ARC (AB) (Minute 16/11 only) by
conference call
INTRODUCTION
(a)
(b)
A quorum being present, the Chairman opened the meeting.
Each Director confirmed that they had no conflict of interest in
relation to the business to be considered at the meeting.
REPORT FROM POMS ARC
(a)
(b)
(c)
The Chair welcomed AB to the meeting.
AB gave a verbal report from the meeting of the POMS ARC which
had taken place on 15 March 2016, immediately preceding the
POMS Board.
The POMS ARC’s main focus of discussion had been: oversight by
Post Office; consideration of the Policy Framework; and updates on
risk and compliance.
1 FINAL
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(d) The POMS ARC had approved: the Compliance Monitoring Plan; the
Internal Audit Plan for 2016/07; and the noted the External Audit
Plan and fee for the period ending 27 March 2016.
(e) The POMS ARC in May would receive a comprehensive action plan
covering the oversight of POL performance under the MSA; the
management of risk associated with POL commercial activities —
especially regarding marketing & sales activity; and oversight of POL
regulatory activities.
(f) NK explained that the need for clarity in the relationships of the
Principal and Appointed Representative had been raised by PwC in
the readiness assurance provided for POL before the establishment
of POMS. He reported that POL CEO would be attending a POMS
ARC and Board in due course.
(g) NK explained that the immediate issue of managing compliance in
the branch network including AML is covered in work being
undertaken by the GC.
The Committee asked for a paper for the May meeting
explaining how POL had oversight of regulatory activity in
ACTION: GC branch and how issues are escalated.
(h) The Committee asked how POL and POMS were kept abreast of
regulatory changes. NK assured the Committee that responsibility
for horizon scanning for regulatory changes was the accountability
of a member of his POMS team.
(i) The Committee noted the report.
(j) AB left the meeting.
POLARC 16/12 MINUTES OF THE MEETING HELD ON 22 JANUARY 2016, STATUS
REPORT AND MATTERS ARISING
(a) I The minutes of the meeting held on 22 January 2016 were
approved as presented and the Chair of the Committee was
authorised to sign them as a true record.
(b) POLARC 15/30 (e) —- The Committee noted the developments to
the Contract Management processes and noted the further work
that would be required across each function commencing in Q1
2016/17.
(c) POLARC 16/02 (e) —- The Committee noted the Cyber Security and
Information Assurance Update paper.
(d) The Committee asked for more clarity on how actions had been
discharged before reporting them as closed.
CoSec was asked to highlight where actions are absorbed into
ACTION: CoSec activity which the Committee are tracking.
(e) The Committee noted the action list dated 11" March 2016.
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POLARC 16/13 RISK & CONTROLS UPDATE
(a) MMF introduced the Risk Update and explained the progress to
date.
(b) The Committee discussed the Group Risk Profile and Incident
Reporting and asked whether Trinity should have been highlighted
as an incident. MMF explained that Trinity was being treated as a
risk mitigation for risk 7, which had consequently be renamed from
‘Transformation Complexity’ to ‘Transformation IT delivery’. A
reduction in the net risk evaluation was expected in the near future
as the impact of Trinity was taken into account.
(c) The Committee asked for more granular detail on the ‘top risks’ to
enable them to understand the contribution of specific issues such
as IRIS or Trinity. Using ‘Industrial Relations’ as an example, the
CEO explained that the risk rating was a conflation of the Industrial
Relations risk of a number of transformational projects.
Description of top risks to be amended where relevant to
ACTION: MMF identify the contribution to the top risks of issues such as IRIS
or Trinity.
(d) The Committee discussed the IT incident reporting. The CFO
explained that a survey of incidents was in place and reviewed by
the Group Executive (GE).
Consider how to make failure of any of the critical suppliers
(eg ATOS, Fujitsu, BOI, RMG) more apparent on the Risk
ACTION: MMF Profile, with an explanation of how Management are managing
the risk.
e) The Committee discussed whether the ‘top risks’ covered the
current areas and issues which were of most concern to the CEO.
Consider how to update the ARC/Board on the current risks
facing the business at a point in time and relating these back
ACTION: MMF to the ‘top risks’, giving greater clarity on the ‘risks of the
moment’.
(f) MMF reported the progress made in developing the General
Control Framework. The GE accountabilities had been agreed
and would be included in objectives for 2016/17. An attestation
process to enable GE self-assurance had been developed which
would be trialled during the Interim Accounts process and in place
POL ARC, 17" March 2016 3 FINAL
ACTION: MMF
ACTION: GC
ACTION: CoSec
POL ARC, 17" March 2016
(9)
(h)
(i)
()
(k)
(!)
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for the 2016/17 year end Board Annual Assessment and disclosure
in the Annual Report & Accounts.
The Committee asked for assurance that the timescales for
developing the Policy Framework were realistic and were assured
by MMF that the work was progressing to plan. The GC explained
that some policies had been brought forward to meet the timetable
of the Banking Services Framework assurance and that these were
on track.
Include in the Policy Framework update for the May ARC an
explanation of the governance for policies, and which will be
presented to which Committee for oversight.
The Committee discussed the Business Continuity Plan (BCP)
and challenged the timescale to complete phase 3 of the process.
MMF explained that the October date included in the paper was
when BCP would become business as usual, it was not meant to
suggest that nothing would be in place before that date.
The CEO stressed that the work underway was to document best
practice but that processes were in place for BCP and the Business
had the ability to react to an incident.
The Committee asked what part the Board played in the Crisis
Management Construct and how the Board would be informed if an
incident occurred. The CEO explained that she was personally
responsible for keeping the Chairman and the Board informed.
The Committee requested that the Crisis Management plan
included details of the role of the Board making clear when
and how they would be contacted. It would be finalised and
circulated to the Board as soon as possible.
The Committee approved the draft proposal for the Post Office
revised corporate governance compliance statement for inclusion in
the governance section of the 2015/16 Report and Accounts.
Include the statement ‘PO maintains standards of corporate
governance appropriate for our ownership structure, our
commitment to social purpose and our strategy to commercial
sustainability’ in the Annual Report & Accounts.
After providing feedback on its elements, the Committee noted the
Risk Update.
4 FINAL
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POLARC 16/14 INTERNAL AUDIT UPDATE
(a) GH introduced the Internal Audit (IA) Update. The Committee were
disappointed by the lack of progress on IA actions and challenged
management as to whether enough focus was being given to the IA
findings.
(b) I The CEO explained the time pressure that Trinity had put on the
Business over the last two months but accepted that the actions had
not be progressed quickly enough. The CEO promised that audit
actions would be addressed before the May ARC and that in future
GE members would be invited to the Committee if red audit actions
had not been addressed.
Late red audit actions to be addressed before the May ARC and
where this has not happened the GE responsible would be
ACTION: GH invited to the Committee to explain why actions had not been
cleared.
The Committee asked that the GE responsible for the Financial
ACTION:GC Crime audit be invited to the May ARC.
(c) The Committee were concerned by the report on Property
Compliance Governance, especially in relationship to Health &
Safety. The GC expected to have property compliance in place by
the end of March, and that all the property IA actions would be
completed before the next ARC.
Provide an update on property compliance governance for the
ACTION: Kevin Committee, with more detail on the areas of concern highlighted
Seller in the report.
(d) The CFO gave an update on Trinity and a FOI request received from
a law firm. The GC explained the nature of the request and stressed
that the information supplied would be redacted to ensure no
commercially sensitive information was provided.
(e) Having taken all the discussion points into consideration, the
Committee noted the update.
POLARC 16/15 INTERNAL AUDIT PLAN 2016/17
(a) I GH introduced the proposed Internal Audit Plan for 2016/17.
(b) I The Committee asked that cyber security to be included as part of
the proposed reviews and not as part of the watch list.
ACTION: GH Cyber security to be included as a review in the Internal Audit
plan 2016/17.
(c) GH confirmed that he had the required resource to complete the
proposed Audit Plan.
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(d) Having taken all the discussion points into consideration, the
Committee approved the Internal Audit Plan for 2016/17.
POLARC 16/16 AML CTF FRAMEWORK
(a) GC introduced the Anti-Money Laundering (AML) and Counter
Terrorist Financing (CTF) Framework. During 2015 responsibility for
AML had moved to the Head of Security who had commissioned a
review by Promontory. The recommendations from this review were
summarised in the Committee paper.
(b) GC reported that the business has also been notified by HMRC that
they are to carry out an AML/CFT compliance audit on the Post
Office in 2016 in advance of a possible Financial Action Taskforce
Review in 2017.
(c) The Committee were concerned by the issues raised in the
Promontory report and asked for the following updates:
ACTION: GC A monthly progress report on the actions highlighted in the
Promontory report to be circulated to the Committee
ACTION: GC A report on AML at every ARC meeting including a stakeholder
plan
(d) The Committee asked GC if the Audit team could assist in the
process and the Chair offered her experience in AML risks and
frameworks.
(e) Following discussions the Committee noted the paper.
POLARC 16/17 FINANCE
Lessons learnt on Postmaster Compensation provision
(a) CFO introduced the Lessons Learnt paper on Postmasters’
Compensation.
(b) The Committee recognised the work undertaken to improve the
controls and noted the changes that had been implemented.
Update on Financial Reporting and Controls
(c) CFO introduced the update on Financial Reporting and Controls.
His paper set out the areas where work is underway to give
assurance for the signing of the 2015/16 year end accounts, but also
to build effective controls for the future.
(d) CFO told the Committee that during the work no further areas of
discrepancy had been identified. CFO noted the criticality of the
income reconciliation from source data through to client settlement.
Scrutiny of the items on the Balance Sheet, was also underway and
would include post balance sheet event testing.
(e) CFO took some comfort that the external audit plan approach had
been changed to include more testing of the balances.
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(f) Having commented on the progress and the plans, the Committee
noted the paper.
EY External Audit Update
(g) PM introduced the External Audit Update and the audit approach
which included:
1. Additional work planned to further test the Postmaster
Compensation Provision which was highlighted in Appendix
A of the EY report, including post balance sheet payments to
subpostmasters.
2. Revenue reconciliation across a range of diverse products
and systems, similar approach to last year.
3. Classification of and completeness of the exceptional items
and the utilisation of the Government Funding, similar
approach to last year
4. Other areas would include Pension valuation & accounting;
VAT accounting; and IT and SAP Core Finance System
checks, similar approach to last year
Performance materiality levels had been reduced from 75% to 50%
So any errors over £540k would be deemed material and included in
the audit report.
(h) The Committee challenged PM on the appropriateness of using a
similar audit approach to last year which had not identified the
Postmaster Compensation Provision issue. The Committee asked
what EY had learnt from the previous audit and what additional
checks would be put in place this year. PM acknowledged the fact
that the EY audit had not identified the issue in last year’s accounts
and that a new team was in place to give a fresh set of eyes and to
challenge the risks.
(i) I PM gave assurance that the approach this year would include more
substantive testing and lower level of materiality.
(j) IThe Committee asked if the audit approach for 2015/16 had been in
place would it have highlighted the Postmaster Compensation
Provision error in 2014/15.
PM was asked for written response, before the next ARC, to
explain what EY had learnt from last year’s audit and if the audit
ACTION:PM approach for 2015/16 had been in place in 2014/15 would EY
have highlighted the Postmaster Compensation Provision
error.’
(k) I The Committee noted the report.
Report and Accounts
(l) IThe CFO introduced the production approach for the Report and
Accounts 2015/16.
(m) The Committee endorsed the approach, process and timescales
outlined and noted the paper.
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POLARC 16/18 PENSIONS INVESTMENT REPORT
(a) The Committee discussed the Pensions papers presented which
were not clear about what the Committee were being asked to
decide.
(b) I The CFO gave an introduction to the agenda item and explained that
the Business was in the mid-point of a consultation to close the
Defined Benefits Pension Scheme to further accrual. Because of this
the Pension Trustee had delayed the triannual evaluation which
meant that the scheme surplus position reported in the papers
appeared optimistic. The Trustee recognise the weakening employer
covenant and therefore proposed to de-risk the scheme. Part of this
decision required the Trustee to consult with the Business and was
the reason for the paper coming to the ARC.
(c) The Chair welcome NW and TG to the meeting.
(d) TG gave a high level summary of the report.
(e) I The Committee recognised that Virginia Holmes, the Non-Executive
on the Board with pensions expertise, would have been a helpful
contributor to the debate and the Chair suggested she be invited to
join the ARC for any future pension slots.
The Chair to ask Virginia Holmes if she would be able to join
ACTION: Chair ARC for any pension debates
(f) CFO emphasised that it was the responsibility of the Trustees to take
any decision to de-risk the Scheme and that the Committee was
being asked to note that decision. The Committee asked NW to
contact Virginia Holmes before responding to the Trustee to
understand her view on the decision being made.
(g) The Committee understood the Trustee desire to de-risk the pension
scheme to protect the members from a weakened covenant and
noted this decision.
(h) NW and TG left the meeting.
POLARC 16/19 REVIEW OF THE ARC TERMS OF REFERENCE AND INTERNAL
AUDIT CHARTER
(a) I GC introduced the ARC Terms of Reference review.
(b) I The Chair asked if during the year the ARC had met with EY without
Management attending. The Company Secretary confirmed that this
had taken place as part of the May ARC meeting.
(c) I The Committee asked that AML be added to the proposed topics for
all forward agendas.
ACTION: CoSec Include AML on every ARC agenda going forward, until further
notice.
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(d) The Committee members confirmed that they had fulfilled the
requirements of the ARC Terms of Reference as specified by the
Board.
(e) I The Committee noted the Annual Self-Assessment of the Internal
Audit Charter.
POLARC 16/20 ITEMS FOR NOTING
Horizon Spotting
(a) The Committee discussed the Horizon Spotting paper and
suggested that Management add the current Trade Union Bill and
Ofcom Review.
Include the Trade Union Bill and Ofcom Review in the Horizon
ACTION: GC Spotting exercise.
(b) I GC explained that the implications of the Modern Slavery Act 2015
were being tested in relationship to subpostmasters and their
employees, and that this might require a change to the
subpostmaster contract. The Committee discussed the requirement
on the Business to ensure its key suppliers were also adhering to the
Modern Slavery Act.
Provide a paper for the May ARC/Board to explain the approach
ACTION:GC to Modern Slavery, including subpostmasters and their
employees and Post Office key suppliers.
(c) The Committee noted the paper.
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Strictly Confidential
Post Office Limited ARC Committee
Status Report as at 12/05/2016
REFERENCE [ACTION ‘Action Owner Due Date STATUS Open/Closed
(GE Member)
7 March 2016 IPensions Investment Report Carla Stent IMay ARC Company Secretary to ensure that (Closed
POLARC 16/18 ITo invite Virginia Holmes to ARC for any pension debates Virginia Holmes invited to relevant
Ce) meetings.
2i September _ IStrategic risk/Risk update -To look separately at the CFO May ARC Noting paper Closed
2015 15/30 (f)_Imanagement of the ATOS contract.
7 March 2016 Review of the ARC Terms of Reference and Internal Audit ICompany May ARC fincluded on forward agenda (Closed
POLARC 16/19 (cICharter Secretary
) IThe Committee asked that AML be added to the proposed
topics for all forward agendas.
7 March 2016 IRisk and Control Update Company Ti-Apr-16 [Statement included in the corporate [Closed
POLARC 16/13. IInclude the statement ‘PO maintains standards of Secretary governance overview on the first page
tk) corporate governance appropriate for our ownership lof the governance statement.
structure, our commitment to social purpose and our
strategy to commercial sustainability’ in the Annual
Report & Accounts.
17 March 2016 IStatus Report Company May ARC Ongoing. Closed
POLARC 16/12 ICoSec was asked to highlight where actions are absorbed ISecretary
(a) into activity which the Committee are tracking.
7 March 2016 I[nternal Audit Update Garry Hooton IMay ARC [Attending the meeting (Closed
POLARC 16/14 IThe Committee asked that the GE member responsible for
(b) the Financial Crime audit be invited to the May ARC.
17 March 2016 Internal Audit Update Garry Hooton [May ARC Financial Crime Audit on the May Closed
POLARC 16/14 Late red audit actions to be addressed before the May agenda. 32 overdues reported last
(b) ARC and where this has not happened the GE responsible time, 26 cleared. 6 remain with clear
would be invited to the Committee to explain why actions plans to address.
had not been cleared.
17 March 2016 Internal Audit Plan 2016/17 Garry Hooton Included in the Internal Audit Plan. Will [Closed
POLARC 16/15
2)
Cyber security to be included as a review in the Internal
Audit plan 2016/17.
be done in time to report to the
September ARC.
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REFERENCE [ACTION Action Owner [Due Date STATUS Open/Closed
(GE Member)
7 March 2016 [Re z (General September ARC (Open
POLARC 16/11 IThe Committee asked for a paper for the May meeting _ I Counsel
cf) lexplaining how POL had oversight of regulatory activity in
branch and how issues are escalated.
17 March 2016 [AML CTF Framework General May ARC Included on May agenda closed
POLARC 16/16 (cITo provide a monthly progress report on the actions Counsel
) highlighted in the Promontory report to be circulated to
the Committee.
17 March 2016 I General Update at the Addressed in the BCP paper under Closed
POLARC 16/13 (j IThe Committee requested that the Crisis Management I Counsel May ARC conclusion four.
) plan included details of the role of the Board making clear
when and how they would be contacted. It would be
finalised and circulated to the Board when available.
22 January 2016 IRisk Update General May ARC Corporate Governance Capability - EY [Open
POLARC 16/03 IFor the Executive to work with the external auditors to I Counsel are assisting us in developing a plan for
(a) set out what a three year roadmap to benchmark against updating the May ARC
the UK Corporate Governance Code would like.
77 March 2016 [Horizon Spotting General May ARC and [To be provided to the Board 24 May. [Closed
POLARC 16/20 [Provide a paper for the May ARC/Board to explain the I Counsel Board
(>) approach to Modern Slavery Act.
17 March 2016 Horizon Spotting General May ARC See paragraphs 1-9 ofthe Horizon [Closed
POLARC 16/20 Include the Trade Union Bill and Ofcom Review inthe —_ [Counsel scanning paper.
(a) Horizon Spotting exercise.
17 March 2016 [AMI Framew General May ARC included on May agenda and forward IClosed
POLARC 16/16 (cITo provide a report on AML at every ARC meeting Counsel plan.
) including a stakeholder plan.
17 March 2016 Internal Audit Update Kevin Seller [March ARC Paper going to May ARC. Closed
POLARC 16/14 (cIProvide an update on property compliance governance for
) the Committee, with more detail on the areas of concern
highlighted in the report.
17 March 2016 Risk and Control Update Mike Morley- [Sept ARC Critical supplier failure will be made [Open
POLARC 16/13 IConsider how to make failure of any of the critical Fletcher more explicit when the Top Risks are
(d)
suppliers (e.g. ATOS, Fujitsu, Bol, RMG) more apparent
lon the Risk Profile, with an explanation of how
Management are managing the risk.
reviewed with GE members at the half
year and reported to September ARC.
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REFERENCE [ACTION Action Owner [Due Date STATUS Open/Closed
(GE Member)
7 March 2016 IRisk and Control Update Mike Morley- [May ARC Included in update paper on Policy Closed
POLARC 16/13 Include in the Policy Framework update for the May ARC_ IFletcher Framework in paper 7a, Appendix 1.
(9) jan explanation of the governance for policies, and which
Iwill be presented to which Committee for oversight.
17 March 2016 Risk and Control Update Mike Morley- [September ARC [Risks of the Moment’ will be consideredIOpen
POLARC 16/13 IConsider how to update the ARC/Board on the current —_I Fletcher when the Top Risks are reviewed with
Ke) risks facing the business at a point in time and relating GE members at the half year and
these back to the 'top risks’, giving greater clarity on the reported to September ARC
‘risks of the moment’.
[17 March 2016 Risk and Controls Update Mike Morley- [September ARC [The impact of issues such as Iris and Open
POLARC 16/13 (cIDescription of top risks to be amended where relevant to IFletcher Trinity will be considered when the Top
) identify the contribution to the top risks of issues such as. Risks are reviewed with GE members at
Iris or Trinity. the half year, particularly in mitigation
plans and reported to September ARC
17 March 2016 [Finance Peter Mciver [May ARC Paper from Peter Mciver circulated on [Closed
POLARC 16/17
(6)
To provide a written response, before the next ARC, to
lexplain what EY had learnt from last year's audit and if
the audit approach for 2015/16 had been in place in
2014/15 would EY have highlighted the Postmaster
Compensation Provision error.
27 April 2016. Included on the May ARC
agenda.
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POST OFFICE PAGE 1 OF 3
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 ARC 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. It is proposed that a short ARC call be arranged for the end of June to confirm the
completion of the work, provide details of any findings and agree that the ARA can be
signed and published, within the Board’s delegated authority.
4. The papers comprise a full ARA, a briefing book setting out details of the financial results, a
report from Ernst & Young on their findings to date and the latest update on progress in
improving financial reporting and control.
Questions
5. 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?
e What issues are we drawing to the ARC’s attention in their review?
The Main Report
Financial Results
6. 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.
7. Overall, as planned, POL is now spending more on transformation than it receives through
the declining Government Grant. As a result, we increased the use of our facility with
government, increasing borrowings by £155m to £465m, against a limit of £950m.
Strictly Private and Confidential 1
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Audit Status
8. As previously discussed with the ARC, given the need to strengthen the financial control
environment, additional procedures are being carried out. The bulk of this work is finished
and further detail is provided in the Financial Reporting update and the external audit
report from EY.
9. 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.
10. As agreed with the ARC, procedures will be completed during the next few weeks and
updated with ongoing reviews of post year end transactions. The Board on 24 May will be
asked to approve the ARA subject to the completion of this work, delegating authority to
the ARC to give final approval and to the CEO and CFO to then sign the financial
statements. An additional ARC call will be diarised towards the end of June.
Matters for the ARC’s attention
Basis of preparation
11. The financial statements have been prepared on a basis that is consistent with prior years.
12. The accounts have been prepared on the assumption that POL is a going concern, taking
into account the funding and facilities available. 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 is incurred. The amount written off in 2015-16 was £137m (2014-15 £141m) 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.
As previously 29 March 2015
reported Restatement Restated
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 as operating costs of £3m and
income of £0.16m are removed (2014/15: £3m). 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.
Input Sought
21. The ARC is requested to review and comment on the draft Annual Report and Financial
Statements for 2015-16, enabling the Chairman to provide a verbal report to the Board on
24 June.
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Audit, Risk and Compliance Board Sub-
Committee
Year ended 27 March 2016
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Section Page
1. Glossary 3
2. Introduction 4
3. Accounting Policies 4
4. Primary Statements 5
5. Operating Profit 8
6. Revenue 9
7. Costs and People 13
8. Quality of Earnings 17
9. Pensions 19
10. Exceptional Items and Provisions 22
11. ‘Interest, cash, debt, funding and hedging 24
12. Going Concern 25
13. Property, plant and equipment and non-current assets held for sale 27
14. Goodwill, Investments and Intangibles 28
15. Working Capital 29
16. Provisions 35
17. Litigation and claims- potential claims regarding Horizon 36
18. Taxation 38
19. Impairment 39
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1. Glossary
Below is a listing of key abbreviations used throughout this document with the full
meaning given:
Abbreviation I Meaning
AEI Application, Enrolment & Identity
ATM 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 A contract variation made in 2007 with POFS generating £100m
cash and income over a number of years in return for a series of
commitments through to 2020
GRNI 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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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.
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 Em
Continuing operations:
Turnover 981 976
Network Subsidy Payment 130 160
Revenue
1,111 1,136
People costs excluding restructuring costs
Other operating costs
(233) (238)
(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
- impairment
(283) (301)
(136) (140)
Operating loss from continuing operations
Profit on disposal of property, plant and equipment
(164) (168)
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)
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)
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
=m
103
5 1
set :
(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
e Postmasters costs - section 7.3
e 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%)
e £1.7m reduction in special mails including international (2%)
e £0.5m net decrease in other products
Offset by
e £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.
o £5.0m due to the BOI savings underpin.
e £4.0m increase in Travel products.
o £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
e £11.3m increase in Insurance revenue is driven by the acquisition of the insurance
business from BOI in September 2015.
e £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:
e £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:
e« £9.7m lower DVLA revenues from a fall in volume as a result of the paperless car
tax.
e 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
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)
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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 £m £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) ie} 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) ie} 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.
e 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
7.3.4
7.4
7.4.1
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 £m £m % Comments
Decrease due to decision to
Mails & Retail (3) (4) 1 15% _ restrict product range to higher
margin items
Financial 9 Fi
Services (4) (1) (3) (270%) Increase is due to POMS
Increase of £0.8m is due to
Government £2m related to Verify service
Services Q9) (28) (1) (3%) offset by £1.2m lower POCA
volumes
Increase of £1.5m due impact
0,
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 £m £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} 0
Reported EBITDAS (24) (57) (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
8.4
8.5
8.6
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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.
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.
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.
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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9.1
9.2
9.3
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Pensions
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.
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 2015
% pa RMPP Post Office Section
Inflation (RPI) 2.9 3.0
Inflation (CPI) 1.8 1.9
Discount rate (i.e. bond rate) 3.5 3.5
Rate of increase in Pensionable
salaries 2.8 2.8
Rate of pension increases - RMPP A/B 1.8 1.9
Rate of pension increases —- RMPP C 2.8 2.8
Rate of increases in deferred pensions 1.8 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.
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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9.4
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Year ended Year ended
27 March 29 March
2016 2015
£m £m
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.
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 Plc 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.
10.1
10.2
10.3
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Exceptional Items and Provisions
This section discusses the exceptional items on the income statement together with
movements in the related balance sheet provisions/payables.
Exceptional items summary
The following exceptional items were recognised in the consolidated income statement for
the 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 . . ee Jj
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 = 20
Total cash and cash equivalents 712 821
Loans, re _ _ oO).
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 1%* 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 444 324 302 311
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) wu 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.
13.1
Property, plant and equipment and non-current assets held for sale
Net Book Values
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The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed
assets at 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 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 £m
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 6 6
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
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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The Bank of Ireland cost recovery debtor relates to marketing and promotional spend
incurred on their behalf. This has decreased by £2m as invoices have been paid in year.
There has been a decrease in the FRES cost recovery debtor of £2m due to a provision
raised to cover older outstanding invoices.
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 £m
Bank of Ireland 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 ees 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 £m
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
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
Others 138 140
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
Advanced customer payments 7 1
Postal order liability 11 12
Drop and Go 1 1
Gamma 4 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).
Bank of Ireland deferred income concludes in financial year 2022-23 and is recognised in
line with an agreed amortisation schedule. The final instalment of £2m was received early in
2015/16.
The amortisation profile was reviewed following the Hawk acquisition from the Bank of
Ireland, and a one-off £5m was released to income for the year. Additionally amortisation
of £4.3m was released to income as normal during the year; ongoing this reduces to £3.6m
per annum following the review of Gamma deferred income.
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16. Provisions
Provisions (March 2016: £163m vs March 2015: £150m)
Crown
Conversion Network
Vacant/ Transformation Other
Onerous £m £m
leases Total
£m £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: Enil), 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.
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 Activity
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
19.1
19.2
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 Enil 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:
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.
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.
39
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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.
40
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* Building a better
+ - working world
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eat
a better exvRSTOR I
ing wortd
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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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
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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 to 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 overail 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 to 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.
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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 ciaims,
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.
Acquisition of Insurance Business division from Bank of Ireland (Project Hawk): We reviewed the Project
Hawk accounting papers prepared by Management. As part of our audit procedures, we are satisfied that the
acquisition of the Bank of Ireland insurance Business division was appropriately accounted for as a business
combination under IFRS 3. We also concurred with Management assumptions on the assessment of the
impairment of goodwill (£43.8m) recognised as a result of this transaction and the write-off of c.£2.6m of acquisition
related costs.
Release of deferred commission received from Bank of Ireland in relation to the sales of the insurance
products by Post Office: As part of our audit procedures we noted that following the finalisation of acquisition of
Bank of ireland Insurance Business division discussed above, Post Office Limited released £5m of deferred
revenue. This represents the element of the commission previously received from Bank of Ireland under the
Financial Services Join Venture Agreement related to the sales of Bank of Ireland insurance products through the
Post Office network. We discussed with Management, sought representations and checked with the contract terms
whether there are any claw-back conditions to return part of commission to Bank of Ireland and identified none. We
concurred with Management's assumption to release part of deferred commission and recognise as revenue in
2016.
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
aiso 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, POLSAP, 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.
~
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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 contro! 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.
eview 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 outtums
Annual report and confirmed; 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
P 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
r EY
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 th our audit the G a Management and
‘0 be signed/ dated contemporaneous with our audit opinion on the Group an ‘Audit committee
Letter of representation Company 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
. Z Management and
Joumal entries testing Follow up on queries to Company in relation to journal entries selected for EY
testing
+ Follow up on final signed deliverables from PwC FRES component audit team;
FRES - Interotfice + Review of PwC component team’s working papers for FRES audit ey
reporting deliverables
Goodwillimpaiment __ Fialisation 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
Poet Office Limited. 2
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Significant accounting and auditing matters
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 weil as the
reliability of the underlying data used to develop the estimate.
Deseo
High Estimate involves significant judgement and is made with little 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. it
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) Mediurn
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) Mediurn
* Identified as a significant risk under Intemational Standards on Auditing and communicated in our Audit Planning Report in March 2046
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Significant accounting and auditing matters
(cont'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 to 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 focus 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 reasonabie.
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
individua! 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 sampie 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 matters
( .
(cont'd)
1. 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 cornplete 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 fo Postmasters
made post year end (for April 2016). This was done by checking that all 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 inciuded 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 to 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 line with Management's expectation as the original programme was set out to transform up to 8,000
branches (nen-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 abie 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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Significant accounting and auditing matters
(cont'd)
7 2. Revenue recognition across diverse range of revenue streams (£1,111m)
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 caiculations 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 aiso performed detailed test of controls
work on those revenue lines, this testing involved checking correct contractual rates and volumes data in their
calculations. No issues were identified and we have taken a controls-based approach to all revenue lines.
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 fine 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 availabie, 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 aiso 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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Significant accounting and auditing matters
(cont’ dq)
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 IAS 20 Government Grants.
Please refer to the table below for the details on exceptional items recorded for 2016 year:
Agents Compensation
It Transformation costs
Bu iness Transforma ion Prograt
Business Transformation costs
ee
feomer ee ceeds) Guurges Given eI
Total operating exceptional expense, net I (269) (272)
3.1 Network Transformation (£75m) and Crown Transformation costs (£23m)
The Network Transformation and Crown Transformation costs are attributable to the modernisation of Post
Office's existing branches as part of the transformation programme.
The network transformation has reached approximately 75% of compietion, tracking in line with budget.
Management note that the costs of network and crown transformation are exceptional in nature given that a
branch modemisation 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 statement to allow a better understanding of financial
performance in the year.
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Significant accounting and auditing matters
(cont'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
discu: 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 beth the
Network and Crown transformation and understand how it is tracking to plan. This has enabled us to
corroborate our testing results and Management explanations.
We selected a sample of $7 transactions giving us a coverage of 49% for Network Transformation cost in the
year and we tested over 50% of the Crown transformation costs. Our tests invoived obtaining the details and
the nature of the costs incurred against the overall strategy of the programme and we checked each
transaction to supporting decurnentation such as invoices and project approvals to validate that they are
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 judgernental 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
are to be reimbursed by POL. For the OBC accrua! we have identified the costs relating to accruals older than
§ months, these accruals are for works that POL have placed with suppliers for equipment services, which we
would expect to have been settled. These have both been adjusted by Mariagement 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
13.
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 matters
(cont'd)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.4 Separation (£11m)
Separation costs comprise of costs incurred to achieve separation from Royal Mail. In line 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
formaily closed down. POL have estimated internally that the maximum extension costs and penaity charges which
RMG could try to levy on them is approximately £3.0m plus irrecoverabie 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 1T Transformation Costs (£30m)
The {T 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 [T 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. 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 IT 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 to 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.
POL00103188
POL00103188
Significant accounting and auditing matters
(cont'd)
7 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
c.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 that 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 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
disciosure 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 modeis 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
POL00103188
POL00103188
Significant accounting and auditing matters
(cont'd)
3. Classification of exceptional items relating to Transformation and utilisation of
Government Grant (cont'd)
3.7 Government grant - State Aid Funding
On 19 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 to 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 Aprii 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 IT 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 to perform procedures to address risks that could result in
material misstatement due to fraud and error including the risk of management override of controis. 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.
POL00103188
POL00103188
Significant accounting and auditing matters
(cont'd)
4. Risk of management override around estimates and judgements (cont'd)
Area of focus a t
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.
detennination of their best estimate of amounts provided.
Journal entries ~ By their nature, there is the potential for the risk of We have performed joumal 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 closing 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 risk that controls operating at the We performed various procedures to assess the ‘tone
‘centre are not implemented consistently across the group. from the top’ and the design and implementation of
key entity level controls and assessed the overalt
control environment to be effective.
During the course of our audit, we found no evidence of material, or potentially materia! 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 IAS 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 utilised 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 IAS 37 ~
Provisions, and have therefore been appropriately provided for at the end of the year.
POL00103188
POL00103188
Significant accounting and auditi ing matters
(cont qd)
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 formai 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:
— RMPP —s=RMSEPP_ = RMPP = RMSEPP_
Fair value of pension plan assets 407 379 3
Pension liabilities _ ea on ee (26)
‘Surplus in plan before assets ceiling Baer oy see ie oo ec
Effect of assets celing = OV yen: Q
Surplis a cian allerassels Goling adpiainant 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 x
Price inflation (RPI)
Price inflation (CPI)
Pens ines ia
payt {above infl) CPE
Pens ines def (above CPI)”
Demographic Prudent Optimistic —
Males
Mortatity in co
I retirement
Females
Retrement age
Cor
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.
POL00103188
POL00103188
Significant accounting and auditing matters
( .
(cont'd)
Acquisition of Insurance Business division from Bank of Ireland (Project Hawk)
Post Office Limited (“POL”) and Bank of Ireland (“Bol”) had a contractuai arrangement (Financial Services Joint
Venture Agreement) under which they agreed that they will together carry on the business of selling to customers
of POL throughout the UK a range of retail financial services products endorsed by the POL and manufactured by
or on behalf of BOI. Under this contract POL had an option to acquire insurance business division of BOI during
the period frorn September 2014 to March 2016. POL indicated its interest in BOI's insurance business and
exercised this option in March 2016.
POL completed the acquisition of BO!’s insurance division business, trade and assets on 1 October 2015. The
purchase price paid by POL to BO! was determined by an independent consultant based on external valuation
and was £43.9m. The purchase price was paid in full in cash. POL incurred approximately £1.3m of acquisition
related costs, including legal expenses, various M&A fees, etc. The acquisition of BOI’s insurance business was
subject to FCA regulations, therefore the decision was made to sell the acquired business to POMS. POMS.
incurred additional £1.3m acquisition related costs, which were expensed in POMS accounts.
We reviewed the Project Hawk accounting papers prepared by Management. The transactions meet the definition
of a business combination under IFRS 3 Business Combinations on the basis that the Group purchased an
integrated set of assets that are capable of being conducted and managed as a business by a market participant.
We are yet to finalise our audit procedures on impairment considerations of goodwill recognised as a result of this
transaction. Based on our discussions with Management we understand there is no impairment of goodwill
required.
Release of deferred commission received from Bank of Ireland in relation to sales of insurance
products by Post Office
As part of our audit procedures we noted that following finalisation of acquisition of Bank of Ireland Insurance
Business division, Post Office Limited released £5m of deferred revenue. This represents part of commission
previously received frorn Bank of Ireland under Financial Services Join Venture Agreement relating to sales of
Bank of Ireland insurance products by Post Office. We discussed with Management, sought representations and
checked with the contract terms whether there are any claw-back conditions to return part of commission to Bank
of Ireland and identified none. We concurred with Management's assumption to release part of deferred
commission and recognise as revenue in 2016.
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 compiex, 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
Cari Nielsen (Head of VAT) and fan 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 aiso confirmed that there are no further unusual transactions or VAT planning arrangements
apart from those disclosed to us.
POL00103188
POL00103188
Significant accounting and auditing matters
( .
(cont'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 exernption 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:
_ (Loss)/Profit before tax oe ee 4 ee ery: Z Q
Tax Credit in Income Statement (26)
Tax charge — items taken directly to equi
and correct classifications in accordance with IAS 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 fo 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.
“eness
POL00103188
POL00103188
Significant accounting and auditing matters
(cont'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 liability 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 to finalise our review. The draft financial statements include a going concern note
covering the above.
POL00103188
POL00103188
POL00103188
POL00103188
Summary of audit differences
Summary of audit differences
ff
mstances. Jude
neertain or open to I
g Network tra
r than 12 months and Operati Bu S range over 6 months, unde!
sation Provision, unders' Mail Separation c
ie assets of PO! en Now recorded by
1)
ferpretation,
fatement of
is and impairment for
agement
Compe!
software inta
yal Mail Separation
ed Habilitie
Assets Assets non- Liabilities Incomef
Misstatements (Em) current current current expenses
Debit! Debit? Debit! Debit(Credit)
Judgementat (Credit) (Credit) (Credit) Current period
Corrected misstatements:
Network Transformation OBC Accrual - This is a release 1.2 (4.2)
of an accrual where projects have no dates or are over 6
months old, These are for vendor costs where it is
generally expected that the costs should be paid within
2 months.
Network Transformation Project Enabling Works Accrual 27 (2.7)
- 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 Postmasters Compensation C0) TO
Provision for all branches that are currently being
engaged (56 branches at an average amount of
£17,396).
Understatement of provision for the costs related © or) o8
Royal Mail Separation contract (maximum exposure of
£3.3m) and reclassification from aceruais to provisions
line.
Impairment of POMS assets within POL Group accounts
Reclassification audit difference:
Transfer of £2.5m from accruals to provisions for the 25
costs related to Royal Mail Separation contract and
reciassification from accruals to provisions tine
Balance sheet totals
T @ 2A Os)
al we ide:
lidated finan
dually or in
s for the year
Conclusion: Subject to our outstar:
aggregat
ng items, there are mo arnounts
s of the cor
POL00103188
POL00103188
POL00103188
POL00103188
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 contro! we are
required to communicate to you any significant deficiencies in interna! 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 contro! 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 formaiising 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 contro! 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 incomplete 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.
Post Olfioe Limited
POL00103188
POL00103188
Control themes & observations (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 abie 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 held to determine the effect on the overall
audit approach.
We aiso 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 contro! 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 to segregate
incompatible duties when developing and implementing system changes.
Post Gifioe Limited 2088 Audit Rows
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Appendix A Independence update
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 matter 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 1: Fujitsu SAE 3402 report —
1SAE3402 report for the Fujitsu services
supporting the POL account. This report will
provide an assessment of the Fujitsu controls
supporting POL business critical systems. We
have placed reliance on the ISAE3402 as part
of the 2015-156financial statement audit.
Service 2: ISAE 3000 report on POL Note
Circulation Scheme related services to the
Bank of England for the FY2015-16 period
and to be performed in May 2016.
Service 3: Agreed-upon procedures
performed which relate to testing of
covenants relating to the loan from the
Department of Business, Innovation and
Skills (BIS)
Service 4: Agreed-upon procedures
performed to ensure that the amount which
is collected by Post Office Limited on behalf
of the DVLA for road tax is subsequently
paid over to the DVLA.
Service 4: Agreed-upon procedures
performed to ensure that the amount which
is collected by Post Office Limited on behalf
of the DVLA for road tax is subsequently
paid over to the DVLA.
Performed on continued annual basis
Performed on continued annual basis
Performed on continued annual basis
Performed on continued annual basis
Performed on continued annual basis
Not a prohibited service
A separate team from the POL IT team has
been engaged for the review of the ISAE3402
report, and standard ring fencing applied
between two teams.
Went through review exercise to ensure in line
with EY independence rules
Not a prohibited service
‘These are standard agreed-upon-procedures,
where Management instructs us on exactly
the procedures to be performed and we
conclude by issuing a factual findings report
only.
Not a prohibited service
‘These are standard agreed-upon-procedures,
where Management instructs us on exactly
the procedures to be performed and we
conclude by issuing a factual findings report
only.
Not a prohibited service
‘These are standard agreed-upon-procedures,
where Management instructs us on exactly
the procedures to be performed and we
conclude by issuing a factual findings report
only.
Not a prohibited service
These are standard agreed-upon-procedures,
where Management instructs us on exactly
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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Appendix A Independence update (cont'd)
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.
33
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Appendix a Independence report (cont'd)
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 Fim is required ba publish by law.
The most recent ve version of this Report is for the 2015 year and can be found at ))
Financial interests Our Partners and client facing (technical) staff are prohibited from investing in any audit client around the
World
All partners and staff are required to confirm their compliance each year with the firm's independence policies
Monitoring of compliance in respect of all partners and professional managers takes place through a worldwide
investment tracking system.
New starters are required to confirm their compliance with the firm’s independence policies on commencement
of their employment.
Training Alll partners and professional staff are required to undergo regular mandatory training on our Independence and
Ethical policies and processes.
Partner rotation The firm has detailed policies on the rotation of the audit partner, and in the case of listed clients key audit
partners, the independent partner and ‘other partners and staff in senior positions’.
Consultation The firm requires consultation outside the audit team on complex accounting, auditing and ethical matters
Major issues of principle arising on all audits are referred to a panel of independent experienced audit partners.
Independent partner _Before listed company audit opinions are issued, an audit partner independent of the audit team reviews the
reviews nature of the relationship with the client, aspects of the accounts that are subject to significant estimates and
judgements, and the adequacy of the presentation of information in the accounts
Quality reviews The firm operates a worldwide programme under the direction of senior partners that annually assesses the
quality of our work. Over a three year period, a proportion of the work of all audit partners is reviewed. The
results of the programme help us to evaluate the firm's quality controls and personnel performance and identify
areas for improvement.
As with other firms, EY's audit practice is subject to annual review by the Audit Inspection Unit (AIU) and the
Quality Assurance Directorate (QAD) of the Institute of Chartered Accountants in England and Wales (ICAEW)
for compliance with Audit Regulations. As part of its visits, the AIU/QAD 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.
Emst & Young LLP has also established the EY/Ethics hotline which will allow any person, inside or outside of
EY, to confidentially and anonymously report an activity that they believe may involve conduct that is unethical,
illegal, in breach of professional standards, or is otherwise inconsistent with EY's established policies and Code
of Conduct.
Non-audit services Our audit engagement partners must approve any non-audit services offered to their clients. This allows them
to:
» Ensure the objectives of the proposed engagement are not inconsistent with the objectives of the audit of
the financial statement;
> Identify and assess any related threats to our objectivity; and
> Assess the effectiveness of available safeguards to eliminate such threats or reduce them to an acceptable
level
Where no satisfactory safeguards exist we do not carry out the non-audit service.
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“Appendix B
Management representation letter for statutory —
reporting
June 2016
Ernst & Young
1 More London Place
London SE1 2AF
Attn: Peter Mciver, 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 contro! 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 financiai 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 controls 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
individuaily 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)
1. We acknowiedge that we are responsibie 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, (regardiess of the source or form
and including without limitation, any allegations by “whistlebiowers”) 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.
Cc. 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: flist 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 all 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 weil 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 ali 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)
1. All fiabilities 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
statements.
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 disclosed in Note 20 to the consolidated and parent company financia! statements all
guarantees that we have given to third parties.
‘ies and Contingencies
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
41, 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 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.
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/capitai 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 financiai 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
1. 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 ail tax opinions, correspondence with tax authorities, or other appropriate
information that served as support for the accounting for potentially materia! 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 net 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
- Compieteness 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 deterrnine
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.
. 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
1. We have provided to you with access to 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 caiculation 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 impairrnent is required as at 27 March 2016.
Yours faithfully,
Chief Executive Officer
Chief Financial Officer
Post Gtice U
“Appendix Cc
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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:
Overview of planned scope and timing of the audit
Major issues discussed with management in connection with
initial or recurring retention
Other information in documents containing audited financial
statements
Significant audit adjustments
Unrecorded misstatements considered by management to be
immaterial
Expected modifications to the audit report
Our judgements/views about qualitative aspects of the
Company's accounting practices and financial reporting
Disagreements with management
Consultations with other accountants
Serious difficulties encountered in dealing with management
when performing the audit
The adoption of, or a change in, an accounting policy
Refer to our 2016 Audit Planning Report
Refer to our 2016 Audit Planning Report
Discussed within this report.
Discussed within this report.
Discussed within this report.
Not applicable, we do not anticipate any
modifications to our audit report
Discussed within this report.
Not applicable, no such instance noted
during our audit.
Not applicable, no such instance noted
during our audit
Not applicable, no such instance noted
during our audit.
Not applicable, no such instance noted
during our audit
“Appendix Cc
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Required communications with the Audit
and Risk Committee (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
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.
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
> An overview of the nature of the Group audit team's
planned involvement in the work to be performed by the
component auditors on the financial information of
significant components
» Instances where the Group audit team's evaluation of the
work of a component auditor gave rise to a concern about
the quality of that auditor's work
Any limitations on the Group audit, for example, where the
Group engagement team’s access to information may have
been restricted
Fraud or suspected fraud involving Group management,
component management, employees who have significant
roles in Group-wide controls or others where the fraud resulted
in a material misstatement of the Group financial statements.
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.
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“Appendix C
Required communications with the Audit
and Risk Committee (contd
‘Audit and Risk Committee pre-approval of services, including v Discussed within this report
specific pre-approval of internal control-related services and
non-prohibited tax services
Critical accounting policies and practices, ISA 260 (UK and v Discussed within this report.
Ireland) requires the auditor to communicate the auditor's,
views on the qualitative aspects of the Company's accounting
practices and financial reporting
Al material alternative accounting treatments discussed with v Discussed within this report.
management
Fees v Discussed in our Audit Planning report
dated and in this report
Other material written communications with management v Discussed within this report.
Communication of independence matters v Discussed within this report.
Other findings or issues regarding the oversight of the financial v Discussed within this report.
reporting process
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Emst & Young LLP
Assurance I Tax I Transactions I Advisory
Draft to ARC — IN STRICTEST CONFIDENCE —12 May 2016
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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Post Office Annual Report and Financial Statements I Page : 1
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Draft to ARC — IN STRICTEST CONFIDENCE —12 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 11600 branches
dedicated to meeting the needs of a myriad of different communities throughout the country. Iam
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.
In a 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 fully 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 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.
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.
Post Office Annual Report and Financial Statements I Page : 2
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Draft to ARC — IN STRICTEST CONFIDENCE —12 May 2016
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 Deparment 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.
lam 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)
Ss?
00 “93
119 116
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;
b
oS
EBITDAS, £ million
2012/13 2013/14 2014/15 215/16 2016/17 __ 2017/18
‘aaus Investment funding mumm 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 %
Mails and Retail 380 388 (8) (2.1)
Financial Services 303 290 13 45
Government Services 128 141 (13) (9.2)
Telecoms 130 120 10 83
Other income 40 37 3 8.1
Turnover 981 976 5 0S
Network Subsidy Payment 130 160 (30) (18.8)
Revenue 411,136 (25) (2.2)
People costs (233) (238) 5 24
Other operating costs (308) (831) 23 28
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 -
Less: Network Subsidy Payment (130) (160) 30 (18.8)
EBITDAS (24) (57) 32 56.1
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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
£m im £m %
Mails and Retail 380 388 (3) (2:1)
Financial Services 303 290 13 45
Government Services 128 141 (13) (9.2)
Telecoms 130 120 10 83
Other income 40 37 3 8.1
Turnover 981 976 5 05
Network Subsidy Payment 130 160 (30) (18.8)
Revenue 1111 1,136 (25) (2.2)
The payment decreased by £30 million in the year to £130 million and is recognised in revenue.
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 380 383, (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 152 127 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&I 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
£m £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
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
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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 withdrawing from the development and roll out of a proposed mobile offer in order to
focus on its Homephone and Broadband activities.
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.
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
Mae eel
23
r r r
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 Bank of Ireland with each holding 50% of the
business. First Rate Exchange Services Holdings Limited, whose principal activity is the supply of
foreign exchange in the UK to the Post Office and others. The share of operating profit from the joint
venture was £35 million (£1 million lower than in 2014/15), the small decrease is due to competitive
pressures on the high street.
Acquisition of joint insurance business
On 30 September 2015 Post Office Limited acquired from Bank of Ireland the remaining 50% of the
business and assets of our joint insurance business. The consideration of £43,900,000 was settled in
cash. The full acquisition cost is recognised as goodwill on the balance sheet and was reviewed for
impairment on the date of acquisition and at the year end. There are no indicators of impairment.
Immediately following acquisition, Post Office Limited transferred the business to its subsidiary Post
Office Management Services Limited, which operates the business alongside its existing travel
insurance activities.
From the date of acquisition the former joint insurance business has contributed £17 million of revenue
and £0.8 million of profit before tax to the Group’s results.
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Exceptional Items
Exceptional items are shown below:
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Operating exceptional items:
Restructuring costs including postmasters' compensation
Impairment of intangible assets, property, plant and equipment
Government grant
2016 2015
Restated
£m £m
(283) (301)
(136) (140)
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:
Network Transformation programme
-Postmasters' compensation
-Programme costs
Crown Transformation programme
IT Transformation programme
Business Transformation programme
Redundancy costs
Business Transformation payments
Other exceptional items
Restructuring costs
2016 2015
Restated
£m £m
102 154
75 73
23 10
30 16
9 12
29 25
4 1
11 10
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 1
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 pic 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 pic 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
£m £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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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 Corpo rate
State for Business, Innovation and Skills (BIS) holds a
special share in Post Office and the rights attached to St ructure 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.
A strong commercial link remains between Post Office
and Royal Mail, underpinned by a contractual
agreement, which is at arm’s length, to continue to
supply Royal Mail products and services through Post
Office.
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. Mindful of this commitment, in 2015/16 we reviewed our
oversight of risk and as a result rationalised the Board’s committee structure to ensure a more streamlined and
robust overview of risk at the Audit, Risk and Compliance Committee and implemented the elements of a new
risk management framework. At Post Office we are committed to conducting our business ethically and 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.
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. Appropriate governance structures have been established
to manage any potential conflicts of interest and to ensure proper reporting lines between the FCA regulated
principal, POMS, and Post Office as its parent and authorised representative for sales across the Post Office
network.
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Rationalisation of Committee Structure
One of the outcomes of the 2014/15 Board effectiveness
review was the need for the Board to review its committee
structure. The proposals resulting from this review were to
dissolve two committees: Financial Services; and Pensions.
The Board’s Audit, Risk and Compliance Committee (ARC) has
delegated responsibility for the oversight of Post Office’s risk
management systems, operational controls and key systems.
However, with the Financial Services Committee also having
responsibility for financial services risk and the Pensions
Committee for pensions risk, there was some fragmentation of
risk oversight. The Board was also mindful of the importance
of strengthening the governance of conduct risk and of
maintaining oversight of insurance risk, managed through the
ARC of the Post Office’s subsidiary Post Office Management
Services Limited (POMS).
The Board approved these proposals in September 2015, to be
effective from 1 October 2015 and the old and new structures
are provided for comparison. Following the dissolution of the
two committees, 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.
Previous Committees
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Insert old
Committee
Structure
Insert new
Committee
Structure
These two committees operated during the year but were dissolved effective 1 October 2015. The
rationale behind this committee change is set out above.
Financial Services Committee
Membership and attendance
The Committee was chaired by Virginia Holmes and the other members were Tim Franklin, non-
executive director and Alisdair Cameron, Chief Financial Officer. There were no changes to the
membership.
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The Committee’s terms of reference required it Committee Member Meetings Attended
to meet a minimum of four times a year and that (areendefeiaioe to
atten
two members were required for a quorum. In
2015/16 from the beginning of the financial year I Virginia Holmes 2/2
until the committee was dissolved, it met twice Alisdair Cameron 2/2
and the members’ attendance is set out in the
table: Tim Franklin 2/2
Role of the Committee
The Committee operated in accordance with its Terms of Reference which were approved by the
Board in January 2014 when the Committee was established. The Committee’s key responsibilities
were to: provide guidance on, oversight of and authorisation for, the development of the Post
Office’s financial services; review key activities of the financial services strategic programme,
including those activities of First Rate Exchange Services Holdings Limited (a 50 per cent joint
venture with the Bank of Ireland (UK) plc); and to consider financial services risk management
matters including receiving quarterly a copy of the risk register.
Work carried out by the Committee in 2015/16
The Committee continued to review and provide guidance on all aspects of Post Office’s financial
services, including strategy development, the monitoring of sales volumes for financial services
products and the consideration of risk.
Pensions Committee
Membership and attendance
The Committee was chaired by Virginia Holmes and the other members were Richard Callard (the
ShEx representative) and Alisdair Cameron, Chief Financial Officer. There were no changes to the
membership.
The Committee’s terms of reference required it Committee Member Meetings Attended
to meet a minimum of three times a year and (attended/eligible to
that two members were required for a quorum. attend)
In 2015/16 from the beginning of the financial Virginia Holmes 3/3
year until the committee was dissolved, it met Richard Callard 3/3
three times and the members’ attendance is set
out in the table: Alisdair Cameron 3/3
Role of the Committee
The Committee operated in accordance with its Terms of Reference which were last reviewed by the
Committee in July 2014 and approved by the Board. The Committee’s key responsibilities were to:
make recommendations to the Board in respect of pensions and pre-retirement risk benefits
provision within Post Office; put into effect appropriate investment strategies for the Post Office
section of the Royal Mail Pension Plan (RMPP) on behalf of the Board and in line with the Board’s
investment beliefs; and to monitor and keep under review the investment of RMPP assets.
Work carried out by the Committee in 2015/16
The Committee continued to monitor the funding and investments of the Royal Mail Pension Plan
(RMPP) and had oversight over the pensions project with regards to the proposed closure of the
RMPP to future accrual.
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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.
Post Office Board
Gender Diversity
& Male ® Female
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
Paula Verinells {CEO}
Tins Franidin
Richard Callard
Alisdair Cameron (CFO)
Fry Parker Khairy
Ken Mi
Carla Stent
Bzea) 1.00 2.00 3,00 4.00 5.00 6.00
w Time Semved {¥:
Post Office Annual Report and Financial Statements I Page : 19
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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
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 Ken McCall Paula Vennells
Independent Chairman Senior Independent Director Chief Executive
Joined the Board 1 October Joined the Board 21 January Joined the Board 18 October
2015 2016 2010
PHOTO PHOTO 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.
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Group Executive (as at 27 March 2016)
Below main Board level, 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. It fulfils these accountabilities through regular briefings by the Chief Executive and Chief
Financial Officer to the Shareholders and by the provision of its annual report and financial
statements and its mid-year interim report. Of particular importance for accountability is its
identification of principal risks, their impacts and mitigations and its assurance of the existence of
sound risk management and internal control systems.
. ; 2015/16 Highlights
Key focus and achievements in 2015/16
© Delivering significant progress
During the year to 27 March 2016 the Board oversaw further
in network transformation
significant progress in network transformation, with another
1,904 branches modernised, bringing the total so far to 6,001 and =e +Continued development and
delivering a better service to customers. The Board also successful implementation of
considered the development of the financial services strategy 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. Driving forwards efficiency
* Successful transition to a
revised Board membership
2016/17 Forward Focus
In 2015/16 the Board went through a period of transition witha * Ensuring support services are
optimised to deliver the
ongoing transformation
journey
change in 50 per cent of its Non-Executive Directors. This
refreshed Board will focus in 2016/17 on driving forwards
Post Office Annual Report and Financial Statements I Page : 23
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efficiency and ensuring that all support services are optimised to deliver the ongoing transformation
journey towards a sustainable and thriving network of Post Offices.
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Non-Executive Directors’ Terms of Office at 27 March 2016
Non-Executive Date of appointment Term of Unexpiredtermat I Committee
Director office 27 March 2016 memberships
Tim Parker 1 October 2015 3 years 2 years 6 months 5 Nominations
days (Chairman)
Remuneration
Richard Callard 26 March 2014 Until N/A Audit, Risk and
removal Compliance
Tim Franklin? 19 September 2012 4 years 5 months, 23 days Audit, Risk and
Compliance
Virginia Holmes 4 April 2012 3 years? 2 years, 8 days? Nominations
Remuneration
Ken McCall 21 January 2016 3 years 2 years, 9 months, Remuneration
25 (Chairman)
Audit, Risk and
Compliance
Nominations
Carla Stent 21 January 2016 3 years 2 years, 9 months, 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
Time Commitment
All Board directors should allocate sufficient time to the organisation to enable them to discharge
their responsibilities effectively. There is an implied terms within all the Non-Executive Directors’
letters of appointment that they will devote an appropriate amount of time to their role, which will
enable them to fulfil their functions satisfactorily. The Board effectiveness review to be carried out
in 2016 will consider whether directors have devoted sufficient time to their role.
Roles
The Board is comprised of six non-executive and two executive directors and the Company
Secretary. The key responsibilities of these roles are set out below:
Non-Executive
Chairman - As Chairman, Tim Parker is responsible for leadership of the Board and for ensuring its
effectiveness on all aspects of its role.
Senior Independent Director — The Board has appointed Ken McCall, one of its independent Non-
Executive Directors, as the Senior Independent Director. He provides a sounding board for the
Chairman and serves as an intermediary for the other directors when necessary.
Non-Executive Directors — Non-Executive Directors constructively challenge the executive and use
their experience and expertise to help develop proposals on strategy and to maintain appropriate
oversight of the business’ management and performance.
Executive
Chief Executive Officer — As CEO, Paula Vennells is responsible for delivering the strategy as set by
the Board and within the authorities delegated to her by the Board and for ensuring the successful
day to day management of the business.
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Chief Financial Officer — As CFO, Alisdair Cameron supports the CEO in developing and implementing
the strategy and oversees the financial delivery and performance of Post Office Group.
Company Secretary — As Company Secretary, Alwen Lyons is responsible for advising the Board,
through the Chairman, on all governance matters and ensuring good information flows within the
Board, its committees and senior management. The Company Secretary also facilitates the Board
induction process, assists with professional development and ensures compliance with Board
processes, Directors’ potential conflicts of interest, indemnity arrangements and other significant
agreements.
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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.
Director Meetings Extraordinary Meetings
(attended/eligible (attended/eligible to
to attend) attend)
Alice Perkins* 2/2 2/2
Tim Parker? 4/4 afi
Richard Callard 7/7 3/3
Tim Franklin 7/7 3/3
Virginia Holmes 7/7 1/3
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.
During the periods of their appointments in 2015/16, Alice Perkins (outgoing Chairman), Tim Parker
(incoming Chairman), Tim Franklin, Virginia Holmes, Alasdair Marnoch, Ken McCall (incoming Senior
Independent Director), Neil McCausland (outgoing Senior Independent Director) and Carla Stent
met, and continue to meet, the criteria for independence as set out in the UK Corporate Governance
Code and are therefore considered by the Board to be independent.
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Post Office has arranged appropriate insurance cover in respect of legal action against directors of
Post Office and its subsidiaries.
Induction, Training and Visits
All Board members receive a comprehensive induction on appointment which includes training on
their responsibilities as statutory directors. In 2015/16 the three new Non-Executive Directors, in
addition to meeting with members of the Group Executive, attended a series of branch visits. These
visits were to Crown and local network branches and were valuable in enhancing their visibility with
branch colleagues and their familiarity with the business.
Additionally, the Chairman addressed the Post Office top 300 leaders at the first conference for the
newly formed L300 and continued his programme of branch visits from his appointment throughout
the year.
Board Members also receive regular briefings to update and refresh their skills and knowledge. As
the branch transformation progressed throughout the year, directors were invited to attend
transformed branch openings in their local areas.
Effectiveness
The effectiveness of the Board is vital to the success of Post Office. Improvements in effectiveness
have been delivered in 2015/16 through the implementation of recommendations from the internal
Board effectiveness review from 2014/15, such as enhancing the effectiveness of Board and
committee papers and reviewing the committee structure (see page XX).
Since the Board underwent a period of transition during 2015/16 a formal review of effectiveness
did not take place. However, as part of the process of appointing new Non-Executive Directors, the
composition and effectiveness of the Board was given much consideration. In March and April 2016,
the three committees all reviewed performance against their Terms of Reference.
An externally facilitated review of the Board’s effectiveness is planned for 2016 and will be led by
Ken McCall the Senior Independent Director. The review will seek to give assurance that directors
have the requisite balance of skills, experience, balance and knowledge to enable them to discharge
effectively their respective duties and responsibilities.
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. Until 1 October
2015 the Board also had committees to consider financial services and pensions, please see pages XX
for more details of the work of these committees and page XX for the current committee structure.
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
This year has been one of transformation, in terms of the continuing
transformation of the branch network but also for the non-executive
leadership of the business.
The Committee has been key in bringing this new capability into the
non-executive 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 couple with internal
resourcing. This ensures that we are able to access specialist
expertise relevant to each role. This expertise, together with the
skills matrix, assists the Committee in finding those individuals with
the right knowledge, skills and experience. 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, as
we move to the next phase of business transformation, the
Committee’s focus, with its refreshed membership, will move to
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’s Terms of Reference require that it meets a
minimum of twice a year and that two members must be in
attendance for a meeting to be quorate. In 2015/16 there were five
meetings of the Committee (including one meeting by telephone)
and the members’ attendance is set out below.
Committee Member Meetings Attended
(attended/eligible to
attend)
Alice Perkins* 2/2
Virginia Holmes 5/5
Neil McCausland? 2/2
Tim Parker? 3/3
Ken McCall* wi
1. Alice Perkins resigned 31 July 2015
2. Neil McCausland resigned 30 September 2015
3, Tim Parker was appointed to the committee 1 October 2015
4, Ken McCall was appointed to the committee 21 January 2016
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Nominations Committee
Role
The Committee operates in accordance with
its Terms of Reference, which were last
approved by the Board in March 2015. A copy
of the Terms of Reference can be downloaded
from postoffice.co.uk.
The overall responsibility of the Committee is
to effectively manage all senior executive and
non-executive appointments. This includes
active management of succession planning
with consideration of skills, experience and
diversity.
Evaluation
In November 2015 the Committee reviewed
its Terms of Reference. This review was
followed by an evaluation in April 2016 of the
Committee’s effectiveness and performance
against its Terms of Reference. The
evaluation concluded that the Committee had
met the requirements of its Terms of
Reference.
Work carried out by the Committee in 2015/16
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 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 Board and Committee
performance evaluation.
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. The matrix considered the following skills and
experience: 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 : 30
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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 Holme’s
continued membership brings and 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 Committee’s Terms of Reference require that it meets a
minimum of three times a year and that two members must
be in attendance for a meeting to be quorate. In 2015/16
there were four meetings of the Committee and the
members’ attendance is set out below.
Committee Member Meetings Attended
(attended/eligible to
attend)
Alice Perkins* 2/2
Virginia Holmes 4/4
Neil McCausland? 2/2
Tim Parker? 2/2
Ken McCall* 1
1. Alice Perkins resigned 31 July 2015
2. Neil McCausland resigned 30 September 2015
3. Tim Parker was appointed to the committee 1 October 2015
4, Ken McCall was appointed to the committee 21 January 2016
Post Office Annual Report and Financial Statements I Page : 31
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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’ key responsibilities are to:
Remuneration Committee .
¢ make recommendations to the Board on the
Role remuneration strategy and any changes to individual
elements of the remuneration package for Executive
The Committee operates in accordance with Directors; members of the Group Executive who
its Terms of Reference, which were last report directly to the Chief Executive; and other
approved by the Board in March 2015. A copy senior level appointments with comparable
of the Terms of Reference can be downloaded remuneration;
from postoffice.co.uk. * provide an oversight function for the remuneration
The overall responsibility of the Committee is of the Directors of Post Office Management Services
to recommend to the Board the remuneration Limited;
strategy and any changes to individual © obtain information on salary levels across the
elements of the remuneration package for: business and within external organisations of
executive directors of Post Office; members of comparable size, in order to set remuneration levels
within an appropriate context, while being mindful
that any remuneration increases should correspond
with corporate and individual performance
improvements; and
the Group Executive who report directly to the
Chief Executive; other significant senior level
appointments with comparable remuneration;
and to provide an oversight function for the
remuneration of the directors of Post Office ¢ have oversight of, approve and make
Management Services Limited. recommendations to the Board in respect of
remuneration levels for new senior executive
However, any changes in remuneration for appointments. In doing so, it liaises and works
directors of Post Office must be approved in closely with the Nominations Committee.
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.
Further details of the incentive schemes now in place and a table setting out the remuneration paid
to all Directors in the year to 27 March 2016 are provided in the Directors’ Remuneration Report on
pages XX-XX.
Evaluation
In November 2015 the Committee reviewed its Terms of Reference. This review was followed by an
evaluation in April 2016 of the Committee’s effectiveness and performance against its Terms of
Reference. The evaluation concluded that the Committee had met the requirements of its Terms of
Reference.
Work carried out by the Committee in 2015/16
During the year, the Committee reviewed and made recommendations for the 2014/15 payments
against the short and long term incentive plans and the targets, scorecard measures (including
stretch targets) and objectives for 2015/16.
Post Office Annual Report and Financial Statements I Page : 32
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The Committee also reviewed the rules of the long term incentive plan, the remuneration for the
Chief Executive and the Chief Financial Officer and the fees paid to Non-Executive Directors.
Prior to the acquisition in October 2015 of the insurance arm of Post Office via its wholly owned
subsidiary Post Office Management Services Limited, the Committee reviewed, and recommended
for approval, the Remuneration Policy for the subsidiary.
The Committee is permitted to engage external consultants and in the year under 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.
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 profitability
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.
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 : 33
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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
enable the Committee to discharge its duties robustly and with effective
challenge in the year to come.
Carla Stent
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. [Insert other para below here]
The Committee’s Terms of Reference require that it meets a minimum of
three times a year and that two members must be in attendance for a
meeting to be quorate. In 2015/16 there were five meetings of the
Committee and the members’ attendance is set out below:
Committee Meetings Attended Notes
Member (attended/eligible to
attend)
Richard Callard? 2/2 1. Richard Callard appointed to the
- - Committee 25 November 2015
Tim Franklin 5/5 2. Alasdair Marnoch resigned 31 July
Alasdair Marnoch? wt 2015
3. Ken McCall was appointed to the
Ken McCall? 2/2 Committee 21 January 2016
Nell McCausland” 77) 4. Nell McCausland resigned 30
September 2015
Tim Parker® 11 5. Tim Parker was a member of the
Committee 28 October 2015 until 20
Carla Stent® 2/2
January 2016
6. Carla Stent appointed to the
Committee 21 January 2016
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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.
Audit, Risk and Compliance
Committee
.
Role
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. A copy of the
Terms of Reference can be downloaded from
postoffice.co.uk.
The overall responsibility of the Committee is
to assist the Board in fulfilling its fiduciary
responsibilities by:
¢ contributing an independent view on the
accounting, financial control and financial
reporting practices of Post Office;
taking all reasonable steps to ensure
accurate and informative corporate
financial reporting and disclosures which
meet appropriate accounting and
corporate governance standards; and .
¢ providing oversight of the Post Office risk
management systems, including the steps
taken to mitigate those risks.
The Committee’ additional responsil
ies 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;
review and agree the annual audit plans for both
internal and external audit;
ensure the appropriateness of the Post Office
relationship with the external auditor is managed,
including consideration of the external auditor’s
independence and endorsement of its remuneration
and terms of engagement for approval by the Chief
Financial Officer;
review the provision of any non-audit services
provided by either internal or external audit;
devote specific time to the consideration and
overview of risks relating to the financial services
businesses of the Group and to any risk relating to
existing and new pension schemes; and
consider the impact of any new legislative, regulatory,
market or other developments which could materially
or adversely affect Post Office and its subsidiaries.
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.
Evaluation
In September 2015 the Committee reviewed its Terms of Reference and the resulting amendments
were approved by the Board. This review was followed by an evaluation in March 2016 of the
Committee's effectiveness and performance against its revised Terms of Reference. The evaluation
concluded that the Committee had met the requirements of its Terms of Reference.
Work carried out by the Committee in 2015/16
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 strategic risks. It also approved the annual audit plans for both the
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internal audit function and the external auditors, Ernst & Young LLP.
The Committee reviewed the work carried out by internal audit and by the external auditor, further
details of which can be found below.
As part of an holistic review of risk management and internal controls, the Committee supported
and provided guidance on the further improvement of the Risk Management Framework and
clarification of our general controls. This work included the development of a framework of key
policies, 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.
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.
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,
as needs change during the year. 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.
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.
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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:
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.
Subject to acknowledgement of the reinstatement referred to on page XXX, the Board considers the
risk management and internal control systems 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 222.
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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e 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
© awhistleblowing 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 capability
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.
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.
‘As well as loss of
revenue, this could
result in shrinkage to
our network and breach
our public purpose
commitment.
This could result in
disruption of service
leading to negative
customer experience,
breach of contractual
obligations and brand
damage.
* New branch model being developed to provide for
retailers 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
© 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.
* Financial and Accounting manual and a framework
of supporting general controls ~ see our General
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information, financial reporting and compliance with
accounting and governance standards. These may
not operate effectively if they are not documented,
reviewed and monitored regularly.
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damage to reputation
with stakeholders.
Controls Framework on page XXX.
Documented financial controls, with additional
assurance to be provided from a Control Self-
Assessment process.
M) Pension cost increases
The cost of servicing the current Defined Benefits
scheme could become unbearably onerous as a
result of the prolonged low interest rate
environment, resulting in substantially increased
contributions.
LEGAL & REGULATORY RISKS
N) Financial regulatory breach
The Post Office operates under an extensive
regulatory environment, covering areas such as
financial and postal services, telecoms, procurement,
competition law and data security. This environment
continues to evolve, particularly in the financial
services arena, and we need to ensure that the
changing requirements continue to be identified and
met.
This could result in
material increases in
required contributions,
adversely affecting our
ability to achieve
commercial
sustainability
This could result in
regulatory censure,
fines, litigation or
curtailment of trading,
which could impact
income and/ or damage
our reputation with
customers and
suppliers.
.
Valuation assumptions and pension funding strategy
have regular external and internal monitoring and
review.
Options being developed to minimise the impact of an
adverse valuation, with assistance from professional
advisors.
Consultation process initiated on options for the
future of the Defined Benefit plan.
New regulatory obligations monitored by relevant
business owners, with support from Corporate
Services.
On-going training to our staff on legal and regulatory
matters.
Regular compliance tests and monitoring are
conducted.
Internal and external assurance programmes are in
place (including by our regulatory principals) to
ensure that we meet financial services regulatory
requirements, including sales practices and conduct,
customer experience and product experience and
delivery.
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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: fnil).
Directors and their interests
The following served as Directors during the year:
RJ Callard
ACJ Cameron
TA Franklin
VA Holmes
A Marnoch (resigned 31 July 2015)
KS McCall (appointed 21 January 2016)
N W McCausland (resigned 30 September 2015)
T C Parker (appointed 1 October 2015)
A Perkins CB (resigned 31 July 2015)
CR Stent (appointed 21 January 2016)
PA 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
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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 : 45
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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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Post Office Limited
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]
a
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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 1,111 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 7
Loss before taxation from continuing operations (161) (163)
Taxation credit 7 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 7 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
Notes —m £m
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) 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 7 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 ac! ies (145) (116)
Net cash (outflow) /inflow before financing activities (259) (120)
Cash flows from financing activities
Finance costs paid (5)
Payments to finance lease creditors
p ,
Net cash inflow from financing activities 150
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
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Consolidated balance sheet
at 27 March 2016 and 29 March 2015
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 11 409 397
Cash and cash equivalents 12 712 821
Total current assets 1,127 1,224
Total assets 1,455 1,516
Current Ii ies
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 lia ies (1,277) (1,172)
Non-current liabilities
Other payables 13 (25) (30)
Provisions 15 (16) (6)
Total non- current liabilities (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 A Cameron
Chief Executive 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 Em £m £m ém
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 z - 5 2 5
At 27 March 2016 465 (330) 2 137
Share Retained Other Total
premium earnings —_ reserves equity
Notes £m £m £m £m
At 31 March 2014 465 (63) 2 404
Loss for the year (restated) - (141) - (141)
Remeasurements on defined benefit surplus 7 - 54 - 54
At 29 March 2015 (restated) 465 (159) 2 308
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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 Emillion 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
Plant 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 borro' IS
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
2016 2015 2016 2015
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 £m
Postmasters’ fees 413 435
Bureau de Change foreign currency exchange losses - 1
Depreciation -
Cost of inventories recognised as an expense 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
4. Operating exceptional items
2016 2015
£m_— (Restated)
ém
Se ee. ee Ls
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. = :
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 Actual Benefits I Cash in lieu ‘STIP LTIP Total Total
salary/fees I salary/feesI 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 N/A
(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 33,333 - - - - 33,333 100,000
Perkins
(note 6)
Carla Stent 45,000 8,831 - - - - 8,831 N/A
(note 7)
Richard 0 ie) - - - - i?) ie}
Callard
(note 8)
Executive Directors
Paula 250,000 250,000 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 Marnoch 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 indusion 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)
Loss on ordinary activities before tax from discontinued operations (10) (4)
A474) (167)
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. ~ eo (2). snub ®)
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 £m
Pensions temporary differences (25) (30) (5) 9
Losses available for offset against future
taxable income 25 30 : :
Total deferred tax asset : : (5)
Income statement (5)
(d) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £165 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 £86 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 £m £m —m —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) - - - (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 Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m £m £m £m ém £m Em
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) : (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 () : (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 (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.
* 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.
Joint venture
2016 2015
Joint venture
Share of net assets
Total net investment at 30 March 2015, 31 March 2014 67 61
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 liabilities: —ém £m
Current assets 205 191
Non-current assets 6 6
Share of gross assets 211 197
Current liabilities (144) (130)
Share of net assets
Share of revenue and profit:
Revenue 79 82
Profit after tax 35, 36
11. Trade and other receivables
2016 2015
Current:
Trade receivables 93 101
Prepayments and accrued income 73 106
Client receivables 229 162
Other receivables 14 28
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:
2016 2015
—£m —m
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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
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.
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
é£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
Le 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 liabilities - interest bearing loan and borrowings
2016 2015
£m ém
Department of Business, Innovation & Skills loan
drawn down 465 310
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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
£m £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) (6) (26)
Unused amounts in the year — .
operating costs (2) (2)
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 ém —m £m ém
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.
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.
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Strengthening Effect on Effect Strengthening Effect on Effect
/ (weakening) profit on equity / (weakening) profit on equity
in US dollar rate —_ before tax ineuro rate —_ before tax
per cent ém £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) (4) (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 . ° . 394
Cash and cash equivalents 712 . - ~ 712
Financial liabilities
Trade and other . .
Pavables (614) “ (618)
Interest bearing loan (465) . - ~ (465)
Finance leases obligations (8) ° 7 - (8)
inancial assets/ 19 (4) - - 15
ies.
12 1-2 2-5 > Total
Months Years Years 5 Years
At 29 March 2015 £m
Financial Assets
Trade and other receivables 378 . . 7 378
Cash and cash equivalents 821 . - - 821
Financial Liabilities
Povables we) : 5D
Bank overdraft - - 7 . 7
Interest bearing loan (310) - - - (310)
Finance leases obligations - ° ° - 7
Total financial assets/ 200 (2) . . 198
(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.
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
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*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 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 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.
Accurrent liability of Enil (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 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
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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 & RMSEPP 2.9 3.0
Inflation assumption (CPI) - RMPP & RMSEPP 1.8 1.9
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 volati : 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:
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)
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
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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: 2016 2015
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
40 year old female RI member 2 years 32 years
b) Plans’ assets
The assets in the plans for the Group were:
Market value 2016
Market value 2015
Sectionalised RMPP ém £m
UK equities - 1
Overseas equities - 10
Corporate bonds* 233 217
Property 11 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 11
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 . (29) I (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.
Market value 2016
Market value 2015
Share of RMSEPP —£m —m
UK equities 1 1
Overseas equities 10 ti
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. a ©.) ee C1)
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:
Assets Sectionalised Sectionalised
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
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
—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 (1) (1)
Share of assets in RMSEPP at end of period 30 31
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabilities Sectionalised Sectionalised
RMPP 2016 RMPP 2015
é£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 £m
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) (28)
*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 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 exceptioi
items:
Current service cost _ a ee ~ co 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 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
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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 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 on assets (all experience adjustments) (1) 3
Experience adjustments on liabilities -
Effects of changes in actuarial assumptions on liabilities (1) (2)
Actuarial losses on liabilities (1) (2)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (2) 1
18. 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 and fully paid
Ordinary shares of £1 each 50,003 50,003
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.
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Post Office Limited
19. Commitments
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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.
20. Finance lease liabi
2016 2015
Present
value Present value
of minimum of minimum
Minimum lease Minimum lease
payments payments payments payments
£m ém £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 -
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.
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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
Cash 1
Provision (1)
Net Assets >
Goodwill arising on acquisition 44
44
Consideration paid
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 £17,190,518 of revenue and £755,922 to profit before
tax.
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 é£m
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 Enil as the costs included in the £10 million expenses noted above.
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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 ém £m £m
First Rate Exchange
Services Holdings
Limited 26 26 122 129 10 7 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.
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
*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. ém £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.
Company balance sheet
at 27 March 2016
Non-current asset
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Post Office Limited
2015
(Restated)
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 11 196 205
Trade and other receivables 6 12 10
Total non-current assets 268 226
Current assets
Inventories 6 6
Trade and other receivables 411 399
Cash and cash equivalents 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 (465) (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)
71 242
Total equity
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
Chief Executive
A Cameron
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 ém £m
At 30 March 2015 (restated) 465 (223) 242
Loss for the year - (167) (167)
Remeasurements on defined benefit
surplus 1. - (9) (9)
Income tax effect = 5 5
At 27 March 2016 465 (394) 71
Retained
Share earnings Total
premium —£m equity
At 31 March 2014 465 (121) 344
Loss for the year (restated) - (147) (147)
Remeasurements on defined benefit
surplus 11 - 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
ii. 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.
i
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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 (60) (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
Plant and Machinery ———=~CS~S~S*S «1:5 yer
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 receivabless 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 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
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.
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
Cost £m £m
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 _ :
388 297
At 27 March 2016, 29 March 2015
Net book value
At 27 March 2016, 29 March 2015 a” _
The above intangible assets relate to software.
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3. Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m £m £m £m ém £m Em
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) : (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 () : (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
=m —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 11
Total 648 716
Non-current:
Other payables 25 30
9. Financial liabilities - interest bearing loans and borrowings
2016 2015
£m £m
Department of Business, Innovation & Skills loan
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 ém Total
£m £m
At 29 March 2015 (restated) 127 23 150
Charged in operating exceptional 123 54 177
items
Charged in operating costs ~ 5 5
Charged for discontinued . 3 3
operation
Utilisation (95) (46) (141)
Unused amounts in the year -
operating exceptionals (21) (5) (26)
Unused amounts in the year - .
operating costs @) (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 ccurrent liability of Enil (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
ém £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)
Post Office Limited
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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: 2016 2015
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
UK equities - 1
Overseas equities - 10
Corporate bonds* 233 217
Property 11 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 11
Equity funds bal 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 (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.
Market value 2016
Market value 2015
Share of RMSEPP £m £m
UK equities 1 1
Overseas equities 10 11
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)
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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
£ 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
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
ém £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 (1) (1)
Share of assets in RMSEPP at end of period 30 31
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)
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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
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
RMPP 2016 £m
Sectionalised
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 20 19
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 AD
Actuarial (losses)/gains on assets (all experience (10) 77
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 (7) 53
57
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Post Office Limited
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 (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 on assets (all experience adjustments) (1) 3
Experience adjustments on liabilities -
Effects of changes in actuarial assumptions on liabilities (1) (2)
Actuarial losses on liabilities (1) (2)
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (2) 1
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, Finance lease liabilities
Details of the Company’s finance lease liabilities are disclosed in the Group financial statements (note 20).
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).
58
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Post Office Limited
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
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.
59
Corporate information
Registered Office
Post Office Limited
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ
Auditor
Ernst & Young LLP
1 More London Place
LONDON
SE1 2AF
Solicitor
Linklaters LLP
One Silk Street
LONDON
EC2Y 8HQ
Post Office Limited
Actuary
Towers Watson Limited
Watson House
London Road
REIGATE
Surrey
RH2 9PQ
Consumer Body
Consumer Focus
4th Floor
Artillery House
Artillery Row
London
SW1P 1RT
60
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Financial Reporting and Controls
Author: Dave Carter Sponsor: Al Cameron Date: 19" May 2016
Executive Summary
Context
1. We agreed to provide an update to each ARC on the plans and progress to create sustainable
controls to support reliable financial reporting.
Questions addressed in this report
2. The questions covered in this paper are:
« What progress has been made?
« What are we doing to provide assurance that we can sign the 2015-16 financial statements?
« What are the longer term plans to create sustainable and reliable financial reporting?
Conclusions and recommendations
3. Additional assurance to support the 2015/16 year-end accounts is being performed.
This includes the recalculation of revenue invoices from source documentation through
to the ledgers, and the reconciliation of revenue volumes and values through the
various systems (Credence, Horizon, Polsap, BI) to the Core Finance System. In
addition, we have performed a detailed review of our balance sheet accounts, which
will be further supported by on-going post-balance sheet testing. No further issues
have been identified.
4. By the end of May, 80% of invoiced revenue will have been recalculated and
confirmed (currently at 74%) representing all material / high risk revenue streams.
The remaining 20% comprises a large number of low value / low risk contracts and
will be completed before the accounts are signed.
5. Currently 98-100% of revenue volume & value is reconciled between the Core Finance
System, Business Information and POLSAP systems. Reconciliation between Credence
and Horizon is complex, currently 80% complete with work ongoing through May.
6. Balance sheet testing is 90% complete and will be finalised during May. Immaterial
adjustments have been identified through the balance sheet work in 9 out of 250
accounts tested. Cumulative impact to EBITDAS is £1.2m debit. This has been posted
to the 15/16 accounts to ensure a clean balance sheet position into 16/17.
7. Plans are in place to ensure we continue to develop a sustainable control environment
in 2016/17, providing appropriate support for the financial statements. This includes
restructuring of Financial Control, the remediation and self-certification of controls
and further development of our core reporting capability.
Input Sought
8. The ARC is asked to comment on the progress and plans.
Strictly Confidential
POST OFFICE
The Report
9. Details of the progress and plans are set out below:
PAGE 2 OF 4
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Work stream
Actions Taken
Support for 15-16 year-end
Support for 16/17 year-end
Governance
Weekly Financial Reporting Control
meetings chaired by CFO embedded
since January 2016
Financial Systems & Reporting
Steering Group since Oct 2015
Agreed scope and reviewed progress
against each work stream.
Oversight of controls, remediation of
control gaps, balance sheet probity,
financial adjustments
On-going throughout 16/17
Structure and
Accountabilities
New Financial Control structure
agreed to clarify accountabilities,
increase segregation of duties
between accounting & reporting,
remove duplication and re-align to
business structure.
Final role changes are being embedded
as part of the consultation process
starting 11 April
Junior role accountabilities agreed and
in place
Increased resource dedicated to
Financial Control and Governance.
This team will be responsible for
governing the remediation of
control gaps, embedding the
financial control framework and
rolling out self-certification.
Systems &
Reporting
Redesigned BI architecture to
remove complexity and manual
intervention. Single source of
financial reporting.
7 core financial reports live and system
generated for year end, including
Balance Sheet, P&L, Trial Balance,
Income & Expenditure reports, Aged
Debt, VAT.
29 reports at sign-off stage. 10
under development
Assessing the potential replacement
of income spreadsheets with
embedded system capability
Re-design of core CFS architecture
(in IT/Back office strategies for the
July board)
Strictly Confidential
POST
OFFICE
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Work stream
Actions Taken
Support for 15-16 year-end
Support for 16/17 year-end
Financial Control
Process mapping of controls,
Phase 1 completed
Remediation of remaining control
reconciliation
revenue in CFS back to source
systems and data.
Recalculation of spreadsheets driving
revenue - proving price data,
matching volumes and tracing to GL
Reconciliation of volumes driving
revenue between systems and to
client settlement volumes.
revenue have been recalculated for
accuracy. Will be 80% by May
representing all high value/high risk
contracts. Remaining 20% of low
value/low risk completed in June.
System reconciliation status (June
completion)
- Polsap to CFS 98%
- CFS to BI 100%
- BI to Credence 98%
- Credence to Horizon 80%
Framework iwentiication and remediation of Phase 2 & 3 completed subject to final gaps.
that impnct financial accounting. sign-off. Roll-out self-certification software
, . Remediation process underway for and implement rolling self-
Phase 1:PPE & Intangibles, Project Phase 1 and 2 processes. 54% of assurance over controls
accounting, Bill to Cash, Record to control gaps closed (74 out of 138). supplemented by Internal Audit
Report testing.
Management attestation process
Phase 2: Payroll, Treasury, Client - 9 p Repeat management attestation bi-
implemented
Settlement, Control Environment anually
Phase 3: Stock Accounting, Purchase Self-certification software identified and
under trial.
to Pay, Taxation
Income 100% reconciliation of P1-P10 Invoices representing 74% of total Consider the need to repeat in
2016/17
Postmasters’
Compensation
Full review of control gaps
Planned controls implemented and
tested
Maintain controls
Strictly Confidential
POST
OFFICE
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Work stream
Actions Taken
Support for 15-16 year-end
Support for 16/17 year-end
Balance Sheet
Review
Full balance sheet review
undertaken by Financial Control,
supported by KPMG
100% of balances reviewed and
assessed for materiality and risk
profile.
All material / high risk balances
tested for accuracy, completeness
and valuation.
Reliance placed on experts, systems
and 3" parties where appropriate.
90% of material / high risk balance
sheet accounts tested - will be 100%
by end of May.
9 balances out of 250 tested have
adjustment. No individual item in
excess of audit materiality
Total cumulative adjustment of £1.2m
reduction to EBITDAS has been posted
to accounts.
Substantial post-balance sheet testing
in progress
Improved balance sheet probity
process through remediation of
control gaps
Re-perform 100% testing for
2016/17 year end
Assurance
External Audit re-plan agreed
Revised external audit undertaken,
significant additional testing being
performed
Internal Audit testing of self-
assurance
Strictly Confidential
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AUDIT, RISK AND COMPLIANCE COMMITTEE
5) Risk & Governance Disclosure in Annual Report
Author: Mike Morley-Fletcher Sponsor: Jane MacLeod Meeting date: 19 May 2016
Executive Summary
Context
As agreed by ARC at its previous meeting, compliance with the UK Corporate Governance
Code is not sought at present, however, we intend to maintain "standards of corporate
governance appropriate for our ownership structure, our commitment to our social purpose
and our strategy for commercial sustainability”. We have used this to guide our disclosure
notes.
For this year’s risk, control and assurance disclosures, the Risk and Internal Audit team
reviewed the previous PO Annual Report, discussed best practice with our external auditors
and considered other relevant organisations’ reports to ensure we are providing appropriate,
up to date and informative disclosures to our stakeholders. Several enhancements have
been made and are detailed below. Please read in conjunction with relevant sections in the
draft Annual Report, extract of which are included in appendix.
Questions this paper addresses
1. How have we explained our approach to Corporate Governance compliance and
disclosure?
2. What changes have we made to the risk and control disclosures on how we manage risk?
3. What changes have we made to the risk and control disclosures on how we govern risk?
Conclusion
1. Corporate Governance compliance statement:
e Includes our redrafted Corporate Governance statement, “PO maintains standards of
corporate governance appropriate for our ownership structure, our commitment to our
social purpose and our strategy for commercial sustainability”.
2. Managing Risk — for details see appendix 1 and 2:
e Fuller description of our approach to risk, our risk management framework and our
risk governance.
e Includes details of our Internal Controls Framework, now that we have defined it, to
explain to stakeholders the key general controls we use to manage the business.
e Discloses 14 Principal Risks per the Group Risk Profile (8 included last year), with
updated details of causes, consequences and mitigations.
3. Governing Risk- for details see appendix 3:
e Includes a description of Internal Audit activity, how the annual plan is developed and
an overview of the audits conducted in 2015/ 16.
e Includes a description summarising how the ARC assesses the risk management
framework and systems of internal control, on behalf of the Board.
Strictly Confidential ARC, 19" May 2016
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Input Sought
The Committee is asked to review and approve the disclosures presented, in particular the
details of our Principal Risks and Mitigations in appendix 2 and Board Assessment in
appendix 3, and provide any input or feedback.
y Confidential ARC, 19" May 2016
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sks
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 ZZZ.
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
e expectations of standards of conduct by our colleagues as set out in our Code of Business
Standards
e 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
Strictly Confidential ARC, 19" May 2016
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*® an organisational structure with lines of responsibility and appropriate segregation of
duties
« change management approach, resources and governance are used to manage significant
projects
e 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
e a framework of operating, financial and IT policies
« awhistleblowing 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 Risk assessment: for 2016/ 17, we plan to
been more regular use of the risk management focus our incident reporting process to
framework in business areas and by RCC, with provide lessons learnt on our risk
greater focus on defining further actions required I assessments and operationalise our risk
to manage risks and the introduction of longer appetite further
term horizon scanning
Control environment: during 2015/ 16, we I Control environment: for 2016/ 17, we
have reviewed the appropriateness of our Internal I plan to formalise our monitoring
Control Framework and our key policies and mechanisms for both our Internal Control
identified appropriate remediations. Framework and our key policies
Strictly Confidential ARC, 19" May 2016
POST OFFICE
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Appendix 2: Extract from the draft 2015/ 16 Annual Report — Principal Risks
Our Principal Risk and Mit
igations
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.
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.
e 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) plc.
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.
Strictly Confidential
ARC, 19" May 2016
POST OFFICE
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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.
F) Lack of appropriate
capability
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
business disruption
leading to loss of
revenue, reduced
customer
satisfaction and
brand damage.
This could result
not achieving our
strategic objectives
and loss of staff
engagement.
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.
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
propo: n
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 for retailers 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.
I) 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.
This could lead to
business
interruption and
additional costs
through failure to
meet contractual
obligations.
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.
Strictly Confidential
ARC, 19" May 2016
POST OFFICE
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 result in
not achieving our
growth objectives,
failing to meet our
public purpose
commitment and
damaging our
reputation with
stakeholders.
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« 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.
e Scheduled feedback to stakeholders and
review.
L) Financial reporting and
controls failure
Our financial controls are fundamental to
delivering our fiduciary responsibilities,
management information, financial
reporting and compliance with accounting
and governance standards. These may
not operate effectively if they are not
documented, reviewed and monitored
regularly.
This could result in
loss of revenue,
increased costs,
financial
misstatement and
damage to
reputation with
stakeholders.
« 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 Internal Controls Framework on
page XXX.
« Documented financial controls, with
additional assurance to be provided from a
Control Self-Assessment process.
M) Pension cost increases
The cost of servicing the current Defined
Benefits scheme could become unbearably
onerous as a result of the prolonged low
interest rate environment, resulting in
substantially increased contributions.
REGULATORY RI
I regulatory breach
The Post Office operates under an
extensive regulatory environment,
covering areas such as financial and postal
services, telecoms, procurement,
competition law and data security. This
environment continues to evolve,
particularly in the financial services arena,
and we need to ensure that the changing
requirements continue to be identified and
met.
This could result in
material increases
in required
contributions,
adversely affecting
our ability to
achieve commercial
sustainability
SKS
This could result in
regulatory censure,
fines, litigation or
curtailment of
trading, which
could impact
income and/ or
damage our
reputation with
customers and
suppliers.
« Valuation assumptions and pension funding
strategy have regular external and internal
monitoring and review.
« Options being developed to minimise the
impact of an adverse valuation, with
assistance from professional advisors.
Consultation process initiated on options
for the future of the Defined Benefit plan.
« New regulatory obligations monitored by
relevant business owners, with support
from Corporate Services.
« On-going training to our staff on legal and
regulatory matters.
« Regular compliance tests and monitoring
are conducted.
¢ Internal and external assurance
programmes are in place (including by our
regulatory principals) to ensure that we
meet financial services regulatory
requirements, including sales practices and
conduct, customer experience and product
experience and delivery.
Strictly Confidential
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Appendix 3: Ext
of risk management and internal control systems
ant
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.
*Subject to acknowledgement of the reinstatement referred to on page XXX, the Board considers the risk
management and internal control systems 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.
Suggestion that we need to reference the accounting issues mentioned on page XXX, as this would be described
as a “significant weakness”.
Strictly Confidential ARC, 19" May 2016
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AUDIT,RISK AND COMPLIANCE COMMITTEE
7) Risk & Control Report
Author & sponsor: Mike Morley-Fletcher Meeting date: 19 May 2016
Executive Summary
Context
This paper updates the ARC on progress against the project plan for developing POL’s
Risk Framework, in particular how we have been developing POL’s Group Risk Profile,
Internal Control Environment, Assurance mechanisms and Corporate Governance
capability. Please note, our Risk Profile is NOT reviewed at this ARC (nor Incident
Reporting) as it is covered at the other four meetings.
Questions this paper addresses
1. What has been the primary focus since the last ARC?
2. What else has been progressed?
3. Is implementation of the Risk Framework on target?
Conclusion
1. This period has been primarily focused on developing our risk, control and
assurance disclosure statements for our stakeholders in the Annual Report. We
have used our revised position on corporate governance compliance to guide
the content and extent of our disclosures, but also compared these with other
relevant organisations’ reports and discussed them with our external auditors.
See paper in agenda item 6 for more details.
2. We have also progressed our work on improving our Internal Control
Environment (e.g. dry running/ testing our Internal Control Framework,
comlpeting the review and remediation of our Corporate Services key policies,
continuing to enhance our Business Continuity capability) and our Assurance
Mechanisms (e.g. completing our first Executives’ Declaration and starting the
control self-assessment of our Financial Reporting controls) - see attached
papers.
3. The plan is on schedule (see appendix 1), despite some resource shortages
(through illnesses and recruitment holds). However, we have rescheduled
developing the Route Map to Corporate Governance Compliance until
September, as we have brought forward work on the Internal Control
Framework and Executives’ Declaration. A summary of Work Done since the
March ARC and Next Steps is included in appendix 2.
Input Sought
The Committee is asked to review the attached papers and provide feedback,
support and approval as appropriate.
ARC 19 May 2016
POL00103188
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Appendix 1: Risk Framework - Project Plan Version: 19" May 2016
Four Components Q3 Qa Qi Q2 Q3 a4
31 Dec 2015 31 Mar 2016 30 Jun 2016 30 Sep 2016 31 Dec 2016 31 Mar 2017
a) Develop Refine Top Risks Confirm Controls & Half year refresh of I Full year refresh
Group Risk : Key Further Actions Risks & KFA of Risks & KFA
Profile & Key
Further Actions Drive consistency in RM _ Develop Incident Develop risk measures) I Compare actions/ residual Redraft statement
tools and techniques —__ Reporting : _and dashboards tisk to Risk Appetite on Risk Appetite
b) Enhance ( “ ‘ "
f 1 Design Conduct Gap Analysis Remediate Control Framework Gaps
nterna General Controls & Implement
Controls I Framework* J I I Quick Wins J J Include in ED &
Environment Pa ~, ~\ I _ CoA enc)
. Design Policy For CS, conduct For non-Cs, below
coordinate with lysis & id hich For non-CS, conduct Gap Analysis &
Financial Control Framework & Gap Analysis consider whicl Remadiate Policy Gaps, as required
+ conduct Gap Remediate Policy policies to include :
Framework project Analysis Gaps
SConltatd J J J
c) Develop I Develop )
Assurance I Assurance Map
Mechanisms to
t Board’ Develop Self-Assurance mechanisms: Dry run of Self-Assurance Year End Self-Assurance
Support Board's Executives’ Declaration + Control Self-Assessment mechanisms (ED & CSA)
Annual Assessment i al
ve vement oe cenal Develop Year End Board Annual / Implement Year End Board Annual
contrat systems) Assessment and sign off process Assessment and sign off process
Pontinltslinalinlired
Research & agree Corporate Develop Route Map to
d) Develop Governance positioning & I Corporate Governance I
Corporate wording I compliance !
Governance a CHANGE: Rescheduled
Capability (and Draft ARA Statement (Principal Risks for September Draft ARA
di and mitigations, GCF and Assurance) Statement
isclosures for Annual
Report & Accounts)
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Appendix 2 -Risk and Control Framework: Summary of Work Done and Next Steps
We have completed all key and time-critical components against the four main components of the plan (see Appendix 1).
Some of the main achievements have been, and next steps:
a)
k Profile and Actions
.
Group Risk Profile:
Details are NOT reviewed at this RCC/ ARC.
Drafted Principal Risk and Mitigations for disclosure in Annual
Report, per d) below.
Provided information on the Top Risks and Key Further
Actions to the Strategy Team for consideration in the
Business and Strategy planning process for 2016/ 17.
Risk owners will review Principal Risks and Key Further
Actions for reporting to September RCC/ ARC.
b)
Internal Controls Environment
General Controls Framework (GCF):
Reviewed the General Control elements of the Financial
Controls Framework project to confirm the design of our
GCF, assess its current state, ensure any appropriate
remediations have been identified and prepare templates for
our subsequent Self-Assessment exercise.
Details of our General Controls have been included in this
year’s Annual Report in the risk note.
Considered embedding risk and control accountabilities into
GE objectives (or role profiles). GE members briefed and
acknowledged responsibility. Decision with Chief of Staff and
HR to include in standard wording in role profiles, but action
once strategy and TOM revisions completed.
Conduct dry run at half year 2016/ 17 and full roll out at
year end (to help the Board complete its year-end Annual
Assessment of Internal Controls for 2016/ 17).
Ensure risk and control accountabilities are reflected in GE
role profiles post strategy/ TOM review (June).
Strictly Confidentiat
ARC 19 May 2016
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Policy Framework (key policies) - see paper 7a
Completed remediation of all Corporate Services policies.
Used EY’s benchmarking to develop a list of non-Corporate
Services key policies, which have been approved by the RCC.
° Consider implementation needs of CS policies, ensuring
pragmatic and co-ordinated.
Formalise monitoring mechanism to ensure we can
evidence compliance with policies.
. Complete a current state assessment of non-Corporate
Services key policies to steer which polices need
remediating and identify any implementation and
monitoring needs.
biii) Business Continuity - see paper 7b):
Major Incident Management processes introduced, in
conjunction with Crisis Management Team Construct
Initiation of Business Impact Assessments across business
units, with aim to develop and test continuity planning.
° Complete phase 1:
- Business Protection Team Training & Invocation Test
- CMT Exercise
. Continue phase 2:
- BC Programme Management Structure Development.
c)
Assurance Mechanisms (& assessment of effectiveness of Risk Management and Internal Control systems) - see paper 7c)
To provide assurance to Management and the Board (via the
ARC):
1. Completed a dry run/ test of the Executives’
Declaration return, completed by the General Executive
(GE), and
2. Implemented Control Self-Assessment (CSA)
techniques for the General Control Framework and
Financial Reporting processes.
Use any lessons learnt to improve self-assessment at half
year 2016/ 17
. Conduct full roll out at year end 2016/ 17 (to help the
Board complete its year-end Annual Assessment of Internal
Controls for 2016/ 17).
d)
Corporate Governance Capability (& disclosure in the Annual Report & Accounts) - see paper in agenda item 6
For this year’s disclosures, we reviewed previous
declarations and enhanced the risk information in the
Strategic Report (our approach to risk, our Internal Control
° Ernst & Young have provided a review of our compliance
gaps, which the Central Risk team will analyse to develop a
route map to compliance (over the next 2 or 3 years). This
Strictly Contidentiat
ARC 19 May 2016
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PAGE 5 OF 5
Framework and more details on our principal risks) as well
as in the Governance section (description of internal audit’s
approach and audits, plus how the Board conducts their
assessment of the risk management framework and systems
of internal control), in discussion with our external auditors.
In particular, following RCC and ARC suggestion, compliance
with the UK Corporate Governance Code is not sought at
present and our compliance statement is now, "PO maintains
standards of corporate governance appropriate for our
ownership structure, our commitment to our social purpose
and our strategy for commercial sustainability”.
will enable RCC and ARC to determine if this is appropriate
for our needs and practical.
This was originally estimated for presentation in May, but
has been rescheduled to September.
Strictly Confidentiat
ARC 19 May 2016
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AUDIT,RISK AND COMPLIANCE COMMITTEE
6) Risk & Control Report
Author & sponsor: Mike Moriey-Fletcher Meeting date: 19 May 2016
Executive Summary
Context
This paper updates the ARC on progress against the project plan for developing POL’s
Risk Framework, in particular how we have been developing POL’s Group Risk Profile,
Internal Control Environment, Assurance mechanisms and Corporate Governance
capability. Please note, our Risk Profile is NOT reviewed at this ARC (nor Incident
Reporting) as it is covered at the other four meetings.
Questions this paper addresses
1. What has been the primary focus since the last ARC?
2. What else has been progressed?
3. Is implementation of the Risk Framework on target?
Conclusion
1. This period has been primarily focused on developing our risk, control and
assurance disclosure statements for our stakeholders in the Annual Report. We
have used our revised position on corporate governance compliance to guide
the content and extent of our disclosures, but also compared these with other
relevant organisations’ reports and discussed them with our external auditors.
See paper in agenda item 6 for more details.
2. We have also progressed our work on improving our Internal Control
Environment (e.g. dry running/ testing our Internal Control Framework,
completing the review and remediation of our Corporate Services key policies,
continuing to enhance our Business Continuity capability) and our Assurance
Mechanisms (e.g. completing our first Executives’ Declaration and starting the
control self-assessment of our Financial Reporting controls) - see attached
papers.
3. The plan is on schedule (see appendix 1), despite some resource shortages
(through illnesses and recruitment holds). However, we have rescheduled
developing the Route Map to Corporate Governance Compliance until
September, as we have brought forward work on the Internal Control
Framework and Executives’ Declaration. A summary of Work Done since the
March ARC and Next Steps is included in appendix 2.
Input Sought
The Committee is asked to review the attached papers and provide feedback,
support and approval as appropriate.
ARC 19 May 2016
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Appendix 1: Risk Framework - Project Plan Version: 19" May 2016
Four Components Q3 Qa Qi Q2 Q3 a4
31 Dec 2015 31 Mar 2016 30 Jun 2016 30 Sep 2016 31 Dec 2016 31 Mar 2017
a) Develop Refine Top Risks Confirm Controls & Half year refresh of I Full year refresh
Group Risk : Key Further Actions Risks & KFA of Risks & KFA
Profile & Key
Further Actions Drive consistency in RM _ Develop Incident Develop risk measures) I Compare actions/ residual Redraft statement
tools and techniques —__ Reporting : _and dashboards tisk to Risk Appetite on Risk Appetite
b) Enhance ( “ ‘ "
f 1 Design Conduct Gap Analysis Remediate Control Framework Gaps
nterna General Controls & Implement
Controls I Framework* J I I Quick Wins J J Include in ED &
Environment Pa ~, ~\ I _ CoA enc)
. Design Policy For CS, conduct For non-Cs, below
coordinate with lysis & id hich For non-CS, conduct Gap Analysis &
Financial Control Framework & Gap Analysis consider whicl Remadiate Policy Gaps, as required
+ conduct Gap Remediate Policy policies to include :
Framework project Analysis Gaps
SConltatd J J J
c) Develop I Develop )
Assurance I Assurance Map
Mechanisms to
t Board’ Develop Self-Assurance mechanisms: Dry run of Self-Assurance Year End Self-Assurance
Support Board's Executives’ Declaration + Control Self-Assessment mechanisms (ED & CSA)
Annual Assessment i al
ve vement oe cenal Develop Year End Board Annual / Implement Year End Board Annual
contrat systems) Assessment and sign off process Assessment and sign off process
Pontinltslinalinlired
Research & agree Corporate Develop Route Map to
d) Develop Governance positioning & I Corporate Governance I
Corporate wording I compliance !
Governance a CHANGE: Rescheduled
Capability (and Draft ARA Statement (Principal Risks for September Draft ARA
di and mitigations, GCF and Assurance) Statement
isclosures for Annual
Report & Accounts)
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Appendix 2 ~Risk and Control Framework: Summary of Work Done and Next Steps
We have completed all key and time-critical components against the four main components of the plan (see Appendix 1).
Some of the main achievements have been, and next steps:
a)
Risk Profile and Actions
.
Group Risk Profile:
Details are NOT reviewed at this RCC/ ARC.
Drafted Principal Risk and Mitigations for disclosure in Annual
Report, per d) below.
Provided information on the Top Risks and Key Further
Actions to the Strategy Team for consideration in the
Business and Strategy planning process for 2016/ 17.
Risk owners will review Principal Risks and Key Further
Actions for reporting to September RCC/ ARC.
b)
Internal Controls Environment
Internal Controls Framework (ICF):
Reviewed the Internal Control elements of the Financial
Controls Framework project to confirm the design of our ICF,
assess its current state, ensure any appropriate remediations
have been identified and prepare templates for our
subsequent Self-Assessment exercise.
Details of our internal Controls have been included in this
year’s Annual Report in the risk note.
Considered embedding risk and control accountabilities into
GE objectives (or role profiles). GE members briefed and
acknowledged responsibility. Decision with Chief of Staff and
HR to include in standard wording in role profiles, but action
once strategy and TOM revisions completed.
Conduct dry run at half year 2016/ 17 and full roll out at
year end (to help the Board complete its year-end Annual
Assessment of Internal Controls for 2016/ 17).
Ensure risk and control accountabilities are reflected in GE
role profiles post strategy/ TOM review (June).
Strictly Confidentiat
3
4
19 May 2016
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Policy Framework (key policies) - see paper 6a
° Completed remediation of all Corporate Services policies.
. Used EY’s benchmarking to develop a list of non-Corporate
Services key policies, which have been approved by the RCC.
° Consider implementation needs of CS policies, ensuring
pragmatic and co-ordinated.
Formalise monitoring mechanism to ensure we can
evidence compliance with policies.
. Complete a current state assessment of non-Corporate
Services key policies to steer which polices need
remediating and identify any implementation and
monitoring needs.
biii) Business Continuity - see paper 6b):
° Major Incident Management processes introduced, in
conjunction with Crisis Management Team Construct
. Initiation of Business Impact Assessments across business
units, with aim to develop and test continuity planning.
° Complete phase 1:
- Business Protection Team Training & Invocation Test
- CMT Exercise
° Continue phase 2:
- BC Programme Management Structure Development.
c) Assurance Mechanisms (& assessment of effectiveness of Risk Management and Internal Control systems) - see paper 6c)
° To provide assurance to Management and the Board (via the I « Use any lessons learnt to improve self-assessment at half
ARC): year 2016/ 17
1. I Completed a dry run/ test of the Executives’ . Conduct full roll out at year end 2016/ 17 (to help the
Declaration return, completed by the General Executive Board complete its year-end Annual Assessment of Internal
(GE), and Controls for 2016/ 17).
2. Implemented Control Self-Assessment (CSA)
techniques for the General Control Framework and
Financial Reporting processes.
d) Corporate Governance Capability (& disclosure in the Annual Report & Accounts) - see paper in agenda item 5
. For this year’s disclosures, we reviewed previous
declarations and enhanced the risk information in the
Strategic Report (our approach to risk, our Internal Control
° Ernst & Young have provided a review of our compliance
gaps, which the Central Risk team will analyse to develop a
route map to compliance (over the next 2 or 3 years). This
Strictly Contidentiat
ARC 19 May 2016
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Framework and more details on our principal risks) as well
as in the Governance section (description of internal audit’s
approach and audits, plus how the Board conducts their
assessment of the risk management framework and systems
of internal control), in discussion with our external auditors.
In particular, following RCC and ARC suggestion, compliance
with the UK Corporate Governance Code is not sought at
present and our compliance statement is now, “PO maintains
standards of corporate governance appropriate for our
ownership structure, our commitment to our social purpose
and our strategy for commercial sustainability”.
will enable RCC and ARC to determine if this is appropriate
for our needs and practical.
This was originally estimated for presentation in May, but
has been rescheduled to September.
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AUDIT, RISK AND COMPLIANCE COMMITTEE
6a) Policy Framework Project update
Author: Mark Rodgers Sponsor: Mike Morley-Fletcher Meeting date: 19 May 2016
Executive Summary
Context
The purpose of the Policy Framework Project (“PFP”) is to ensure that we know what our key policies are
and that they are up to date, implemented and that we can demonstrate this to the Board and third
parties. The project also supports other Post Office initiatives such as the Partnership Banking Agreement
work.
The project aimed to develop a suite of key policies for Post Office and splits this into two sequential
phases: the first was to confirm Corporate Services (CS) policies, review them and, where necessary
revise or develop them before implementing them; the second phase has identified key policies from
other areas of the business and we will now ensure these are reviewed, re-drafted or developed and
implemented. Our external auditors have provided benchmark data which has been used to ensure the
reasonableness and completeness of the final suite of policies. As policies are developed or revised they
will be presented for approval to the relevant governance body. Policies need implementation plans to
articulate what is required to operationalise and monitor them in the business.
Questions this paper addresses
PHASE 1
1) Status of phase 1 plan?
2) How will these be approved and by which governance body?
3) How will we manage subsequent implementation of the policies from phase 1?
PHASE 2
4) For phase 2, can ARC approve the proposed suite of additional key policies?
5) I What are the next steps?
Conclusion
PHASE 1
1) The CS policies have been reviewed, redrafted where required and signed off by the sponsor/
Executive Policy Owner (see appendix 1). The Conflicts of Interests and Physical Security policies
are going through final stages and will be completed by the end of May. The March 2016
Partnership Banking Agreement (“PBA”) project deadline was met for the relevant policies.
2) Governance bodies have been identified for each policy (see appendix 1, column 4). Where
policies are new or have needed a degree of updating, RCC has requested a formal Gap Analysis
from the policy sponsor/ owner to confirm the extent of any significant remediations needed and
to develop proportionate implementation plans. RCC has requested these be completed for three
of the revised policies (Financial Crime, Anti-Bribery and Corruption, Anti-Money Laundering)
before considering full approval at the July RCC and subsequent presentation to ARC. ARC
approval will be requested via circulated papers after the July RCC. Two key policies
(Whistleblowing, Business Continuity) already have remediation plans in progress and
consequently are now presented for ARC approval (see appendix 2).
3) Policies, once approved, will be rolled out to the business by the policy owner. An outline Policy
Implementation Process has been developed to assist individual policy owners (see appendix 3).
These will require agreement by key stakeholders of details and timelines.
ARC 19th May 2016
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PHASE 2
4) — Following a review of the proposed list of key policies and benchmarking against data provided by
Ernst & Young, we now recommend the set of 23 key policies, as set out in appendix 1.
5) Subject to agreement by ARC of this suite of policies, we will undertake for the phase 2 policies a
gap analysis to identify any significant remediations and develop implementation plans with
individual policy owners.
Input Sought
ARC is asked to review this paper and invited to provide feedback and comments. In particular to:
° note the progress to date for the phase 1 CS policies,
° agree the proposed suite of policies from other areas of the business for phase 2 as set out in
appendix 1, and
° approve the two policies set out in appendix 2 (full copy documents in appendix 4 and 5).
Appendices
Appendix 1: Key Policy Framework — Latest update on strawman
Appendix 2: Policy Approval - Summary of policies and rationale
Appendix 3: Policy Implementation Process - An example
Appendix 4: Policy for approval - Whistleblowing
Appendix 5: Policy for approval - Business Continuity
Confidential ARC 19" May 2016
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Appendix 1: Key Policy Framework — Latest update on strawman
The two tables below together from the suite of key policies, our “Key Policy Framework”. Details are
provided of policy sponsors (GE members), status of policy review and the governance body for
ultimate approval.
The Policy Approval proced'
ure
The proposed governance over the policy approval procedure is for the policy sponsor to sign off the
new or revised policy and then for it to be presented to the designated governance body (for instance
RCC only, and ARC, or/ and Board) for ultimate approval. These are set out in column 4.
The cycle of review is defined is the policy, but is usually annual, when the policy would be reviewed by
the policy owner, signed off by the policy sponsor and any changes presented for approval to the
designated governance body.
A) Phase 1 is the suite of Corporate Services key policies, which have been reviewed and
then drafted or revised
PHASE 1 - CORPORATE SERVICES
Corporate Governance, including
1) Board Constitution (covered by No changes required Board Next approval will be
our Articles of Association, Matters
referred to Board, ToRs, Delegation of I Jane MacLeod er review cycle
Authority)
2) Conflicts of Interest Jane Macleod I Due for completion by end I Board Board July 2016
of May 2016
3) Enterprise Risk No changes required - ARC Per review cycle
) Pi Jane MacLeod updates 2015
4) Internal Audit (covered by IA No changes required ARC Per review cycle
Charter per intemal Audit Standards)
Jane MacLeod
16
ARC
6) Investigations Jane MacLeod Completed April 2016 RCC RCC July 2016
Information Security, including
7) Cyber & Information Security I Jane MacLeod No changes required - ARC ARC Sept 2016
8) IS - Acceptable Use Jane MacLeod Re ole Recueet tor, RCC only Per review cycle
9) Business Information 7) Cyber & Information I RCC only Per review cycle
Systems Jane Macleod I Security to also be
approved by ARC
10) Information Assurance (incl RCC only Per review cycle
Data Protection) Jane MacLeod
Financial Crime, including
11) Financial Crime Jane MacLeod Completed April 2016, ARC ARC (post July RCC)
subject to Gap
12) Anti-Bribery and Corruption ‘Analysis? ARC/ Board* ARC (post July RCC)
(incl. Gifts & Hospitality Policy) Jane MacLeod y
Implementation Plan
13) Anti-Money Laundering (inc. and RCC approval (July I ARC/ Board* ARC (post July RCC)
Counter Terrorism, Sanctions) Jane MacLeod 2016)
No changes required — Board Next, per review cycle
14) Prosecution (England and Wales) I Jane MacLeod updated and approved in
Feb 2016
Resilience, including
15) Physical Security Due for completion by end I RCC only RCC July 2016
Jane MacLeod
of May 2016
ne
Note: Green
the Board
Strictly Confidential
RC, Yellow = still to complete * Board approval as per Matters reserved to
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B) Phase 2 is the list of proposed key policies from other business areas, which once agreed
will be reviewed and where necessary drafted or revised.
These proposals for further “key” policies have been developed through review of other organisations’
policy suites and reference to benchmarking examples provided by Ernst & Young. As key policies
these are our most material policies and ones we expect to be formally approved by RCC only, and
ARC, or/ and Board. In consequence, we have tried to keep the list as contained as possible. Many
other areas are covered by policies, but these are less significant and so not considered necessary for
ARC or Board review and approval. The list will be kept under review and adjusted as required.
In addition to the 16 CS key policies, we propose seven others, see below, to be considered as “key”.
Of these two are currently being revised (Business Change Management, Treasury Risk
Management) and one will be new and needs to be drafted (Customer Treatment, including
Elderly/ Vulnerable). Once completed, all three will be subject to a Gap Analysis and
Implementation Plan before they can be presented to their relevant governance forum for approval.
PHASE 2 - NON-CORPORATE SERVICES
17) Code of Conduct Represented by our Code I Board
Neil Hayward of Business Standards (GE
March 2015)
18) Customer Treatment (including Elderly/ ; New policy required, and I ARC (timing tba)
Vulnerable) Martin George I being developed
79) Social Purpose - Distribution Network Represented by the Board (at each funding
Coverage Kevin Gilliland I Entrustment Letter, Nov review)
2013
20) Business Change Management Policy being developed RCC only (timing tba)
David Hussey from recent BCM
methodology
21) Accounting and Reporting ‘Alisdair Represented by our ARC (reviewed annually as
Cameron Accounting and Reporting I part of accounting policies
Manual year end procedures)
22) Treasury Risk Management ‘Alisdair Policy being revised ‘ARC (timing tba)
Cameron
23) Health & Safety Neil Hayward I Revised April 2015 Board
Note: Yellow = still to complete.
Strictly Confidential
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Appendix 2: Policy Approval - Summary of policies and rationale
These policies have been reviewed and signed off by policy owners:
A) policies that have been approved by RCC and are presented for ARC approval
B) policies that have been approved by RCC, subject to provision of Gap Analysis and remediation
plans.
Four relate to the Partnership Banking Agreement project (highlighted by *).
A) Presented for ARC approval
5) Whistleblowing I Jane To help Post Office meet Proposal for process I 1. Policy Manager will
MacLeod I its legal and regulatory to implement coordinate, and
internal and external policies, including: I ensure QA standards,
obligations. To * where they including compliance
implement good should be stored I monitoring.
practice and engender + how they should
good standards in this be communicated I 2. Policy Owner
context. RCC May and supported undertakes
16)* I Business Jane To embed a framework I and ARC with training compliance, and will
(PBA) I Continuity MacLeod _ I to identify potential May 2016 I + how they should I identify measures,
threats to business be controlled, develop monitoring
continuity, and to help monitored and —_I processes, track
manage impacts to reviewed. results and provide
business operations. It reporting with MI to
is a set of standards the relevant
which support resilience Please refer to governance body.
and sets out the appendix 3 for
capabilities to respond. more details.
See appendix 4 and 5 for policy documents.
B) To be circulated for ARC approval, following July RCC
Sanctions) risks whilst
reducing actual loss,
and avoiding potential
losses.
11)* Financial Crime Jane To help Post Office meet
(PBA) Macleod I legal and regulatory
obligations within
appetite, and to
manage financial crime
risks reducing actual
loss, avoiding potential
losses.
12)* I Anti-Bribery and I Jane To help Post Office meet
(PBA) I Corruption (incl. I MacLeod I its legal and regulatory I RCC July
Gifts & obligations within 2016 and
Hospitality) appetite, to help then
manage ABC risks, and I circulated
support good conduct to ARC
standards in all members
dealings.
13)* I Anti-Money Jane To help Post Office meet
(PBA) I Laundering Macleod I its legal and regulatory
(incl, Counter obligations within
Terrorism, appetite, and to help
Sanctions) manage AML (CTF and
Proposal for process
to implement
policies, including:
* where they
should be stored
how they should
be communicated
and supported
with training
how they should
be controlled,
monitored and
reviewed.
Please refer to
appendix 3 for
more details.
1. Policy Manager will
coordinate, and
ensure QA standards,
including compliance
Monitoring.
2. Policy Owner
undertakes
compliance, and will
identify measures,
develop monitoring
processes, track
results and provide
reporting with MI to
the relevant
governance body.
ly Confidential
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Appendix 3: Policy Implementation Process - An example
These are the steps we identified for planning and monitoring implementation of policies. They will be
trialled with CS polices before being recommended to other business areas. An illustrated timeline of 6
months has been used.
1) Identify and a confirm associated controls framework and Identify by end of
develop associated Q cr tome trix ne r ! oneibilit month 1, remediate by
controls Gale MAETIX OF FESPonsiDullties end of month 3
Q_ Confirm controls operating as expected
2) Add to storage @ Store documents (using SharePoint) End of month 1
. Q > Update Intranet and links (checking searches)
repository and make O Define maintenan
accessible Stine maintenance
3) Develop and plan a entity [earning messages, resources, End of month 2
Supporting training Q Develop modules/ materials
Q Coordinate and deliver training (using Learning
Academy)
Q Publish materials to SharePoint (if appropriate)
4) Communicate policy I 2 Agree audience for communication End of month 2
Q Develop communications policy and messages
and requirements . .
Q Communicate policy and requirements
5) Deliver supporting Q Identify resources and compile modules/ Month 3-6
training materials (Learning Academy)
Q Plan training rollout
Q Coordinate and deliver training
6) Monitor and a proce and eunaeainpeeatialaaalid At end of month 6
measure compliance 4
P Q Identify measures and test monitoring plans
Q Commence monitoring routines
Q Capture results and evaluate
7) Review policy a ost montonng results to evaluate current Per recommended
of policy ols and continuing appropriateness I review cycle, usually
annuall
Q > Conduct policy review (maintain policy review y
!og)
Q Report to relevant governance body
Confidential
ARC 19" May 2016
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Appendix 4
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Contents Page
Contents Page
Document Control Sheet
Section A. Introduction .
Section B. Context.
About this Policy...
What is Whistleblowing.
Section C. Policy details
How to raise a concern...
Whistleblowing Officer and ‘Speak Up’ details ...
Confidentiality and anonymous reporting ....
Investigating concerns.
Outcomes and Reports
eo ©nvVvVvnuuanr won
External Disclosures...
Protecting the Whistleblower
Contact us.....
Who is responsible for this policy
How we monitor compliance ...
Section D. Key Terms and References .
Key Terms
References...
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Document Control Sheet
MMA
GE Policy Sponsor Policy Owner Polley Implementor
Policy Approver
Post Office
RCC and ARC
Committees
General Counsel Employment Lawyer Employment Lawyer
Jane MacLeod Nisha Marwaha Nisha Marwaha
Policy Review Effective from:
Period
Policy location:
Version and Policy
Status:
Final V1.4 Annual Review Z:\NEW COMPLIANCE\New
Policy Fremework
2015\Refreshed Policies 2016
19 May 2016
(from Effective date)
REVISION HISTORY
Version
Draft v1.3 18/04/16 Nisha Marwaha Policy Owner review
Final vi.4 27/04/16 Jane MacLeod Sponsors review and sign-off
POLICY APPROVAL
Role/Forum
Executive Owner and Sponsor General Counsel (Jane MacLeod) 30 March 2016
Executive Committee Post Office Risk and Compliance 5 May 2016
Committee (RCC)
Board Committee Post Office Audit, Risk and Compliance 19 May 2016
Committee (ARC)
DOCUMENT DISTRIBUTION STATUS
Distribution Document Sensitivity
(Mark x as appropriate) (Mark x as appropriate)
Internal Only Non-sensitive
External Only Sensitive
A revi
Quality Control oe ew
This document is periodically reviewed and at least once each year starting No later than 19%
from the last effective date. This policy has been reviewed against the latest May 2017
Post Office policy standards.
Section A.
Introduction
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Section B. Context
The purpose of this policy is to encourage the reporting of suspected wrongdoing
and/or dangerous practices, (see section entitled What is Whistleblowing below),
within Post Office, to make it easier for management to address those concerns and
therefore avoid serious accidents, fraud, regulatory breaches, financial impropriety
and/or reputational damage.
The aims are:
(1) to encourage staff to report matters as soon as possible in the knowledge
that their concerns will be taken seriously and investigated, and that
confidentiality will be respected,
(2) to provide staff with guidance as to how to raise those concerns, and
(3) to reassure staff that they should be able to raise concerns without fear of
reprisals, even if they turn out to be mistaken.
This policy enables Post Office to comply with its Whistleblowing obligations under
applicable legislation and to be in line with regulatory requirements. This Policy is
effective as at 19° May 2016.
"Whistleblowing" refers to the act of exposing wrongdoing and/or dangerous
practices by reporting it either internally within an organisation, or externally, for
example to a regulator. The law on Whistleblowing is contained in the Employment
Rights Act 1996 as amended by the Public Interest Disclosure Act 1998. Wrongdoing
includes criminal activity, civil offences (including negligence, breach of contract,
breach of administrative law), miscarriages of justice, dangers to health and safety
or to the environment and the cover up of any of these.
Workers should raise a concern if they are aware of, or suspect, wrongdoing which
affects others (e.g. customers, members of the public, colleagues or the Post Office).
Some examples (this is a non-exhaustive list) of situations where a worker may raise
a concern are:
. Fraud,
. Giving, offering or taking of bribes,
. Financial mismanagement,
. Misreporting,
. Practices that could put individuals or the environment at risk,
. Breach of Post Office internal policies and procedures (including the Code of
Business Standards),
. Concerns about slavery or human trafficking, and
. Any conduct likely to damage Post Office’s reputation.
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A Whistleblower is a person who raises a genuine concern relating to any wrongdoing
including any of the above. If a worker has any genuine concerns related to
suspected wrongdoing, they should report it under this Policy.
If a worker is uncertain about whether something is within the scope of this Policy,
they should seek advice from the Whistleblowing Officer, whose contact details are
set out in this Policy.
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Section C. Policy details
In the first instance, workers should raise concerns with their line manager, or a
senior HR manager in Post Office. Alternatively workers can notify the
Whistleblowing Officer directly, using the contact details provided in this Policy.
It is recognised that sometimes raising a concern directly with the business may not
be possible, for example, if the worker considers that the line managers may be
involved in the issue or if they have a concern about confidentiality.
In such instances workers should contact the “Speak Up” confidential reporting
service which is run by InTouch MCS Ltd, an independent company (see section
below entitled Whistleblowing Officer and Speak Up details for more information).
InTouch will treat concerns in complete confidence and the worker does not have to
provide contact details. Post Office treats all concerns raised under this Policy
very seriously.
The Whistleblowing Officer for the Post Office Group is Post Office’s.General_Counsel,
cted by telephone on: pr by
The Speak Up service is available on!
portal http://www.
r via a secure on-line web
postoffice.
All reports to the Speak Up line will be acknowledged within five working days and
will be passed to the Whistleblowing Officer.
Post Office hopes that workers will feel able to voice Whistleblowing concerns openly
under this Policy. However, if a worker wants to raise a concern confidentially, Post
Office will make every effort to keep their identity secret. If it is necessary for
anyone investigating a concern to know the worker's identity, the investigator will
discuss it with that individual.
When reports are made anonymously via Speak Up, there is no requirement to
provide contact details. However, not providing details may reduce Post Office’s
ability to undertake a thorough investigation into the concerns raised.
In all cases the individual’s concern will be treated sensitively and in confidence.
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All concerns (including those raised via Speak Up) will be passed to the
Whistleblowing Officer who will carry out an initial assessment of the issue to
determine the scope of any investigation.
The Whistleblowing Officer will decide whether an investigation is appropriate and
what form the investigation should take. The type of investigation will depend on the
nature of the concern and may be:
. investigated internally (or the Whistleblowing Officer may decide to appoint an
external investigator if there are good reasons),
. resolved by agreed action as determined by the Whistleblowing Officer without
the need for investigation,
. referred to the police, and
. referred to a regulatory authority.
If an investigation is appropriate, the Whistleblowing Officer will appoint an
investigator. The appointed investigator should be an individual at an appropriate
level for the matter under investigation and they must not have any conflict of
interest with the individuals or issues concerned.
In some cases an investigator or team of investigators may be appointed including
staff with relevant experience of investigations or specialist knowledge of the subject
matter.
The Whistleblowing Officer may determine that the matter should be investigated
under the terms of other more appropriate Post Office Group policies, such as those
covering grievance or bullying and harassment matters, in which case the process
described in the applicable policy will apply. The Whistleblowing Officer can also
decide to take no action if the complaint appears to be without a reasonable basis.
During an investigation under the Whistleblowing Policy, the investigator may wish to
contact the worker directly to request additional information. Where the worker's
identity is known, this will be done only where the worker has consented to a
representative from Post Office speaking to them directly. Where the worker’s
identity is anonymous, questions or requests for information can be raised
anonymously either through the Speak Up service, or via secure voicemail or
messaging on the web portal.
Subject to concerns about confidentiality, the worker may be required to attend
meetings to provide further information. Workers can bring a colleague or union
representative to any meetings under this Policy. The companion must respect the
confidentiality of the worker and any subsequent investigation.
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Investigators should consider the principles set out in Post Office’s internal
Investigations Policy and adhere to those wherever possible when undertaking the
investigation.
The investigator should aim to keep the Whistleblower informed of the progress of
the investigation and its likely timescale.
The investigator must write a report containing the findings of the investigation,
including conclusions as to the validity of the allegations and recommendations for
further action. The report should be submitted to the Whistleblowing Officer.
After the investigation, the investigator will inform the Whistleblower of the outcome
of the investigation and what action, if any, has been taken. Sometimes the need for
confidentiality may prevent Post Office disclosing specific details of the investigation
or any disciplinary action taken as a result. If it is determined that no action will be
taken, then the individual concerned should be informed of the reason for this.
The Whistleblowing Officer will determine what further action is required. If Post
Office concludes that a Whistleblower has made false allegations maliciously or with a
view to personal gain, the Whistleblower will be subject to disciplinary action.
Post Office cannot always guarantee the outcome the Whistleblower is seeking, but
will aim to deal with concerns fairly and in an appropriate way. If a worker is
unhappy with the way in which their concern has been handled, they should raise it
with the Whistleblowing Officer or if that is not appropriate for any reason, the
Chairman of the Post Office Board Audit and Risk Committee.
The investigator will share any reports with the Whistleblowing Officer. In all cases a
report of the outcomes of any investigation will also be made to the Audit Committee
as a means of allowing the committee to monitor the effectiveness of the Policy.
Copies of such reports should be held in accordance with Post Office’s document
retention policies.
External Disclosures _ oo
The aim of this Policy is to provide an internal mechanism for reporting, investigating
and remedying any wrongdoing in the workplace. In most cases workers should not
find it necessary to alert anyone externally.
However, the law recognises that in some circumstances it may be appropriate for
workers to report their concerns to an external body such as a regulator. It will very
rarely, if ever, be appropriate to alert the media.
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The independent Whistleblowing charity, Public Concern at Work, have a list of
prescribed regulators for reporting certain types of concern. Their contact details are
as follows:
Helpline:
E-mail
Website: www.pcaw.co.uk
Public Concern at Work operates free, confidential advice to people concerned about
crime, danger or wrongdoing in the workplace. We strongly encourage you to seek
advice from them before reporting a concern to external parties.
It is understandable that Whistleblowers are sometimes worried about possible
repercussions. Post Office has a statutory obligation to protect Whistleblowers and
will support workers who raise genuine concerns under this Policy, even if they turn
out to be mistaken.
Post Office will take all reasonable steps to ensure that Whistleblowers do not suffer
any detrimental treatment as a result of raising a concern. Detrimental treatment
includes disciplinary action, dismissal, threats or other unfavourable treatment
connected with raising a concern.
Workers must not threaten or retaliate against Whistleblowers in any way. If anyone
is involved in any such conduct, it will be taken seriously and they will be subject to
disciplinary action.
If a worker believes that they have suffered any such treatment, they should inform
the Whistleblowing Officer immediately. The Whistleblowing Officer should take
steps to address any victimisation, which may include working with the HR team to
put appropriate measures in place. If the matter is not addressed the Whistleblower
should raise it formally using Post Office’s Grievance Procedure.
Training will be provided to managers to make them aware of the rights of
Whistleblowers.
If you need further information about this Policy or wish to report an issue
in relation to this Policy , contact Nisha Marwaha - Employment Lawyer on
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Post Office’s Board of Directors have overall responsibility for ensuring that Post
Office has a framework to ensure compliance with legal, regulatory and contractual
requirements. The Board is kept abreast of relevant matters relating to the
Whistleblowing by reports from its committees including its ARC Committee.
. The General Counsel for Post Office is the Policy Sponsor, accountable to the
Post Office Board overall.
° The Principal Employment Lawyer is the Policy Owner responsible for the day
to day implementation of and compliance with this Policy. The Employment
Lawyer is accountable to the General Counsel.
The Principal Employment Lawyer will ensure that this policy is reviewed and remains
effective. Post Office’s internal systems and controls ensure that this policy is
regularly independently assessed for effectiveness, suitability and adequacy. In
addition, Internal Audit will periodically test compliance with this policy.
Review and assessment of compliance with this policy is done on a regular and timely
basis. Reports are made to the Risk and Compliance Committee.
The General Counsel provides an annual summary of reports made via the Speak Up
line and other known instances of Whistleblowing to (i) the Post Office Board and the
Post Office Management Services Board as appropriate, and (ii) the Post Office Board
Audit and Risk Committee. In making these reports, the confidentiality of
Whistleblowers will be respected.
Any serious concerns reported by Whistleblowing will be escalated by the
Whistleblowing Officer to the Chairman of the Post Office Board Audit and Risk
Committee.
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Section D. Key Terms and References
Term or Acronym Description
HR team Post Office Human Resources team
References Description
Post Office Group (‘Post Office’) Post Office Limited and all subsidiaries and
entities within the Post Office Group which
includes Post Office Management Services
(POMS)
Executive Policy Owner As defined by the Post Office Policy
Framework-Roles and_ responsibilities
Matrix document V0.5
Policy Owner As defined by the Post Office Policy
Framework-Roles and_ responsibilities
Matrix document V0.5
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Appendix 5
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Contents Page
Contents Page
Document Control Sheet.............
Section A. Introduction
Section B. Context ....
About this Policy
What is Business Continuity? .
Risk Appetite.
How we organise Business Continuity Management...
Who is responsible ....
Who must comply and how....
Section C. Policy Details
Information...
Our controls and arrangements ....
Baseline and on-going Business Continuity objectives .
Satisfying BCMP Requirement:
1
2
3. Approach to Managing Risk & Audit Requirements...
4
Continual Service Improvement...
Section D. Governance...............
How we monitor compliance
How to raise a concern...
Contact us and more information...
Section E. Key Terms and References
Key Terms
References...
Document Control Sheet
GE Policy
Sponsor
Policy Owner
Business
Continuity
General Counsel Manager
Jane MacLeod Jonathan
Waples
Version and
Status:
Period
Annually from
Policy Review
POLICY SUMMARY
Policy Implementor Policy Approver(s)
Business Continuity
Manager
Jonathan Waples
Post Office
RCC and ARC Committees
Effective from : Policy location:
Z:\NEW COMPLIANCE\New Policy
Version
Final - V0.7 policy effective is May 2016 Framework 2015\Refreshed Policies 2016
ate
DOCUMENT REVISION HISTORY
Author
Reason For Change
Draft v0.6 21/03/2016 Mike Morley-Fletcher Head of Risk sign - off
readiness Review
Final v0.7 30/03/2016 Jane MacLeod Final review, sponsor sign off
Role/Forum
Executive Owner and Sponsor
POLICY APPROVAL
General Counsel (Jane MacLeod) 30 March 2016
Executive Committee Post Office Risk and Compliance 5 May 2016
Committee (RCC)
Board Committee Post Office Audit, Risk and 19 May 2016
Compliance Committee (ARC)
Distribution
(Mark x as appropriate)
Internal Only
DOCUMENT DISTRIBUTION STATUS
Document Sensitivity
(Mark x as appropriate)
Non-sensitive
External Only
Sensitive
Quality
This document is periodically reviewed and at least once each year starting
from the last effective date. This policy
Post Office policy standards.
Next review
date
No later than 19%
May 2017
Control
has been reviewed against the latest
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Section A. Introduction
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Section B. Context
The purpose of this document is to define Post Office’s policy with regard to business
continuity management that is appropriate to the aims and objectives of Post Office.
This includes:
¢ A framework for:
o setting business continuity objectives;
o Satisfying appropriate requirements;
eo continual improvement of the Business Continuity Management
Programme; and
e Ahigh level statement of our key controls in respect of business continuity.
The Policy is consistent with business continuity “ISO22301”, which are the Business
Continuity Institute’s Good Practice Guidelines.
Policy Scope: It is important to understand which areas of the business currently fall
under the protection of the policy, and which do not. The boundaries of the Post
Office business continuity framework are detailed within a separate document,
“Business Continuity Context, Requirements and Scope”, and these documents
should be reviewed together when assessing a BC response requirement.
This policy’s effective date will be determined by the date on which final approval is
given by the appropriate governance forum.
Post Office adopts the Business Continuity Institute’s Good Practice Guidelines
definition of business continuity as: "A holistic management process that identifies
potential threats to an organisation, and the impacts to business operation those
threats, if realised, might cause, and provides a framework for building
organisational resilience with the capability of an effective response that safeguards
the interests of its key stakeholders, reputation, brand and value-creating activities.”
Post Office has an averse appetite for business continuity risk. Post Office recognises
that it cannot completely eliminate this risk. However, this policy sets out controls to
reduce and/ or mitigate such risks.
This policy describes Post Office’s Business Continuity Management policy and should
be read in conjunction with other Post Office resilience, health & safety, and physical
security related policies and procedures.
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The BCM Framework
ZOSI
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The Organisation . BCM Strategy
Business
Continuity
Programme
Management
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3
=
5
=
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&
2
5
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a
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Developing &
Implementing an
Appropriate
Response
Maintaining &
Reviewing
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o
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1$O 22301 Busi
This Business Continuity Management Policy is stored electronically, and is available
to all relevant stakeholders within the organisation.
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Post Office’s Board of Directors have overall responsibility for ensuring that Post
Office has a framework to ensure compliance with legal, regulatory and contractual
requirements. The Board is kept abreast of relevant matters relating to the
management of business continuity by reports from its committees including its ARC
Committee. The key individuals and their specific responsibilities in relation to this
policy are:
e The General Counsel is a member of the Post Office Executive team and is the
Group Executive Owner and policy Sponsor, accountable to the Board.
e The Group Business Continuity Manager is the Policy Owner who is responsible for
the day to day implementation of and compliance with this policy and is
accountable in this regard to the General Counsel.
Compliance with this policy is mandatory for all Post Office employees, officers,
contractors, casual workers and agency workers. This policy applies wherever in the
world Post Office’s business is undertaken. All third parties who do business with
Post Office, including consultants, suppliers and business and franchise partners, will
be asked to agree contractually to this policy or to comply with their own equivalent
policy.
It is important that you read, understand and comply with this policy. Your actions,
behaviour and conduct to apply the provisions of this policy are your responsibility.
You must adhere to all parts of this policy. You should avoid any activity which may
lead to a breach of this policy. We may request your confirmation of agreement to
this policy. You must notify your line manager, in the first instance, as soon as
possible if you believe or suspect that a breach of this policy has occurred or may
occur.
You may request a policy exception or waiver to this policy, but you must follow the
Post Office’s exceptions and waivers procedures which can be obtained from the
business continuity Policy Owner.
If non-compliance is identified the matter must be referred to the General
Counsel. Any investigations should be carried out in accordance with Investigations
Policy. If the cause is found to be due to wilful disregard or negligence, it will be
treated as a disciplinary offence.
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Section C. Policy Details
Post Office recognises the need to ensure that our business operates safely, smoothly
and without interruption for the benefit of our colleagues, customers, shareholders
and other stakeholders.
To ensure such levels of safe, continuous operation, Post Office has implemented a
Business Continuity Framework consistent with “ISO 22301”.
The operation of a Business Continuity Framework has many benefits for Post Office,
including:
e The safe-guarding of colleagues at times of duress;
e Ensuring the supply of goods and services to our customer; Protection of revenue
streams and business profitability;
e Maintenance and enhancement of shareholder / stakeholder value; and
e Compliance with legal and regulatory requirements.
In addition, our Business Continuity Framework is a commitment to the
development, maintenance, improvement and socialisation of a Business Continuity
Management Programme within and across the organisation.
I Our controls and arrangements
1. Baseline and on-going Business Continuity objectives
The baseline objectives for business continuity within Post Office are defined
within the “Business Continuity Context, Requirements and Scope” document.
These are fundamental steps required which are led by business areas and are not
subject to frequent change.
These baseline objectives guide the setting of lower level detail for short-term
objectives for business continuity planning arrangements within an annual cycle.
They coincide with the organisational budget planning. This ensures that
adequate funding is obtained for necessary activities identified in the previous
cycle.
These business continuity objectives will be documented in the Business Continuity
Management Plan (“BCM Plan”), produced each financial year, which will also
identify how objectives will be achieved, over what estimated period, and at what
level of estimated cost. Once the annual BCM Plan is approved by the Post Office
Risk and Compliance Committee it will be subject to regular management review
to ensure that its objectives remain valid.
Amendments to objectives will be managed through the standard Post Office
change management process.
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2. Satisfying BCMP Requirements
Senior Managers commit to the provision of the appropriate resources to establish
and develop the Business Continuity Management Programme (“BCMP”).
Systematic performance review of the programme. This is conducted by the
Business Continuity Manager on a regular basis, ensuring that quality objectives are
being met. Qualitative evaluation is undertaken and any issues identified through
the audit programme and management processes. Management review includes
departmental and other management meetings.
Business Continuity Management Quality System. The Business Continuity
Manager has overall authority and responsibility for this and implements and
manages the system carrying out the following:
e The identification, documentation and fulfilment of applicable requirements;
e Assigning authorities and responsibilities for the implementation, management and
improvement of the BCMP;
e Integration of business processes with the BCMP;
e Compliance with statutory, regulatory and contractual requirements in the
management of assets used to deliver products and services; and
e Reporting to senior management on performance and improvement of the BCMP
Role definition and responsibilities are reviewed by the Business Continuity
Manager to ensure that colleagues understand the roles they are required to fulfil,
and that they have the appropriate skills and competences to do so. These controls
are necessary to ensure the continued BCMP success and to mitigate risk.
Post Office will ensure that colleagues involved with the BCMP are competent on the
basis of appropriate education, training, skills and experience. The skills are
required to ensure business continuity will be determined and reviewed on a regular
basis, together with an assessment of existing skill levels within Post Office.
Training needs will be identified and executed via individual’s training plans
maintained to ensure that competences are in place.
Full details of the business continuity responsibilities associated with each of the
required roles, and how they are associated within Post Office are given in a
separate document, “Roles, Responsibilities and Authorities”.
Use of third parties. Post Office uses third parties, both internal and external, in
the delivery of products and services. Where this involves the operation of a
business process, or part of such process, that falls within the scope of the BCMP,
then this should be identified by the Business Continuity Manager within the annual
Business Continuity Management Plan.
Post Office retains governance of the relevant business continuity management
processes for third parties by demonstrating:
e Accountability for the process;
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e Control of the definition of, and interface to, the process;
e Performance and compliance monitoring; and
e Control over process improvements.
This will be evidenced by documentation and records, including contracts, meeting
minutes and performance reports.
Third party agreement contractual business continuity terms. Specific, high
level, requirements for new and existing relationships will be made available to
associated third parties by the relevant third party relationship manager. These
requirements set out minimum expectations for service continuity provision (as
appropriate to the contractual service level terms). For further information see
“Supplier Business Continuity Evaluation Process”.
3. Approach to Managing Risk & Audit Requirements
The risk management strategy defined under ISO 22301 requires that relevant
assets are identified and the following considerations made:
e Threats;
e Vulnerabilities;
e Impact & likelihood before risk treatment;
e Risk treatment (e.g. reduction, removal, transfer);
e Function responsible/ owner; and
e Timescale and review frequency.
Risk management will occur at multiple levels within the BCMP, including but not
restricted to:
« Business continuity management planning - risks to the achievement of
objectives;
e Business Continuity risk assessment;
« Assessment of the risk of changes under the established business change model;
and
e At the project level as part of the management of significant business change.
High level risk assessments will be reviewed annually, or upon significant change
to the business environment. More detail on the approach to risk assessment can be
found in the document “Risk Assessment Process”.
Regular reviews must take place concerning how well business continuity
management processes and procedures are being observed. These occur at two
levels:
e Structured regular management review of conformity to policies & procedures
within Post Office; and
e Internal audit reviews against the ISO 22301 standard by the Post Office Internal
Audit Team.
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Certification auditing. Additionally, should certification to ISO 22301 be sought
and attained, a third audit level applies:
e €xternal audit against the standard in order to gain and maintain certification to
ISO 22301.
Details on the process for internal audits can be found in the document “Procedure
for Business Continuity Audits”.
4. Continual Service Improvement
The approach to continual improvement of the BCMP is to:
e Consider effectiveness across all business areas and end to end systems,
processes within scope;
e Enhance current processes to bring them in to line with best practice (as
defined within ISO 22301);
« increase the level of proactivity (and the business perception of proactivity)
with regard to the on-going management of business continuity;
e Achieve an enhanced understanding of and relationship with the business
units to which the BCMP applies;
e Review relevant metrics on an annual basis to assess their appropriateness, or
to make changes to them based on collected historical data and feedback;
e Obtain ideas for improvement via regular review meetings with stakeholders,
documenting them in the “Procedure for Continual Improvement”; and
e Review the “Procedure for Continual Improvement” document at regular
management meetings in order to prioritise and assess timescales and
benefits.
Ideas for improvement may be obtained from any source, including but not restricted
to: Customers; Suppliers; Colleagues; Risk Assessments & Audits.
In order to evaluate any proposed improvements to the BCMP, the following criteria
would be applied:
e Cost;
e¢ Business benefit;
e Risk;
e Implementation timescale; and
« Resource requirement.
Accepted improvement proposals will be prioritised, and planned according to
standard project management principals. Additional information on continual
improvement methodology can be found in “Procedure for Continual Improvement”.
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Section D. Governance
The Business Continuity Manager will ensure that this policy is implemented,
reviewed and remains effective. Post Office’s internal systems of business continuity
risk control ensure that controls are regularly independently assessed for
effectiveness, suitability and adequacy. In addition, Internal Audit will periodically
test compliance with this policy.
Review and assessment of compliance with this policy is done on a timely basis and
regular gap analysis is undertaken by the Business Continuity Manager and reported
to the Risk and Compliance Committee.
Business continuity testing is planned and pre-determined. See further information
in the “Business Continuity Exercising and Testing Schedule”. Post Office’s capability
to maintain business operation will be subjected to exercise, and the results of these
exercises will also be made available to the Risk and Compliance Committee.
We require third parties who do business with Post Office to have at least equivalent
arrangements, systems and controls to this policy, and these should be demonstrable
on request.
Any Post Office employee who has concerns about a failure to comply with this policy
has a duty to:
e discuss the matter fully with their Line Manager; or,
e discuss it directly with their Head of Business Unit; or,
e bring it to Post Office’s attention independently of management, via the Speak Up
Line (see Section E ‘References’ for more information).
If you need further information about this policy or wish to report an issue
in relation to this p: _Please contact Jon Waples - Business Continuity
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Section E. Key Terms and References
Key Terms
Term or Acronym Description
Post Office Group (‘Post Office’) Post Office Limited and all subsidiaries
and entities within the Post Office Group
which includes Post Office Management
Services (POMS)
Executive Policy Owner As defined by the Post Office Policy
Framework-Roles and responsibilities
Matrix document V0.5
Policy Owner As defined by the Post Office Policy
Framework-Roles and responsibilities
Matrix document V0.5
ISO 22301 The International Standard for Societal
Security (Business Continuity).
References Description
Business Continuity Context, The purpose of this document is to describe
Requirements and Scope the way the business operates, internal and
external factors influencing it and to
highlight in general terms the potential
consequences of a business interruption.
This will allow the most appropriate level of
measures to be put in place to reduce the
level of risk and to ensure that plans are
available and tested to manage the impact
of any interruptions that do occur.
Roles, Responsibilities and The purpose of this document is to set out
Authorities the organisation structure in terms of job
roles, management and numbers of
resources in each area and then to define
how responsibility for each of the processes
within the Business Continuity Management
System (BCMS) is allocated within that
structure.
Supplier Business Continuity This document sets out a process for the
Evaluation Process evaluation of the business continuity
arrangements of our suppliers so that a
degree of confidence may be gained that
13
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they possess sufficient resilience to support
our requirements.
Risk Assessment Process It is important that Post Office has an
effective risk assessment process in place
to ensure that potential impacts do not
become real, or if they do, that
contingencies are in place to deal with
them. The starting point for risk
assessment is the list of key business
activities documented in the most recent
business impact analysis.
Procedure for Business Continuity The purpose of this document is to set out
Audits how the Business Continuity Management
Quality system will be audited internally.
Continual Improvement Action Log Management of BCMP improvements can
become unwieldy if they are spread across
multiple reports, action plans and meeting
minutes. The idea of this spreadsheet is to
act as a focal point to record, assess and
track all such improvement items in a
common manner.
In general Post Office will use the Plan-Do-
Check-Act method (the Deming Cycle) for
managing improvements as defined in the
ISO 22301 standard
Procedure for Continual
Improvement
Business Continuity Exercising and The purpose of this document is to set out
Testing Schedule a schedule for testing / exercising
activities.
Whistleblowing (Speak Up Line) In case of concerns staff may contact their
line manager, a senior member of the HR
Team, or if either or both are not available
staff can contact Post Office’s General
Counsel, Jane MacLeod who can be
contacted by email.on:....
whistleblowing: GRO
telephone on
staff can use,
available on I
on-line web p
http://www
_postoffice
14
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AUDIT, RISK AND COMPLIANCE COMMITTEE
6b) Business Continuity & Crisis Management Project update
Author: Jonathan Waples Sponsor: Jane McLeod Meeting date: 19" May 2016
Executive Summary
Context
The Business Continuity Project Manager has been tasked to review, revise and
develop plans, materials, processes and infrastructure to draw our Business
Continuity (BC) & Crisis Management (CM) disciplines in line with best practice
guidelines, as defined by the Business Continuity Institute, and measured against
1S022301:2012 Societal Security - Business Continuity Management Systems
(BCMS). It is recognised that whilst the organisation is historically successful in
reacting to business interruptions and critical incidents, there has been a significant
amount of change to the organisations structure, locations, arrangements with third
parties and colleagues in recent years. In consequence, the GE would gain more
confidence if the approach to BC and CM was formalised, compared to a standard
and tested. It is expected that adopting such a formal response will confirm
resilience, but also help improve time taken to recover and allow for more cost
effective use of resources upon invocation.
The project started in late November with the recruitment of a contractor and is
divided into three phases:
e Phase 1: Gap analysis; Business Continuity policy creation; Crisis Management
review (develop construct, test, communicate); pilot Business Continuity
activity (Business Impact Assessments, followed by confirmation of BCP)
e Phase 2: Expanded BC activity; Business Continuity Management Systems
Framework delivery
« Phase 3: Improved BCMS awareness; BCMS integration to BAU.
In addition, the Business Continuity Project Manager assists the business with its
ongoing BC and CM support needs.
Questions this paper addresses
1. How have we progressed our plan?
2. How is this bringing us in line with ISO 22301?
3. Per the ARC’s request, do we have visibility of our top suppliers’ BC
capability?
4. Per the ARC’s request, can we confirm NED’‘s role in the Crisis Management
construct?
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Conclusion
1. The plan has been devised and shared with management and the sponsor; Phase
one milestones have delivered a revised and improved Business Continuity policy
(presented for ARC approval in section 7a) and Crisis Management processes,
including a test, to be followed by lessons learnt, remediations and then formal
publication of the confirmed CM processes. Business Impact Assessments for the
three priority areas are in progress and will enable review of BC Plans (for these
areas). Phase 1 is on plan for completion by end of May and Phase 2 is underway.
See Appendix 1 for details.
2. Planned progress was for 45% of achievement at time of reporting to conformity
to ISO 22301 at this stage and this has been achieved. The majority of effort in
the opening stages of the project related to discovery and gap analysis of current
capability against the agreed standard. From this point, activity is focused on
achieving alignment to the best practice principles and will therefore deliver
significant deliverables and advances in conformity over the coming months.
3. The ARC requested a view on our top suppliers (ten selected) and their Business
Continuity capabilities. A reach-out was initiated to request visibility of BC
planning, capability & testing regimes. As a new type of request, response at
first was slow as suppliers worked through internal approvals. But we have now
received significant amounts of information from all but one supplier. The results
to date suggest that BC plans are documented and tested; some have in addition
confirmed that their plans are audited and certified. Going forward, the BC
Manager will repeat this exercise on an annual basis and report to the RCC.
4. Additionally, the ARC enquired about how their engagement in the Crisis
Management process might be managed during an invocation. This is described
in sections 5.4 and 5.5 of the Major Incident Response Procedure (see appendix
2), which is designed to engage the right stakeholders, at the right time, during
any incident. The invocation procedures state that NED involvement would be
requested by the Crisis Management Team (all GE members). Typically this
would be an incident event with severe operational disruption across multiple
business units, expected to be for a prolonged duration, with commensurate
reputational damage risk. Contact would be made by the CEO or CFO, with
details to NEDs of requested involvement.
Input Sought
The Committee is requested to review this report and highlight any input or
suggestions it has on the project’s goals or progress.
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Appendix 1
Task / Activity / Product plet “In-Flig
Phase One: Gap analysis; policy creation; CM review; BC pilot
End of May Completion Target
- Discovery, Policy & Strategy Review/
Framework Development
- Crisis Management Process
- Schedule and begin Business Impact
Assessments
Schedule and begin Business Continuity Plan
Development
- On-going BCM Planning for priorities
(embedding to BAU)
Phase Two: Expanded BC activity; BCMS Framework delivery
- BC Management Programme Structure
for
- Critical Process Mapping Dreams 5
Phase Three: Improve BCMS awareness; BCMS integration to BAU End of September Completion Target
- Integrate BCM to BAU
- Deliver prioritised BC Plans
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Appendix 2
The following includes extracts from the “Major Incident Response Procedure”,
detailing the Major Incident Response Teams’ construct and each levels roles
and responsibilities, including senior stakeholder engagement during a Crisis
Management invocation. This has been shared with BTP members and is being
tested, with lessons learnt being actioned before formal communication.
Designed on the principle of escalation to the relevant business stakeholders and
specialists, the construct aims to swiftly engage appropriate resources in
effectively resolving the incident and managing communications. The fulcrum is
the Business Protection Team, senior management representation from across
all business units, for coordinating tactical response and deciding when to
involve more senior stakeholders.
GE involvement will be as invoked by the BPT. This could be either on a
selective basis at Major Incident Escalation Group level (for a major incident
event, such as significant operational disruption across multiple business units)
or on a full basis at Crisis Management Team level (for a crisis, such as a similar
incident that is more severe and is expected to be for a prolonged duration and
has reputational damage risk). An invocation of the Gold Team may instigate the
involvement of our major stakeholders, such as the NEDS or ShEx. This would
be via contact from the CEO or CFO
5.4 Major Incident Response Teams’ Construct
Crisis Management Team
¢
:
:
:
I
ris Event : Governance
(Gold Tear)
Major Incident Escalation
Group
Crea Incident strategic
(silver Team)
Business Protection Team
i, Security Risk
~ Champion)
Business Protection Team
Member
{e:g. IT Risk Champion)
Business Protection Team
(eg. SAG Risk Champion)
‘Tactical
(Bronze Team)
GOVERNANCE
Majorincident I
Incident Escalation
‘Control
{Red Team)
Comms &
Management
Lines of Service incident Lines of Service incident Lines of Service incident
Management Management Management
(e.g. IT / Atos) (eg. SAG) (eg. Security) Operational
Incident \ (Bue Team)
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7
a
5.5 Major Incident Response Teams’ Responsibilities
GOLD TEAM - Crisis Management Team (CMT)
All GE Members (potentially other major stakeholders - NEDs, Ministers, etc.);
Instigated at point of high crisis (escalated Major & Critical Incidents; prolonged
severe operational disruption across majority of business units; reputational
damage or risk; Ministerial or Judicial scrutiny, etc.)
SILVER TEAM ~ Major Incident Escalation Group (MIEG)
Selected, appropriate, GE membership supported by senior management teams;
instigated in response to major incident event (escalated Major incidents;
significant operational disruption across multiple business units; major disruption
to individual office/ operational locations; major disruption to IT service(s)
provision across all/ majority of network; significant staff abstraction events (snow
days, transport strikes etc.). Tactical guidance to BRONZE team, in response to
GOLD, as appropriate.
BRONZE TEAM - Business Protection Team (BPT)
Senior management representation from across all business units. Invoked on
escalation from any departmentally managed Incident to a Major Incident.
Remains in direct control of Operational resources during ALL levels of response
above Incident, receiving tactical and strategic guidance from SILVER & GOLD
teams respectfully.
RED TEAM - Incident Escalation Point & Command and Control (EIP / C&C)
Permanently assigned resource dedicated to managing incident escalation and
communication across the POL network (branch & offices). Single, direct line of
communication to Operational Teams. Operates across all levels of Crisis
Management Construct from the moment of Incident escalation to the point of
closure. Has direct engagement with Business Continuity function and
Communications Team, to ensure adherence to CM & BC process and appropriate
internal and external comms.
Caveat: At this point in time, there is no single capability for this function
within POL. Escalation is affected by a call to Atos Service Desk requesting
they contact the Business Protection Team and provide a conference call
bridge for this group. At that point the central management of incident
logging, comms, BC response etc. concludes, and reverts to BPT. This is
inefficient, and the recommendation is that this hub activity be brought
back in-house, potentially utilising an enhanced, permanent Command &
Control Centre.
BLUE TEAM -~ Operational Incident Management
Incident Management activities currently controlled within respective business
units, either internally or via a third party (e.g. Atos) will need to develop an
escalation route into the RED Section in order to engage Major Incident or Crisis
Management.
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AUDIT, RISK AND COMPLIANCE COMMITTEE
6c) Assurance Mechanisms: Executives’ Declaration
Author: Deana Herley Sponsor: Mike Morley-Fletcher Meeting date: 19 May 2016
Executive Summary
Context
The purpose of this paper is to provide an update on the progress made in enhancing our
Assurance Mechanisms. In particular, how we have started the Executives’ Declaration
return, completed by the General Executive (GE).
Questions this paper addresses
1. How have we progressed with trialling the Executives’ Declaration?
2. What are the results of the Executives’ Declaration?
Conclusion
1. Executives’ Declaration. Following the last ARC we launched a new exercise, run by
Internal Audit, to support GE members in considering (and attesting) if any additional
disclosures were required in our Annual Report as part of our year-end procedures.
Against a set of key question areas, this involved GE members consulting with their lead
teams and making further enquires with relevant Finance, Risk and Legal representatives
to identify any additional issues or concerns that have NOT already been recorded as a
part of normal management processes. Going forward, GE members will be asked to attest
twice annually, at half year and year end in support of our Interims and Finals.
2. Executives’ Declaration exceptions. Outputs have been collated and reviewed for
consistency against Internal Audit reviews. Seventeen exceptions were identified:
e nine exceptions have already been specifically disclosed
e eight were considered by the owner, but were determined as being sufficiently
addressed by other generic disclosures.
All items noted have been reviewed for materiality and approach to disclosure
collectively agreed by RCC (refer to Appendix 1).
Input Sought
The Committee is asked to review the information provided in appendix 1 and:
* note the items disclosed
e confirm the approach to disclosure as set out in this paper
e consider whether there are any other matters that should be considered.
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Appendix 1 - Exceptions
PAGE 2 OF 5
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EXECUTIVES’ DECLARATION SUMMARY
Exceptions
1) any material risks to PO that are not
captured in the Group Risk Profile
None.
All
2) any material control failures or
breaches, including of the General
Control Framework and policies
that I am accountable for
“General weakness in consistency and transparency of financial
Postmasters’ Compensation re-statement,
Alisdair Cameron
reporting controls.
Alisdair Cameron
_purpose, is still at a preliminary stage.
The General Control Framework (‘GCF’) is of recent
implementation within Post Office and therefore work to assess
the level of controls already in place and whether they are fit for
Jane MacLeod
Further, the policy suite to support the GCF is not complete and
those policies for which I am responsible have not yet been
through governance, nor do we yet have a self-assessment
process against those controls and policies.
Jane MacLeod
3) any material frauds, irregularities
or losses that have come to light,
whether carried out by our staff,
agents, contractors, suppliers or
partners
None.
All
N/A
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4)
any complex or subjective
accounting judgements,
estimates and revenue
transactions
‘Estimation of Cred
Accounting for Gamma.* (see below) Under the agreement
with Bank of Ireland, in 2012 POL received one-off, non-refundable
income in lieu of providing distribution for Bank of Ireland
products, including insurance products. This income (Gamma) is
being recognised over the period of the agreement. Following the
Project Hawk acquisition, POL no longer has any obligations to
Bank of Ireland in respect of insurance and a paper has been
submitted to the external auditors by Group Financial Control
setting out the rationale for recognising an appropriate portion of
the Gamma income (c£4.5m) in 2015/16.
“Exceptionalisation of the costs of project Hawk in POL and
POMS*: A paper setting out the rationale for this has been
submitted to the external auditors by Group Financial Control.
Total amount treated as exceptional is £3m.
Estimation of FRES profit share at year end: The draft
financial statements for 2015/16 include income of £35.3m in
respect of POL’s share of profits of its FRES joint venture. Of this,
£2.4m relates to the profit share for March 2016. This amount is
consistent with estimates from FRES management but will not be
confi
Card profit share: The financial
statements for 2015/16 include income of £750k in respect of
profit share on credit cards under the arrangement with Bank of
Ireland. This amount has been confirmed verbally by Bank of
Ireland, but the actual amount will not be confirmed before POL
closes its 2015/16 books.
Alisdair Cameron
& Nick Kennett
Nick Kennett
Nick Kennett
Nick Kennett
- “Proposed no
roposed no
disclosure required
disclosure required
5) any provisions or exceptional
items not already recorded
We are just disclosing the need to provide on the Mobile
decision.
Alisdair Cameron
6) any liabilities and contingencies,
including those associated with
guarantees
There is a risk that the RMG Resource Costs and Incentives
claim as a result of delayed IT separation will exceed the estimate.
POL received an invoice for £837,783 on 13 November 2015. This
was formally disputed with RMG, It is not clear what further
amounts they may claim for the period through to end of March
2016, but in conversations RMG have made reference to their
claim potentially amounting to approximately £3m (and this is
Jane MacLeod
Proposed no
disclosure required
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similar to the projected costs of this claim identified as approx.
£2.3m by Roger Middleton).
7) any material legal action being I Threat from British Gas in the last couple of days for unpaid I Alisdair Cameron I Proposed no
taken by or against PO energy bills. disclosure required
On pri Jane MacLeod
advising that they have lodged a claim in the High Court on
behalf of some 91 claimants. They have not as yet served the
claim on us and accordingly as at the date of this declaration we
remain unsighted on the grounds of the claim, who it is brought
on behalf of, or the remedy they are seeking.
on any POL business address (which includes Customer Service disclosure required
Centres and Crown Offices), there is no guarantee that the
relevant documents will be forwarded to the legal team
with the consequence that we may not be aware of such
proceedings.
8) any legislative, regulatory or I We are managing risks around public procurement, especially I Alisdair Cameron I Proposed no
contractual compliance issues I the contract extension with Fujitsu, which was published in disclosure required
that have come to light February.
Post Office Limited as Appointed Representative for POMS hasI Jane MacLeod
limited oversight over the levels of compliance of sales of
regulated products in the network, in particular in relation to
over 50s life insurance and travel insurance. While complaint
levels are low, this does not of itself provide assurance that
_sales are compliant. _
D I
g 20 me aware that POL had
network contracts with operators who were at the time,
appointed representative of third parties, giving rise to
disclosure required
Pp
Tam aware that during 2015/16 there were a number of branches I Jane MacLeod Proposed no
which operated under expired contracts or without a disclosure required
written contract.
9) any material new contracts entered I Fujitsu extension, CSC extension. Alisdair Cameron I Refer to question 8,
into, and where I have not followed first item
the contract process
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indirect personal
any transaction,
related parties
10) any direct or
interest in
arrangement or
entered into by PO
None.
All
N/A
11) any material events that could
crystallise before the end of the
reporting period above
Mobile decision.
Alisdair Cameron
Refer to question 5
12) any other information that could
have an impact on period (indicated
above) when drawing up our annual
report.
I am aware of a review of POL internal controls being carried
out by KPMG for the CFO and that preliminary findings suggest
some potential gaps versus an ideal control environment.
However, I am not aware of the conclusions of this work, their
implications or their potential materiality in the context of POL
group.
Nick Kennett
Refer to question 2
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AUDIT RISK AND COMPLIANCE COMMITTEE
Internal Audit Report
Author: Garry Hooton Sponsor: Mike Morley-Fletcher Meeting date: 19 May 16
Executive Summary
Context
The purpose of this paper is to update the Committee on the PO Internal Audit and
Business Transformation Assurance activity and key outcomes. This includes details of
the work completed since the last Audit, Risk and Compliance Committee (ARC) in
March and the closing out of the 2015/16 Internal Audit Plan. We have commenced
work on 2016/17 Q1 reviews.
Questions this paper addresses
1. What progress has been made since the March meeting?
2. Is the Internal Audit Plan on track for completion of 2015/16 audit activities?
3. Do we have the resources we need to deliver our plan and actions arising going
forwards?
4. Have any significant issues arisen that the committee need to be aware of?
Conclusion
1. During the period seven audits, four Internal Audit and three Business
Transformation Assurance (BTA), have been completed, with actions agreed with
management. The majority of these have been finalised with GE Sponsors. Five
others (three IA and two BTA) are nearing completion. We have been working closely
with GE sponsors to remediate overdue audit actions and good progress has been
made. The team have also continued to contribute in a business assistance capacity
to the Property Compliance Forum. We will cease this in 2016/17. Work on the
2016/17 plan has commenced. Work has continued on the General Controls
Framework, Executives’ Declaration processes and developing our Controls Self-
Assessment capability (see Risk Paper 7). BTA replanning will take place following
the upcoming second series of boot camps.
2. The audits remaining for 2015/16 are now either completed, closed or going through
final clearance with senior management. The completion of the Agents Remuneration
audit has been significantly delayed by the “Agents pay” issue. Work will resume
once the business has completed its recovery work. (see Appendix 1, “Audit Plan
Status”). We are working on a paper that identifies the themes from the audits for
presentation to the July RCC and consideration by ARC in the future.
ne Hub tery
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3. We remain one team member short as we continue to seek appropriate temporary
maternity cover for the IT audit manager role. Another team member who has been
on long term sick leave has returned to the business, full time as of 2"° May 2016.
4. There are no significant issues that we believe the committee should be made aware
of.
Input Sought
The Committee is asked to note and provide directions as necessary.
The Report
Reviews in Progress
5. The following reviews are in progress:
Activity In Progress
Internal Audit 2015/16
¢ Data Protection
e Common Digital Platform
e« Agent Remuneration
2016/17
e Identity and Access Management
¢ IT and Operations Governance
and IT Risk Management
e FS Training and Competence
Schemes
BTA * Communications and Stakeholder
Management
¢ Digital Programme Mobilisation
e Winning with retailers
e Target Operating Model
e Separation PIR
e Planning Boot Camps
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Completed Reviews
6. Three reviews have been completed and are produced in summarised form at
Appendix 3.
Updates on Internal Audit Overdue Actions
7. We have developed an Overdue Actions monitoring process to ensure clarity of
requirements and responsibilities — this involves providing monthly summaries to GE
Sponsors and has already shown benefits in assisting them in the tracking and
closure of overdue audit actions.
Since the March meeting, where 32 overdue actions were reported, significant
progress has been made by the business. At the end of April, 28 actions have been
completed and validated. 4 remain outstanding, but clear work plans are in place to
ensure they are closed in the near future.
Overdue Audit Actions 1-FC Additional Controls
Please see separate paper from Jane MacLeod for the detailed remediations.
Business Assistance
8. Internal Audit has continued to work with Legal to assist Property with the
implementation of adequate governance and controls to address regulatory
compliance requirements. We have also continued to attend the Property
Compliance Forum to monitor progress. We are seeking to bring this long term time
commitment to an end once we are sure remediation is in place.
9. A formal plan is now in place to address all of the required statutory compliance
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checks / risk assessments for the elements and sites. A workshop between Property,
Health and Safety and Network Operating team is planned for 25‘* May to co-
ordinate the monitoring control activities of the different teams improving the
delivery of effective compliance.
10.Two residential properties (out of the 8 reported last time) are still not compliant as
the visits could not be arranged with the tenants by the Facility and Estate
management suppliers. The Property Compliance Board has been assured that the
two remaining properties will be visited and serviced by 10% May.
11.Electrical testing programme: 91% of all the premises classified as “not satisfactory”
have been visited again and any issues fixed. The remaining sites will be visited by
the end of May.
12.The Head of Property has provided an updated noting paper to this meeting, as
requested at the March ARC.
Resourcing
13.The team has a headcount of 4 with approximately 150 days of Co Sourced resource
from PwC for specialised audit work. During the year we have been without one
member of the team for a total of 5 months due to long term sickness. In addition
we have been recruiting for temporary maternity cover since February and have yet
to secure suitable resource. If this situation continues we will consider alternative
options for resourcing some of the audits.
Business Transformation Assurance
14.Since the March meeting the BTA team have completed three reviews, with two
more due to finalise shortly. These reviews are generating recommendations for
programmes going forward and aim to create more effective and efficient processes
within Transformation and across Post Office as a whole. The executive summaries
are at Appendix 3.
15. In this quarter BTA has started following up on observations from earlier reviews.
32 issues have been closed on time. To date there has been very good engagement
with the business and no observations have been remediated late.
16.There have been some underlying changes to the Transformation portfolio, namely
the removal of the Financial Services and Commercial projects into a ‘non-
transformation’ change portfolio as well as material changes to some of the
individual programmes within Transformation. As such Transformation is running a
second series of boot camps in May to revise the integrated transformation
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plan. Once the revised plan is published, BTA will revise the assurance plan for the
rest of this year and ensure alignment with the main Transformation plan.
17.A full summary is included at Appendix 2, (“BTA Progress to plan”) with report
summaries at Appendix 4.
Strictly Con vial Board Intelligence Hub template
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POL00103188
POL00103188
1. Executive summary
Within Post Office, social media started to be used in 2010/2011 primarily by the marketing, corporate
communications and human resources departments. Twitter, Facebook and LinkedIn, are the social media
channels most used for responding to customer feedback, for product campaigns, for recruitment and for
corporate communications.
The review revealed that currently within PO social media is used effectively on a day to day
functional level according to the definition in the image below:
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Figure1 - Social media maturity scale (source: http://www.socialmediamodels.net/social-media-
adoption-models-category/social-media-maturity-model/)
The following social media aspects have been deployed and give an indication of its maturity level.
v The Chief Marketing Officer (part of the commercial organisation) is responsible for PO presence
on social media channels related to customer feedback and products campaigns, and the Corporate
Communication Director is responsible for the PO news and information the organisation wants to
share with its customers.
v Adedicated social media manager role (and a newly other support role) exists within the marketing
organisational structure,
v A dedicated social media budget has been allocated by marketing to fund business wide technology
and tools, agency support and training.
v Social media guidelines for postmasters have been defined and issued to postmasters at the end
of November 2015.
v Customers’ feedback on social media is monitored and responded to by an established social media
team within the customer service team.
v The marketing social media team works in collaboration with Corporate Comms, other PO divisions
and external social media agencies when required.
Although Post Office has a presence on social media and has proved to use social media channels
successfully in a number of different situations, it is our belief that there is greater scope to use social
media in a more transformational and proactive way.
As social media channels are becoming increasingly important to communication for organisations and
customers the competitive advantage is mainly driven by customer satisfaction, it is important for our
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organisation to take social media usage to the next level of maturity and further explore its opportunities
to enhance brand awareness and leverage the digital channels more to achieve business objectives.
To use social media in a transformational way for the business consideration shall be given to the following
aspects:
1. Defining an overall social media vision, purpose and strategy which details the way social
media channels will be used by different business areas to support companywide business
objectives. This could assist with the identification of new opportunities to add value to the business
through using social media channels (please see recommendation noi in the detailed report).
2. Formally identify social media risks and requests for compliance with legislation on social
media and share those with all social media users to raise awareness and ensure the organisation
is not exposed unnecessarily on social media channels (please see recommendation no2 in the
detailed report).
3. Defining employee social media guidelines will help raising awareness on social media
opportunities and risks (please see recommendation no3 in the detailed report).
4. Ensure there is oversight of all social media accounts opened on behalf of the organisation by
the different business areas and the way those accounts are used is in line with the overall defined
social media vision/purpose and strategy (please see recommendation no3 in the detailed report).
5. Ensure social media communication and response to customers’ feedback is considered in
the crisis management process and the relevant stakeholders are clearly identified and informed
of their responsibilities in case business incidents need social media response (please see
recommendation no4 in the detailed report).
6. Ensure social media skills and resources are suitable to allow exploring more the potential and
opportunities of the social media channels in achieving business objectives (please see
recommendation no5 in the detailed report).
The overall audit rating is medium risk level.
Overall audit rating I
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2. Overall management response
The report proves that social media is positively used by marketing, insights, corporate communications,
and customer services, and that there are controls in place, with an opportunity to add additional
controls around crisis management, for example.
The report makes additional recommendations, one of which includes the creation of a holistic business
wide social media strategy. The Management team (Marketing & Communications) believe it would be
sensible to instead produce a shared social media vision and objectives, with key deliverables. This
would be delivered by cross-business representatives working together, from HR, Communications,
Marketing, etc. The key question will be the priority/importance of this work. As it stands, we have a
compliant and effective social media programme with the relevant controls in place. Anything above and
beyond this, whilst expected to be value adding for Post Office, will take time and resource to deliver
and potentially additional cost. For this reason, its prioritisation must be considered alongside other
business priorities for the year ahead.
Alongside the recommended vision work, we believe existing social media cross-business vision and
objectives (created in early 2014 - attached/appendix) need to be refreshed in light of our new business
priorities, with new cross business representatives identified - as those previous colleagues whom were
previously engaged have now left the business.
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Treasury Operational Risk Review Completed April 2016 - GE Sponsor Al Cameron Appendix 3
Background
The POL Treasury team is based in Chesterfield and currently reports directly into the Head of
Corporate Finance who is based in London (but visits Chesterfield weekly). The Treasury operation is Treasury Policy and Procedures
relatively straightforward and responsibilities include: The Treasury Policy is a comprehensive document which sets out POL’s treasury risks
Short term liquidity management and investment of surplus cash balances (holdings < £90m and how they should be managed. However the policy should be updated for current
invested with Barclays or RBS; holdings > £90m invested in money markets); FX and interest rate environment and include Treasury KPIs.
* Enterprise-wide cash forecasting process (based on data received from various areas of business, * A Treasury Committee has not met in the last 6-9 months.
largely from Supply Chain); * Monthly Treasury Report has not been produced for the last 6-9 months.
+ Fulfilment of Bank of England Notes Circulation Scheme reporting obligations (including managing. FX hedging is only completed on a monthly basis, for a period out of one month
relationship with RBS); ; j (covering 80% of exposure). Not all currencies are hedged.
* Management of borrowing requirements (daily borrowing from BIS £950m working capital Treasury organisation
facility);
. Bee iationship management; * The Head of Corporate Finance has significant background knowledge of the treasury
+ Execution of corporate disbursements and administration of payments systems; team and operations but is scheduled to leave the organisation in September 2016.
* Forward hedging of foreign exchange exposures (current Policy is to hedge 80% of exposure on a Limited understanding, visibility and awareness of Treasury and its operations by
monthly basis). other senior management.
Internal Audit have performed an operational risk review of PO's Treasury function to identify those * The Treasury team have suitable knowledge and experience to carry out daily
specific operational risks that a change in Treasury personnel might pose and to consider whether there benaiend however they would benefit from a wider awareness of Treasury and the
are any potential mitigating controls. risks to be managed.
The Treasury administrative staff responsible for settlements report directly to the
NCS Liquidity Manager and the Cash Manager and do not provide the challenge and
escalation required of a Back Office function.
* Due to the small size of the team there is a lack of segregation of duties. One person
completes the entire FX hedging process, including dealing, confirmation and has full
access to the TMS. This highlights the need for compensating controls.
* FX hedging process is manual (done in Excel) and segmented between two teams.
a - ; - - - - em a - . Treasury has no real time visibility of actual FX exposure on a weekly basis. All deals
In the context of the PO's Treasury activities, which are relatively straight forward, operational risk are made with First Rate Exchange Service (FRES) and Barclays, with no competing
The audit was completed under the PO's existing co-source arrangement with PwC and the team
consisted of both PO Internal Audit and PwC Treasury personnel.
The review focused on understanding risks in processes and the treasury team dynamic, rather than
detailed testing of each control in place.
Overall assessment
arises because of a particular dependency on the knowledge and experience of certain key quotes obtained.
individuals, and a lack of automation and straight through processing. Additionally the team would ‘Treasury Management System
benefit from a wider awareness and visibility of the risks to be managed and greater oversight - as
they are currently operationally focused and lack the wider understanding to be able to question some
of the more complex treasury areas (e.g. FX Hedging).
* Integrity is not used to record FX deals ~ this is required for journal entries to
interface from Integrity to SAP automatically.
+ No formalised or documented strategy for full implementation and future
A higher level of operational risk currently exists, as only the Head of Corporate Finance (who is use/maintenance of the system.
scheduled to leave the organisation in September this year) currently provides oversight of the I * —_User profiles are incorrectly set-up e.g. System Administrator does not require
team. Outside of this role, there is limited understanding, visibility and awareness of Treasury and its further approval to set up new static data.
operations by other senior management. Post September this work will be undertaken by the * Two users have full access to the system, despite it being a live system. [Since been
Group Financial Controller. Appendix 2 provides an interim plan for this risk. changed post audit].
No formal review of the user profiles or any system generated audit logs.
Some re-organisation of the team is required with clear definition of roles and responsibilities and ere Systems
authority limits. Greater business oversight is needed, this can be achieved with better use of KPI's
and more formal use of the Treasury Committee. Employing a Manager to report onto the Head of * There is no formal control in place to ensure people are removed from electronic
Corporate Finance will also reduce the key person dependency risk and provide greater oversight and banking systems on leaving the PO.
challenge of current Treasury operations. + — Two individuals have access to input and authorise payments (although required a
third person to make an actual payment). Not removed from authorisation panels in
The TMS system ‘Integrity’ has been implemented for managing cash forecasting and cash position, timely manner.
money market dealing and reporting. The system could also be used to capture FX dealing and Banking Mandates
automate corporate payments and journals into SAP. This increased automation would enhance + Backup documentation not provided when updates to bank mandates are sought.
segregation of duties and add to more efficient processes with increased formal control over treasury
activities.
Business Cot jity
* No specific disaster recovery or business continuity plan in place for Treasury.
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Background
Management use a number of critical metrics for decision making (these are reliant on financial and non-
financial data sources). In March 2015 the General Executive (GE) requested that the Head of Finance (PG)
perform a high level review of the current management information landscape. The review indicated a low
level of maturity in the management and use of commercial and finance data. A more in-depth assessment
was requested by the GE over whether reliance can be placed on reporting, given the current data landscape.
To do this Internal Audit with PWC co-source resource met with PO Finance Directors to establish critical (or
key) metrics to understand and assess the critical metrics relied on for decision making as they perceive it,
and ascertaining whether or not any gaps currently exist. As a result of those meetings the review focused
on the following PO scorecard metrics scope:
Customer Effort
Crown Profit
Network Transformation Branches Transformed in Year
Number of Branches; and
Headcount
eeceoe
Our Assessment
Sample testing of scorecard metrics confirmed that figures reported for the months tested were accurate
with an isolated exception which has been subsequently corrected. However, PO currently measures
scorecard metrics against a criterion self-set by business units, rather than robust and formalised with
processes fully signed up to GE downwards.
The framework below shows what we consider to be the key elements scorecard metric management. We
have also highlighted immediate challenges and future opportunities for consideration by the business.
Loss of corporate A y Spreadsheats Rompiexity of
memory
rough statt ee : icant
rou documented pro
information lation
Bales and workarounds
Definition of roles and
Metrics are not Fesponsont
formally defined
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Management have reviewed scorecard metric management for 2016/17 against the findings in the table
below (and suggested Framework) in terms of:
>» strengthening arrangements where gaps or weaknesses in control exist; or
>» managing the limitations to assurance over accuracy of reporting due to known
weaknesses.
« The responsibility for coordination and oversight of the scorecard is not
formally documented (High).
ue ¢ An absence of common standards exists over processes for measurement of
Definition scorecard metrics by owners (High).
« Definitions, source location, processes for calculation and reporting are
. . not formally documented (High).
Criteria « There is no enterprise level guidance or guiding principles agreed and
documented (Medium).
e Reliance is placed on self-validation by business units to ensure accuracy
and completeness of reporting. (Low).
e No random independent spot checks are currently performed on reporting
back to source (Low).
e There are limitations to reporting that are known to management including:
>» Systems have not been designed and built to generate statistics, but
rather to automate the work of PO staff. The significant change and redesign
of how staff at PO work has also contributed to the challenges in
extracting and converting data from source for reporting purposes.
>» Key systems do not currently have the capacity to generate all data needed
for statistical reporting and this has resulted in workaround methods
being applied and remains necessary at present.
e Reviews of scorecard metric reporting are not consistently performed
within each business unit (Medium).
Portfolio Management Operational Effectiveness
Background
The purpose of this report is to provide a summary of BTA’s follow-up on the
Portfolio Governance, Management and Change Methodology review dated 05
October 2015, which identified 11 issues. This review has focused on following up
on issues that management has assessed as remediated and testing the
operational effectiveness of elements that were previously assessed as designed
effectively. Specifically this review has assessed the operational effectiveness of
the following elements;
. Leadership;
. Organisational structure;
. Governance structure;
. Scope and change management; and
. Design effectiveness of the operational transition management.
Elements of portfolio management identified by management as still under
remediation have not been assessed as part of this review. BTA intends to review
these elements in future portfolio management reviews. This report contains
observations on an exceptions only basis, including those that have been self-
identified by management.
UbBWNE
Overall assessment
Since BTA's last review management has designed and implemented a number of
improvements into how the Transformation Portfolio is governed and controlled. One of the
key aspects implemented by management since the last review is the ‘One Best Way’
framework. This is a standard change framework which includes approval gateways enabling
management to control POL's financial and risk exposure (see Figure 1). In support of this
implementation the Change Director for Business Transformation has introduced training on
the framework as well as compliance monitoring of project documentation for both
completeness and quality.
Completed March 2016 - GE Sponsors David Hussey/Jane MacLeod
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Appendix 4
Key findings
By strategically prioritizing programmes within the portfolio, return on investment can
be maximised, and resources can be appropriately allocated to the programmes that
best align with the business strategy.
«Through discussions with management it was determined that no formal prioritisation
process is yet in place within Transformation. A broad categorisation separates
programmes by Regulatory, In-Flight and New, though this does not directly translate
to a prioritisation.
* Itis recognised that programmes are steered at the project level through the One Best
Way (OBW) change process. One Best Way includes control gate ways which enable
individual projects to be evaluated and tailored / cancelled if appropriate. Due to the
implementation of OBW the original finding has been partially remediated.
* The two main documents relating to organisational chart for the individuals managing
and controlling Transformation did not fully define individual roles and responsibilities
and neither document was accessible outside of the immediate central transformation
team.
— Inresponse to findings made In the Portfolio Governance, Management and Change
Methodology review dated 05 October 2015, the One Best Way Methodology has been
improved; notably in creating approval gates where a complete set of documentation is
required to pass through each gate.
"@ Of the documentation templates sampled, three specific elements were found to be not
fully developed
1. Business Case ~ There was no specific reference to Transformation’s 3 year plan;
2. Business Case — There was a lack of detail of both financial and non-financial
benefits; and
3. Solution Design — There was no specific section referencing the solution.
* Without comprehensive documentation there is potential that projects do not pass
through stage gates, effecting overall programme delivery
Audit Opinion I
End to End Portfolio Financial Management
Background
The objective of this review was to identify any significant weaknesses in the
management process, the review investigated a range of
financial management principles established.
The end-to-end financial management review undertook an assessment of the
portfolio’s:
« Financial governance;
« Budgeting and forecasting;
* Quantification of financial benefits; and
e Internal financial reporting.
Overall assessment
In total there were fourteen findings; one major, eight moderate and five minor.
The six gate approvals process that all business cases must pass through is now
well documented and mandated by transformation management. It is robust and
is consistent with examples of good practice seen elsewhere. Attention is required
to ensure it is followed by all projects that are applying for funding.
Good progress has been made by the Transformation team and, with robust
challenge in place, the standard of business cases is generally much improved.
Completed March 2016 - GE Sponsors David Hussey/Jane MacLeod
Audit Opinion
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Appendix 4
Key findings
_« TFCG require all business cases to have an independent finance
financial management of the transformation portfolio. The review considered all
stages of the financial management cycle, from the request for approval to I
commit funds through to the reporting of expenditure. Although the focus of the I
review was on the overall portfolio, to identify any weaknesses in the financial ©
specific —
projects/programmes within the portfolio and tested whether they adhered to the ©
review prior to being submitted for approval. None of the five
business cases reviewed had been subjected to this. One of the
business cases was reviewed by someone outside of the project
team, but they could not be deemed to be independent.
e The terms of reference for TFCG includes the responsibility to
undertake a run rate analysis. Whilst the monthly finance MI reports
provide details of the actual costs incurred, the forecast and the
approved budget, no run rate analysis is undertaken
«The monthly finance reports which are submitted to ESG and TFCG
are based on actual financial data extracted from SAP and merged
with offline data sourced from manual MS Excel spreadsheets.
Incorporating manual data with the system data is inefficient and
prone to user error. The offline data consists of the theme, specific
portfolio, approved budgets and forecasts. There was no evidence of
any user instructions on how to update the manual spreadsheets or
cell protection in place to prevent inadvertent input to calculation
and output cells.
e Four of the five business cases reviewed did not include any
consideration of inflation in the financial values.
e The terms of reference include TFCG’s responsibility for tracking and
managing actual costs to forecast. Whilst the monthly finance MI
reports do this at an overall portfolio, specific portfolio and theme
level, this is not undertaken at project level.
e No evidence was found of formal internal training on business case
writing. This has led to style and detail inconsistencies and issues
with the general quality of business cases submitted.
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Cross Tower Governance and PAA Completed March 2016 - GE Sponsors David Hussey/Jane MacLeod Appendix 4
Background Key findings
In June 2015, Post Office deployed a revised IT governance structure to clarify the ©
respective roles and responsibilities of POL and Atos, where POL is accountable for —
the overall Technology Transformation Programme and Atos, as the Service
Integration (SI) supplier, is responsible for providing oversight of the activities
performed by third parties delivering IT tower services.
« A key part of the role of the PAA is to provide POL IT management with assurance of
the SISD and cross-tower tower implementation and management activities. There is
therefore a clear conflict with Atos’ current involvement in PAA.
* Several POL members of the Programme Assurance Authority (PAA) are also
responsible for delivery activities within and/or across towers. The reason given for the
i lack of segregation by IT management was that there are insufficient POL resources
Prior to our review commencing, management had self-identified issues with the with the required skillset to fully segregate the delivery and assurance roles.
current cross tower governance model and how it was not suitable to address the
changes in and challenges of the Transformation Programme at this time. In with the management of POL obligations between the different towers, exacerbated by
recognition of a new model has been under development, it was agreed that the obligations being placed on POL by tower suppliers that are in conflict between towers.
review would be undertaken in two parts: i One cited example is a substantial claim from Computacenter due to the delays with
j standing up the EUC tower. Atos have stated that it is not their responsibility to
manage POL obligations and management of such issues is not clear in the current
govemance structures.
I «We understand through our meetings that there have been and continue to be issues
1. High-level review of the effectiveness of the current structures; and then
Review of newly proposed model in the context of our understanding of the
issues with the current structures to help assure that the issues identified will
be addressed « We observed in reports provided to us a material number of milestones that had been
reported as ‘green’ one week and ‘red’ the following week (bypassing ‘amber’) as part
of IT transformation programme reporting to TESG. Whilst we understand that Trinity
had an impact, there remains evidence that risks to key milestones are not always
being managed sufficiently and/or their dependencies are not fully understood by
individual programmes. This issue had been recognised and we understand that the
Business Transformation Planning Manager is working with IT management to
As management has already identified, the current governance structure is not understand and improve the situation
operating effectively. Based on our review, we understand the underlying reasons
for this include:
Overall assessment
The Cross Tower Delivery Integration Group (CTDIG) had not been operating
effectively, evidenced by poor attendance from the POL Programme Managers due,
we understand based on feedback from POL Programme Managers, to the meeting
tending to focus in large parts on Atos responsibility related discussions. We
understand that the meeting has now been restructured so that POL Programme
¢ Lack of clear accountabilities and roles at each level of governance that is
aligned to the needs of both the technology transformation and business
transformation programmes. Managers only attend part of the meeting. However, having reviewed the Terms of
e Conflict in Atos’ role and insufficient segregation of duties for assuring Reference for this meeting it is difficult to see how part of the meeting would be dealing
SISD and cross tower implementation activities. with issues that should not involve POL.
* Uncoordinated and incomplete management of all contractual obligations
- including of SISD role and across towers.
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BOARD AUDIT RISK & COMPLIANCE COMMITTEE COVER SHEET ONLY
Author & Sponsor: Jane Macleod Meeting date: 19 May 2016
Executive Summary
Context
There are 4 overdue Audit actions arising from the Financial Crime and Contracts
Management Audits. This paper summarises progress against these.
Questions this paper addresses
1. What are the outstanding actions?
2. What is the plan to address these?
Conclusion
Contract Management
1. In October 2015 all Business Areas were requested to provide information about the
material contracts which they managed and in particular they were requested to :
« Confirm in writing by 31 December 2015 that they had mapped all obligations
and had a documented process to demonstrate:
o obligations on Post Office
eo obligations on Supplier/Client
o frequency of obligations, and
© processes by which performance of obligations are monitored
e Advise what MI is produced to demonstrate performance (both quantitative and
qualitative) of obligations.
This process identified over 50 contracts as ‘material’ (being a value/cost of > £5m
per annum or otherwise critical to operations).
2. While these obligations have been identified at a high level, there is not yet a
comprehensive documented process. Work is ongoing in relation to a number of
major contracts however the resource requirements for this work is significant and
is currently not available to support this analysis across all areas.
3. Accordingly we are reviewing what is realistic with a view to taking a risk based
approach to these contracts. In light of the ongoing changes across Post Office
during 2016, we will revert to the ARC in September with a revised update, however
at this point it will not be possible to fix a hard date by which all material contracts
will have been reviewed.
Financial Crime
4. The audit made a number of recommendations as set out in the table in the
Appendix. The actions to address these have been incorporated into the policy
Strictly Confidential Board Iateiligence Hub temy
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development work referred to elsewhere in the ARC papers. The policies were
drafted by end March however questions raised by the Risk & Compliance Committee
during the governance approval cycle have further delayed implementation of the
policies.
5. It is now expected that the policies will be reviewed and approved during July and
that the implementation plan will be addressed as part of the approval process.
Input Sought
The Committee is asked to note the plans to address these actions.
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APPENDIX
Recommendation
Status
Financial
Crime Strategy / Policy should be developed and
implemented. This should:
have a GE owner to promote Board commitment.
Board approval
cover prevention, detection, deterrence and response.
roles and responsibilities clearly described.
Relevant financial crime documents should be communicated.
Effectiveness should be measured. This should be reported to ARC on
an agreed basis
As described elsewhere in the ARC papers, policies which include
these requirements have been prepared and submitted to the RCC
for consideration. Work is underway to scope the requirements
for implementation and the policy will be re-submitted to RCC for
approval in July and thereafter ARC approval will be sought.
Following approval of each policy, communication and training will
be provided as part of the implementation proposal.
Each policy will be reviewed regularly in accordance with an
agreed cycle and as part of that process the policy owner will be
required to assess and report on the effectiveness of the controls.
Delegation of roles and responsibilities to deter, detect and respond to
fraud across PO. This should cover as a minimum
Develop framework of anti-fraud policies and procedures across the
business.
Raising awareness of fraud risks and developing mechanisms to
maximise the opportunities for fraud risk reporting.
responding to Speak Up and other concerns
management.
investigation of suspicions and other irregularities.
Providing advice and recommendations to managers across PO on
appropriate controls to help prevent and detect fraud.
Monitoring anti-fraud activity across PO.
Communicating of outcomes as appropriate.
raised with
Division of responsibilities should be defined and communicated.
The General Counsel is the GE member with accountability for
management of the risk and associated controls in relation to
fraud and is addressed in the policies referred to above. The
implementation plan will include training.
The whistleblowing policy is separately on the agenda for approval
by the ARC.
Each policy contains provisions regarding the reporting and
investigation of suspicions.
The ARC will receive annual reports on Financial Crime and its
management.
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Recommendation Status
Relevant training should be provided to executive management and the I The implementation plan will include training proposals.
Board.
Consideration should be given to the inclusion of honesty and integrity I This will be addressed as part of the next scheduled review of the
as defined behaviours within the Behaviour Framework. Code of Business Conduct.
Financial crime awareness training (including Speak Up Policy) should I Training will be included in the implementation plan for the
be covered during induction for new staff in all business areas. policies - including as part of induction training. The suite of
annual training to be provided to staff and agents is being
nsideration should iven for regular financial crime training for all ‘ " 5 nen I
Cons tio ould be give egula anc e training reviewed to ensure awareness of wider financial crime issues.
staff being mandated by the Board.
Strictly Confidential Board Intellige
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BOARD AUDIT RISK & COMPLIANCE COMMITTEE
AML & CTF Update paper
Author: John Scott Sponsor: Jane MacLeod Meeting date: 19 May 2016
Executive Summary
Context
This paper updates the Board Audit, Risk & Compliance Committee on management of
both the HMRC’s Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF)
audit, and progress as regards the recommendations set out on the Promontory Report.
Questions this paper addresses
° What is the current position on the HMRC Audit?
e What is the current position on progress with the Promontory Report
recommendations?
Conclusion
1. A steering group has been convened to oversee the assessment and
implementation of the Promontory recommendations, and to manage the HMRC
compliance audit activity. The Steering Group includes representatives from key
impacted areas such as Network (inc. Supply Chain), People & Engagement, and
Financial Services. External financial crime legal specialists have also been
engaged.
HMRC Audit
2. POL continues to work closely with HMRC through the current ‘Discovery’ phase
of the Audit. Following requests for information from HMRC, we have provided a
significant amount of information covering areas such as Branch Registration,
FRES Data and Sub-Postmaster On-boarding processes.
3. HMRC has also requested transactional information on the regulated services
provided by POL and documents such as the current Bureau workbook have been
supplied. In addition, HMRC’s lead representative, Lee Simpson has been hosted
in Model Office at Finsbury Dials to observe operational processes and procedures
for these transactions.
4. We have now agreed with HMRC the correct categorisation of branches for
registration and based on that agreement are now on track to lodge and pay the
correct registration fees which are due on 1 June 2016. There remains a risk that
we have under-registered in previous years, and we are currently assessing that
risk based on the agreed categorisation.
5. In relation to branch audits, HMRC had indicated that they proposed to conduct
hosted visits at two Crown Offices and at one WH Smith branch, and a visit to
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one branch of each of the next three largest agents. The purposes of these visits
was to be as an ‘educational tool’ to help formulate the scope of the assessment
required for the main audit. As at the date of writing, 4 such visits had been
undertaken to multiple agency branches - WH Smith in Swiss Cottage, Tesco in
Brent Park, Martin McColl’s Ltd in Finchley and Co-operative Group Ltd in Fulham.
6. Based on the list of agreed branch registrations referred to above HMRC will
indicate the number of branches that they wish to visit for the audit. While HMRC
had previously indicated that they would visit approximately 150 branches, they
are now considering if that number of visits will be required. We will have the
opportunity to comment on the proposed list of branches to be visited and agreed
communications will be issued to each branch at least a week prior to the visit.
7. As the HMRC’s approach to the audit emerges and the links to Promontory
Report’s recommendations are established, we will develop the engagement plan
for external stakeholders including Treasury, BIS, FCA and Bank of Ireland.
HMRC Concerns
8. At a recent meeting between Post Office executives and HMRC (Ian Spence
(Deputy Director of AML Regulatory Supervision) and Ann Quigley (Head of
Compliance MSB, Regulatory Supervision)) HMRC briefed Post Office on the
results of an industry audit (which did not include Post Office), focusing on how
regulated companies manage their AML risks in the context of an agency
relationship. HMRC identified numerous deficiencies in the way in which
companies manage these AML risks.
9. HMRC audited 24 of the top 30 MSB networks which included visiting 1450
branches. Overall, they were “shocked” at the lack of effective management of
AML issues arising in the context of the agency relationship. Key areas of concern
across the industry included:
« Poor processes for onboarding and training of agents and lack of ongoing
due diligence post appointment. There was also a failure to manage
conflicts of interest in the recruitment of agents, and lack of
documentation / records evidencing the training of agents;
e Lack of ongoing monitoring of the business relationship including of
compliance with contractual requirements;
° Poor record keeping by agents of transactions, missing transactions and
evidence of system failures resulting in information not being recorded;
° branches not registered correctly, branches registered from residential
addresses, ‘nesting’ where there is a cluster of MSBs but not customers,
out of hours transactions, and speed of consecutive transactions;
« concern over communication where agents’ first language was not English
and customers would speak other languages;
° Password sharing, remote access of terminals and transaction splitting not
being appropriately monitored by principals;
e general lack of understanding of the SAR process, and
° evidence that relationships were terminated when HMRC requested audits.
10. HMRC's briefing will be a useful guide as to what risks need to be managed by
Post Office given its large branch network. It should be noted at the outset that
although Post Office was not involved in the industry review, HMRC suggested
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that given the breadth of its network, it is likely that some of the deficiencies will
apply to the Post Office. We will assess which of the above issues may be of
concern for Post Office and include these in the scope of the risk assessment
discussed below. The Steering Committee will review the output of that
assessment and review the steps needed to remedy any areas of concern. This
will include the review of agent vetting processes and ongoing oversight of
agents.
AML training
11. AML compliance training was rolled out to all staff during March and was released
to the Network in the week commencing 25th April. Agents are able to access
the training via Horizon On-line and the mandatory test though Horizon itself. A
communications framework is in place to promote this regulatory training and we
are monitoring completion levels.
Promontory Report Recommendations
12. Recruitment is underway for additional roles required to implement the
recommendations arising from the Promontory Repot and as at the date of
writing, we are hopeful that successful candidates will be able to start in early
June. The priority is now to undertake the risk assessment, the terms of reference
for which are currently being prepared to take into account the Promontory
recommendations. The Risk Assessment is itself a key recommendation and the
output of that work will inform our approach to many of the other
recommendations.
13. Many of the recommendations made in the Promontory Report relate to
improvements in current processes and procedures such as implementing a
product risk assessment tool, transitioning to electronic suspicion reports and
increasing training and awareness, and the viability of these will be assessed
during the project.
14. A breakdown of the areas of focus within the Promontory Report is provided
below. Further detail of these recommendations and progress against them will
be monitored and reported.
Area Level 1 Level 2 Totals
Governance and Culture 2 1 3
Risk Assessment 7 4 11
Policies & Procedures 7 7 14
Monitoring Arrangements 3 1 4
Operation of relevant systems and processes 0 4 4
Training, Awareness and Testing 4 2 6
Suspicion Reporting 4 2 6
MSB 5 2 7
Resourcing 3 1 4
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EY
Building a better x
working world
Private and confidential 19 April 2016
Audit and Risk Committee
Post Office Limited
20 Finsbury Street
London
EC2Y 9AQ
Dear Members of the Audit and Risk Committee,
Audit Quality Enhancements paper
Following your request at the Audit and Risk Committee meeting on 17 March 2016, we have completed this summary
document of our Audit Quality Enhancements for our audit of the year ended 27 March 2016.
This document should be read in conjunction with our Audit plan as described in our Planning Audit Report (Appendix A
Nature of Substantive Audit Procedures) delivered to the Audit and Risk Committee dated 17 March 2016.
Please note, we acknowledge the improvements that Post Office Limited are making to it's internal controls, processes and
systems and our Audit Quality Enhancements attached recognise that fact and we will continue to work with you as further
improvements are embedded. We will also be issuing a detailed Management Letter following the audit regarding
recommendations we identify during the course of our procedures.
This report is intended solely for the information and use of the Audit Committee, Board of Directors and Management, and
is not intended to be and should not be used by anyone other than these specified parties.
Yours faithfully
Peter Mclver
Engagement Partner
For and behalf of Ernst & Young LLP
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Audit Quality Enhancements paper
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 2044 and for the year ended
29 March 2015. Management informed us about the identified under-provision before our review procedures of the half
year ended 27 September 2015. The total amount of restatement recognised was £87 million and £67 million forthe year
ended 29 March 2015 and the half year ended 28 September 2014 respectively,
This under-provision was not identified by Management of the Company and was undetected by us as part of our audit
procedures designed and executed for the year ended 29 March 2015.
In order to mitigate this issue and any other potential issues going forward we took the following pian of actions and revised
our audit approach as described below:
1. New SenlorAuditTeam
For the purposes of the audit of the year ended 27 March 2016 we introduced a new Audit Partner - Peter Mclver and anew
Senior Manager - Elena Belyaeva.
Both of them have long standing experience in EY. Peter Mciver has 31 years experience in Australia and the UK and has
been working as an Audit Partner for 20 years on clients like Wesfarmers (ASX 20), CSR (ASX 20) and since arriving in the
UK FTSE 100 Company, Persimmon ple. He has experience in organisations that are complex and are undergoing transition
changes, such as ERG Limited (global business}, Ticor Limited, Griffin Group Limited and government organisations like
Gold Corporation, Department of Commerce and Trade and Royal Perth Hospital.
Elena Belyaeva spent 5 years in EY Moscow and has been in EY London for 5 years. Elena has vast experience working on
largest government owned transportation monopoly and FTSE 250 international group. She was involved in audit of largest
Russian government owned transportation monopoly (Russian Railways) during the period 2005-2011. During this period
Russian Railways went through transformation program, which covered all the branches across the country.
2. Audit Quality Support Reviewer
In addition to our current Engagement Quality Reviewer, we have also introduced an Audit Quality Support Reviewer, who is
an independent reviewer, to give us an additional set of eyes challenging our testing, scope, procedures, judgments and
documentation, so as to provide extra audit scepticism.
3. Reduced materiality
We revised our performance materiality from 75% of planning materiality to 50%. Performance materiality for the year
ended 27 March 2016 is £5.4m as compared to £8.5m used for the audit of the year ended 29 March 2015. This was also
communicated to you in our Audit and Risk Committee (‘ARC’) Planning Report dated 17 March 2016.
Reduced performance materiality resulted in larger samples of transactions we are testing as part of our audit procedures
described in Appendix 1”Nature of Substantive Audit Procedures” to our Audit Planning Report delivered to the Audit and
Risk Committee dated 17 March 2016.
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We summarised below examples of impact of lower performance materiality on our audit strategy:
1) Additional Balance Sheet and Income Statement accounts were added in our scope, which were identified as not
significant for the purposes of the audit of the year ended 29 March 2015, being below our performance materiality;
2) We are using lower thresholds for testing the Balance Sheet accounts and Income Statement accounts;
3) Due to lower thresholds we are testing increased number of key items and sample items;
4) We are investigating the changes in Balance Sheet and Income Statement accounts for lower amounts and performing
more detailed analysis.
4, Completeness of Postmasters’ Compensation provision - New Significant Risk Introduced for FY16 audit
For the purposes of our audit for the year ended 27 March 2016 we added a new significant risk in relation to
completeness of Postmasters’ Compensation provision. Our rationale and planned audit procedures were explained in
detail in our Planning Audit Report delivered to the Audit and Risk Committee which was discussed on 17 March 2016. We
also summarised them below.
We have performed the following audit procedures:
We have discussed with Management the progress they have made since interim in their plans for implementing a
formal policy of procedures and controls for the Postmasters’ Compensation provision process. We have
assessed the new controls and checked those implemented by Management to address the risks around
completeness of the provision and we have carried out additional testing where appropriate;
An independent reconciliation of the total branches as well as an analysis of their data and status as at 27 March
2016, We have compared this to Management's results and used this to identify anomalies and challenge the
provision analysis provided by Management. At the date of writing this paper, this analysis is in progress;
» To ensure that every branch in the Post Office Network is classified correctly we independently categorised each
branch into their categories at 27 March 2016, based on their individual attributes and we have challenged POL’s
assessment by comparing results. At the date of writing this paper, this analysis is in progress;
» To check the validity and accuracy of POL’s records we undertook sample based testing on the Conditional
Resignation Pack (‘CRP’) contracts and checked the dates for correct cut off and authorisation. We also traced the
contracted amounts of these CRPs per POL’s records to the payment listing and bank statements, showing the
amounts settied post year end. At the date of writing this paper, this analysis is in progress;
We will perform an unrecorded liabilities test by reviewing all cash payments made to Postmasters in the period
subsequent to the year end (up until the date of signing the Financial Statements). We will independently sample
selected payments and vouch to bank statements. We will also check that provision is accrued in correct period;
» To further gain assurance on the completeness of the provision as at year end, we are performing a
reasonableness test on each category of the Postmaster’s Compensation provision by comparing costs incurred
to date against budgeted costs and estimated costs to complete for the various programmes. This involves
understanding of the number of open projects and hew the estimated costs to complete are computed.
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5. Revised Audit Approach
As part of our planning audit procedures we have performed a detailed review of our audit work program and revised our
planned audit procedures as follows:
a) Use of management information as part of the audit procedures:
As part of our audit procedures for FY16 we have had various meetings with key personnel outside of Finance team to obtain
corroborative evidence and compare to information received as part of our testing and follow up on any inconsistencies. We
plan to have update these discussions as part of subsequent events procedures.
b) Detailed transactions testing:
We have performed further transaction testing for Income Statement accounts in addition to the detailed analytical review
procedures and test of controls. For example, we have tested:
» Revenue - Our transaction testing of revenue gave us a coverage of 93% of total revenue amount by value for FY16.
This came from the 19 largest clients ~ we are testing all revenue transactions in the year relating to these 19 clients.
For FY16 audit we changed our methodology to select transactions for testing compared to last year. During the last
year audit we selected individual revenue lines as opposed to customers balances and our value coverage was 88%.
This change was also driven by changes in EY Audit Methodology to address the focus on revenue balances testing;
» Exceptional items - 92 sample items were selected for testing. By performing detailed tests we gained value
coverage of 66% of the total amount of exceptional items by value recorded during FY16. We are focusing on
completeness of exceptional items as well as correctness of classification in Financial Statements. We summarised
below the techniques/appreaches we have used to select our samples for testing for each type of exceptional
expenses:
Agents Compensation - we have used EY Microstart - a statistical tool which determines a sample for testing
based on performance materiality and level of risk associated with Financial Statements account;
POL Severance costs - EY Microstart as above;
Non-redundancy Network & Crown Transformation, IT Transformation, Separation costs - we have selected a
sample of 60 transactions; and
Business Transformation Costs - we have covered 100% of the balance by our testing.
» Detailed Income Statement transactions testing was introduced during FY16 audit following the changes in EY Audit
Methodology, as noted above.
©) Managements’ estimates and elements of unpredictability
We have also focused our attention on auditing Management's Estimates. We are in process of performing the following
procedures as part of our audit of Management's estimates:
i} Further application of professional scepticism - we have obtained audit evidence to support Management
representations and are reviewing any existing contra evidence for Management's estimates. We have obtained a
sufficient understanding of the particular methods/models and assumptions used by Management te develop their
accounting estimates. We are testing the integrity of the data that is applied to those methods/models and
assumptions, and considering all available meaningful information related to those estimates - both corroborative and
contrary.
il) We have had discussions with Management to understand the process for identifying accounting estimates and assess
the inherent risk for each accounting estimate.
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if) We have obtained a detailed understanding of the estimation of Significant Class of Transactions (‘SCOT)* affecting the
significant accounting estimate, including:
The method and where applicable the model, used in making the estimate;
Whether there was/should have been a change from prior year method for making the accounting estimate and the reasons
behind it;
Whether Management used a specialist;
The assumptions underlying the accounting estimate, including understanding the relevant factors underlying the
assumptions (e.g. financial and operating plans, accounting policies selected, historical trends);
How data on which the accounting estimate is based is generated;
How the estimation SCOT is initiated, recorded, processed, reported and incorrect information is corrected;
The policies and procedures that apply to the estimation SCOT;
The effect of IT on the estimation SCOT;
Relevant controls over the estimation process; and
Whether Management has assessed the effect of estimation uncertainty, and if so, how.
Based on our analysis we classified the estimates identified by the level of risk, including lower, higher and significant risk
estimates. Our audit procedures for each type of estimate identified are in progress.
iy) We have also added the elements of unpredictability. We selected transactions for testing using random techniques,
rather than transactions above certain set thresholds.
iv) We also planned to perform retrospective review of accounting estimates, via checking the precision of Management's
prior estimates and assumptions made for certain areas as at 29 March 2045. At the date of writing this paper, this
analysis is in progress.
©) Subsequent Events Review audit procedures
For the purposes of year ended 27 March 20146 in order to mitigate any issues we are taking following further actions:
» We have hold meetings with other key personnel outside the Finance team on current business operations results and their
risks areas to identify any subsequent events.
» Wewill ensure that the subsequent event period covered by our audit procedures is up to the final date of sign-off:
We will perform our subsequent events review audit procedures in two stages:
Stage 1 ~ we will perform detailed subsequent events procedures as at date of the Audit and
Risk Committee meeting on 19 May 2016;
Stage 2 - we will update our subsequent events review procedures as at the date of the
Financial Statements sign-off.
* We identified the folowing Significant classes of transactions as part of our audit:
Business combinations accounting and goodwill impainnent festuation) - Project Hawk ~ Nigher Risk Estimates
Postmastees' compensation provision (completeness) - Significant Risk Estimate;
Disposal of mobite operation ~ Higher Risk Estimate:
Release of accrued revenue (£8m) - Project Gamma ~ Lower Risk Estimate.
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During stage 2 our update on subsequent events will cover a detailed subsequent events review for significant
Management's estimates (including business combination accounts and goodwill impairment, disposal of mobile
operation and postmasters’ compensation provision). We plan to perform a detailed review of the events and transactions
occurred during the period from 19 May 2016 to the date of sign-off and request Management's representations on
subsequent events. In addition we will have discussions with key personnel outside of Finance team to update our
understanding of assumptions used for significant Management's estimates and to check whether any events occurred post
19 May 2016 which may have impact on assumptions applied.
Coordination of EY subsequent events procedures with Management's process for identification of subsequent events
and review of the supporting documents for any subsequent events identified;
Use of lower thresholds for selecting a sample of transactions for subsequent events considerations testing and
hindsight analysis.
6. Detailed Overview of the Audit Procedures performed in respect to each of the Balance Sheet accounts and
income Statement
At the planning stage, we have performed a detailed overview of the audit procedures designed at planning stage. We are
continually reviewing the audit procedures performed and the respective results during the course of our audit on a
continuing basis. This allows us to enhance our audit process in the following aspects:
Timely adjustment of the audit procedures for any unusual transactions identified as part of our audit procedures to
ensure that those are covered by appropriate audit tests;
Select the most efficient and appropriate audit tests for significant classes of transactions, including significant
accounts and estimates; and
Look back analysis based on the final draft financial statements to check whether the audit tests performed cover all the
risks identified and represent the robust evidence over the amounts recorded in the financial statements.
7. Extended use of EY analytic modules
We are using EY analytic modules to identify transactions which are unusual or not in line with our expectations. We are
checking manual journal entries separately. We have included revenue journal entries batches for our testing using EY
analytics module. We are checking relevant supporting documentation and Management analysis for the journal entries
selected for testing. We have used analytics module to do analysis around payroll and unrecorded payments. At the date of
writing this paper, this analysis is in progress.
~
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EY I Assurance I Tax I Transactions I Advisory
Ernst & Young LLP
© Emst & Young LLP. Published in the UK.
All Rights Reserved.
ED None
The UK fem Emst & Young LLP sa limtediatlty parnerstsp registered in England and Wales
with registered number 0030000 and ie a member fm of Erst 8 Young Giobal Limited,
mst & Young LLP, 1 More London Place, London, SEY 2AF.
ey.com
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AUDIT RISK & COMPLIANCE COMMITTEE
Horizon Scanning Report
Author: Jane MacLeod Meeting date: 19 April 2016
Executive Summary
Context
As part of its remit, the Board Audit Risk & Compliance Committee should consider legal,
regulatory and other external developments on behalf of the Board in order to ensure
that impacts on Post Office (including its customers, staff, suppliers and stakeholders)
are understood and being appropriately managed. This report highlights current
developments of relevance to Post Office and the work that is being done to monitor
these.
Questions this paper addresses
1. What are the material legal, regulatory and other external risks the Post Office
executive and Board should currently be aware of?
2. What work is being undertaken to assess, monitor and mitigate these risks?
3. Who is accountable for this work and how will it be reported through Post Office
governance structures?
Conclusion
1. There are a number of material developments which either will or could impact Post
Office and details of these are set out in this summary.
2. In each case work is being undertaken to monitor and assess the risks arising from
these developments. The Corporate Services team is working with the different
stakeholders to progress this assessment.
3. Governance structures and reporting lines will be developed to ensure there is
appropriate representation from across Post Office in formulating responses to, and
mitigation plans for, these developments.
Input Sought
The ARC is asked to note these developments.
Strictly Confidential Board latelligenc
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The Report
Trade Union Act
1. The Act, which received Royal Assent on 4 May 2016, reforms various aspects of
the law on industrial action and trade union obligations and activities. The Act will
be brought into force by statutory instrument in due course; no commencement
date has been set as yet.
2. The changes have been made to ensure strikes can only go ahead as a result of a
clear and positive democratic mandate from union members. Importantly, the
Trade Union Act will ensure industrial action only ever goes ahead when there has
been a ballot turnout of at least 50%.
3. Key provisions are:
. requirement for at least 50% turnout in votes for industrial action
. in certain public services, including in the health, education, transport,
border security and fire sectors, an additional threshold of 40% of support
to take industrial action from all eligible members must be met for action to
be legal
. setting a 6 month time limit (which can be increased to 9 months if the
union and employer agree) for industrial action so that mandates are always
recent
. requiring a clearer description of the trade dispute and the planned
industrial action on the ballot paper, so that all union members are clear
what they are voting for
. creating a transparent process for trade union subscriptions that allows new
members to make an active choice of paying into political funds
. ensuring that payroll deductions for trade union subscriptions are only
administered where the cost is not funded by the public
4. The broad effect of these changes for organisations such as our own will be to
increase the predictability around, and notice of, impending strike action. Legal will
work together with the IR Team to ensure these changes and their implications are
understood by relevant team members.
Ofcom Review
5. On 16 June 2015, Ofcom announced a wide ranging review of the regulation of
Royal Mail. The scope of the review is to ensure that the regulatory framework
within with Royal Mail operates remains appropriate to secure the efficient and
financially sustainable provision of the universal postal service (USO) against the
backdrop of changes in the competitive profile of the market.
6. In July 2015, Ofcom published a Discussion Paper providing further detail on the
context and purpose of the review and asked stakeholders to consider and provide
answers to a number of preliminary questions on the appropriateness of its scope.
Ofcom intends to complete the review during the course of 2016, with any
recommendations for changes to the regulatory framework to be implemented by
the end of the year.
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7. Self-evidently, any changes to the regulatory framework for Royal Mail has the
potential to impact on our own obligations, particularly under the Mails Distribution
Agreement, thorough which POL effectively provides services to Royal Mail which,
in part, enable it to discharge the USO.
8. Accordingly, in its response to the Discussion Paper, POL put down a marker of its
interest in the work of the review and POL representatives from the Mails and
Public Affairs teams also met with Ofcom last autumn to establish an open
dialogue. Discussions have also taken place with colleagues in the Regulatory
Affairs Team at Royal Mail, in order to develop a shared appreciation of the likely
direction of travel and to ensure that POL is kept abreast of developments.
9. No update or progress report has been forthcoming from Ofcom since the
publication of the Discussion Paper, but we anticipate that it will come forward with
its emerging thinking in the near future if it is to keep to its intended timetable.
Any material developments will be reported to the RCC as they occur.
Enterprise Act
10.The Enterprise Act received Royal Assent on 4 May 2016. It retains those
provisions of the Enterprise Bill designed to cap termination/redundancy payments
to certain public sector employees to £95,000, which were highlighted at the ARC’s
last meeting.
11.Government has decided to undertake a further consultation on the range of public
sector organisations to which this cap will apply, the results of which will be
reflected in Regulations to be introduced in October 2016. This provides the
business with a further window, and a vehicle, through which to seek to have both
POL and POMS exempted from these provisions. These efforts will be led by HR,
supported by Legal and Communications/Corporate Affairs as appropriate.
General Data Protection Regulation (GDPR)
12.The EU’s wide ranging reforms to the Regulatory Framework for Data Protection
across the EU, detailed at the ARC’s previous meeting, have now been formally
published in the Official Journal. This provides a date of entry into force of 25 May
2018, setting the hard deadline by which POL must be compliant.
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Appendix
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STATUS OF PREVIOUSLY REPORTED DEVELOPMENTS
Issue Brief Description Update
Money Implementation of the Please refer to separate paper in
Laundering recommendations in the this pack.
Promontory Report
HMRC compliance audit
Brexit Assessing impact on Post We continue to monitor the
Office should the result of developments with a view to
the referendum be to leave assessing the possible impact of
the EU an ‘exit’ vote.
GDPR New and more onerous EU Work is about to start on scoping
Data Protection Regulation
Networks and
New EU Directive to support
the likely impact of the
Regulations and the Directive on
PO ahead of commencing activity
Information GDPR to implement necessary changes.
Security
Directive
Senior Statutory accountability of No developments at this stage.
Managers’ senior management in FCA
Regime and PRA regulated firms
Mails - Information collection No developments at this stage.
International
Data Capture
requirements to support
mails related dangerous
goods requirements
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AUDIT & RISK COMMITT! GOVERNANCE UPDATE
Property Compliance Update
Author: Steve Norris Sponsor: Thomas Moran Meeting date: 19 May 2016
Executive Summary
Context
This paper addresses the request made by the Audit & Risk Committee (ARC) on the
17th of March to receive an update on Property Compliance Governance.
Questions this paper addresses:
1. What improvements have been made to property compliance governance?
2. What progress has been made to address the other property compliance issues
raised in the March audit report?
3. What remains to be done?
Conclusion
1. The Property team, assisted by the Post Office Legal and Risk and Audit teams and
Property experts from BNP Paribas, has completed the assessment of the key risks and
the prioritisation of any remedial projects.
The Property team has assessed its operating model and specific monitoring controls
over Property regulatory including environmental and H&S risks have been clearly
assigned within the Property Team and service suppliers. Engagement and co-
ordination processes have been established with stakeholders across the business.
2. There has been significant progress towards achieving full property regulatory
compliance since the last update. Work to remedy identified high risk items has been
completed and plans have been developed and included in our 2016/17 budget for
dealing with identified medium risk remedial works.
3. Further work is needed to improve the culture of prioritising the identification and
reduction of property and health and safety risks at operational sites, including the
prevention of fire hazards. This will be achieved by closer working between the Property
(Steve Norris), Health and Safety (Martin Hopcroft) and Network Operational (Steve
Blampied) teams and branch manager training by the H&S Team which will be
completed by June 2016.
Input Sought
The Audit & Risk Committee is asked to note this report and endorse the approach to
further mitigating and managing Property compliance set out in the paper. This paper
has already been reviewed and approved by the Risk & Compliance Committee.
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The Report
What improvements have been made to property compliance governance?
1. The Property team is implementing improvements against five pillars of good
governance processes:
(1) Leadership, accountability and culture
a. The desired risk appetite has been discussed with all property and facilities
management suppliers (the H&S team is aware of the business risk
appetite).
b. The scope and responsibilities for service suppliers and Facilities Managers
have been reviewed and H&S responsibilities have been clearly assigned
to them.
c. Representatives from the Network and Health & Safety teams now attend
the monthly Property Compliance Forum which provide oversight of all the
key property-related H&S risks and incidents.
(2) — Structure, processes and performance oversight
a. We have re-prioritised the role of Facilities Managers to focus on identifying
and minimising the higher risks within the property estate and the
suppliers’ operations. “Duty holders” and “Responsible Persons” roles
have now assigned to POL staff, with Tom Moran now the Duty Holder
having taken on the role of General Manager, Network, on 9% May 2016.
b. Training for the Post Office property team, Duty Holders and Responsible
Persons on key statutory compliance areas is ongoing and will be
completed by the end of June.
c. Facilities Management suppliers’ competency has been self-assured
against best standard.
d. Relevant policies and handbook have been reviewed and will be signed off
shortly.
(3) Risk Monitoring
a. Assessment of the key risks and the prioritisation of any remedial projects
have been completed.
b. The development of the compliance controls framework, which defines the
ongoing compliance controls across the property estate for all the key
stakeholders, is nearly complete, pending update on Person in Control
(“PiCs”) and Facilities Managers’ new responsibilities.
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c. Facilities management contractors’ polices, compliance regimes have been
checked and approved by the Post Office Property team.
d. Relevant policies and handbook have been reviewed and will be signed off
shortly.
(4) Engagement with stakeholders
a. Integration and co-ordination between the Property and H&S teams has
improved and we are now attending each other’s planning meetings and
reporting jointly to the Health & Safety Sub-Committee.
b. Compliance communication and planning with facility management
suppliers has improved with visibility of their performance via attendance
to the Property Compliance Forum and formal monthly supplier operational
meetings.
(5) Management of information
a. Regular incidents/near miss reports are being produced by facility/estate
management suppliers and discussed at the Property Compliance Forum.
b. Board/Committee papers: a joint monthly report including H&S and
Property is now being issued to the Group Executive team on property
compliance issues monthly.
What progress has been made to address the other property compliance issues raised
in the March audit report and what remains to be done?
1. Regulatory risk progress
There has been significant progress towards achieving full property regulatory
compliance including reducing the risk of breaches of health and safety and
environmental law since the last update.
2. Property regulatory compliance risk assessments
Risk assessments have now nearly all been completed by our suppliers (see Appendix
1). There has been some slippage owing to practical difficulties encountered by our
suppliers e.g. difficulties gaining access and reliable information. Work to remedy
identified high risk items has been completed and plans have been developed and
included in our 2016/17 budget for dealing with identified medium risk remedial
requirements; mainly electrics, asbestos, building fabric and legionella.
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3. Electrical testing
Electrical testing is now 91% complete. There has been a 1 month slippage due to access
issues, but these assessments will be 100% complete in May.
4. Residential risk assessments
Residential risk assessments for fire and fixed wire testing are ongoing due to be
completed by the end of May and lower risk water risk assessments (which are not a
statutory responsibility) by the end of May. Remedial works such as fitting smoke alarms
and carbon monoxide should all have be fitted by mid-May. External fabric of residential
properties has been assessed. Internal inspections have only highlighted damp issues
at one property. Gas inspections are also complete.
5. Environmental law
There has been significant focus on waste management across the POL estate to avoid
fixed penalties and other enforcement being taken against POL. Regulation concerning
the management of waste is restrictive and easy to breach. POL is reliant upon Servest
and our PiCs to ensure compliance. Servest have retrained and communicated with
their staff the need for strict compliance and POL has sent communications to PICs
followed up by phone calls to ensure their responsibilities are understood. This is an
area of ongoing concern as breaches are still occurring. We have an action plan in place
now with Servest to address this. While the most usual enforcement is by small fixed
penalty fines of £50-£100 we have faced prosecution for abandonment of waste outside
our own premises (successfully defended) where the fine could have been within a range
of £7K to £25K.
POL’s annual Carbon Reduction Submission was completed and submitted to the
Environment Agency in September last year for the year 2014/15. The Environment
agency additionally carried out an audit on the previous year’s submission in 2013/14
which was also found to be satisfactory.
6. Fire risk and housekeeping
The most significant area to improve is in housekeeping to manage fire risk. This was
reported by CBRE to the Property Compliance Forum as a finding from their risk
assessments, currently carried out over 93% of the estate.
We are taking immediate action to mitigate the high risk of fire identified at some Crown
sites. The GM of the Crown network is issuing Comms to all Crown Branch managers
(who are the PiCs) emphasising the importance of acting on the recommendations of
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the recent site assessments. This will be followed this month by an on-site visit to every
Crown branch by a CBRE engineer.
In addition, all PiCs have been mandated to undertake PiC training by the end of June.
This is important as Many PiCs are Managers who have relocated, are new in post or
are simply overdue a refresh of their original training. The outline for training is outlined
in Appendix 3.
We are engaging with Network Operations to propose the implementation of:
a) Peer to peer compliance review in accordance to industry best practices or an
equivalent alternative process. This will be actioned in May.
b) Regular reviews and appraisal of PiCs Property compliance performance by their line
managers.
c) Clear audit trail of compliance actions identified and resolved.
d) Improve communications processes between Property, Network Operations and H&S
teams.
7. Leadership, accountability and culture
Work is ongoing to ensure that the culture of health and safety across the business is
aligned to the ‘risk averse’ appetite for the areas where opportunities to improve have
been noted. The plan in summary is as follows:
e Compliance programmes addressing the risk assessments as set out in Appendix 1
will be completed in the financial year 2016/17. The Compliance Forum, chaired by
Steven Norris, is the entity which will manage completion of this programme of work.
The delivery of compliance works will be undertaken by CBRE.
e Site by site risk assessments will be produced by CBRE, which manages the high
risk areas and enhanced with insights from Servest and the H&S team. This has
been live, and being reviewed by the Compliance Forum, since April 2016. This risk
based view is now being used to prioritise site visit audits by POL’s Facilities
Managers to ensure high risk areas are continually identified and addressed either
through the PiCs, CBRE, BNP the H&S teams or Servest. This will be an ongoing
process in perpetuity and key risks will be escalated up to the RCC and Post Office
GE through monthly reporting from the Compliance Forum.
The role and responsibilities of the PiCs and training needs are being reviewed by the
H&S and property teams at present. The Network Operations Team has been engaged
and they will attend the Compliance Forum to ensure that PiCs responsibilities get
implemented and monitoring mechanisms of their activities are established by June.
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8. Structure, processes and performance oversight
The future stability of the Property and Health and Safety teams must be assured in
order to enable the implementation of the new operating model and ensure that
appropriate property regulatory compliance including health and safety matters are
properly addressed and monitored going forward. The structure of the Property Team
is shown below:
Property Function Structure
Tobe
appointed
Gutsourced
‘Seartieg 2M + erarnat cans
support
+ Toncdit C3RE and
‘soure value for
Estates Menagement
‘Herd sernces (eulties muraceenent
Sol services Gelition manugerrent
(Note: the above structure exclude: Crown Transformation and NT and Equipment teams. These
teams have a different reporting line)
There are additional statutory roles of Duty Holders and Competent persons
required under environmental law, health and safety law and other statutory
compliance, for each of the 14 areas of compliance. These roles have ail been
defined and individuals appointed within the Post Office. The table at Appendix 2
explains these roles and the appointee. In addition the role of Competent Person
is fulfilled by our suppliers, Servest and CBRE and their competency has been
recently checked.
The business should be aware that in the event of enforcement, the relevant
authority may look to enforce against Group Executive Members and Directors.
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The compliance controls activities for PiCs and H&S teams are to be finalised and
integrated with the activities of the Property Team and a final meeting to
implement this is planned on 25" May.
There is ongoing work to improve the management of risks across the estate and
risk reporting. Particular focus will be given to shared premises and third party
occupied properties where obligation may be shared especially between Royal Mail
Group (RMG) and POL. A programme of work covering these risks is being
prepared by CBRE which will then need to be for action to by RMG.
9. Risk Monitoring
The compliance control framework has been developed which has addressed critical
areas. Other priority areas are now being addressed. Amended policies will be
signed off and implemented.
The Property Compliance Forum recommended that once the new operating model
and compliance governance framework has reached business as usual, an
operating benchmark exercise is carried out to ensure that structure and processes
in place are designed and operating as expected for an organisation of this size
and complexity. We anticipate this to be around August.
10. ARC and RCC support
Continued support is required from the ARC and RCC to ensure all involved give
these objectives the high priority they demand and that behaviours are fostered
and appropriate decision are taken to fully support these objectives.
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Appendix 1
Status of compliance risk assessments
9 -
Fire Risk Assessments 93% IM-H {End May improvements still needed at sites
All high risk items access controlled
9
Asbestos 100% M 30 April while containment is completed.
Radon 100% L complete No risk areas identified nor unlikely to
be in phase 2 assessments
Highly inefficient boilers, coolers and
9
TM44 100% EL complete lighting systems being replaced in 2016
Lift - Insurance 100% L complete Minor defects remedials actioned to Lift
Inspections service contractor
PAT Testing 100% IL IComplete Minor issues. All have been addressed
All high risk areas addressed. Medium
9
Fixed Wire p1% M End May risks will be addressed in 16/17
Pressure 100% IL (Compete No issues
Energy Certificates 100% L complete Minimal issues. Reports now being
received
43 remaining, these are being planned
9
Legionella pi% M End May to be completed within May
. Mainly security and access risks which
9
Building fabric 100% mM icomplete will be addressed in 16/17
Note: This table explains the recovery of the backlog of overdue risk assessments over
the last 6 months. Going forwards risk assessments will be undertake on a rolling
programme as they become due.
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Appendix 2
Duty holder and Responsible Persons roles and appointed person
LEGISLATION ‘Main Regulatory Bodies PROPOSED JOB TITLE = << ~BUFY HOLDER = =
RESPONSIBLE PERSON .
Beciricty I Electrety a Work 1000 Reguation 3) IHeakh and Safeny Tom Moren (General Manager, Network)
I lec ae
a Local Authority, oo
I ~The Control of Legionella Bacteria n Water [Environmental Agency “Tom Moran (General Manager, Network)
‘Systems (AcoP L8) & The Notification of Cooling
Be ioesre acl Capeeniie Criemeee Reger
(1992)
Enaronmental Protection Act 1900, Section 34. Environmental Agency
‘Tom Moran (General Manager, Network)
The Control of Asbestos Regulations 2012, IHealth and Safety Faciities “Tom Moran (General Manager, Network)
a Reguition 4 Executive lee cane
i Local Authority.
“The Health and Safety at Work Act 1974, Section IHealth and Safety Martin Hoperof
a [Executive _
COSHH regulation
Local Authority
Environmental Liability Directive
I
Natural England (i.e
[Environmental Liabilit oS
Pressure Systems Regulations 2000 Health and Safety
Executive
Tifting Operations and Lifting Equipment IHealth and Safety
Regulations 2008 Executive
Local Authority
“ [Regulatory Reform (Fire Safety Order) 2005 & Part IHealth and Safety
3 of the Fire (Scotland) Act 2005, supported by lexecutiv
the Fire Safety (Scotland) Regulations 2006.
“Gas Safety (Installation and Use) Regulations IHealth and Safety
1998
Tom Moran (General Manager, Network)
~ Kevin Parkin I
Neth Netw
‘Tom Moran (General Manager, Network)
‘Tom Moran (General Manager, Network)
Tom Moran (General Manager, Network)
Executiv
aeI Construction (Design & Management) Regulations [Environmental Agency 7 "Tom Moran (General Manager, Network)
I 2015 Health and Safety i
: Local Authority _
j Tonising Radiation Regulations 1090 Ed fim Head of Pr ‘Tort Moran (General Manager, Network)
I Carbon Reduction Commitment P im [Property _I Tom Moran (General Manager, Network)
Environmental Agency 25 ‘Tom Moran (General Manager, Network)
binds Health and Safety
ee Health and Safety [__tnteries Head of Property ‘Tom Moran (General Manager, Network)
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Appendix 3
PiC training approach
Context - There was a requirement to refresh the content of the online Person in Charge training product and make available to
all PiCs across the Post Office Estate. Although this was recognised by the Health & Safety Team, this was also a recommendation
through the Property Compliance Risk Review.
Reason - Many PiCs are Managers who have relocated, are new in post or are simply overdue a refresh of their original
training. Due to IT issues, it has been difficult to update the previous version of the PiC Training and therefore a new product
has been created and is currently being tested by our external provider and H&S Business Partners.
Topics - The PiC training covers the general PiC duties and areas of responsibility including Health & Safety Duties, undertaking
risk assessments, hazard surveys, ensuring Site Log Books are maintained, keeping H&S training records, fire risk assessments
and training, evacuation plans, testing fire alarms and emergency lighting, knowledge of RIDDOR and control of contractors
including signing in logs.
Assurance - The H&S Business Partners will have access to Certificates of Compliance with dates that PiC training has been
completed and these will be supported by a central view of certification of PiC training module completion via the Training
team. There is a requirement for PiC Training to be refreshed every 3 years.
Inspections - These are undertaken by Trade Union rep Inspections (2 per year) and H&S BP Audits at high risk sites. Facilities
Managers will also be auditing high risk sites and undertaking property audits. At all inspections and audits the question will be
asked whether the PiC training has been undertaken and certificate in date.
Timescales - The new product has been returned to the H&S Team for final review and it is expected that the PiC Training will
be launched across POL be the end of May 2016. Local Risk Assessments will be completed in May / June 2016 at all sites and
the Certificates of Compliance collated and checked in June 2016.
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