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Audit, Risk and Compliance Committee Agenda
I Date: I Wednesday 29 May 2019
[Time I 14.00-16.30 hrs I Location I 1.19 Wakefield ]
Present
© Carla Stent (Chair)
© Tom Cooper
(Interim CEO)
Alisdair Cameron
i Other Attendees
Shirine Khoury-Haq
(Non-Executive Director)
Johann Appel
(Head of internal Audit)
© Deana Hurley
(Senior Manager, Assurance, deputising
for Jenny Ellwood )
© Tim Franklin © Tim Parker ¢ Jonathan Hill
(Chairman ~ PO Limited) (Compliance Director)
© Ken McCall © Andrew Paynter, PwC-by telephone ¢ Veronica Branton
(External Audit, Partner) (Head of Secretariat)
© Stewart Light, PWC - by telephone * Micheal Passmore (item 4.)
(External Audit, Director) (Finance Director)
© Chris Neale Rob Houghton (item 5.)
(External Audit, Director) (Group Coo)
* Lucy Mason © Mick Mitchell (item 5.)
(External Audit, Senior Manager) {IT Security & Service Director)
© Amanda Bowe (item 2.)-bytelephone + Tony Jowett (item 5.)
(Chair, ARC PO Insurance) (Chief Information Security Officer)
Apology: Liz Robson (item 5.) © David Parry
Jenny Ellwood
(Change and IT Director ~ Retail)
(Senior Assistant Company Secretary)
Agenda item Action ng
1 Welcome and Conflicts of Interest Noting Chair
2. Update from Subsidiaries: Noting & Input Amanda Bowe 14.00 - 14.05
© Post Office Management Services
ARC
3. Minutes and Matters Arising Approval Chair 14.05 - 14.10
3.1 Minutes of the Audit, Risk and Compliance
meeting held on 25 March 2019
3.2 Actions List Noting & Input
3.3 Draft Minutes of the Risk and Compliance I Noting
Committee held on 9 May 2019
4, Annual Report and Accounts Approval Micheal Passmore / I 14.10- 14.40
External Audit Andrew Paynter
(PwC)
41 ARA Covering Note
4.2 Financial Statements
43 Post Office Limited Briefing Book including
Accounting Judgements
44 PwC External Audit - Post Office Limited
Audit and Risk Committee Report for the
year ended 31 March 2019
45 External Auditor Re-Appointment for Approval
2019/20
5. PCI-DSS Update and Cyber Security Noting & Input I Rob Houghton/Mick I 14.40- 15.05
Update Mitchell/Liz Robson
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Audit, Risk and Compliance Committee Agenda
6. Consolidated Report from Internal Audit, I Noting &Input I Johann Appel/ 15.05 - 16.10
Compliance and Risk Departments Jonathan Hill/Deana
Hurley
6.1 Internal Audit Report 15.05 - 15.30
6.2 Compliance Report 15.30- 15.45
63 Risk Report 15.45 - 16.10
64 Risk Management Section for Annual
Report and Accounts 2018/2019
7. Any other Business Noting Chair 16.10 - 16.15
Note: Date of next meeting 29 July 2019,
15.30 - 17.30 hrs
8. NEDs meeting with Auditors (PwC) Andrew 16.15 - 16.30
Paynter/Stewart
Light/Chris
Neale/Lucy Mason
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POST OFFICE INSURANCE PAGE 1 OF 3
POST OFFICE LIMITED ARC GOVERNANCE UPDATE
POI Risk Management and Compliance Update
Author: Ian Holloway Meeting date: 29 May 2019
Executive Summary
Context
This paper provides a concise summary for the POL ARC of the key matters considered
within the POI Risk and Compliance Committee meeting on the 14'" May 2019. It also
provides a high level summary of matters considered at the Board risk workshop which
was held on the same day.
Questions this paper addresses
1. I What key points emerged from the Board risk workshop?
2. What are the key points considered within the Risk and Compliance meeting which
the Board should be aware of?
Input Sought
The report is provided for information and discussion.
The Report
1. What key points emerged from the Board risk workshop?
The key summary points emerging from the POI Risk workshop were:
Cyber risks
¢ There is a need to define cyber risks and controls in greater depth so that we can
be sure that we have appropriate risk coverage. In particular we should note risk
pertaining to operational resilience and data security and compliance as well as
the core cyber element.
Oversight of financial risks
e Second and third lines of defence within POI need to consider how they provide
more oversight for financial risks.
Strictly Confidentiat
fiance Report
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POST OFFICE MANAGEMENT SERVICES LIMITED PAGE 2 OF 3
Enhancing risk appetites
e Reputation risks needs greater specification, and POI needs to have a clear
appetite for reputational risks.
e There is a need for more definition around how we define and manage third party
risks. It was noted in particular that our need to oversight and control third
parties will grow in importance post Nemesis. Cyber risks within third parties
were particularly noted.
e Within POI’s risks and appetites there is a need for more focus on people, skills
and capabilities. The risks of key people should also be recognised and planned
for- dependencies in product and change were particularly mentioned.
Conduct issues
e A Board paper is required to review our culture and how our culture is focused
around achieving good outcomes for our customers and the achievement of our
business plan.
¢ POI needs to consider further how it builds on our customer outcomes/values
and ensure that we are properly focused on making these values live within our
business. These values should more clearly link to our conduct model and to key
controls, notably MI oversight.
e Our conduct models and risk appetites need to consider proposition as a whole
rather than just product. Covering the entire proposition helps us ensure that
we can see the risks along the customer journey, rather than just around the
product design and pricing.
e There is a need to consider developing a joined up model which is capable of
linking the two current conduct models used. There is also a need to show clearly
the feedback loops and oversight techniques which are used to ensure
compliance.
e There is a need for more visibility of root cause analysis (RCA), as a management
tool. Notably around complaints. A paper on travel complaint RCA will be
produced for the next ARC.
Action plans to address these areas are currently being developed.
2. What are the key points considered within the Risk and Compliance meeting
which the Board should be aware of?
The transition of travel business from TIF to ERV is progressing satisfactorily. TIF
initially queried the termination date for the agreement, and have attempted to raise
net rates. Management's focus is on managing good outcomes for customers with TIF
during the run-off of the agreement, and on managing the transition of the book to
ERV. MI due from TIF is late and we are currently escalating this issue with TIF
Management.
Mystery shopping results for March and April have significantly improved. Of 20
mystery shops conducted in March, 13 were scored green, 6 amber and one red. For
April to date there were no red mystery shops with six scored green and five at amber.
POI Management expect AR risks to be within tolerance by the end of June 2019 subject
to the completion of all remaining actions which are currently on track.
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ance Repe
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POST OFFICE MANAGEMENT SERVICES LIMITED PAGE 3 OF 3
POI inadvertently failed to meet a requirement to supply supplier payment data to the
Business Energy and Industrial Strategy (BEIS), for the period from the 26 March to
23 September 2018. This data has now been supplied and we have apologised to BEIS
for the error.
A clear scope, timescale and resources for a marketing database review have yet to
be agreed. This follows two breaches where data was inadvertently used to market
POI and POL products without customers having clearly provided consent. Such a
review is necessary to ensure that any risk of further breach is minimised
POI received an update from Ben Foat-Post Office General Counsel, on the current
Group litigation case relating to Horizon functionality and Sub Post office colleagues.
This focused on the potential risks for POI.
The FCA have produced their business plan for 2019/2020. Key focus areas will include
governance, culture and specifically for general insurance product value, pricing and
market access. POI Management will be coming back with clear plans to address areas
raised within the FCA business plan, starting with a specific assessment of our culture.
The SMCR programme is making satisfactory progress. SORs are now complete, and
application forms for Approved People have been submitted.
Strictly Confidentiat
ance Repe
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POST OFFICE LIMITED AUDIT AND RISK COMMITTEE MEETING
Strictly Confidential
MINUTES OF A MEETING OF THE AUDIT AND RISK COMMITTEE OF POST OFFICE LIMITED HELD ON MONDAY 25
MARCH 2019 AT 20 FINSBURY STREET, LONDON EC2Y 9AQ AT 12.30 PM
Present: Carla Stent Chair (CS)
Tim Franklin Non-Executive Director (TF)
Tom Cooper Non-Executive Director (TC)
Ken McCall Senior Independent Director (KM)
In Attendance: Alisdair Cameron Group Chief Financial and Operating Officer (AC)
Tim Parker Chairman, PO Limited (TP)
Shirine Khoury-Haq Non-Executive Director (SK) (items 5. — 10.)
Andrew Paynter Group Audit Partner, PwC (AP)
Lucy Mason Group Audit Senior Manager, PwC (LM)
Stewart Light Systems and Controls Director, PwC (by telephone) (SL)
Jane MacLeod Group Director, Legal, Risk and Governance (JM)
Johann Appel Head of Internal Audit (JA)
Jenny Ellwood Risk Director (JE)
Jonathan Hill Compliance Director (JH)
Veronica Branton Head of Secretariat (VB)
Amanda Bowe Chair, ARC PO Insurance (AB) (item 2.)
Colin Stuart Finance Director — FS&qT (CSt) (item 6.)
Sally Smith MLRO (SM) (item 6.)
Elizabeth Robson Change and IT Director (ER) {item 5.)
Mick Mitchell IT Security & Service Director (MM) (item 5.)
Apologies: Paula Vennells Group Chief Executive
Action
1. Welcome and Conflicts of Interest
The Directors declared that they had no new conflicts of interest in the matters to be
considered at the meeting in accordance with the requirements of section 177 of the
Companies Act 2006 and the Company’s Articles of Association.
2. Update from Subsidiaries
Amanda Bowe provided an overview of the key issues discussed at recent Post Office
Insurance ARC meetings:
«the business was stretched with a number of key projects underway. Thought was
being given to the risks and dependencies associated with the projects
aseparate session had taken place on Brexit preparation and risks. The ARC was
confident that the team had done as much as possible to prepare
good progress was being made on Appointed Representative issues
«the Board had decided to change its travel insurance underwriter. It had been
concerned about the data breach experienced by TIF and the lack of clarity about the
cause of the breach. We have had need to report a few breaches to the Information
Commissioner's Office (ICO) and were mindful of this when taking the decision
consideration was being given to Fit and Proper compliance risks over the next few
months
the PO Insurance ARC had been disappointed that a WH Smiths branch had been
suspended for a second time following poor delivery of financial services
* a pricing paper and a paper reviewing our processes re how we treat customers had
been considered. The position overall was seen as fair but it was a subject that would
continue to be monitored closely.
3.2
3.3
POST OFFICE LIMITED AUDIT AND RISK COMMITTEE MEETING
Strictly Confidential
It was asked whether any price rises could be seen as exploitative? AB reported that the
PO Insurance ARC had asked for work to be done to identify any price increase outliers
and whether any vulnerable customers had been affected by price rises.
Minutes and Matters Arising
The minutes of the meeting of the Audit and Risk Committee held on 29" January 2019
were APPROVED and AUTHORISED for signature by the Chairman.
Progress with the completion of actions as shown on the action log was NOTED. In
addition, Jenny Ellwood reported that PO Insurance and FS&T both included risks on their
risk registers which incorporated the Competition and Market Authority’s response to the
super complaint as a potential strategic risk.
The draft minutes of the Risk and Compliance Committee held on 14 March 2019 were
NOTED.
Compliance
Jonathan Hill introduced the Compliance Report and highlighted the key issues:
* Ofcom had responded formally to PO Limited’s self-reporting of non-compliance with
Text Relay requirements. The notification from Ofcom indicated that an early
settlement may be possible.
The regulator was comfortable with our approach on early termination payments. The
financial impact of this approach would be around c£60k per annum. Customers were
asked to sign up to broadband for a minimum term but had a 14 day cooling off period.
If they decided to terminate after a longer period and there were reasons for us to
apply discretion and waive the termination fee, we encourage that discretion to be
applied. We also provide training to our agents on these issues.
Fit and Proper. We were still aiming to meet the June 2019 deadline for providing Fit
and Proper data for all branches selling financial services products and to register these
branches with HMRC. We were working through what we would do if agents had not
submitted their data in time (which could lead branches being ‘switched off’). In
tandem, we will be having discussions with HMRC about the potential for an extension
should this be required.
* Payment Systems Regulator (PSR) was taking a greater interest in PO Limited cash
processing activities. The PSR would need to apply to HM Treasury and Government to
expand their role but we wished to flag the additional interest. It was noted that if
there were a single cash utility it was likely that this would be regulated and we would
need to consider what effective regulation would look like from our perspective.
A number of points were raised, including:
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* On Telco: should we consider a ‘no blame’ / uncontested complaint option? JH to JH/ MS
discuss this with Meredith Sharples.
that we needed to make sure there was appropriate support to ensure agents
understood the need to collect and provide the Fit and Proper data if they were
struggling to do so.
The Committee NOTED the Compliance Report.
Risk
Jenny Ellwood introduced the Risk Report and highlighted the key points:
Information Security Update
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POST OFFICE LIMITED AUDIT AND RISK COMMITTEE MEETING
Strictly Confidential
PCI compliance
Liz Robson provided an overview of the work streams for PCI compliance:
Communications; data Audit; and, IT. The Communications work stream was the route
through which we were advising clients about our plans to secure PCI compliance and
explaining that this was distinct from our security arrangements which we regarded as
robust. We had provided updates twice at the Banking Framework Governance Forum.
Barclays had, subsequently, asked for detailed information about our compliance plans.
The QSA (Nettitude) was helping us with the audit work stream and had provided PO
Limited with support and information, including reviewing our Business as Usual (BAU)
processes, auditing these and helping to implement changes. The IT work stream posed
the most significant challenge. We needed to implement point-to-point encryption of
devices and were still developing the scope of this work . We had engaged DWM, a PCI
specialist, and were working through the recommendations in their report and identifying
where we held card data. Work was continuing with Fujitsu and Ingenico on pin pad
encryption and ensuring that the devices worked pre and post encryption. We would be LR/MM
reporting back to ARC after 18" April 2019 on the revised scope of the PCI compliance
plan.
We had begun conversations with the banks to enable us to receive data from them in
encrypted form which would mean that this data did not need go through the Horizon
system which would remove Horizon from the scope of PCI. We still had some control gaps
which would need to be bridged in order to obtain PCl compliance. When we transition to
the cloud, we would need to make sure that we maintained our PC! compliance.
Anumber of points were raised, including:
¢ that we seem to be struggling to find the right scope for the work. The ARC would
like some certainty that this was going to be the full and final review. It was reported
that more certainty on costs and delivery dates could be provided after 18 April 2019
e that the risk table indicated that the position on PCI compliance was deteriorating.
Questions were raised as to why we did not know where we were holding card data
and what assurance could be provided that the control had not worsened? It was
reported that data discovery had not been completed. The context was that when
we upgraded Horizon to HNGA, the QSA had advised us that more was in scope for
PCI compliance than we had originally anticipated. By 18"* April 2019 we expect to be
in a position where we understand the scope of the work and can plan to mitigate the
back end risk. Where possible, we want to simplify data flows which was why we
were having the conversations we are with the banks about receiving encrypted data
rather than this data going through the Horizon System
* should we not have clarified what card data we held as part of our work on GDPR
compliance? It was reported that that GDPR legislation involves personal data and
therefore only applies if the card data was linked to the person but not necessarily
otherwise. LR undertook to check the nature of the card data that had been
identified through the data audit. LR/ MM.
Cyber Security
Work had been taking place on Cyber Security (IT and second line risk reviews). The risks
and associated mitigations were being considered.
Anumber of points were raised, including:
© how could Cyber Security be rated amber if we had experienced data breaches? It was
reported that the incidents were linked to human behaviour (e.g. use of weak
passwords). This risk was seen as a high amber rather than a red risk
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Strictly Confidential
«did we know what data we held, where it was located, what our critical data was and
that it had been locked down? It was reported that the preliminary Internal Audit
Report was included and a more complete report had now been produced. The
maturity of the controls had now been validated leading to improved ratings for many
of the 34 controls. This linked to actions that the team had already taken. We now
needed to update our risk appetite for Cyber Security. We needed to take into account
all the recommendations from the Deloitte Report and work out a priority plan; this
included clarity on what constituted our “crown jewels” from a data perspective and
that this data was secure. Mick Mitchell had seen the draft Deloitte Report which
benchmarked us against retail and financial services sectors. We would have to set
targets on each of the deltas. We now needed to review our priorities against the
Deloitte Report to ensure our security investment was appropriately targeted. Work
was taking place to understanding the unstructured data we held. We had a Data
Protection Officer (DPO), reporting to the Compliance Director and a Chief Data Officer
(CDO) reporting to the Chief Information Officer. ARC Members were clear that the
Information Security Committee needed to be held accountable for the overarching
work and that the ARC needed to receive reports on this Committee’s work.
RSA Archer
JE reported that the RSA Archer integrated risk management system had been introduced
for the Security Operations Centre for managing security incidents, but a wider
rollout had not yet been agreed. It was noted that the system was critical to us being
able to manage data and manage risks by exception. For some time we had not been able
to negotiate a suitable price for the service we required but had reached a sensible
position and were building a business case, including the information security functionality
that was needed.
Risk appetite for Information Security
JE reported that we would need to break down our risk appetite statements by the
different areas of Information Security and would bring these back to the May ARC with
some recommendations.
Anumber of points were raised, including:
whether we had defined our risk appetite and what within this would constitute red,
amber and green ratings? It was reported that we had drawn up our risk appetite
statement four years ago but need to consider this again
«the reference in the report to 140,000 “stale” (not accessed within 60 days)
files containing sensitive data and about 14,000 sensitive files being
shared with external users was queried with Committee Members asking whether
the sensitive data had GDPR implications? The ARC requested an urgent update on
what was included in the sensitive data LR/MM
© whether updates on GDPR would be brought back through the work on information
security? It was reported that the GDPR work was almost finished. Record retention
was a separate piece of work that would include defining and categorising the LR/ MM
unstructured data we held that was not personal data. The ARC requested an
overarching paper on data, the work being undertaken and the gaps we had identified;
this should include how we managed third party data and the contractual issues
associated with this. This paper should be reviewed by the Information Security
Committee. We needed proper frameworks in place to be able to look at the wider
data security plan. Andrew Paynter noted that the third party assurance provisions
were quite immature currently. Contractual robustness was one issue but there were
reputational implications associated with any data breach.
POST OFFICE LIMITED AUDIT AND RISK COMMITTEE MEETING
Strictly Confidential
Payzone Bills Payments (PZBP)
It was reported that controlled pen testing had been carried out following the acquisition
and weakness had been identified in that some PZBP devices could be breached. Work
would be taking place on over next 3-6 months to rectify the issue. We had not been able
to carry out full pen testing as part of the acquisition due diligence . We would be
‘exploring whether we could charge Payzone for the associated costs. The Committee
NOTED the Risk Report.
The Fin11 issue and Telecoms Controls
Colin Stuart (CSt) outlined the Fin11 issue which had arisen because of a mismatch
between the billing system and the Fujitsu data warehouse which had resulted in records
being incorrectly treated as live in the Fin11 report but correctly treated as on-hold by the
billing system. CSt explained the work undertaken since discovering the error, which had
included an independent review by PwC. The recommendations from this report had
largely been implemented.
The lessons learnt from the incident included that we had been overly reliant on third
party data; the monthly balance sheet reviews had been insufficient; and we needed to
receive aged data reports. The recommendations from the report had been rolled out
across the business. This included regular meetings between Telecoms and the Finance
Team with more testing of the data undertaken.
It was reported that one of the key criterion for the award of new data warehouse
contract would be data management, controls and reporting.
A number of points were raised, including:
© whether there was a contractual obligation for Fujitsu to give us accurate data? It was
reported that this was not a contractual requirement of the historic agreement and will
be included in any future agreement
whether there were any outstanding concerns about balance sheet reviews? It was
report that third party data remained an area of focus and that Grant Thornton had
been engaged to undertake a review of our third party data
« what was CSt’s view of the current control environment? CSt reported that he had
confidence in the current control environment.
The Committee NOTED the report on the Fin11 issue and Telecoms Controls.
Back Office Transformation
Al Cameron reported that on 28" January 2019 we had transitioned our Supply Chain
operations to Transtrack CWC and financial processes to our Core Finance System (SAP
CFS), which had mitigated a significant hardware risk. The migration had gone well. The
“go live” on the cash side had identified two areas where there would need to be cash
workarounds. That position was almost back to normal although reconciliation differences
remained. The reconciliation report had worked before “go live” in the Belfast Cash
Centre but had not worked after “go live”. Cash was being counted correctly every week
and data was being captured accurately but this was not flowing through correctly into the
SAP CFS system.
Transtrack CWC had not been able to provide the service we needed, which in addition to
the problems in reconciling daily cash movements from Transtrack CWC through to CFS,
had led to delays in the intermediate and permanent solutions for branch cash forecasting.
We had investigated the source of the problem and the main issue was that Transtrack had
not been able to work through the issues quickly enough. As a result, we are unlikely to be
building cash forecasting into the Transtrack CWC system.
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POST OFFICE LIMITED AUDIT AND RISK COMMITTEE MEETING
Strictly Confidential
A number of points were raised, including:
* that we needed to understand the size of Transtrack and whether they could
adequately support us over the next couple of years. It was reported that our focus
currently was on resolving the immediate problem but the team would come back with
a view’ on Transtrack involvement in the longer term.
« what were the accounting implications? We are working with PWC on end of year
accounting and auditing. Andrew Paynter reported that PwC was alert to the issue and
its auditing work on cash would be substantive and with a focus on reconciliation.
An update was requested for the May ARC meeting.
Executive
8. Internal Audit
JA advised that there had been delays in finalising some of the reports, however network
reporting and branch hub change reporting had been finalised since the report was issued;
agent remuneration should be finalised this week. Vendor management should be
finalised this week although there were certain actions where it was unclear who would be
the appropriate owners. It was suggested that ownership of the framework should be
jointly owned by the GC and the CIO, given his new additional operational responsibilities.
AC requested that delays in finalising reports should be reported to the CEO in the first
instance and then to the ARC Chair should there be concerns.
It was noted that there were a number of reports due to be finalised before the May ARC
and the Chair requested that these be issued to the Committee in stages, rather than
waiting until the next meeting. It was noted that as a result of the GLO decision,
consideration would need to be given as to whether additional audits needed to be
scheduled around branch trading issues and processes. These would be monitored at
subsequent meetings.
9. Treasury Policy
The paper and proposed changes to the Treasury Risk Management Framework, Policies
and Authorities were noted and discussed.
Tom Cooper would have a separate conversation with the Executive about the Barclays
overdraft. He also asked about the hedging arrangements for foreign exchange. It was
reported that we did not want to take risk in relation to foreign currency. TC suggested
that the Executive consider whether it would be appropriate to have two hedging
arrangements in place, one to deal with short term currency fluctuation, the other with
the longer term position.
Tc/ Ac
The ARC APPROVED the changes to the Treasury Risk Management Framework, Policies
and Authorities set out in the paper presented.
10. AOB
There being no further business, the meeting closed.
Chairman Date
+ That was likely to be in May or June 2019.
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POST OFFICE LIMITED AUDIT AND RISK COMMITTEE MEETING
Strictly Confidential
Actions from meeting
Minute I Action Lead Due
Date
4. Telco: should we consider a ‘no blame’ / uncontested complaint JH May
option? JH to discuss this with Meredith Sharples.
5. Compliance: revised scope of the PCI compliance plan to be LR/MM I May
circulated to ARC.
5. Risk appetite for Information Security: update on what was LR/MM May
included in the sensitive data shared (14,000 files) with external
users.
5. Risk appetite for Information Security: overarching paper on LR/MM May
data, the work being undertaken and the gaps we had identified;
this should include how we managed third party data and the
contractual issues associated with this. To be reviewed by the
Information Security Committee
7. Back Office Transformation: update on (1)whether Transtrack Executive I May
could adequately support us; (2) any accounting implications
there are.
9. Treasury Policy: Tom Cooper to have a separate conversation Tc/ac_ I May
with the Executive about the verdraft. Executive to
consider whether it would be appropriate to have two hedging
arrangements in place, one to deal with short term currency
fluctuation, the other with the longer term position.
Post Office
time and resource costs.
fixed cost, if either party break this contract then a penalty applies.
30 October 2018
9. An update on BCP to be provided. Tim Armit I March 7 Open
Business 2049 Reviewed at the May RCC meeting. An update will be provided in
Continuity the July ARC meeting.
July 2019
11. Review the risks covered by the suite of Jenny May 2019, Update-to-begiven-atthe May ARC meeting—Following discussion Open
Insurance Insurance policies. Ellwood —_I July 2019 with the Chair, an update will be provided in the July ARC meeting.
Policies
29 January 2019
2. Updates from Subsidiaries
2.(a) Include the CMA’s response to the super Jonathan I March 2019 I We are checking that this risk appears on the Risk Registers for FS&T I Open
complaint as a potential strategic risk on the I Hill and PO Insurance.
risk register.
2. (b) ARC to review the quality of sales of financial I Jonathan Proposals for deep dives and the sequencing of these will be brought I Open
services products in the branch network in Hill July 2019 to the May ARC meeting. Proposals will now be brought to the July
more depth. ARC meeting.
4. Risk Report
6. Money Laundering Reporting Officer (MLRO) Annual Report
6. (a) To provide regular updates on the complete I Nick Ongoing Ongoing until project close. Item included on ARC agenda. Open
fit and proper data to HMRC. Boden/
Sally Smith
7. Security Strategy
7.(a) To provide quarterly reports to the ARC Rob May 2019 I Ongoing. item included on ARC forward agenda. Open
showing how we were performing against theI Houghton
metrics agreed to implement the Security / Mick
Strategy once the deep dive with Deloitte hadI Mitchell
taken place.
9. Audit To consider a deep dive on Successfactors Exec Proposals for deep dives and the sequencing of these will be brought I Open
Strategy given the cost of the system and its limited July 2019 to the May ARC meeting. Proposals will now be brought to the July
Memorandum I functionality. ARC meeting.
25 March 2019
4. Compliance Report -
4. Telco Consider whether we should write off ETCs Jonathan May 2019 Customers joining enter a 12, 18 or 24 month contract which
where a complaint is received. This could saveI Hill/Mered protects our commercial interests and their rights to service at a
w
N
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Post Office Limited — Audit, Risk and Compliance Committee Actions List
Updated 22.05.19
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ith This penalty works for the customer and for POL e.g. if we raise the
Sharples prices then customers can leave early without charge or if a
customer chooses to leave early then we are entitled to charge a fee
for Early Termination Charge (ETC)
Any customers who complain follow a standard process by which
their grievance is evaluated on a case by case basis, in the case of
ETCs this can sometime lead us to cancel the charge.
Our focus on customer is demonstrated by Ofcom reported
complaints where we are below the industry average and have
reduced by 33% YoY driven by our Customer First programme.
Our complaints specifically around ETCS are at record low levels and
are down 23% YoY.
5. Risk
5. PCI Check whether any of the additional credit I Mick May 2019 I The GDPR programme looked at how we use all credit card (PC!)
Compliance card data we hold contains personal data and I Mitchell/ data across the business. PCl-related data would also be categorised
whether this had been covered as part of the I Liz as Personal Data, under GDPR. As part of the Process Mapping
GDPR work programme. Robson/ exercise, we have identified where this data is captured across our
Jonathan processes and procedures. The Data Audit addressed any PCI-
Hill related data held in systems.
5. Pa Circulate the updated scope for PCI Mick May 2019 I The update report was issued to ARC members on the 25th April
Compliance compliance and the plan and timeline for its _I Mitchell/ 2019. A further update paper will be provided as pre-read for the
delivery as soon as the plan has been agreed I Liz ARC meeting on the 29th May 2019.
(18 April 2019 is the target date). Robson
5. Cyber The Information Security Committee should I Jane May 2019 An update is provided within the Cyber Security report.
Security Report I be accountable for the Cyber Security MacLeod
implementation strategy and should report I / Rob
back to ARC on this. The plan needed to take I Houghton
into account all the recommendations from
the Deloitte Report and work out a priority
plan.
Post Office Limited — Audit, Risk and Compliance Committee Actions List
Updated 22.05.19
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arrangements in place for foreign exchange,
one to deal with short term currency
fluctuation, the other with the longer term
position.
5. Risk Appetite I Provide an answer urgently on what the data I Mick May 2019 An update is provided within the Cyber Security report.
for Information I was contained in the 140k files shared with I Mitchell
Security external users.
5 Bring back an overarching paper on data, what Jonathan I May 2019 I Workisin train. A paper will be presented at the July ARC meeting.
we are doing, where there are gaps, include I Hill/
the position on third party data and Jenny
contractual issues. Take that paper through _I Ellwood
the Information Security Committee.
7. Back Office I Provide an update on Back Office Executive I May 2019 I An update will be provided in the CEO paper to the Board in May.
Transformation I Transformation and the position with
Transtrack.
9, Treasury Executive consider whether it would be Executive I May 2019 An update will be provided at the July ARC meeting.
Policy appropriate to have two hedging
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the Risk & Cor held on
POST OFFICE LIMITED RISK AND COMPLIANCE COMMITTEE
Minutes of a Risk and Compliance (“RCC”) meeting held at
Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ
on 9 May 2019 at 13.00 pm
Present: Alisdair Cameron (Chair) (AC) Interim Chief Executive Officer
Priyanka Dewan (PD) Senior Strategy Manager
(on behalf of Owen Woodley)
Ben Foat (BF) Legal Director
Rob Houghton Group Chief Information Officer
Mo Kang Group HR Director
Cathy Mayor (CM) Finance Director, Retail
(on behalf of Debbie Smith)
In Veronica Branton (VB) Head of Secretariat
Attendance: David Parry (DP) Senior Assistant Company Secretary
Johann Appel (JA) Head of Internal Audit
Jenny Ellwood (JE) Risk Director
Jonathan Hill (JH) Compliance Director
Liz Robson (LR) ClO — Retail (item 3.)
Deana Herley (DH) Senior Manager, Assurance (item 5.3)
Apologies Debbie Smith, Chief Executive Officer, Retail, Owen Woodley, Chief Executive Officer, Financial Services,
Telecoms and Identity, Group Marketing and Group Digital & Innovation.
1 Welcome and Conflicts of Interest Actions
Following introductions round the table, Alisdair Cameron opened the meeting. He remarked that the
pack needed to be streamlined and that papers should be condensed, identifying the most significant risks
and issues, what we were going to do to address these and the timeframes for doing so.
2. Minutes and Action Lists
The minutes of the RCC meeting held 14 March 2019 were APPROVED. Progress on completion of actions
as shown on the action log were NOTED.
3. PCI-DSS Update
Liz Robson provided a verbal update on PCI compliance.
She explained this update would focus on the progress made on the alternative approach to banking
services under investigation which would result in these transactions not being processed through Horizon
and therefore not being in scope for PCI compliance. The progress report requested by ARC had been
circulated for noting.
Regarding retail transactions via pin pad devices in branch, the deployment of point-to-point encryption
(P2PE) of the Pin-Pad estate remained on track to plan, with devices being shipped to enable the required
software upgrade and physical swap-out in branch.
PCI accreditation linked to the pin pad devices expired in the next 12 months and steps had been taken
with Global Payments (our acquirer) to extend this accreditation until 2023 following accreditation
testing. Accreditation cover came with the proviso that no further software changes would be made to
the pin-pad devices beyond P2PE. An update from the Branch Device and Strategy Review on the future
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41
of Pin-Pad device for branches, along with other devices such as Paystations, was expected at the end of
May.
Regarding banking transactions, positive progression had been made with Ingencio and Vocalink to
process transactions directly with the banks via the Ingencio cloud. This approach removed the POL back-
end from PCI scope, helping to simplify the process of achieving PCI compliance by moving these
transactions out of scope. Design and planning sessions were in train with payment partners and a
revised timeline plan plus associated costs was expected at the end of May 2019. P2PE deployment
would not be impacted and remained crucial for PCI compliance being achieved. Work remained ongoing
in parallel.
The recent Data Audit of the systems estate was almost complete, with low instances or no instances of
PCI related data being identified. PCI data that had been identified was removed and users educated to
prevent further occurrences. Audits for Computacenter and Accenture remained outstanding and
completion dates would be confirmed with both partners.
The team had remained actively engaged with Nettitude, our Quality Security Assessor (QSA) and Global
Payments throughout this activity, and our Acquirer was also fully aware and supportive of our plans. A
full plan update would be provided at the end of May 2019.
A number of points were raised:
What challenges were associated with data encryption for banking transactions, as an alternative to
processing data through Horizon? It was reported that there were two main challenges: 1)
reconciliations and 2) banks needing to change their systems. A workshop was taking place with
Ingenico and Global Pay to assess the technical feasibility of an alternative approach.
The timescale for achieving PCI Compliance. It was reported that we would not be PCI compliant by
the end of the year and JE and LR were working on identifying the associated risks, including the
views of our partners.
The following was AGREED:
1. The Data Audit paper would include a section on how a BAU process would be implemented to
monitor/scan the systems estate to identify and action any appropriate remediation for any PCI-
related data,
2. The Branch Device Strategy paper would include an assessment of requirements of pin-pad
devices in the future if they were going to be used for data entry by customers.
3. Mark Siviter would provide an update on current negotiations with RMG on the solution for
International Data Capture.
A holistic plan on achieving PCI compliance, our position on data security and management (structured
and unstructured data) and our risk controls would be presented to ARC in May.
Internal Audit (IA)
Internal Audit Report (IAR)
Johann Appel reported that apart from two change reviews, which had been deferred as part of the re-
prioritisation plan, the Audit plan for 2018/2019 had been completed. 17 reports had been finalised with
seven cleared by management. There was no outstanding fieldwork required for completion, and at 30
April 2019, there were no overdue actions.
‘AC requested that JA pass on his thanks to the team.
The RCC discussed the contents of the reports and noted that whilst there were no significant areas for
concern, the message(s) conveyed could be more clearly identified. It was felt the reports should be
focussed so that ARC members were fully aware of the key risks, the expected impacts, whether there
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LR
LR
LR
To do:
JA
5.1
5.2
5.3
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were any shortcomings and the mitigating actions. Where appropriate, reports should be benchmarked
against other industries and we should indicate where lessons from one report could be applied to other
parts of the business.
It was suggested that the Internal Audit Report on Cyber Security needed to bring out the extent of our
vulnerability, how long it would take to reach an acceptable position with reference to industry
benchmarks, the prime drivers of weaknesses (e.g. not having strong passwords) and the activities we
were undertaking such as tightening of controls around critical data assets.
It was noted that the security issues with some Payzone devices was not within the scope of the audit but
Jenny Ellwood would reference this in her risk report.
JA was asked whether he had any concerns in relation to future audit reports planned or any other issues
he wished to flag. He reported that terms of reference have not been agreed with process owners yet.
The ToRs were in place for the Pensions Internal Audit. The Telco Internal Audit was at an early stage of
planning. JA and RH would discuss the proposed change assurance work for the payment technology
programme.
The reports would be circulated to the ARC for noting.
Risk
Consolidated Risk Report
Jenny Ellwood presented the consolidated risk report.
She reported that PCI, Information Security, Litigation and Change workforce remained the key risks but
that there had been positive progress in relation to Information Security, including piloting some testing of
third party supplier information security arrangements.
Emerging risks included uncertainty around the stability of the Government; people risk because of
measures in the pipeline such as the introduction of a redundancy cap and because there had been
significant people changes in critical roles recently and further organisational design changes were
planned; and, the risk of the regulator taking action to address loyal customers’ potential disadvantage
vis-a-vis new customers. It was suggested that we should include what our mitigating actions would be in
response to the loyalty super complaint,
It was AGREED that we would:
* Check whether RMG was affected by LINK ceasing to settle for partner banks from 1 July 2019.
* Include an update on the Fit and Proper compliance risk.
Litigation Update
The second trial relating to the Horizon system was pending direction from the Court of Appeal following
our application to recuse the managing judge, which had been denied. The trial was due to resume on 4
June 2019 until early July.
Annual Report and Accounts 2018/19 — key risks
Deana Hurley presented the Risk Report for the Annual Report and Accounts 2018/19.
The principal risks and top risks were noted.
DH commented that since the publication of the last Risk Report there had been two main changes.
Firstly the risk of increased likelihood of litigation had been amended from unlikely to possible, and
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6.2
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secondly, the risk related to Technology and Business Interruption had increased in impact as a result of
being unable to automatically failover the second datacentre.
‘AC requested a review of the wording of the report. RH remarked that the cyber security risk had reduced
as control effectiveness had improved; we were still not within risk appetite but we would be providing
more information on additional risk mitigations.
DH
The Executive Declarations were noted. The following was AGREED:
* Mitigating actions should be included.
* The GLO litigation should be included under the risk section and should be expanded to include
details of the risk(s) involved, timings, costs involved (where available) and any operational
changes that may be required.
* Health and Safety had not previously been included asa risk but should be referred to.
An updated paper would be presented to ARC in May.
Compliance
Compliance Report
Jonathan Hill presented the consolidated compliance report.
The following key points were noted.
Ofcom would investigate the text relay breach and assistance was being provided to respond to
information requests from Ofcom. Difficulty had arisen in that Ofcom wished to understand the position
dating back to 2002. JH believed the potential penalty was likely to be hundreds of thousands of pounds,
but it was noted that the self-declaration and wish to settle early had been well received by the regulator
and was likely be taken into consideration. The regulator had also recognised the mitigating actions we
had completed to date.
Fit and Proper: Compliance with HMRC June 2019 Deadline
Since the last RCC meeting, the project team had focused on completing fit and proper returns. A large
backlog of responses had been cleared and HMRC had agreed to extend the June 2019 deadline to
September 2019 for MI data gathering purposes.
The RCC noted the improved and accelerated position but requested that the risks and how they would be
tracked were identified. JH
HMRC had increased branch registration fees from £130 per annum to £300 per annum from 1 May 2019.
Fees would be in the region of £1.3 million and the plan was to stagger payments. Around 4,000
registered branches processed a limited number of transactions. Work was being undertaken on the
implications of not providing a Forex service in those locations; however it was not thought that we
should remove the service during the course of the litigation except where there were no transactions ina JH
branch.
Appointed Representatives
Work remained ongoing with CAP ONE on the Appointed Representative appointment. Any new
arrangement would need to be consistent with the current approach taken with our existing regulatory
principals.
Approved person forms would need to be filed at Companies House once completed.
Vulnerable Customers’ Policy
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An external assessor had provided positive feedback on our vulnerable customers’ policy and the
associated training in branches.
Whistleblowing Policy
A question was raised about whether our whistleblowing policy was being used as we would hope. JH
advised the whistleblowing hotline would become a Freephone number and that work was being
undertaken by HR to encourage a culture which encouraged employees to raise issues of concern.
Cyber Security
RH advised that the main update of note was the work that had taken place on penetration testing of
Payzone devices and the work now underway with the IT Security team to formulate a risk treatment plan
to remediate vulnerabilities identified.
Business Continuity Plan and Policy
The paper and policy were NOTED but the item was deferred.
The POL policy template needed to be used and the risks and mitigating actions need to be clearer.
It was AGREED that with assistance from RH and JH, an updated paper and policy would be presented to
the RCC and ARC in July 2019. TA/RH/JH
GDPR Update
The paper was NOTED.
AC felt that the paper should use less technical language and be simplified to bring out the key challenges
and the next steps. We also needed to provide a complete picture of data and not just the personal data
covered by GDPR to provide the ARC with a holistic view. Further work required on data should also be
set out.
The RCC noted that some contract remediation was outstanding and that before the GDPR programme
could be signed off, the transition from programme to BAU needed to be clarified. It was also proposed
that privacy/GDPR champions should be established group wide.
It was AGREED that:
1. Arevised paper would be presented to ARC showing the work completed to date, and the areas. JH
of outstanding work.
2. An Internal Audit would be completed in Spring 2020. JA
Review of draft Audit, Risk and Compliance Committee meeting agenda
The draft ARC agenda for 29 May 2019 was NOTED and discussed.
A consolidated report for Risk, Compliance and Internal Audit would be presented to ARC.
Any other Business
Meeting dates
It was noted that the next scheduled RCC meeting was on 4 July 2019.
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POST OFFICE PAGE 1 OF 3
AUDIT RISK AND COMPLIANCE COMMITTEE ADVISORY PAPER
Annual Report and Accounts 2018/19
Author: Tom Lee Sponsors: Micheal Passmore, Al Cameron Date: 29 May 2019
Executive Summary
Context
The draft 2018/19 Annual Report and Accounts (ARA) is presented to the ARC, along
with supporting papers, for review.
The papers comprise 1) the ARA, 2) a briefing book setting out the details of the financial
results and accounting judgements, and 3) the Audit Committee Paper from PwC
outlining the work performed and findings to date.
Questions addressed in this report
The following questions are addressed in this report:
1. In summary, what were POL’s financial results for the year ended 31 March 2019?
2. What is the status of the audit work on the ARA?
3. What matters are we drawing to the ARC’s attention in their review?
Conclusions
Post Office reported a trading profit (EBITDAS) of £61 million (2018: £35 million), an
improvement of £26 million, comprising a small increase in commercial turnover and
cost reductions. Net assets increased to £256 million (2018: £206m).
PwC is working to complete its audit procedures and will provide an update on their
identified significant risk areas and areas of audit focus in their Audit Committee Paper
to the ARC on 29 May. Subject to the completion of their audit work, PwC has not
identified any significant issues to date which would impact on the signing of the ARA.
Refer to the Audit Committee Paper prepared by PwC for details of findings to date.
The following items have been set out in this report:
e Accounting for the acquisition of Payzone Bill Payments Limited;
e Note Circulation Scheme; and
« Group Litigation Order.
Input Sought
The ARC is requested to review and comment on the draft ARA for the year ended 31
March 2019 prior to signing.
Strictly Confidential
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POST OFFICE Page 2 of 3
The Report
In summary, what were POL’s financial results for the year ended
March 2019?
1. Post Office made an underlying operating profit of £13 million (2018: £47 million)
and reported a trading profit (EBITDAS) of £61 million (2018: £35 million). This
represents a trading profit improvement of £26 million on the prior year. Trading
revenue increased year on year by £16 million to £972 million principally as a result
of growth in Identity and Insurance business areas, with continued growth also noted
within Banking Services. This was partly offset by the anticipated decline in our Post
Office Card Account income stream. The focus on controlling and reducing the cost
base generated a reduction in direct costs of £2 million to £958 million (2018: £960
million).
2. On the Post Office Group balance sheet, net assets have increased from £203 million
to £256 million. Notable changes driving this increase include an increase in tangible
and intangible assets of £55 million, a decrease of £112 million in cash and a
decrease in the government loan of £58 million.
What is the status of the audit work on the ARA?
3. PwC is working on the completion of its audit procedures. PwC will provide an
update on each of their identified significant risk areas and areas of audit focus in
their Audit Committee Paper at the ARC meeting on 29 May. Subject to the
completion of their audit work, PwC has not identified any significant issues to
date.
4. At this stage no significant findings or management letter points have been brought
to management's attention. Findings and adjustments raised to date include:
« £6m balance sheet reclassification, to move Camelot scratchcard balances from
inventory to prepayments;
¢ control recommendation around the leavers process in relation to global user
access, however alternative procedures are being performed to provide
appropriate assurance. Appropriate corrective measures will be performed
internally once findings confirmed.
5. As part of the year end process, internal Post Office reviews have been undertaken
to review post year end invoices, purchase orders and bank reconciliations and no
adjustments are proposed as a result. This work is continuing to be updated, and
PwC will also need to continue its post year-end review prior to signature.
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POST OFFICE Page 3 of 3
6. The migration from POLSAP to CFS was completed and reviewed internally prior to
year-end. PwC are currently completing their procedures over the accuracy and
completeness of the migration process. The results of this will be concluded and
reported prior to signing the ARA.
What matters are we drawing to the ARC’s attention?
Payzone Acqui:
7. Oni
total consideration o'
contingent fee (of whic!
h 2019, the Payzone business has ‘contribute
‘0 trading profit.
Note Circulation Scheme
8. In the 2018/19 Annual Report and Accounts we have included an explanation of the
Note Circulation Scheme (NCS), in line with 2017/18, to provide greater
transparency to users. A reference is included in the Finance and Business Review
and note 22 includes a description of the scheme.
9. At the year-end i as funded via the NCS. As in previous
years we do not disclose anything on the Balance Sheet but have taken a decision
to include narrative on the scheme in the notes to the accounts to allow the users
of the accounts to better understand our funding. In 2017/18 we agreed the
narrative included with the Bank of England and do not propose to amend it in the
2018/19 ARA. We have asked PwC to confirm that they agree with the off balance
sheet treatment and associated disclosure.
Group Litigation Order
10. The High Court claim is expected to remain ongoing beyond the signing date of the
ARA. The current disclosure in the ARA remains unchanged from 2017/18, being the
disclosure of the litigation as an unvalued contingent liability with no provision made.
We do not anticipate a material change to this disclosure, however the position will
be revisited prior to ARA signing to reflect the latest status of the claim with any
subsequent events reflected as required.
11. We have separated out the costs incurred in 2018/19 of £14m as an exceptional
item, which corresponds with the 2017/18 treatment. This classification has been
selected because the expenditure is not in the ordinary course of business and
anticipated total costs are material. Further spend is expected in 2019/20 but the
value cannot yet be estimated and no provision has been recognised.
12. PwC have and will continue to be consulted on the disclosures.
Strictly Confidential
Strategic Report
The Strategic Report for the Post Office comprises the Chairman's Foreword, Chief
Executive's Statement and Financial and Business Review.
Chairman’s Foreword
The Post Office has had another strong year. We. aie
d we have delivered a trad fi
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umover aia by 2%, to-£972 millions (Formatted: Netrighight «dd
24%,
9.0 posting 3-£61 wai j §
profit, 2-74 increace orlask-yesr. A particularly encouraging performance was recorded ia number,
Formatted: Not Highlight
of areas including Banking, Mails, Telecoms and Travel, showing our resilience in what has been \{ Formatted: Not Highight
another challenging year on the high street.
This year we have built on the major business restructures undertaken in previous years, consolidating
and reshaping central and back office functions to better serve our increasingly dynamic organisation.
We are creating stronger foundations to provide better services to our customers and support to those
who run our branches. At the same time, we have been challenged by Government to be a self-
sustaining company free of public subsidy. To achieve all this, we are going to have to work harder
than ever before. We must match the pace of change in the industry, embrace new technology, adapt
to market trends and meet customer expectations more decisively still.
Our recent results demonstrate that the ways in which we are transforming the business to remain
relevant, easily accessible and the first choice for customers are working. We are on the right track.
The success of our Banking Framework arrangements with the UK's banks has seen us become the
biggest high street provider of cash and point of access for everyday banking services in the country.
We are now the last cash provider in thousands of communities, reflecting our social purpose in action,
supporting the consumers and small businesses which fuel local economies. There is more growth to
come and we are working hard to expand this offer, to simplify the processes underpinning It and
provide a better share of that success to our postmasters.
This year’s acquisition of Payzone Bill Payments Limited ("Payzone”) underscores our determination
to extend our reach and accessibility for corporate and retail customers alike. The integration of
Payzone’s bill payments business with our own more than doubles the number of outlets at which
these services can be conveniently transacted, to 25,000. This provides us with a much stronger
platform through which to innovate and win new contracts from a wide range of corporate clients.
Improving the support we provide our postmasters and agents, and making It easier for them to run
their Post Offices profitably, remains a priority. We have been reviewing our ways of working to ensure
that effort and complexity are kept to a minimum, while looking to extend thelr product offering and
rebalancing transaction fees. Our ambition is to attract and retain high quality business people to
deliver for all our customers with energy and care. The ongoing Group Litigation Involving Post Office
is an important reminder that this aspect of our work is open ended, and that we must always strive
to do even better.
As ever, it’s our people, whether working in branches across the country, in our supply chain or in our
support centres, who are making these changes happen and I would like to thank them for their
continued support and their dedication to making this business successful,
1 would also like to express my appreciation to our Shareholder, the Secretary of State at the
Department for Business, Energy and Industrial Strategy (“BEIS”), as well as his Ministers and officials
in UK Government Investments and BEIS for their collaboration and support across the year. My
corporate.pt
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colleagues on the Post Office Board and the Executive Team have, once again, demonstrated real
drive and energy in addressing the many challenges involved in modernising the Post Office for future
generations.
Finally, I would like to extend particular thanks to Paula Vennells for her service over the past seven
years as Chief Executive, leading and transforming this unique business towards an even brighter
future. During Paula's leadership, Post Office has grown from a company that was losing £120 million
a year, with a branch network in desperate need of modernising, to a strong, customer focused,
innovative and profitable business. She is leaving the business in good shape and I wish her every
success for the future. I look forward to working with Al Cameron, Interim Chief Executive, and the
Executive Team to build on Paula’s success in the coming year
Tim Parker
Chairman
XX XXXX 2019
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Chief Executive Statement
The Post Office matters more today than ever before. Providing essential services to millions of
consumers and small businesses, day-in, day-out, it fulfils a unique function in the UK. We are,
therefore, relentlessly focused on what needs to be done to evolve Post Office so it is relevant for
future generations, financially robust to weather new challenges, and always faithful to our central
purpose: being there for every customer in every community.
With a trading profit of £61 million this year, achieved-agalast-a-breadly-faisupported by a small
Inctease in turnover-revenue-profile, we are on track to achieve our £100 million trading profit target
by 2020/21. As Government looks, quite rightly, to reduce its financial support for the business in
favour of other spending priorities, it is essential that we build robust financial foundations,
Our trading profit target reflects our shared ambition to become entirely subsidy free after 2020/21,
and create sufficient value to build a thriving, UK-wide, business for the long term. This will not be
easy. We have to keep developing ahead of the market, and generate enough profit to reinvest in
products, technology, our branches, and our people. We take confidence from the fact that our recent
results demonstrate that If we stay focused on the right things we can succeed.
This year saw us complete our Network Transformation Programme, by far the biggest change we
have ever made, and one of the biggest in UK retail. Investing in and modernising over 7,700 branches
has resulted in significant increases in opening hours and levels of customer satisfaction. Over the
period, we also opened over 440 new Post Offices in new locations, part of our strategy to increase
convenience and choice for customers who want easier access to our services on their doorstep. With
11,638 branches as at the year-end (2018: 11,547), our network is at its most stable for more than
a decade, and is growing.
Franchising, combining a post office alongside a separate retail offering, enables us to share the
property, staffing, and other costs of running any business. This model, which has been operated
successfully across the vast majority of the network for decades, continues to be extended to some
our Directly Managed Branches ("DMBs"). These represent less than 2% of our network, but are
disproportionately expensive to operate as stand-alone post offices. The decision to franchise is driven
by a determination to keep these essential services available on high streets across the country in the
face of the very significant cost challenges facing all retailers. Research shows that customer
satisfaction levels return to, or even exceed, their pre-franchise levels soon after the change is made.
Improvements to our physical network of brick-and-mortar outlets has been matched by significant
IT investment across the business. In financial year 2018/19, we substantially completed the
transformation of our back office systems. These handle £60 billion in financial transactions each year
for corporate clients and customers. As well as driving further efficiency, the changes give us better
commercial insights to enable us to improve products and services. At the front line, we also renewed
equipment in all our branches, and continue to look for opportunities for technology to expedite and
simplify processes for our postmasters and customers.
We are consolidating and strengthening our position in some of our traditional markets, such as bill
payments. Following clearance by the Competition and Markets Authority in October 2018, the
successful acquisition of Payzone’s bill payments business gives us a combined network of 25,000
locations at which customers can conveniently pay for essential services, significantly enhancing
opportunities for future revenue growth in this competitive market.
We have retained our position as number one in letters and parcels, with significant growth in home
shopping returns offsetting the continued decline in stamps. Online shopping has continued to drive
strong growth in Collections and Return volumes and we are working closely with Royal Mail to
innovate and improve our customer offering. This year we launched the new ‘Labels to Go’ service for
corporat
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online shoppers to print a returns label at their local Post Office, by simply using a QR code on their
mobile phone or tablet.
Our travel proposition also continues to grow as we leverage our market leading position in Travel
Money, using technology to enhance our offer. More than 300,000 customers are already using our
new Travel App. This enables customers to manage their Travel Money Card accounts 24/7 from
anywhere in the world, as well as providing easy access to travel insurance. Over 700 branches are
now offering Passport Digital Check and Send, enabling branches to process applications online,
dramatically improving the customer experience, while boosting security. To round off what has
become a one stop shop for our customers’ travel needs, we made International Driving Permits
available in 2,500 branches across the country, selling 350,000 permits over two months, with plans
for further expansion in the year ahead.
Over 900,000 new customers registered for our GOV.UK Verify service, which provides a secure, and
re-usable, means of definitive identity assurance to enable customers to access a range of online
Government services. The opportunity now is to build on this success and expand the benefits of
digital identity to a much broader range of users and organisations. We believe the Post Office is,
ideally placed to help grow this wider market, and we are seeking to rekindle Government's impressive
early interest and positive action in the development of this new and transformative technology.
Concerns over bank branch closures across the country have grown louder across the year, and
underscore just how important the continued availability of access to basic banking services through
the Post Office is to communities. Since its inception in January 2017, we have significantly grown the
volume of transactions we undertake on behalf of all the UK’s major banks, and doubled revenue. We
have been busy working on a significant further expansion over the next three year phase, rebalancing
the fees we receive to better reflect the value of the service. We want all those involved to share in
the success of the service, especially those working at the counter, and we recently announced that
we are near tripling the fees our postmasters receive for cash deposits as a result.
We recognise that our postmasters are key to the success of our business. These are the people
operating our branches alongside their retail businesses, serving our customers, day-in, day-out.
While the model works well in thousands of branches across the country, we know that in common
with other retailers, there are challenging head winds to face into. That is why have been working
hard to make it easier for them to operate their post offices more profitably, with less effort, and
better support from us. From the process of on-boarding, through improved training and field
engagement, to simplified products and sales processes, we are continually improving the support we
provide postmasters. Irrespective of the legal merits, the Group Litigation we are engaged in brings a
sharper focus to this work. While our culture and practices have changed hugely over the 20 years
spanned by the case, it is right that we must continue to do better.
1 would like to thank the Post Office Board, led by Tim Parker, for its direction and support throughout
the year, as well as our Shareholder and colleagues at BEIS. I must also thank all my colleagues in
‘our main customer support centres for rising to the challenge, once more, as we build a stronger
business. My final thanks are reserved for my predecessor, Paula Vennells, who over the past 7 years
has led us, as CEO, to be a profitable, confident, business without losing sight of our values. The Group
Executive is continuing, with passion and enthusiasm, to evolve an organisation like no other in the
service of current and future generations.
Alisd
Cameron
Interim Chief Executive
XX XXXX 2019
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Financial and Business Review
Summary results
We delivered our third consecutive year of profit as we continue on the path to commercial
sustainability,
Operating profit was £13 million (2018: £47 million). This is after increased depreciation and
amortisation charges of £94 million (2018: £55 million), and exceptional items of £14 million (2018:
£3 million).
Trading profit increased by £26 million to £61 million (2018: £35 million). Our turnover grew by £16
million during 2018/19 to £972 million (2018: £956 million). Growth was driven by our Identity (9%)
and Insurance (15%) business areas, with continued growth also noted within Banking Services
(15%). This was partly offset by the anticipated decline in our card account income stream (down
25%).
‘As planned, the Network Subsidy Payment ("NSP") from Government decreased by £10 million to £60
million (2018: £70 million). NSP Is to cover the costs of loss making branches which deliver our social
purpose. It is our responsibility to demonstrate that the NSP received is equal to or less than the total
loss these social purpose branches create. If the loss is less than the NSP, we are obliged to pay the
difference back to Government. This reduction in the NSP was partly offset by cost reductions of £2
million and, when combined with the growth in revenue streams outlined above, resulted in an
adjusted EBITDA increase of £16 million to £121 million (2018: £105 million)
Profit and Loss Summary - Trading
2019 2018 Variance Variance
ém £m £m %
Turnover 972 956 16 2
Costs (958) (960) 2 1
Other income 14 5 9 180
Share of profit from joint venture 33 34 (1) (3)
Trading profit 61 35 26 74
Add: Network Subsidy Payment 60 70 (10) (14)
Operating profit before depreciation,
amortisation, exceptional items and 124105 16 15
investments (adjusted EBITDA)
Depreciation and amortisation (94) (55) (39) (71)
Exceptional items (14) @) (11) (367)
Operating profit before investments 13 47 (34) (72)
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Significant accounting judgements
Going concern
The Group (being the Group of companies headed by Post Office Limited) has net assets of £256
million at 31 March 2019 (2018: £203 million) and headroom on the loan from BEIS of £385 million
(2018: £327 million). This is £185 million above the target minimum headroom of £200 million, hence
we are not at risk of breaching this limit. We have also been profitable at a trading profit level with
current year profit of £61 million (2018: £35 million) and shown a profit after tax of £52 million (2018:
£17 million).
We have the following funding agreed with BEIS: a working capital facility of £950 million to 31 March
2021; a further £50 million facility available to provide same day liquidity to 4 April 2020; NSP of £50
million for 2019/20 and 2020/21 respectively; and we also have investment funding of up to £210
million as required for up to March 2020.
After careful consideration of the plans for the coming years, we continue to believe that Post Office
will be able to meet its liabilities as they fall due for the next 12 months. Accordingly, on that basis,
the Directors consider that it is appropriate that these financial statements have been prepared on a
going concern basis.
Key Financial Performance Indicators
2019 2018 Variance
£m £m £m
Turnover 972 956 16
Operating profit before depreciation, amortisation, tan 105 16
exceptional items and investments (adjusted
EBITDA) (note [XX])
Operating profit before depreciation, amortisation,
exceptional items, investments and Network 61 35 26
Subsidy Payment (trading profit) (note [XX])
Profit for the financial year 52 17 35
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Profit and Loss
‘As disclosed in note [XX] to the financial statements on page [XX], we have split the results of the Group
between trading and investments. Together these combine to give the results of the Group. This
presentation clearly separates the underlying trading of the business from the change activity being
undertaken to ensure the future sustainability of the Post Office. In the following sections, we consider
each of the columns of our consolidated income statement which combine to give an operating profit of
£52 million (2018: £15 million). Once finance income/costs, taxation credit/charge have been factored
in, the profit for the financial year is £52 million (2018: £17 million). See the consolidated income
statement on page [XX] for full details,
2019 2018 Variance
em £m £m
Operating profit
Operating profit before depreciation, amortisation,
exceptional items and investments (adjusted 121 105 16
EBITDA)
Depreciation and amortisal (94) (55) (39)
Exceptional items (14) @) (ern)
Operating profit before investments 13 47 (34)
Investments 39 (32) 71
Operating profit 52 15 37
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Turnover
The Post Office business is organised into three strategic business units, Retail, Financial Services &
Telecoms (including Insurance) and Identity. Turnover from our subsidiary Post Office Management
Services Limited is included within the Insurance line below. Turnover from our subsidiary Payzone
Bill Payments Limited ("Payzone”) Is included within the Payment Services line below. The divisions
and their performance are detailed on the next pages:
2019 2018 Variance Variance
em —m —m %
Retail
Mails 350 334 16 5
Retail & Lottery 42 45 (3) (7)
Payment Services 27 27 - -
Cash & Banking Services 161 158 3 2
Financial Services & Telecoms
Financial Services 113 127 (14) (11)
Telecoms 153 147 6 4
Insurance 55 48 7 15
Identity 58 54 4 7
Other* 13 16 (3) (ag)
Turnover 972 956 16 2
* Relates to Supply Chain income (£10 million) predominantly for warehousing Of Royal Mail stock, transport of high value
‘mails and release of Bank of Ireland deferred income (£3 milion).
The grouping of products has altered in 2018/19 as a result of changes to internal reporting, with Post
Office Card Account (“POCA”) turnover moving from Government Services to Cash & Banking Services.
Remaining Government Services turnover has been moved into the Identity business unit. Banking
Services and ATMs revenue have also moved into Cash & Banking Services. Commission income
relating to Government Services has been reclassified from revenue to other income because it did
not fall within the scope of IFRS 15 Revenue from Contracts with Customers. The Impact of these
changes on the reported 2017/18 performance of the divisions is detailed below:
Commission Banking 2018
2018 POCA Income Identity Services ATMs reclassified
£m___£m £m £m £m___£m £m
Mails 334 - - - - - 334
Retail & Lottery 45 - - - - - 45
Government Services 99 (40) (5) (54) - - -
Payment Services 57 - : - - (30) 27
Cash & Banking Services - 40 - - 88 (30 158
I Services & Telecoms.
Financial Services 215 : - - (88) - 127
Telecoms 147 - - - - - 147
Identity - - - 54 - - 54
Insurance 48 - - - - - 48
Other 16 : : - - : 16
Turnover 961 - () - - - 956
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Retail
The Retail business encompasses our position as the United Kingdom's number one mails provider, as
well as providing Cash & Banking and Payment services.
Mails
Mails includes the sale of parcels and other mails products provided by Royal Mail and Parcelforce.
Underlying trading turnover Is up £17 million (6%) year on year. Growth in parcels (7%) and home
shopping returns (35%) is partially offset by the continuing decline in stamps. In addition, there were
planned reductions in the fixed fee element of the contract with the Royal Mail Group plc of £2 million.
Cash & Banking Services
This comprises the following services:
2019 = 2018 Variance Variance
£m £m £m %
POCA 30 40 (10) (25)
Banking Services 102 88 14 15
ATMs 29 30 (4) (3)
Cash & Banking Services 161-158 3 2
POCA revenue has decreased by £10 million in line with expectations. ATMs revenue has remained stable
despite market decline. Banking services has significant year on year growth of £14 million to £102
million as more high street banks are closing their branches, in addition to the switch made to automated
deposit transactions in October 2018.
Payment Services
Payment Services includes bill payment transactions. Revenue has remained flat at £27 million (2018:
£27 million). The acquisition of Payzone contributed £4 million to turnover, offset by reduced volumes in
the reseller market of £4 million.
Financial Services & Telecoms
Financial Services
Our Financial Services products include mortgages, credit cards, savings and travel money, in addition
to postal orders. Turnover decreased by £14 million to £113 million (2018: £127 million).
The majority of the decrease is due to Bank of Ireland products, down £12 million to £45 million (2018:
£57 million). This is due to not having a minimum savings commission value in 2018/19. The
competitive, customer and regulatory environments remain tough; the continued low rate environment
and Bank of England funding scheme are putting pressure on Mortgage margins and Savings rates.
Mortgages are also challenged due to Bank of Ireland pricing, but the expansion into the Broker channel
is compensating this.
Turnover from Postal Orders declined by £2 million as this legacy product continues to decline in the
marketplace. The impact of Brexit, weak sterling and tighter AML regulations continue to impact
MoneyGram and to a lesser extent travel money, which has remained stable year on year.
Telecoms
Telecoms includes Post Office HomePhone, Broadband and Fibre services.
Telecoms turnover of £153 million increased by £6 million (2018: £147 million) as customer numbers
have increased.
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Insurance
Post Office Insurance provides Travel, Life and General insurance policy cover. Insurance turnover has
grown by £7 million to £55 million (2018: £48 million). The increase was driven mainly by growth in our
Over 50s Life insurance and Travel insurance businesses
Identity
Identity provides Home Office, DVLA and Verify services. Identity turnover has grown by £4 million to
£58 million (2018: £54 million) due to the launch of Universal Credit in Verify. A new pricing
arrangement with the Government Digital Service in November 2018 significantly reduced average
margin for the Verify service.
Costs
Total costs decreased by £2 million to £958 million (2018: £960 million).
People costs of £193 million increased by £4 million (2018: £189 million) due to pay increases.
Average headcount reduced from 5,066 in 2017/18 to 4,703 in 2018/19 reflecting efficiency savings across
the DMBs and the effect of the Network and DMB transformation programmes. Closing headcount for the
year was 4,397 (2018: 5,020).
Other operating costs decreased by £7 million to £765 million (2018: £771 million) of which £3 million
relates to landlord compensation payments, with other controlled cost savings noted, especially in IT.
Depreciation and amortisation charges increased to £94 million (2018: £55 million); a number of
significant assets under construction came into use during the year and are now being depreciated,
Exceptional costs
On 11 April 2016, a High Court claim was issued on behalf of a number of postmasters against Post
Office in relation to various legal, technical and operational matters, many of which have been the
subject of significant external focus for a number of years. Post Office is robustly defending the claim,
believes it lacks merit, but welcomes the opportunity to have these matters resolved through the
Court managed Group Litigation Order.
The Court has ordered two trials to be heard in 2018/19 to determine a subset of the preliminary
issues in dispute between the parties. The Court has not yet ordered a process for determining any
issues of liability or quantum. To date, the Claimants have not asserted the aggregate value of their
claims in any of the Particulars of Claim filed in the litigation.
While the Directors recognise that an adverse outcome could be material, they are currently unable
to determine whether the outcome of these proceedings would have a material adverse impact on the
consolidated position of the Group, and are unlikely to be able to do so until the Court has made
further determinations and the Claimants have provided the necessary information about the value of
their claims. The Directors continue to keep this under close review
The costs of £14 million included in exceptional items relate to Post Office defending the Post Office
Group Litigation (2018: £3 million).
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Joint venture
Post Office Limited has a joint venture with the Bank of Ireland with each holding 50% of First Rate
Exchange Services Holdings Limited. The principal activity of the business 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 £33 million (2018: £34 million)
Capital and investment costs
Investment costs included in the consolidated income statement are shown below:
2019 2018
£m £m
Investment funding 168 70
Restructuring
Business transformation (14) (16)
Network programmes (64) (63)
TT transformation (13) (6)
Severance (38) a7)
Total restructuring costs (429) (102)
Unwinding of discount on provisions q@) (2)
Total investment income/ (charge) 38 (34)
Restructuring costs include the costs of delivery for major change programmes. In addition, we have
incurred £154 million (2018: £151 million) of capital spend, primarily on IT transformation projects, as
disclosed in notes [X] and [X].
These are offset by Government funding, recognised to match the associated costs. Government
fuadingGovernment funding for 2018/19 of £168 million (2018: £70 million) was received in quarterly
instalments and was fully recognised in the year.
BEIS has approved funding of up to £210 million which is available for the period from April 2018 to
March 2020. The maximum available in 2018/19 was £168 million and this was received in full
postoffice.co.
Post Office Limited corporat
Office Limited
Cash flow and net debt
Cash and cash equivalents amounted to £54360 million (2018: £655 million) at the year-end. There
was a net cash outflow during the year of £95442 million (2018: £25 million).
Net debt (excluding cash in the Post Office network) decreased by £66 million year on year as shown
in the table below
2019 2018
em £m
BEIS loan at the start of the year (623) (561)
Investment funding 168 70
Restructuring costs (119) (116)
Other cash inflows from operating activities 5134 66
Net cash inflow from operating activities 1008 20
Dividends received from joint ventures 33 34
Acquisition of businesses (17) (6)
Proceeds from the sale of property, plant and equipment 4 5
Purchase of tangible and intangible non-current assets (149) (135)
Net cash outfiow from investing activities (129) (102)
Net cash outflow from financing activities (8) (5)
Decrease in cash and cash equivalents 95512 25
BEIS loan at the end of the year (565) (623)
Cash (excluding cash in the Post Office Network) 24 12
Total net debt carried forward at the end of the year (541) (611)
Post Office Limited seeks to minimise the amount drawn down on the loan from BEIS in order to
reduce its interest cost. The facility is limited to a maximum of £950 million, the unused facility at the
end of the year was £385 million (2018: £327 million). The maximum drawn down under the facility
during the year was £744 million on 13 April 2018. The facility is available at two days’ notice and has
an end date of 31 March 2021,
Post Office Limited's borrowing facility from the Government limits the purposes for which the facility
can be used and, together with borrowing limits contained in the Articles of Association, imposes
constraints on the availability of external borrowing,
The Bank of England Note Circulation Scheme
The continued participation in the Note Circulation Scheme ("NCS") assures that Post Office Limited has
an adequate supply of notes to meet customer demand across its network and provides a mechanism
for enabling Post Office Limited to hold Bank of England owned notes. At the end of the year £227 million
(2018: £238 million) of Bank of England owned notes were held. See note 22 on page [XX] for further
details on the NCS.
Post Office also has an arrangement in Scotland with a commercial banking partner whereby surplus
‘Scottish notes are sold to the partner overnight for repurchase the next day. At the end of the year a
total of £3 million (2018: £17 million) was outstanding under this arrangement.
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Pensions
Post Office Limited is the principal employer of the Post Office Section of the Royal Mail Pension Plan
(°RMPP”), which is independent of the Royal Mail section of the RMPP. Royal Mail Group Limited 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 Pian.
Both defined benefit plans are closed to new members and closed to future accrual
In 2016/17, a Memorandum of Understanding was executed by Post Office with the Trustee of RMPP.
This removed the unconditional right to refund from the RMPP. As a result of these events the surplus
relating to this Pian was derecognised.
In 2017/18, the Trustees of the pension scheme entered into an agreement with Rothesay Life PLC in
which a pension buy-in was effected by the purchase of two bulk annuities. Under the purchase
agreements, the Trustees of the pension plan bought an asset that provides income which matches
closely the benefit payments from the pension plan, achieving a material risk reduction as changes in
income mirror changes in benefits due to, for example, inflation and longevity.
The accounting surplus reduced by the difference between the insurance premium and the value of the
insured liabilities, creating a ‘loss’ on buy-in. There was also an ancillary premium as part of the buy-in
agreement which transferred to the insurer the risk of incorrect data being used to price the premium.
These items were recognised in Other Comprehensive Income in 2017/18. As Post Office had no right
to a future surplus in the scheme, there was an equal and opposite adjustment to the asset ceiling
through Other Comprehensive Income. As a result, there was no effect on the net assets position of the
Group.
The immaterial deficit payments into RMSEPP were agreed with the pension trustees during the year
and payments were made in accordance with the agreements. The net cash payments made are detailed
below:
2019 2018
£m £m
Regular pension contributions (2oy (oy
Funding of the pension deficit - RMSEPP - (a)
Payments relating to redundancy q@) (5)
Net cash payments (21) (26)
The income statement charge to trading for the year was £13 million (2018: £17 million) in relation
to the defined contribution scheme. There was no charge (2018: Enil) in relation to the defined benefit,
scheme.
Alisdair Cameron
Interim Chief Executive
XX XXX 2019
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Governance
Corporate Governance
Legal Ownership and Structure
Post Office Limited ("the Company”) is
wholly owned by the Department for
Business, Energy and Industrial i
Strategy ("BEIS”). BEIS holds a special Bort Office timiest
share in the Company the rights of
Which are enshrined within the Post om soon
Secretary of State for Business,
Energy & industal Strategy
Office Limited Articles of Association sasenietianine devise” an i aeagece sins asa api
(http://corporate.postoffice.co.uk/our- cma Ss oe il
leadership) Somclooe
BEIS has no day to day involvement in
the operations of the Company or in “Sioa ever
the management of its branch network earenen tae
and staff. Through UK Government Investments ("UKGI"), BEIS monitors the Company's performance,
in particular its compliance with minimum network access criteria and provision of specified services.
BEIS has the right to appoint Non-Executive Directors to the Board and typically appoints a UKGI
employee for this purpose. Tom Cooper currently holds this position.
Corporate Governance Overview 2018/19
The Company maintains standards of corporate governance appropriate for our ownership structure,
commitment to social purpose and strategy to achieve commercial sustainability. We review our
corporate governance arrangements to ensure they remain appropriate for our developing business
needs and relevant legal and regulatory advances.
Board of Directors
The Board is responsible for setting the business’ strategic aims, putting in place the leadership to
deliver them, maintaining appropriate oversight of the management of the business, reporting to the
Shareholder and determining the Company's vision, values and organisational culture.
During 2018/19 the Board comprised an independent Non-Executive Chairman, the Group Chief
Executive, the Chief Finance and Operating Officer and five Non-Executive Directors (one of whom is
designated the Senior Independent Director and four of whom are independent). Non-Executive
Directors are not employees of Post Office Limited but provide services under the terms of an individual
letter of 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 the Company for the benefit of its Government shareholder and the wider
stakeholder community.
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Alisdair Cameron, Chief Finance
and Operating Officer throughout
the 2018/19 financial year and
I Interim Chief Executive from 5
{ April 2019
Joined the Board 28 January 2015
I Tim Parker, Independent
Chairman, Chairman of the
Nominations Committee and
I member of the Remuneration
Committee
Joined the Board 1 October 2015
Ken McCall, Senior Independent
Director, Chairman of the
Remuneration Committee and
member of the Audit, Risk and
Compliance and Nominations
Committees
Joined the Board 21 January 2016
Tim Franklin, Non-Executive Director
and member of the Audit, Risk and
Compliance Committee
Joined the Board 19 September 2012
Shirine Khoury-Haq, Non- Carla Stent, Non-Executive Director
Executive Director and member of and Chairman of the Audit, Risk and
the Nominations and Remuneration I E}FRQ)! Compliance Committee
Committee Joined the Board 21 January 2016
joined the Board 24 May 2018
Tom Cooper, Non-Executive
Director, and member of the Audit,
Risk and Compliance and i
Remuneration Cortes IGRO
Joined the Board 27 March 2018
Paula Vennells, Group Chief
I Executive, throughout the 2018/19
financial year*
I Joined the Board 18 October 2010
Company Secretary:
Veronica Branton Jane Macleod
Appointed as Company Secretary XX Served as Company Secretary
XXX 2019 from her appointment on 30
August 2017 until 31 May 2019
Paula Vennells resigned as Group Chief Executive on 30 April 2019.
postoffice.co.uk I PAGE £5
ce Limited
Non-Executive Directors are usually appointed for an initial term of three years with the scope to
renew for a second term, subject to Board approval and the approval of BEIS. Ken McCall and Carla
Stent were reappointed for a second term of three years on 29 January 2019 as Senior Independent
Director and Non-Executive Director, respectively. As the Board representative of UKGI, Tom
Cooper's appointment period is determined by the Secretary of State for BEIS.
Biographies of all current members of the Board can be found on the Post Office Limited website:
corporate. postoffice.co.uk/our-leadership.
Board
Role and responsibilities
The Board is accountable to the Secretary of State for BEIS, as the sole shareholder, for the
performance of the Company and is required to seek consent for certain matters, as included in the
Articles of Association. The Shareholder is briefed regularly on the performance of the business and
the progress to deliver the strategy.
The Board is also responsible for oversight of legal and regulatory compliance, delivery of the
strategy, providing constructive challenge to the Group Executive and communicating with the
Shareholder. The Board has a schedule of matters reserved for its decision and has approved Terms
of Reference for its committees, which are available on the Post Office website.
The Board annually reviews the strategy, approves the annual budget and business plan required to
deliver the strategic objectives for that year; the last approval was in [May 2019]. The Board
regularly reviews reports on performance against that plan and receives periodic business reports
from senior management. Directors are briefed on matters to be discussed at Board and Committee
meetings by papers distributed in advance of meetings, as well as management presentations.
In setting the risk appetite for Post Office Limited the Board has established a framework to manage
and mitigate risk. The Board takes guidance from its Audit, Risk and Compliance Committee, and
has oversight of risk management. This Committee receives reports from the executive Risk and
Compliance Committee, from the internal and external audit teams and from operational
management. Further detailed information on the management of risk within Post Office Limited,
together with identification of principal risks, their impacts and mitigation can be found in the
management of risk section on pages [XX] to [XX].
Key focus and achievements in 2018/19
During the year to 31 March 2019, the Board continued to oversee the Post Office Limited’s strategic
plan to achieve commercial sustainability and profitability.
This included project approvals, monitoring of developments in IT strategy, and services in the digital
space. These developments are designed to enhance customer experience and offer services that
meet customer needs in a digital age while continuing to serve our social purpose.
The Company acquired Payzone Bill Payments Limited on 24 October 2018. The business has over
25 years’ experience in the bill payments industry and offers payment terminals for bills, tickets,
lottery and mobile top up in convenience stores, enabling these businesses to generate revenue and
increase footfall.
The Board approved the appointment of new external auditors, following the resignation of Ernst &
Young LLP. PricewaterhouseCoopers LLP were appointed as the Company's external auditors on 31
July 2018 following a tender process.
The Board also focused on a revised banking framework to provide banking services in Post Office
branches on behalf of UK banks and approved investment for the Branch Hub (a self-service portal
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for branch operators and business owners to access support).
The Board continued to monitor the progress of the ongoing Group Litigation Order.
Conflicts of Interest and Independence
The Board may, in the furtherance of its duties, seek independent professional advice at the expense
of Post Office Limited. During the period, no Director sought independent professional advice.
In accordance with the Companies Act 2006, the Articles of Association give the Directors power to
authorise conflicts of interest.
During the period, none of the Directors had a material interest in any contract of significance with
Post Office Limited or any of its subsidiaries. At all times during the periods of their appointments in
2018/19, the independent Directors met the criteria for Independence set by the Board.
Post Office Limited has arranged appropriate insurance cover in respect of legal action against
Directors of Post Office Limited and its subsidiaries.
Tim Parker, Ken McCall, Tim Franklin, Shirine Khoury-Haq and Carla Stent are considered
Independent Non-Executive Directors. Tom Cooper is not an independent Non-Executive Director as
he is a shareholder representative. Paula Vennelis and Alisdair Cameron held executive roles
throughout the financial year, and as such were not independent directors.
Board Meetings
During 2018/19 the Board met 8 times (including additional meetings held either in person or by
telephone). A record of Directors’ attendance (attended/eligible to attend)? at the Board and its
Committees is set out in the table below:
Director Board Board Audit, Risk and Nominations Remuneration
(additional) Compliance Committee Committee
Committee
Chairman
Tim Parker 8/8 TBC - 4/4 6/6
Executive Directors
Paula Vennelis 718 TBC - - -
Alisdair Cameron 8/8 TBC - - -
Non-Executive
Directors
Ken McCall 8/8 TBC 4/5 4/4 6/6
Tom Cooper 8/8 TBC 5/5 - 5/6
Tim Franklin 8/8 TBC 4/5 - -
Shirine Khoury-Haq 8/8 Tec - 3/4 5/6
Carla Stent 8/8 TBC 5/5 - .
2 Directors who are not members of @ committee may attend meetings from time to time, at the invitation of,
the Chair.
Po rited
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Committees
To assist in the execution of its corporate governance responsibilities, the Board has established
three committees which deal with specific topics requiring independent oversight. The Audit, Risk
and Compliance, Nominations, and Remuneration Committees are each chaired by an independent
Non-Executive Director.
The Board retains overall oversight but delegates responsibilities and authorities to its committees
to operate within the Terms of Reference approved by the Board. The Terms of Reference for all
committees are reviewed annually to assess that each Committee discharged its duties effectively in
accordance with the Terms of Reference. The reviews conducted in March 2019 raised no issues.
Terms of Reference for the committees are available on the Post Office Limited website:
www.corporate.postoffice.co.uk/our-leadership.
Nominations Committee
Role and Membership
The duties and responsibilities of the Nominations Committee are included in the Terms of Reference,
which are available on the Post Office Limited website: www.corporate.postoffice.co.uk/our-
leadership.
The Committee is chaired by Tim Parker, Chairman, and the other members during the year were
Shirine Khoury-Haq, Non-Executive Director and Ken McCall, Senior Independent Director.
Work of the Committee in 2018/19
During the year the Committee considered the skills and experience required by the Board for a new
Group Chief Executive and a new Non-Executive Director and worked with Russell Reynolds (search
consultants) on the proposed appointments. The Committee approved re-appointments to subsidiary
boards and the appointment of a new Chair of Post Office Management Services Limited.
The Nominations Committee monitored the independence and internal process for the evaluation of
the Board and Board sub-committees and considered developments in corporate governance and
how these should apply to the Company.
Remuneration Committee
Role and Membership
The duties and responsibilities of the Remuneration Committee are included in the Terms of
Reference which are available on the _—-Post_—Office_—- Limited website:
www.corporate.postoffice.co.uk/our-leadership.
The Committee is chaired by Ken McCall, and the other members during the year were Tom Cooper,
Shirine Khoury-Haq and Tim Parker.
In accordance with the Terms of Reference, the Group Chief Executive may attend meetings, at the
invitation of the Committee Chairman, to discuss matters relating to the remuneration of the Chief
Finance and Operating Officer and members of the Group Executive. However, the Committee
recognises the need to manage any potential conflicts of interest and upholds the principle that no
individual may be involved in discussions concerning their own remuneration.
Work of the Committee in 2018/19
During the year the Committee reviewed and made recommendations to the Shareholder for the
2017/18 bonus payments against incentive plans for Executive Directors, annual pay increases for
Executive Directors and targets and measures for 2018/19. The Committee approved senior salary
pay changes, in line with increases provided to all employees, and pay at appointment where these
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‘porate, postoffice.co.uk I PAGE 18
were within its remit and delegated authority.
The Committee received updates and advice from the HR and Finance teams and from
PricewaterhouseCoopers LLP, its external adviser, on gender pay, market trends and benchmarking
information and corporate governance.
Audit, Risk and Compliance Committee
Role and Membership
The duties and responsibilities of the Audit, Risk and Compliance Committee are included in the
Terms of Reference which are available on the Post Office Limited website:
www.corporate.postoffice.co.uk/our-leadership.
The Committee is chaired by Carla Stent, Non-Executive Director, and the other members during the
year were Ken McCall, Senior Independent Director, Tom Cooper, Non-Executive Director and Tim
Franklin, Non-Executive Director.
The Board considers that the Committee’s members have broad commercial knowledge and
extensive business leadership experience and that this constitutes an appropriate mix of business
and financial experience and expertise.
The Directors of Risk & Compliance and Head of Internal Audit attended all of the meetings of the
Committee and also met the Committee Chairman, independently and regularly, throughout the year.
The external auditor was invited to, and attended, all meetings of the Committee except on 31 July
2018, where the Committee recommended to the Board the appointment of new external auditors
PricewaterhouseCoopers LLP.
Further detailed information on the management of risk within Post Office Limited, together with
identification of principal risks, their impacts and mitigation, can be found in the Management of Risk
section on pages [XX] to [XX].
Work of the Committee in 2018/19
During the year, the Committee reviewed the Annual Report and Financial Statements for 2017/18,
including consideration of the principal and strategic risks, and recommended Board approval.
‘The Committee approved the annual audit pians for the internal and external auditors.
The Committee reviewed the risk management framework for the Company, including its appetite
for risk, self-assessment of the control framework and areas of specific risk highlighted by the
Executive Risk and Compliance Committee. It reviewed and approved relevant policies, such as
financial crime and protecting personal data, as part of an annual review cycle.
Board and Committee Effectiveness Evaluations
The Board recognises that an effective Board is vital to the success of the Company and the business.
Ken McCall, Senior Independent Director, led an internal Board effectiveness evaluation in December
2018 which included a formal evaluation of the performance of the Board, its Committees and the
Chairman.
The Board evaluation was conducted by internal questionnaire and, following a review of the results,
recommendations were presented to the Board. The feedback and scores were positive but areas for
additional focus were identified, including cioser engagement with and understanding of
stakeholders’ perspectives, particularly postmasters and employees; the competitor landscape and
franchising models; and periodic scheduling of meetings without the executives.
As part of the Board review process, each Board Committee undertook a review of its effectiveness.
The feedback and scores were positive. Each Committee considered the feedback from the evaluation
and agreed actions. The Audit, Risk & Compliance Committee decided to increase the number and
rived
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length of meetings held annually to reflect the range and scope of legal and regulatory compliance
and risk management issues across a span of business lines. It also agreed to hold separate meetings
with the Head of Internal Audit periodically. The Nominations Committee added a succession planning
review to its forward agenda and the Remuneration Committee commissioned a report on the group
remuneration framework and the approvals process.
Po
Management of Risk
Our Approach to Risk
The commercially competitive and highly regulated environment, together with operational
complexity, exposes the Post Office to a number of risks. 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. We seek to understand and harness risk in the pursuit of our objectives
and aim to operate within an acceptable level of risk taking. The Post Office has articulated its risk
appetite in relation to the most material risks with a view to managing better the key strategic risks
and assessing the risks in relation to new opportunities.
Risk Management Governance
The Board is accountable for risk management and internal controls in the Post Office, reviewing
their effectiveness and determining the nature and extent of principal risks. The Board has delegated
responsibilities to the Audit, Risk and Compliance Committee ("ARC"), which provides assurance to
the Board through review of reports from management, risk, internal audit external advisers and
external audit. Responsibility for day to day operations rests with the Group Executive. The Risk and
Compliance Committee ("RCC") reviews the effectiveness of the risk management framework and
management of principal risks. The outputs are reported to the ARC as necessary.
Our Risk Management Framework
In order to deliver its objectives, the Post Office is required to identify, assess and manage a wide
range of risks. These are managed through an overarching framework in order to apply consistency
and transparency of risk management across the organisation. The framework identifies roles and
responsibilities of key parties in the risk management process, the policies for how risks are
managed, the tools and processes used and the reporting outputs that are generated.
The approach to risk management is based on the underlying principle of line management
accountability for effective implementation of internal controls to manage risk. The Group Executive
has Identified and manages the principal risks in the organisation, focusing on the aims of the
strategic plan. These risks, with their response plans, are reviewed by the Central Risk team and at
the RCC and the ARC to assure the robustness of risk assessment and management. There is an
‘ongoing process of identifying, evaluating and managing the principal risks faced by Post Office.
During the year we have further improved our oversight over the level of risks being taken across
Post Office and effectiveness of our mitigating actions, including close monitoring of emerging risk
themes and incidents. Plans are also in place to fully refresh risk appetite to better inform decision
making. This is a component within our wider enhancement plan to continue maturing our Risk
Management framework.
Our Control Framework
We have an internal control framework in place for both our financial reporting and IT processes,
which fall under our self-assessment regime. In addition, we have implemented a suite of Post Office
policies which define the minimum control standards we expect to be performed within the applicable
business areas. Our risk management efforts are also underpinned by our Executives’ Declaration.
What has changed since last year?
Our principal risks evolve overtime, as we progress with the North Star strategy and business plan,
new risks emerge and our mitigation activities adapt. Health and Safety has become a new principal
risk this year, reflecting the high importance we place on the safety. Litigation is also new, due to
the change in posture. The level of risk has increased for Economic and Political environment, in
response to the ongoing political and economic uncertainty. Dependency on strategic relationships
remains a principal risk and is in an improving position. We have invested considerably in Technology,
Business Interruption and Cyber and this principle risk is improving. Both our Retail Proposition and
Regulatory Environment risks are stable. Our Retail Proposition remains fundamental to enabling us
to continue to successfully deliver our social purpose and the regulatory environment continues to
evolve and introducing new ways of doing business.
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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. Our principal risks are regularly re-evaluated
and discussed at both a Board and GE level.
Potential
Principal Risk / Movement Consequences Key Mitigations
STRATEGIC RISKS
Dependency on Strategic Not achieving our I+* We have established close working _ Space belo Bot }
Relationships strategic ambitions,I relationships with our strategic ~
Post Office has a number of >a losing revenue and I partners underpinned by formal
strategic relationships which I market share. governance and reporting mechanisms.
are key to delivering its growth Las These ensure commercial objectives
and strategic ambitions. The are aligned and relationship deliver to
number of such relationships is expectation.
increasing. + Regular interaction with strategic
partners to improve joint operating
We work with our partners to efficiency, product offering and service
align our direction and to drive growth and profitability for ali
Interests to enable us to meet parties. This includes regular
evolving customer and market engagement at Chief Executive Officer
requirements and any / Managing Director level.
misalignment. We review the relationships with our
strategic partners on a regular basis, to
ensure long term alignment, with our
customer and business outcomes.
* { Formatted: indent: Left: 0.26", No bullets or I
Gap) isd to mest + We ae continuing to open branch Laumbering
Post Office are committed to ‘our network locations where there is a customer ae
maintaining a Retail network commitment, and I need, adding 328 ‘new network
of at least 11,500 branches. consequent locations’ in 2018/19. We are also
Critical to this objective is adverse impact on I continuing to improve our support to
offering an attractive delivery of our existing postmasters and have
proposition for our retail social purpose and I strengthened our field support team this
partners and to continue to consequential year.
operate Post Offices in financial impacts. I, New technology will help our
communities who need us. postmasters manage costs and our
We continue to review and business remain relevant to customers
develop our proposition to and we are investing in the next
enable us to continue to generation of automation for our
successfully deliver our social branches as well as further developing
Purpose, which addresses the the software that will allow retailers to
impact of: sell Post Office products on their own
‘+ increased high street costs; tills.
‘+ ongoing move to online; + We are developing 15 pilot locations for
and Post Office Parcel Shop and are
+a decline in traditional continuing to develop automated locals,
income streams. with the first proof of concept branch.
‘porate, postoffice.co.uk I PAGE 22
Principal Risk / Movement
STRATEGIC RISKS.
Potential
Consequences
Key Mitigations
Economic and Political
Environment
Current uncertainties in the
external political, economic
and social environment could
have a detrimental impact our
strategy and operating model
significantly:
Brexit itself represents a
potential series of risks which
would be most pronounced in
the event of a no-deal
departure from the EU (see
below), but has also taken a
very serious toll on all aspect
of Government and politics
more broadly. There remains a
possibility that the current
impasse will increase the
pressure for a General
Election, with the attendant
risk that Government and our
Shareholder’s priorities will
change in favour of a Labour
agenda, with significant
implications for the business.
Examples include the
implementation of Labour's
proposals for the
Fenationalisation of RMG, and
the creations of a Post Bank.
Spending patterns
of our customers
during economic
uncertainty and
potential downturn
of the economy
e.g. decline in the
sale of banking
products,
particularly
mortgages.
Disruption to
operations
(customs labels in
branch,
accessibility issues
for supply chain)
Financial resilience
of our postmasters
and suppliers.
Retention of skilled
labour and
recruitment.
New income
streams failing to
grow.
We regularly perform horizon scanning
to identify external events and assess
their potential impact on our business.
Our strategy considers customer
requirements, market trends and
competitor behaviour.
We continue to invest in the
development of our digital capability.
In terms of Brexit arrangements, PO
have communications, training and
contingency processes in place to
deploy in the event of a ‘no deal’.
(OPERATIONAL AND FINANCIAL RISKS
Health and Safety ‘NEW!
Due to Post Office’s wide reach NEW!
through the size and operation
of its Network including fleet,
it is essential we invest in our
safety procedures and
controls.
Aheaith and safety incident or
failure could result in serious
injury, ill health or loss of life.
Exposure to
significant costs for
reimbursement for
damages and
remediation,
operational
disruption,
prosecution and
reputational
damage.
We have regular Health & Safety training
provided to all colleagues and managers
including Directly Managed Branches and
Supply Chain Managers.
We regularly review, update and
monitoring of Local Risk Assessments
and safe systems of work.
We have developed a Road Risk Policy.
We regularly review our Health & Safety
policy and Property Statutory
Compliance policies.
Our Health & Safety Management
System has been independently audited
and assessed as strong and
mature. Initiatives recommended to
further strengthen our safety culture
have been implemented.
An Independent Risk Assessment of high
risk building fabric has been undertaken
and remediation actions completed.
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Potential
Principal Risk / Movement Consequences Key Mitigations
We undertake a dynamic risk
assessment, work closely with industry
experts and bodies and have invested
heavily in security related interventions
to reduce the risk of attack and assault
across the Network and Supply Chain.
TECHNOLOGY AND INFORMATION SECURITY RISKS
Technology, Business J Direct impact on__I + We are continuing to mitigate this risk I __—{ Formatted: Font: Not Italic
Interruption and Cyber ‘our network by migrating some of our aging legacy “<<
As-the-digitalisation-o-our- availability and systems to new infrastructure and this I \\. Formatted: Font: Not italic i
usiness-continues-te-grow reliability resulting I will continue through 2019/20. \\ Formatted: Font: Not tele }
Post Office is dependent on the J in adverse + We regularly evaluate the adequacy of I\-p>mmermnrrmnmmernrmn <
continued effectiveness, customer service our IT infrastructure and related A noes er
availability, integrity and and financial controls.
security of its information performance + We regularly meet with our key third
systems and associated and/or reputation. I parties to ensure they fulfll their
rastructure, obligations covering the security,
Post Office, in common with A cyber-attack resilience and availability of our IT
other businesses, Is continuing could threaten the I systems and infrastructure.
to track the threat “universe” confidentiality, + We have introduced a Security
and is aware of increasing risk integrity and Improvement Pian enabling our third
from cyber-attackers availability of our party suppliers to use their security
(particularly nation states) systems, experience to Identify a gap or
seeking to undermine improvement to a security process or
businesses, government and tool that Post Office has not identified,
utilities. improving our partnership and utilise
their experiences to improve our
overall security posture.
We have policies in place for cyber,
disaster recovery, information security
and acceptable use.
We monitor and provide assurance
against the minimum controls defined
in these policies.
A Security Operations Centre has built
enabling our IT Security Team to
assess and manage vulnerabilities,
identify and mitigate the risk of cyber-
attacks.
We continue to further invest and
further mature our cyber defences
Including:
> increasing capability within our
security operations; and
> cultural awareness around data
protection.
‘porate, postoffice.co.uk I PAGE 24
Principal Risk / Movement
Potential
Consequences
Key Mitigations
ILEGAL & REGULATORY RISKS
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Group Litigation
Post Office Limited is the
defendant in Bates & Others v.
Post Office Limited, Claim Nos.
HQ16X01238, HQ17X02637 &
HQ17X04248 in the High Court
of Justice, Queen’s Bench
Division (“The Post Office
Group Litigation”).
NEW
Legal findings and
court orders which
have an adverse
Impact on financial
performance
and/or reputation.
+ Post Office has instructed specialist
legal advisors to advise on and conduct!
its defence of the litigation, subject to
senior management oversight.
Regulatory Environment Gb
Post Office operates under an
extensive and evolving
regulatory environment,
including areas such as
financial services, transactional
services, postal services,
telecoms, procurement,
competition law, and data
security. This environment
continues to evolve,
particularly in the financial
services (e.g. HMRC’s
requirements around Anti
Money Laundering controls,
location fees as well as Fit and
Proper) and telecoms space,
Which increases the risk of
non-compliance, costs and
could impact our financial
performance.
Fines, penalties,
litigation and a
resulting adverse
Impact on financial
performance
and/or reputation.
+ We have open dialogue with key
regulators to understand and clarify
expectations.
+ We regulatory perform horizon
scanning to anticipate future
requirements and planning with each
business area to undertake
appropriate solutions.
* On-going training is provided to staff
and retail partners on legal and
regulatory matters.
+ Regulatory obligations are supported
by policies which define minimum.
controls that must be operated to
mitigate risks.
+ Internal and external programmes are
In place to provide assurance on
regulatory compliance.
Houghton to approve. The section {s also subject to change by Mark Davies and team who will
review ferspleandianguaged
‘porate, postoffice.co.uk I PAGE 25
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Directors’ Report
The Directors present the Group Annual Report and Financial Statements and Company Financial
Statements for the year ended 31 March 2019.
Expected future developments
Expected future developments are detalled in the Chief Executive’s statement on page [X].
Results and dividends
The profit after taxation for the year was £52 million (2018: £17 million). The Directors do not
recommend the payment of a dividend (2018: £nil).
Political contributions
No political contributions were made in the year (2018: Enil).
Research and development
We submitted our first research and development claim during 2018/19 in respect of 2017/18
and 2016/17. The claim relates to IT transformation projects.
Directors and their interests
The following served as Directors during the year:
TC Parker PA Vennelis (resigned 30 April 2019)
ACJ Cameron TK G Cooper
TA Franklin S Khoury-Haq
KS McCall CR Stent
VA Holmes (resigned 27 March 2018) RJ Callard (resigned 27 March 2018)
No Director has a beneficial interest in the share capital of Post Office Limited. The emoluments
of Directors are set out in note [5] to the financial statements on pages [XX] to [XX].
People
People are critical to our success, whether in branch or in our offices. To attract and retain the
right people we:
* Conduct regular employee surveys and use the feedback to make Improvements.
* Provide information regularly on company performance, policies and organisational
developments through our intranet, briefing sessions and company-wide emails.
+ Have a network of engagement champions representing the voices of colleagues from
each part of the business.
* Are committed to providing a safe working environment that promotes the health,
safety and wellbeing of employees. A range of services is provided to help all employees
stay mentally and physically healthy.
* Operate our Learning Academy to provide high quality learning for all employees and
postmasters, aiming to ensure that everyone is supported into reaching their full potential.
corporate. postoffice.co.uk I PAGE 26
{ Office Limiled 29/0519 a8 of 344
+ Invest in developing the best talent to support our business, including graduate
recruitment and active participation in the apprenticeship programme, available
for new and existing colleagues.
* Promote diversity and inclusion and celebrate the diversity of the workforce and
communities we serve. We have a number of active employee network groups such as:
Women in Leadership, to support and nurture female talent; Prism, which supports and
celebrates our LGBT+ community; BAME (supporting Black, Asian and Minority Ethnic
colleagues) and Return to Work (supporting colleagues returning to work after maternity,
other parental leave and long term absences).
* Proactively communicate that we are a Disability Confident Leader and actively try to
attract talented people to Post Office from diverse backgrounds. We do this through our
corporate careers page, recruitment agencies and other attraction channels such as
Vercida who are the world's leading diversity and inclusion employer brand platform.
* Ask all applicants to inform us of any reasonable adjustments we can make to ensure they
are not disadvantaged due to a particular disability during the selection process.
* Require all Hiring Managers to complete Effective Interviewing and Unconscious Bias
Training to ensure a consistent, fair and unbiased selection process takes place.
* Do not tolerate any form of bullying, harassment, victimisation or discrimination whether
written, verbal, visual or physical. We are committed to taking the necessary action to
ensure that they do not occur, or where they do occur that they are dealt with quickly and
eliminated, by following a consistent, fair and robust Bullying and Harassment Policy and
Procedure. All managers are required to complete Dignity at Work training to ensure they
understand their responsibilities and that they demonstrate the correct behaviours and
treat everyone with dignity and respect at all time.
Disabled employees
As noted above, the Post Office Limited has been recognised as a Disability Confident Leader. We
have a Disability Confidence networking group called ‘Be You’. This group provides support and
advice and helps the business to do the best it can for employees with disabilities. We also make
necessary adjustments for colleagues who are disabled or become disabled during the course of
their employment to allow them to carry out their role and fulfil their potential, including any
specific training needs.
Gender pay gap
Gender pay is not the same as equal pay. Equal pay is about ensuring men and women are paid
the same for work of equal value, as set out in the Equality Act 2010. At Post Office we support
equal pay through a robust job evaluation process that is free from gender bias.
The gender pay gap relates to the difference between the gross hourly pay of all men and the
gross hourly pay of all women across the organisation. The difference between gender pay and
equal pay is important to understand as you can have a gender pay gap without having equal pay
issues. At Post Office we recognise that more needs to be done to reduce the gender pay gap and
we are committed to doing so.
We continue to make progress. Our gender pay gap Is 0.5% lower than last year, and smaller
than the UK average. We are closer to our goal of filling 50% of senior manager roles with women
which was 39% in our last report and is currently 43%. The number of women holding mid-level
managerial roles has risen by a third in the last year. We provide tailored coaching and mentoring
for female colleagues and run recruitment programmes to encourage more women to pursue
careers in IT and Finance. Our commitment has been recognised by The Times as we made their
list of Top 50 Employers for Women for the third time.
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Both our mean and median hourly gap has reduced. Our median gender pay gap is 7.9%, (as
compared with the national figure of 18.4%) and our mean gender pay gap Is 17%. The main
reason for the gap is the lower proportion of women in senior roles relative to men. Another
reason Is part-time working ~ 45% of female colleagues work part-time, compared with only 12%
male colleagues. This especially impacts the bonus pay gap.
However, we are not complacent. There is still work to do to ensure women at Post Office realise
their potential. We are taking actions to reduce the gender pay gap further, such as continuing
to offer tailored mentoring to female colleagues and making sure we have 50/50 gender balanced
shortlists for senior level vacancies and for our next graduate intake. Above all else, we continue
to listen to our colleagues and understand what they need to help them to flourish. We will use
these conversations, alongside the data contained in our full gender pay report, to improve again
next year. Because it is the right thing to do - for the future of Post Office and our people. For
our full gender pay report please see: http://corporate.postoffice.co.uk.
Post balance sheet events
In accordance with the funding agreement with Government, Post Office Limited received a
Network Subsidy Payment of £17.5 million on 2 April 2019. The Network Subsidy Payment is
received on a quarterly basis and a total of £50 million will be received from Government in
2019/20.
Going concern
After analysis of the financial resources available and cash flow projections for Post Office Limited,
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 1 to the financial statements on page [XX].
Financial instrument risk
The exposure of the Group to market risk, credit risk and liquidity risk has been disclosed in note
16 to the financial statements on pages [XX] to [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
PricewaterhouseCoopers LLP were appointed as the Company’s external auditors on 31 July 2018
following a tender process.
By Order of the Board
Veronica Branton
Company Secretary, Post Office Limited (Company Number
2154540) Finsbury Dials, 20 Finsbury Street, London EC2¥ 9AQ
XX XXXX 2019
‘porate, postoffice.co.uk I PAGE 28
Strategic Report
The Strategic Report for the Post Office comprises the Chairman's Foreword, Chief
Executive's Statement and Financial and Business Review.
Chairman’s Foreword
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The Post Office has had another strong year, v2. gcewOur zevenue, crow by 2%, to £972 million, and Formatted: Not Highight
we nave delivered a trading profit of sesting-a-£61 million a 74% incr last year-trading-
A particularly encouraging performance was recorded in a number of I Formatted: Not Highight
areas including Banking, Mails, Insurance and; Telecoms-and—Travel, showing our resilience in what { Formatted: Not Highlight
has been another challenging year on the high street.
This year we have built on the major business restructures undertaken in previous years, consolidating
and reshaping central and back office functions to better serve our increasingly dynamic organisation
Improving the support we provide our postmasters and agents, and making it easier for them to run
their Post Offices profitably, remains a priority.
We are creating stronger foundations to provide better services to our customers and support to those
who run our branches. At the same time, we have been set a challenged by Government to become a
self-sustaining company free of public subsidy. To achieve all this, we are going to have to work harder
than ever before. We must match the pace of change in the industry, embrace new technology, adapt
to market trends and meet customer expectations more decisively still.
Our recent results demonstrate that the ways in which we are transforming the business to remain
relevant, easily accessible and the first choice for customers are working. We are on the right track.
The success of our Banking Framework arrangements with the UK's banks has seen us become the
biggest high street provider of cash and point of access for everyday banking services in the country.
We are now the last cash provider in thousands of communities, reflecting our social purpose in action,
supporting the consumers and small businesses which fuel local economies. There is more growth to
come and we are working hard to expand this offer, to simplify the processes underpinning it and
provide a better share of that success to our postmasters.
where we performe:
{ emerging market tre!
business continued its strong growth in the competitive travel market, Telecoms grew its customer
base whilst significantly shifting it towards broadband. in savings, we broadly maintained total
balances, but a continuing trend away from more profitable branch-based sales towards less profitable
This year's acquisition of Payzone Bill Payments Limited ("Payzone”) underscores our determination
to extend our reach and accessibility for corporate and retail customers alike. The integration of
Payzone’s bill payments business with our own more than doubles the number of outlets at which
these services can be conveniently transacted, to 25,000. This provides us with a much stronger
platform through which to innovate and win new contracts from a wide range of corporate clients.
1 " “ J 6. for-th
their Post Offices- profitably, remains-a-priority. To support postmasters, Wwe have been reviewing
our ways of working to ensure that effort and complexity are kept to a minimum, while looking to
extend their product offering and rebalancing transaction fees. Our ambition is to attract and retain
high quality business people to deliver for all our customers with energy and care. The ongoing Group
Litigation involving Post Office is an important reminder that this aspect of our work is open ended,
and that we must always strive to do even better.
Post Office Limited corporate postoffice.co.uk I PAGE 1
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As ever, it’s our people, whether working in branches across the country, in our supply chain or in our
support centres, who are making these changes happen and I would like to thank them for their
continued support and their dedication to making this business successful.
1 would also like to express my appreciation to our Shareholder, the Secretary of State at the
Department for Business, Energy and Industrial Strategy ("BEIS”), as well as his Ministers and officials
in UK Government Investments and BEIS for their collaboration and support across the year. My
colleagues on the Post Office Board and the Executive Team have, once again, demonstrated real
drive and energy in addressing the many challenges involved in modernising the Post Office for future
generations.
Finally, I would like to extend particular thanks to Paula Vennells for her service over the past seven
years as Chief Executive, leading and transforming this unique business towards an even brighter
future. During Paula's leadership, Post Office has grown from a company that was losing £120 million
I a year, with a branch network in desperate need of modernising, to a strong, customer-focused,
innovative and profitable business. She is leaving the business in good shape and I wish her every
success for the future. I look forward to working with Al Cameron, Interim Chief Executive, and the
Executive Team to build on Paula's success in the coming year.
Tim Parker
Chairman
XX XXXX 2019
Post Office Limited corporate. postoffice.co.uk I PAGE 2
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Chief Executive Statement
The Post Office matters more today than ever before. Providing essential services to millions of
consumers and small businesses, day-in, day-out, it fulfils a unique function in the UK. We are,
therefore, relentlessly focused on what needs to be done to evolve Post Office so it is relevant for
future generations, financially robust to weather new challenges, and always faithful to our central
purpose: being there for every customer in every community.
With a trading profit of £61 million this year, achieved-agaiast-a-breadly-flaisupported by a smal
increase in revenue revenue profile, we are on track to achieve our £100 million trading profit target
by 2020/21. As Government looks, quite rightly, to reduce its financial support for the business in
favour of other spending priorities, it is essential that we build robust financial foundations.
Our trading profit target reflects our shared ambition to become entirely subsidy free after 2020/21,
and create sufficient value to build a thriving, UK-wide, business for the long term. This will not be
easy. We have to keep developing ahead of the market, and generate enough profit to reinvest in
products, technology, our branches, and our people. We take confidence from the fact that our recent
results demonstrate that if we stay focused on the right things we can succeed.
This year saw us complete our Network Transformation Programme, by far the biggest change we
have ever made, and one of the biggest in UK retail. Investing in and modernising over 7,700 branches
has resulted in significant increases in opening hours and levels of customer satisfaction. Over the
period, we also opened over 440 new Post Offices in new locations, part of our strategy to increase
convenience and choice for customers who want easier access to our services on their doorstep. With
11,638 branches as at the year-end (2018: 11,547), our network is at its most stable for more than
a decade and,-and is growing, A detailed breakdown will be avaliable in this year’s Network Report..
Franchising, combining a pPost Ooffice alongside a separate retail offering, enables us to share the
property, staffing, and other costs of running any business. This model, which has been operated
successfully across the vast majority of the network for decades, continues to be extended to some
of our Directly Managed Branches ("DMBs”). These represent less than 2% of our network, but are
disproportionately expensive to operate as stand-alone Ppost Oeffices. The decision to franchise is
driven by a determination to keep these essential services available on high streets across the country
in the face of the very significant cost challenges facing all retailers. Research shows that customer
satisfaction levels return to, or even exceed, their pre-franchise levels soon after the change is made.
Improvements to our physical network of brick-and-mortar outlets has been matched by significant
IT investment across the business, powered by substantial investment funding from Government. In
financial year 2018/19, we largelysubstantially completed the transformation of our back office
systems. These handle £60 billion in financial transactions each year for corporate clients and
customers. As well as driving further efficiency, the changes give us better commercial insights to
enable us to improve products and services. At the front line, we also renewed equipment in all our
branches, and continue to look for opportunities for technology to expedite and simplify processes for
‘our postmasters and customers.
We are consolidating and strengthening our position in some of our traditional markets, such as bill
payments. Following clearance by the Competition and Markets Authority in October 2018, the
successful acquisition of Payzone's bill payments business gives us a combined network of 25,000
locations at which customers can conveniently pay for essential services, significantly enhancing
‘opportunities for future revenue growth in this competitive market.
We have retained our position as number one in letters and parcels, with significant growth in home
shopping returns offsetting the continued decline in stamps. Online shopping has continued to drive
strong growth in Collections and Return volumes and we are working closely with Royal Mail to
innovate and improve our customer offering. This year we launched the new ‘Labels to Go’ service for
Post Office Limited corporate. postoffice.co.uk I PAGE 3
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online shoppers to print a returns label at their local Post Office, by simply using a QR code on their
mobile phone or tablet:
Our travel proposition also continues to grow as we leverage our market leading position in Travel
Money, using technology to enhance our offer. More than 300,000 customers are already using our
new Travel App. This enables customers to manage their Travel Money Card accounts 24/7 from
anywhere in the world, as well as providing easy access to travel insurance. Over 700 branches are
now offering Passport Digital Check and Send, enabling branches to process applications online,
dramatically improving the customer experience, while boosting security. To round off what has
become a one stop shop for our customers’ travel needs, we made International Driving Permits
available in 2,500 branches across the country, selling 350,000 permits over two months, with plans
for further expansion in the year ahead.
Over 900,000 new customers registered for our GOV.UK Verify service, which provides a secure, and
re-usable, means of definitive identity assurance to enable customers to access a range of online
Government services. The opportunity now is to build on this success and expand the benefits of
digital identity to a much broader range of users and organisations. We believe the Post Office is
ideally placed to help grow this wider market, and we are seeking to rekindle Government's impressive
early interest and positive action in the development of this new and transformative technology.
Concerns over bank branch closures across the country have grown louder across the year, and
underscore just how important the continued availability of access to basic banking services through
the Post Office is to communities. Since its inception in January 2017, we have significantly grown the
volume of transactions we undertake on behalf of all the UK's major banks, and doubled revenue. We
have been busy working on a significant further expansion over the next three year phase, rebalancing
the fees we receive to better reflect the value of the service. While the banking framework is already
resonating strongly with customers, we continue to undertake awareness raising activity with our
banking partners to secure maximum benefit from its operation. We want all those involved to share
in the success of the service, especially those working at the counter, and we recently announced that
we are near tripling the fees our postmasters receive for cash deposits as a result.
We recognise that our postmasters are key to the success of our business. These are the people
operating our branches alongside their retail businesses, serving our customers, day-in, day-out.
While the model works well in thousands of branches across the country, we know that in common
with other retailers, there are challenging head winds to face into. That is why have been working
I hard to make it easier for them to operate their Ppost Qoffices more profitably, with less effort, and
better support from us. From the process of on-boarding, through improved training and field
engagement, to simplified products and sales processes, we are continually improving the support we
provide postmasters. Irrespective of the legal merits, the Group Litigation we are engaged in brings a
sharper focus to this work. While our culture and practices have changed hugely over the 20 years
spanned by the case, it is right that we must continue to do better.
T would like to thank the Post Office Board, led by Tim Parker, for its direction and support throughout
the year, as well as our Shareholder and colleagues at BEIS. I must also thank all my colleagues in
our main customer support centres for rising to the challenge, once more, as we build a stronger
I business. My final thanks are reserved for my predecessor; Paula Vennells, who over the past 7 years
has led us, as CEO, to be a profitable, confident, business without losing sight of our values. The Group
Executive is continuing, with passion and enthusiasm, to evolve an organisation like no other in the
service of current and future generations.
Alisdair Cameron
Interim Chief Executive
XX XXXX 2019
Post Office Limited corporate. postoffice.co.uk I PAGE 4
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Financial and Business Review
Summary results
We delivered our third consecutive year of profit as we continue on the path to commercial
sustainability.
Operating profit was £13 million (2018: £47 million). This is after increased depreciation and
amortisation charges of £94 million (2018: £55 million), and exceptional items of £14 million (2018:
£3 million).
I Trading profit increased by £26 million to £61 million (2018: £35 million). Our revenueturnever grew
by £16 million during 2018/19 to £972 million (2018: £956 million). Growth was driven by our Identity
I (92%) and Insurance (15%) business areas, with continued growth also noted within Banking Services
(15%). This was partly offset by the anticipated decline in our card account income stream (down
25%).
As planned, the Network Subsidy Payment ("NSP") from Government decreased by £10 million to £60
million (2018: £70 million). NSP is to cover the costs of loss making branches which deliver our social
purpose. It is our responsibility to demonstrate that the NSP received is equal to or less than the total
loss these social purpose branches create. If the loss is less than the NSP, we are obliged to pay the
difference back to Government. This reduction in the NSP hwas-partiy been offset by cost reductions
of £2 million and; revenue when-combined-with the growth of £16 million. inrevenue streams outlined
aboveds a result, a ef £16 million to £121 million
tus
(2018: £105 million).
ed resuited-in-an-adjusted-EBITDA in
Profit and Loss Summary - Trading
2019 = 2018 Variance
em £m £m
RevenueTurnover 972 956 16 2
Costs (958) (960) 2 t
Other income 14 5 9 180
Share of profit from joint venture 33 34 (a) @)
Trading profit 61 35 26 74
Add: Network Subsidy Payment 60 70 (10) (14)
Operating profit before depreciation,
amortisation, exceptional items and 121105 16 15
investments (adjusted EBITDA)
Depreciation and amortisation (94) (55) (39) (71)
Exceptional items (14) @) (11) (367)
Operating profit before investments 13 47 (34) (72)
Post Office Limited corporate.postotfice.co.uk
Significant accounting judgements
Going concern
The Group (being the Group of companies headed by Post Office Limited) has net assets of £256
million at 31 March 2019 (2018: £203 million) and headroom on the loan from BEIS of £385 million
(2018: £327 million). This is £185 million above the target minimum headroom of £200 million, hence
we are not at risk of breaching this limit. We have also been profitable at a trading profit level with
current year profit of £61 million (2018: £35 million) and shown a profit after tax of £52 million (2018:
£17 million).
We have the following funding agreed with BEIS: a working capital facility of £950 million to 31 March
2021; a further £50 million facility available to provide same day liquidity to 4 April 2020; NSP of £50
million for 2019/20 and 2020/21 respectively; and we also have investment funding of up to £210
million available for. the period from April.2018. to March. 2020.as-required-for-up-to-Mareh-2020
Investment funding of £168 million was received in 2018/19.
After careful consideration of the plans for the coming years, we continue to believe that Post Office
will be able to meet its liabilities as they fall due for the next 12 months. Accordingly, on that basis,
the Directors consider that it is appropriate that these financial statements have been prepared on a
going concern basis.
Key Financial Performance Indicators
2019 2018 Variance
£m —m £m
TurnoverRevenue 972 956 16
Operating profit before depreciation, amortisation, 121 105 16
exceptional items and investments (adjusted
EBITDA) (note [XX])
Operating profit before depreciation, amortisation,
exceptional items, investments and Network 61 35 26
Subsidy Payment (trading profit) (note [XX])
Profit for the financial year 52 17 35
Post Office Limited corporate. postoffice.co.uk I PAGE 6
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Profit and Loss
As disclosed in note [XX] to the financial statements on page [XX], we have split the results of the Group
between trading and investments. Together these combine to give the results of the Group. This
presentation clearly separates the underlying trading of the business from the change activity being
undertaken to ensure the future sustainability of the Post Office. In the following sections, we consider
each of the columns of our consolidated income statement which combine to give an operating profit of
£52 million (2018: £15 million). Once finance income/costs, taxation credit/charge have been factored
in, the profit for the financial year is £52 million (2018: £17 million). See the consolidated income
statement on page [XX] for full details.
2019 2018 Variance
£m £m £m
Operating profit
Operating profit before depreciation, amortisation,
exceptional items and investments (adjusted 121 105 16
EBITDA)
Depreciation and amortisation (94) (55) G9)
Exceptional items (14) @) (41)
Operating profit before investments 13 47 (34)
Investments 39 (32) 74
Operating profit 52 15 37
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I FurrneverRevenue
The Post Office business is organised into three strategic business units, Retail, Financial Services &
I Telecoms (including Insurance) and Identity. RevenueTurnover from our subsidiary Post Office
Management Services Limited is included within the Insurance line below. from our
subsidiary Payzone Bill Payments Limited (“Payzone”) is included within the Payment Services line
below. The divisions and their performance are detailed on the next pages:
2019 2018 Variance Variance
£m £m £m %
Retail
Mails 350 334 16 5
Retail & Lottery 42 45 (3) ”
Payment Services 27 27 - -
Cash & Banking Services 161 158 3 2
Financial Services & Telecoms
Financial Services 113 127 (14) (14)
Telecoms 147 6 4
Insurance 48 7 15
Identity 54 4 z
I Hdleobity BS 54 4 2
Other* 13 16 3) (as)
I FurnoverRevenue 972 956 16 2
© Relates to Supply Chain income (E10 million) predominantly for warehousing of Royal Mall stock, transport of high value
mails and release of Bank of Ireland deferred income (£3 milion).
The grouping of products has altered in 2018/19 as a result of changes to internal reporting, with Post
Office Card Account ("POCA") revenue turnover moving from Government Services to Cash & Banking
jing Government Services rever has been moved into the Identity business
unit. Banking Services and ATMs revenue have also moved into Cash & Banking Services. Commission
income relating to Government Services has been reclassified from revenue to other income because
it did not fall within the scope of IFRS 15 Revenue from Contracts with Customers. The impact of these
changes on the reported 2017/18 performance of the divisions is detailed belo
Commission Banking 2018
2018 POCA income Identity Services ATMs reclassified
£m £m £m £m £m___£m —m
Mails 334 - - - - - 334
Retail & Lottery 45 - - : : : 45
Government Services 99 (40) (5) (54) : : -
Payment Services 57 : - - - (30) 27
Cash & Banking Services - 40 - - 88 30 158
Financial Services & Telecoms
Financial Services 215 - - - (88) - 127
Telecoms 147 - - - . : 447
josurance 48 = = 2 = 2 a8
identity . - - 54 - - 54
ag - - - - - 48
ther 16 - : - - - 16
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Ener
956
Retail
The Retail business encompasses our position as the United Kingdom's number one mails provider, as
well as providing Cash & Banking and Payment services.
Mails
Mails includes the sale of parcels and other mails products provided by Royal Mail and Parcelforce.
I Underiying trading turrever-revenue is up £167 million (65%) year on year. Growth in parcels (7%) and
home shopping returns (3!
5%) is partially offset by the continuing decline in stamps. In addition, there
were planned reductions in the fixed fee element of the contract with the Royal Mail Group plc of £2
million,
Retail & Lottery
Retail & Lotter
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revenue has decreased by £3 million to £42 million (2018: £45 million), The reduction Formatted: Font (Default) Verdana, 10 pt, Font color
reflects the changing shape of our branch network; althouch, a higher number of lottery rollovers Sid irl auto, English (United Kingdom), Condensed by 0.05 pt
\
part offset the trend, toward, online sales,
Payment Services
Payment Services includes bill payment transactions. Revenue has remained flat at £27 million (2028:
£27. mill
n}.. The acquisition of Payzone contributed £4 million to revenue, offset by reduced volumes,
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Auto, English (United Kingdom), Condensed by 0.05 pt
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the reselier market of £4 milion.
Cash & Banking Services
This comprises the following services:
2019 = 2018 Variance Variance
£m £m ém %
POCA 30 40 (10) (25)
Banking Services 102 88 14 15
ATMs 29 30 (4) (3)
Cash & Banking Services 161 158 3 2
Auto, English (United Kingdom), Condensed by 0.05 pt
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Auto, English (United Kingdom), Condensed by 0.05 pt
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fat Englah (United Kngom), conderaed by 005 pt
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POCA revenue has decreased by £10 million in line with expectations. ATMs revenue has remained stable
despite market decline. Banking services has significant year on year growth of £14 million to £102
million as more high street banks are closing their branches, in addition to the switch made to automated
deposit transactions in October 2018.
Payment-Senices
£27-million)The acquisition of Payzone contributed £4 million to turnover, offset by reduced volumes in
the-reseliermarket-of £4 milion
Financial Services & Telecoms
Financial Services
Our Financial Services products include mortgages, credit cards, savings and travel money, in addition
I to postal orders. Turnover Revenue decreased by £14 million to £113 million (2018: £127 million).
Office Limited
{ Office Limiled
corporate.postoffice.co.uk I PAGE 9
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The majority of the decrease is due to Bank of Ireland products, down £12 million to £45 million (2018:
£57 million). This is due to not having a minimum savings commission value in 2018/19. The
competitive, customer and regulatory environments remain tough; the continued low rate environment
and Bank of England funding scheme are putting pressure on Mortgage margins and sSavings rates.
Mortgages are also challenged die-to- Bank-of trelandby pricing constraints, but the expansion into the
Broker channel is compensating for this
I Fitnever Revenue from Postal Orders declined by £2 million as this legacy product continues to decline
in the marketplace. The impact of Brexit, weak sterling and tighter AML regulations continue to impact
MoneyGram and to a lesser extent travel money, which has remained stable year on year.
Telecoms
Telecoms includes Post Office HomePhone, Broadband and Fibre services.
I Telecoms turnover-revenue of £153 million increased by £6 million (2018: £147 million) as customer
numbers have increased
Insurance
Post Office Insurance provides Travel, Life and General insurance policy cover. Insurance turnover
revenue has grown by £7 million to £55 million (2018: £48 million). The increase was driven mainly by
growth in our Over 50s Life insurance and Travel insurance businesses.
Identity
I Identity provides Home Office, DVLA and Verify services. Identity turnover revenue has grown by £4
million to £58 million (2018: £54 million) due to the launch of Universal Credit in Verify. A new pricing
arrangement with the Government Digital Service in November 2018 significantly reduced average
I margin for the Verify service, ang will do in the future
Costs
Total costs decreased by £2 million to £958 million (2018: £960 million)
People costs of £193 million increased by £4 million (2018: £189 million) due to pay increases.
I Average headcount reduced from 5,066 in 2017/18 to 4,703 in 2018/19 reflecting seflecting the evolvind Formatted: Font. (Default) Verdana, 10 pt, Font color
shave of our operations efficieney-savings-across-the-DMBs-and the effect of the Network and DME Auto, English (United Kingdom), Condensed by 0.1 pt
transformation programmes. Closing headcount for the year was 4,397 (2018: 5,020).
I Other operating costs decreased by £76 million to £765 million (2018: £771 million) of which £3 million
relates to landlord compensation payments, with other controlled cost savings noted, especially in IT.
I Depreciation and amortisation
Depreciation and amortisation charges increased to £94 million (2018: £55 million); a number of
significant assets under construction came into use during the year and are now being depreciated.
I Exceptional costs [to be updated _ (eesti tio y
On 11 April 2016, a High Court claim was issued on behalf of a number of postmasters against Post
Office in relation to various legal, technical and operational matters, many of which have been the
subject of significant external focus for a number of years. Post Office is robustly defending the claim,
believes it lacks merit, but welcomes the opportunity to have these matters resolved through the
Post Office Limited corporate postoffice.co.uk I PAGE 10
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Court managed Group Litigation Order.
The Court has ordered two trials to be heard in 2018/19 to determine a subset of the preliminary
issues in dispute between the parties. The Court has not yet ordered a process for determining any
issues of liability or quantum. To date, the Claimants have not asserted the aggregate value of their
claims in any of the Particulars of Claim filed in the litigation.
While the Directors recognise that an adverse outcome could be material, they are currently unable
to determine whether the outcome of these proceedings would have a material adverse impact on the
consolidated position of the Group, and are unlikely to be able to do so until the Court has made
further determinations and the Claimants have provided the necessary information about the value of
their claims. The Directors continue to keep this under close review
The costs of £14 million included in exceptional items relate to Post Office defending the Post Office
Group Litigation (2018: £3 million).
Joint venture
Post Office Limited has a joint venture with the Bank of Ireland with each holding 50% of First Rate
Exchange Services Holdings Limited. The principal activity of the business 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 £33 million (2018: £34 million)
Capital and investment costs
Investment costs included in the consolidated income statement are shown below:
2019-2018
£m £m
Tavestment funding 168 70
Restructuring:
Business transformation (14) (16)
Network programmes (64) (63)
TT transformation (13) (6)
Severance (38) (17)
Total restructuring costs (429) (102)
Unwinding of discount on provisions @) (2)
Total investment income/ (charge) 38 4)
Restructuring costs include the costs of delivery for major change programmes. In addition, we have
incurred £1594 milion (2018: £151 milion) of capital spend, primarily on TT transformation project,
as disclosed in notes [X] and [X]. n restr 0
million}, the total invested in the year was £288 million (2018: £253 mii Tea
These are offset by Government funding, recognised to match the associated costs. Government
Sovernment funding for 2018/19 of £168 million (2018: £70 million) was received in quarterly
instalments and was fully recognised in the year.
Post Office Limited corporate postoffice.co.uk I PAGE EL
Office Limited 9/05
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BEIS has approved funding of up to £210 million which is available for the period from April 2018 to
March 2020. The maximum available in 2018/19 was £168 million and this was received in full.
Cash flow and net debt
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Cash and cash equivalents amounted to £54360 million (2018: £655 million) at the year-end. There
was a net cash outflow during the year of £95142 million (2018: £25 million).
Net debt (excluding cash in the Post Office network) decreased by £6669 million year on year as
shown in the table below.
2019 2018
£m £m
BEIS loan at the start of the year (623) (561)
Investment funding 168 70
Restructuring costs (119) (116)
Other cash inflows from operating activities 5134 66
Net cash inflow from operating activities i903 20
Dividends received from joint ventures 33 34
Acquisition of businesses «a7) 6)
Proceeds from the sale of property, plant and equipment 4 5
Purchase of tangible and intangible non-current assets (149) (135)
Net cash outfiow from investing activities (129) (102)
Net cash outflow from financing activities (8) (5)
Decrease in cash and cash equivalents 95242 25
BEIS loan at the end of the year (565) (623)
Cash (excluding cash in the Post Office Network) 243 12
Total net debt carried forward at the end of the year (5422) (611)
Post Office Limited seeks to minimise the amount drawn down on the loan from BEIS in order to
reduce its interest cost. The facility is limited to a maximum of £950 million, the unused facility at the
end of the year was £385 million (2018: £327 million). The maximum drawn down under the facility
during the year was £744 million on 13 April 2018. The facility is available at two days’ notice and has
an end date of 31 March 2021.
Post Office Limited
Office Limited
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64 of 2
Post Office Limited's borrowing facility from the Government limits the purposes for which the facility
can be used and, together with borrowing limits contained in the Articles of Association, imposes
constraints on the availability of external borrowing,
The Bank of England Note Circulation Scheme
The continued participation in the Note Circulation Scheme ("NCS") assures that Post Office Limited has
an adequate supply of notes to meet customer demand across its network and provides a mechanism
for enabling Post Office Limited to hold Bank of England owned notes. At the end of the year £227 million
(2018: £238 million) of Bank of England owned notes were held. See note 22 on page [XX] for further
details on the NCS.
Post Office also has an arrangement in Scotland with a commercial banking partner whereby surplus
‘Scottish notes are sold to the partner overnight for repurchase the next day. At the end of the year a
total of £3 million (2018: £17 million) was outstanding under this arrangement.
Pensions
Post Office Limited is the principal employer of the Post Office Section of the Royal Mail Pension Plan
(CRMPP"), which is independent of the Royal Mail section of the RMP. Royal Mail Group Limited 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 Pian.
Both defined benefit plans are closed to new members and closed to future accrual
In 2016/17, a Memorandum of Understanding was executed by Post Office with the Trustee of RMPP.
This removed the unconditional right to refund from the RMPP. As a result of these events the surplus
relating to this Plan was derecognised.
In 2017/18, the Trustees of the pension scheme entered into an agreement with Rothesay Life PLC in
which a pension buy-in was effected by the purchase of two bulk annuities. Under the purchase
agreements, the Trustees of the pension plan bought an asset that provides income which matches
closely the benefit payments from the pension plan, achieving a material risk reduction as changes in
income mirror changes in benefits due to, for example, inflation and longevity.
The accounting surplus reduced by the difference between the insurance premium and the value of the
insured liabilities, creating a ‘loss’ on buy-in. There was also an ancillary premium as part of the buy-in
agreement which transferred to the insurer the risk of incorrect data being used to price the premium
These items were recognised in Other Comprehensive Income in 2017/18. As Post Office had no right
to a future surplus in the scheme, there was an equal and opposite adjustment to the asset ceiling
through Other Comprehensive Income. As a result, there was no effect on the net assets position of the
Group.
The immaterial deficit payments into RMSEPP were agreed with the pension trustees during the year
and payments were made in accordance with the agreements. The net cash payments made are detailed
below:
2019-2018
£m £m
Regular pension contributions (20) (20)
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Funding of the pension deficit ~ RMSEPP - (1)
Payments relating to redundancy @) (5)
Net cash payments (21) (6)
The income statement charge to trading for the year was £13 million (2018: £17 million) in relation
to the defined contribution scheme. There was no charge (2018: Enil) in relation to the defined benefit
scheme.
Alisdair Cameron
Interim Chief Executive
XX XXX 2019
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86 of 3
Governance
Corporate Governance
Legal Ownership and Structure
Post Office Limited ("the Company”) is ‘Secretary of Stat for snes,
wholly owned by the Department Energy & Industrial Strategy
Secretary of State for Business, Energy ]
and Industrial Strategy ("BEIS"). BEIS Post Office Limited
holds a special share in the Company
the rights of which are enshrined within ree ~ a i ” ~ “
the Post Office Limited Articles of “HstkiwZowgsSesces” <sodtee Winn Sis saci
Association son oie mineenae tb see wana
(http://corporate.postoffice.co.uk/our- Senet oe
leadership)
BEIS has no day to day involvement in“ itfigungy*™*
the operations of the Company or in
the management of its branch network and staff. Through UK Government Investments (UKGI"),
BEIS monitors the Company's performance, in particular its compliance with minimum network access
criteria and provision of specified services. BEIS has the right to appoint Non-Executive Directors to
the Board and typically appoints a UKGI employee for this purpose. Tom Cooper currently holds this
position.
Corporate Governance Overview 2018/19
The Company maintains standards of corporate governance appropriate for our ownership structure,
commitment to social purpose and strategy to achieve commercial sustainability. We review our
corporate governance arrangements to ensure they remain appropriate for our developing business
needs and relevant legal and regulatory advances.
Board of Directors
The Board is responsible for setting the business’ strategic aims, putting in place the leadership to
deliver them, maintaining appropriate oversight of the management of the business, reporting to the
Shareholder and determining the Company's vision, values and organisational culture.
During 2018/19 the Board comprised an independent Non-Executive Chairman, the Group Chief
Executive, the Chief Finance and Operating Officer and five Non-Executive Directors (one of whom is
designated the Senior Independent Director and four of whom are independent). Non-Executive
Directors are not employees of Post Office Limited but provide services under the terms of an individual
letter of 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 the Company for the benefit of its Government shareholder and the wider
stakeholder community.
Post Office Limited corporate postoffice.co.uk I PAGE £5
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Tim Parker, Independent
Chairman, Chairman of the
Nominations Committee and
member of the Remuneration
Committee
Joined the Board 1 October 2015
Alisdair Cameron, Chief Finance
and Operating Officer throughout
the 2018/19 financial year and
Interim Chief Executive from 5
April 2019.
Joined the Board 28 January 2015
Ken McCall, Senior Independent
Director, Chairman of the
Remuneration Committee and
member of the Audit, Risk and
‘Compliance and Nominations
Committees
Joined the Board 21 January 2016
Tim Franklin, Non-Executive Director
and member of the Audit, Risk and
Compliance Committee
Joined the Board 19 September 2012
Shirine Khoury-Haq, Non-
Executive Director and member of
the Nominations and Remuneration
Committee
Joined the Board 24 May 2018
Carla Stent, Non-Executive Director
and Chairmas of the Audit, Risk and
Compliance Committee
Joined the Board 21 January 2016
Tom Cooper, Non-Executive
Director, and member of the Audit,
Risk and Compliance and
Remuneration Committees
Joined the Board 27 March 2018
Paula Vennells, Group Chief
Executive, throughout the 2018/19
financial year
Joined the Board 18 October 2010
Company Secretary:
Veronica Branton
Appointed as Company Secretary XX
XXX 2019
Jane Macleod
Served as Company Secretary
from her appointment on 30
August 2017 until 31 May 2019
Alisdair Cameron was appointed interim Chief Executive on 5 April 2019 and a handover period
commenced unti! Paula Vennel's’ resignation on 30 Apri! 2019.
*Paula Vennells resigned as Group Chief Executive on 30 April 2019.
Post Office Limited corperate.postoffice.co.uk I PAGE 16
88 of 34:
Non-Executive Directors are usually appointed for an initial term of three years with the scope to
renew for a second term, subject to Board approval and the approval of BETS. Ken McCall and Carla
Stent were reappointed for a second term of three years on 29 January 2019 as Senior Independent
Director and Non-Executive Director, respectively. As the Board representative of UKGI, Tom
Cooper's appointment period is determined by the Secretary of State for SEIS.
Biographies of all current members of the Board can be found on the Post Office Limited website:
corporate. postoffice.co.uk/our-leadership.
Board
Role and responsibilities
The Board is accountable to the Secretary of State for BEIS, as the sole shareholder, for the
performance of the Company and is required to seek consent for certain matters, as included in the
Articles of Association. The Shareholder is briefed regularly on the performance of the business and
the progress to deliver the strategy.
The Board is also responsible for oversight of legal and regulatory compliance, delivery of the
strategy, providing constructive challenge to the Group Executive and communicating with the
Shareholder. The Board has a schedule of matters reserved for its decision and has approved Terms
of Reference for its committees, which are available on the Post Office website.
The Board annually reviews the strategy, approves the annual budget and business plan required to
deliver the strategic objectives for that year; the last approval was in [May 2019]. The Board
regularly reviews reports on performance against that plan and receives periodic business reports
from senior management. Directors are briefed on matters to be discussed at Board and Committee
meetings by papers distributed in advance of meetings, as well as management presentations.
In setting the risk appetite for Post Office Limited the Board has established a framework to manage
and mitigate risk, The Board takes guidance from its Audit, Risk and Compliance Committee, and
has oversight of risk management. This Committee receives reports from the executive Risk and
Compliance Committee, from the internal and external audit teams and from operational
management. Further detailed information on the management of risk within Post Office Limited,
together with identification of principal risks, their impacts and mitigation can be found in the
management of risk section on pages [XX] to [XX].
Key focus and achievements in 2018/19
During the year to 31 March 2019, the Board continued to oversee the Post Office Limited's strategic
plan to achieve commercial sustainability and profitability.
This included project approvals, monitoring of developments in IT strategy, and services in the digital
space. These developments are designed to enhance customer experience and offer services that
meet customer needs in a digital age while continuing to serve our social purpose.
The Company acquired Payzone Bill Payments Limited on 24 October 2018. The business has over
25 years’ experience in the bill payments industry and offers payment terminals for bills, tickets,
lottery and mobile top up in convenience stores, enabling these businesses to generate revenue and
increase footfall.
The Board approved the appointment of new external auditors, following the resignation of Ernst &
Young LLP at the end of thelr term of engagement. PricewaterhouseCoopers LLP were appointed as
the Company's external auditors on 31 July 2018 following a tender process.
The Board also focused on a revised banking framework to provide banking services in Post Office
branches on behalf of UK banks and approved investment for the Branch Hub (a self-service portal
toffice.co.uk I PAGE
7
Post Office Limited
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for branch operators and business owners to access support).
The Board receive teguiar health aad safety reports and teviewed the Conflicts of Interest. Po!
‘The Board also reviewed and approved the Company's 2017/18 Modern Slavery Act Statement.
id
The Board continued to monitor the progress of the ongoing Group Litigation Order.
Conflicts of Interest and Independence
‘The Board may, in the furtherance of its duties, seek Independent professional advice at the expense
of Post Office Limited. During the period, no Director sought independent professional advice.
In accordance with the Companies Act 2006, the Articles of Association give the Directors power to
authorise conflicts of interest.
During the period, none of the Directors had a material interest in any contract of significance with
Post Office Limited or any of its subsidiaries. At all times during the periods of their appointments in
2018/19, the independent Directors met the criteria for independence set by the Board.
Post Office Limited has arranged appropriate insurance cover in respect of legal action against
Directors of Post Office Limited and its subsidiaries.
Tim Parker, Ken McCall, Tim Franklin, Shirine Khoury-Haq and Carla Stent are considered
Independent Non-Executive Directors. Tom Cooper is not an independent Non-Executive Director as,
he is a shareholder representative. Paula Vennells and Alisdair Cameron held executive roles
throughout the financial year, and as such were not independent directors.
Board Meetings
During 2018/19 the Board met 128 times (including additional meetings held either in person or by
telephone). A record of Directors’ attendance (attended/eligible to attend)? at the Board and its
Committees is set out in the table below:
Director Board Board Audit, Risk and Nominations Remuneration
(additional) Compliance Committee Committee
Committee
I Tim parker 8/8 4/4786 - 4/4 6/6
I Executive Directors :
Paula Vennells 7/8
Alisdair Cameron 8/8 - - -
"Non-Executive
Ken McCall 8/8 4jaree a/s 4/4 6/6
Tom Cooper a8 3/4tBC 5/5 - 5/6
Tim Franklin 3/8 2/4TBG as - -
Shirine Khoury-Haq a8 4/4786 - 3/4 5/6
Carla Stent 8/8 4/448 5/5 - -
® Directors who are not members of a committee may attend meetings from time to time, at the invitation of
the Chair.
Post Office Limited toffice.co.uk I PAGE 18
{ Office Limiled ~ Audit Risk & C 2290819 89 of 344
ph
Committees
To assist in the execution of its corporate governance responsibilities, the Board has established
three committees which deal with specific topics requiring independent oversight. The Audit, Risk
and Compliance, Nominations, and Remuneration Committees are each chaired by an independent
Non-Executive Director.
The Board retains overall oversight but delegates responsibilities and authorities to its committees
to operate within the Terms of Reference approved by the Board. The Terms of Reference for all
committees are reviewed annually to assess that each Committee discharged its duties effectively in
accordance with the Terms of Reference. The reviews conducted in March 2019 raised no issues.
Terms of Reference for the committees are available on the Post Office Limited website:
www.corporate.postoffice.co.uk/our-leadership.
Nominations Committee
Role and Membership
The duties and responsibilities of the Nominations Committee are included in the Terms of Reference,
which are available on the Post Office Limited website: www.corporate. postoffice.co.uk/our-
leadership.
The Committee is chaired by Tim Parker, Chairman, and the other members during the year were
Shirine Khoury-Haq, Non-Executive Director and Ken McCall, Senior Independent Director.
Work of the Committee in 2018/19
During the year the Committee considered the skills and experience required by the Board for a new
Group Chief Executive and a new Non-Executive Director and worked with Russell Reynolds (search
consultants) on the proposed appointments. The Committee approved re-appoint ments to subsidiary
boards and the appointment of a new Chair of Post Office Management Services Limited.
The Nominations Committee monitored the independence and internal process for the evaluation of
the Board and Board sub-committees and considered developments in corporate governance and
how these should apply to the Company.
The Committee considered the reporting requirement:
Reporting) Regulations 2018 and a section will be introdu:
how, th i ts. of Sect he.
under the Companies (Miscellaneous
ed to the 2019/20 Annual Report to show
Act, 2006 fulfilled, Including bi
comers and suppliers when making dec
Remuneration Committee
Role and Membership
The duties and responsibilities of the Remuneration Committee are included in the Terms of
Reference which are available. on = the_~—-Post’-—«Office.~— Limited _— website:
www.corporate. postoffice.co.uk/our-leadership.
‘The Committee is chaired by Ken McCall, and the other members during the year were Tom Cooper,
Shirine Khoury-Haq and Tim Parker.
In accordance with the Terms of Reference, the Group Chief Executive may attend meetings, at the
invitation of the Committee Chairman, to discuss matters relating to the remuneration of the Chief
Finance and Operating Officer and members of the Group Executive. However, the Committee
recognises the need to manage any potential conflicts of interest and upholds the principle that no
individual may be involved in discussions concerning their own remuneration.
Post Office Limited tofflee.co.uk I PAGE
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Work of the Committee in 2018/19
During the year the Committee reviewed and made recommendations to the Shareholder for the
2017/18 bonus payments against incentive plans for Executive Directors, annual pay increases for
Executive Directors and targets and measures for 2018/19. The Committee approved senior salary
pay changes, in line with increases provided to all employees, and pay at appointment where these
were within its remit and delegated authority.
The Committee received updates and advice from the HR and Finance teams and from
PricewaterhouseCoopers LLP, its external adviser, on gender pay, market trends and benchmarking
information and corporate governance.
Audit, Risk and Compliance Committee
Role and Membership
The duties and responsibilities of the Audit, Risk and Compliance Committee are included in the
Terms of Reference which are available on the Post Office Limited website:
www.corporate.postoffice.co.uk/our-leadership.
The Committee is chaired by Carla Stent, Non-Executive Director, and the other members during the
year were Ken McCall, Senior Independent Director, Tom Cooper, Non-Executive Director and Tim
Franklin, Non-Executive Director.
The Board considers that the Committee's members have broad commercial knowledge and
extensive business leadership experience and that this constitutes an appropriate mix of business
and financial experience and expertise.
The Directors of Risk & Compliance and Head of Internal Audit attended all of the meetings of the
I Committee and also met the Committee Chairsiaa, independently and regularly, throughout the year.
The external auditor was invited to, and attended, all meetings of the Committee except on 31 July
2018, where the Committee recommended to the Board the appointment of new external auditors
PricewaterhouseCoopers LLP.
Further detailed information on the management of risk within Post Office Limited, together with
identification of principal risks, their impacts and mitigation, can be found in the Management of Risk
section on pages [XX] to [XX].
Work of the Committee in 2018/19
During the year, the Committee reviewed the Annual Report and Financial Statements for 2017/18,
including consideration of the principal and strategic risks, and recommended Board approval.
The Committee approved the annual audit plans for the internal and external auditors. The
Committee received and challenged, where appropriate, internal audit report
The Committee reviewed the risk management framework for the Company, including its appetite
for risk, self-assessment of the control framework and areas of specific risk highlighted by the
Executive Risk and Compliance Committee. It reviewed and approved relevant policies, such as
financial crime and protecting personal data, as part of an annual review cycle.
Board and Committee Effectiveness Evaluations
The Board recognises that an effective Board Is vital to the success of the Company and the business.
Ken McCall, Senior Independent Director, led an internal Board effectiveness evaluation in December
2018 which included a formal evaluation of the performance of the Board, its Committees and the
[I Chairman.
The Board evaluation was conducted by internal questionnaire and, following a review of the results,
recommendations were presented to the Board. The feedback and scores were positive but areas for
Post Office Limited
toffice.co.uk I PAGE
20
additional focus were identified, including closer engagement with and understanding of
stakeholders’ perspectives, particularly postmasters and employees; the competitor landscape and
franchising models; and periodic scheduling of meetings without the executives.
As part of the Board review process, each Board Committee undertook a review of its effectiveness.
The feedback and scores were positive. Each Committee considered the feedback from the evaluation
and agreed actions. The Audit, Risk & Compliance Committee decided to increase the number and
length of meetings held annually to reflect the range and scope of legal and regulatory compliance
ive
and risk management Issues across a span of business lines. It also agreed_that_ Non-é!
Members of the Committee would-to hold separate meetings with the Head of Internal Audit
periodically. The Nominations Committee added a succession planning review to its forward agenda
and the Remuneration Committee commissioned a report on the group remuneration framework and
the approvals process.
Post Office Limited
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Management of Risk
Our Approach to Risk
The commercially competitive and highly regulated environment, together with operational
complexity, exposes the Post Office to a number of risks. 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. We seek to understand and harness risk in the pursuit of our objectives
and aim to operate within an acceptable level of risk taking. The Post Office has articulated its risk
appetite in relation to the most material risks with a view to managing better the key strategic risks
and assessing the risks in relation to new opportunities.
Risk Management Governance
The Board is accountable for risk management and internal controls in the Post Office, reviewing
their effectiveness and determining the nature and extent of principal risks. The Board has delegated
responsibilities to the Audit, Risk and Compliance Committee ("ARC"), which provides assurance to
the Board through review of reports from management, risk, internal audit external advisers and
external audit. Responsibility for day to day operations rests with the Group Executive. The Risk and
Compliance Committee ("RCC") reviews the effectiveness of the risk management framework and
management of principal risks. The outputs are reported to the ARC as necessary.
Our Risk Management Framework
In order to deliver its objectives, the Post Office is required to identify, assess and manage a wid
range of risks. These are managed through an overarching framework in order to apply consistency
and transparency of risk management across the organisation. The fremework identifies roles and
responsibilities of key parties in the risk management process, the policies for how risks are
managed, the tools and processes used and the reporting outputs that are generated.
The approach to risk management is based on the underlying principle of line managements
accountability for effective implementation of internal controls to manage risk. The Group Executive
has Identified and manages the principal risks in the organisation, focusing on the aims of the
strategic plan. These risks, with their response plans, are reviewed by the Central Risk team and at
the RCC and the ARC to assure the robustness of risk assessment and management. There is an
‘ongoing process of identifying, evaluating and managing the principal risks faced by Post Office.
During the year we have further improved our oversight over the level of risks being taken across
Post Office and effectiveness of our mitigating actions, including close monitoring of emerging risk
themes and incidents. Plans are also in place to fully refresh risk appetite to better inform decision
making. This is a component within our wider enhancement plan to continue maturing our Risk
Management framework.
Our Control Framework
We have an internal control framework in place for both our financial reporting and IT processes,
which fall under our self-assessment regime. In addition, we have implemented a suite of Post Office
policies which define the minimum control standards we expect to be performed within the applicable
business areas. Our risk management efforts are also underpinned by our Executives’ Declaration.
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Space After. 6pt
Formatted: Space Before: Opt
What has changed since last year? «—-—-{ Formatted: Space Before: 6 pt
Our principal risks evolve over time, as we progress with our strategy and business plan to achieve
profit by 2020/21, ne rae Health
and Safety has become a new principal risk this year, reflecting the high importance we place on the
safely of cur salt, coleaaues. and customers. tlgalon [s also.new. dus ‘9 the ongoing. gation
ad
nse to. the.ongolng polltical and economic uncertalaty. Dep Jationsnips
cemains a principai risk and is in an improving position, We have invested considerably in Technolog
Business Interruption and Cyber and residual risk is improving, although the management and Board
are not complacent to these risks, Both our Retail Proposition and Regulatory Environment risks are
stable. Our Retail Proposition remains fundamental to enabling us to continue to successfully di
our social purpose and the reguiatory environment continues to evolve and introducing new ways of
doing bus
Post Office Limited toffice.co.uk I PA
E22
Risk & C
amnph
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Our principal risks evolve overtime, a8 we progress with the North Star strategy and business pian
Business. Interruiption-and-Cyber-and.this.principie-risk-is. improving, Both-our-Retali-Proposition-and
iiy-dek soeial-pure \d-the-regulate: _ velnues-to
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. Our principal risks are regularly re-evaluated
and discussed at both a Board and GE level.
Potential
Principal Risk / Movement Consequences Key Mitigations
STRATEGIC RISKS
Dependency on Strategic j Not achieving our I* We have established close working
2 ted: Space Before: 3 pt
Relationships strategic ambitions,I relationships with our strategic i e
Post Office has a number of losing revenue and] partners underpinned by formal
strategic relationships which yj market share. governance and reporting mechanisms.
are key to delivering its growth) These ensure commercial objectives
and strategic ambitions. The are aligned and relationship deliver to
number of such relationships i expectation.
increasing. + Regular interaction with strategic
. partners to improve joint operating
We work with our partners to efficiency, product offering and service
align our direction and to drive growth and profitability for all
interests to enable us to meet parties. This includes regular
evolving customer and market engagement at Chief Executive Officer
requirements and any
level.
mivelignment. / Managing Director level
We review the relationships with our
strategic partners on a regular basis, to,
ensure long term alignment, with our
customer and business outcomes.
*_Dur key Banking Framework contract I
has been comprehensively re
negotiated to place it on a strategic,
commercially sustainable and long
term footing. Linkages have beer
established at Bank Board, POL Board
and Government fevels to ensure
strategic alignment
+ [ther mitigations to be added relating I
to RMG end BOL).
Formatted: Font: Verdana, 10 pt
Formatted: Indent: Left: 0.65 cm, No bullets or
numbering
Post Office Limited tofflee.co.uk I PAGE
Retail Proposition
Bost Office are-committed-te-
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of at ieast 11,500 branches. pnsed . soastinatt Weare
detivery-oF ou existing-postmasters-and-have
soclai-purpose-and-I strengthened our field-support-team this
consequentiat yes,
= SI. Naw-technolegy-wiit-help-our-
s postmasters-manage-costs-and-out
business-remain-relevant-t0-customers-
and-we-are-snvesting-4n-the-next-
generation-of automation-for-our
successfully deiveroursedal branches-as-welt-as-further-developing:
purpese which addresses-the- the-software-that-wilt-allow-retailers-to
sell: Bost-Office-products-on-their-own-
tne igh-streat-e beri
+—engelng-move-te-online; -We-are-developing-15-pilot-locations-for
a _ Post Office-Parcel-Shop-and-are
<a decline in-traditional continulng-te-develop-automated-tocals,
come-streame: ith the fof concept branch
Potential
Principal Risk / Movement I consequences Key Mitigations
Retail Proposition
Post Office are committed to
Nad
this objective Is.
offering an attractive
proposition for our retall
partners and to continue to
operate Post Offices in
communities who need us.
is to continue to
lly det
Tnability to meet
‘our network
commitment, and.
consequent,
[>We are continuing to open branch
‘ocations where there is a customer
need, adding 328 ‘new network
locations’ in 2018/19, We are aiso
adverse Impact on
continuing to improve our support to.
delivery of our
soclai purpose and
consequential
financial Impacts,
existing postmasters and have
strengthened our field support team this:
ye
je New technology will help our
postmasters manage costs and our
next generation of automation for ot
branches as well as further developing
oftware th: low retailers to
sell Post Office products on their own
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at:_O.cm + Indent at: 0.63 em
75 of 344
76 of 34
a deciine in traditional
STRATEGIC RISKS
Economic and Political
Environment
Current uncertainties in the
external political, economic
and social environment could
nave-a-detrimentally impact
‘our strategy and operating
model significantly:
Brexit itself represents a
potential series of risks which
would be most pronounced in
the event of a no-deal
departure from the EU-(see-
elow}, but has also taken a
very serious toll on all aspects,
of Government and politics
more broadly. There remains a
possibility that the current
I I impasse will increase the
pressure for a General
Election, with the attendant
risk that Government and our
Shareholder’s priorities witt-
may. change In favour of any
new Government's agenda,
with potentially slanificant
Implications for the business.
Lanour-agenda,.with-sigaificand
Sipicotions forthe usaese
implementation-of Labour's
Fenationaiisation of RMG,-and-
Principal Risk / Movement,
Spending patterns
of our customers
during economic
uncertainty and
potential downturn
of the economy
e.g. decline in the
sale of banking
products,
particularly
mortgages.
Disruption to
operations
(customs labels in
branch,
accessibility issues
for supply chain)
Financial resilience
of our postmasters
and suppliers.
Retention of skilled
labour and
recruitment.
+ We regularly perform horizon scanning
to identify external events and assess
their potential impact on our business.
‘* Our strategy considers customer
requirements, market trends and
competitor behaviour.
‘+ We continue to invest in the
development of our digital capability.
In terms of Brexit arrangements, PO
have communications, training and
contingency processes in place to
deploy in.the event of a.‘no. deal’.
New income
streams failing to
grow.
Potes
Consequences
Key Mitigations.
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~—{ Formatted: Font: 9 pt
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(Formatted: Font: 9 pt
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(OPERATIONAL AND FINANCIAL RISKS {to di
iscuss inclusion of a "People" risk at ARC]
i Font color Auto, Check spelling and I
Health and Safety NEW
Due to Post Office’s wide reach
through the size and operation
of its Network including fleet,
it is essential we invest in our
I I safety procedures and
controls.
A health and safety incident or
failure could result in serious
injury, ill health or loss of life.
Post Office Limited
Exposure to
significant costs for
reimbursement for
damages and
remediation,
operational
disruption,
prosecution and
reputational
damage.
We have regular Health & Safety training
provided to all colleagues and managers
Including Directly Managed Branches and
Supply Chain Managers.
We regularly review, update and
monitoring-ef Local Risk Assessments
and safe systems of work.
We have developed a Road Risk Policy.
We regularly review our Health & Safety
policy and Property Statutory
Compliance policies.
Our Health & Safety Management
System has been independently audited
and assessed as strong and
mature. Initiatives recommended to
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28
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-_ We und
further strengthen our safety culture
have been implemented.
An independent Risk Assessment of high
risk building fabric has been undertaken
and remediation actions completed.
u take adi sk.
assessment, work closely with industry
experts and bodies and have invested
unity felated intervention:
‘0 reduce the risk of attack and assault
‘oss the Network and Sugaly Chain.
Principal Risk / Movement
Potential
Consequences
Key Mitigations
«We undertake a-dynamic risk
experts-a
ILbodies-and-have-lavested
to-reduce-the-risk oF attaci-and-assatnt
across-the-Networicand-Supply-Ghaine
TECHNOLOGY AND INFORMATION SECURITY RISKS
Post Office Limited
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Technology, Business J Direct impact on [+ We are continuing to mitigate this risk
Interruption and Cyber ‘our network by migrating some of our aging legacy
orm fst availability and systems to new infrastructure and this
pusiness- contiaueste- gia reliability resulting I will continue through 2019/20.
Post Office is dependent on theI in adverse + We regularly evaluate the adequacy of
continued effectiveness, ‘customer service our IT infrastructure and related
availability, integrity and and financial controls.
security of its information performance + We regularly meet with our key third
systems and associated and/or reputation. I parties to ensure they fulfil their
infrastructure. obligations covering the security,
Post Office, in common with A cyber-attack resilience and availability of our IT
other businesses, is continuing could threaten the I systems and Infrastructure.
to track the threat “universe” confidentiality, * We have introduced a Security
and is aware of increasing risk Integrity and Improvement Plan enabling our third
from cyber-attackers availability of our party suppliers to use their security
(particularly nation states) systems.- experience to identify a gap or
seeking to undermine improvement to a security process or
businesses, government and tool that Post Office has not identified,
utilities. improving our partnership and utilise
their experiences to improve our
overall security posture.
© We have policies in place for cyber,
disaster recovery, information security
and acceptable use.
+ We monitor and provide assurance
against the minimum controls defined
in these policies.
A Security Operations Centre has been
built, enabling our IT Security Team t
assess and manage vulnerabilities,
identify and mitigate the risk of cyber-
attacks.
‘+ We continue to further invest and
further mature our cyber defences
Including:
> increasing capability within our
security operations;-ard-
cultural awareness around data
protection; and
> continuous testing in house and with
experience 37 patties
Potential
Principal Risk / Movement Consequences Key Mitigations
LEGAL & REGULATORY RISKS
Post Office Limited
toffice.co.uk I PAGE
I I Group Litigation EW)
Legal findings and
Post Office has instructed specialist
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Post Office Limited is the
defendant in Bates & Others v.I
Post Office Limited, Claim Nos.
HQ16X01238, HQ17X02637 &
HQ17X04248 in the High CourtI
of Justice, Queen’s Bench
Division ("The Post Office
Group Litigation”).
‘court orders which
have an adverse
impact on financial
performance
and/or reputation.
legal advisors to advise on and conduct
its defence of the litigation, subject to
senior management oversight.
Regulatory Environment
Post Office operates under an
extensive and evolving
regulatory environment,
Including areas such as
financial services, transactional
services, postal services,
telecoms, procurement,
‘competition law, and data
security. This environment
continues to evolve,
particularly in the financial
services (e.g. HMRC’s
requirements around Anti
Money Laundering controls,
location fees as well as Fit and
Proper) and telecoms space,
which increases the risk of
non-compliance, costs and
could impact our financial
performance.
had
Fines, penalties,
litigation and a
resulting adverse
impact on financial
performance
and/or reputation.
We have open dialogue with key
regulators to understand and clarify
expectations.
We regulatory perform horizon
scanning to anticipate future
requirements and planning with each
business area to undertake
appropriate solutions.
On-going training is provided to staff
and retail partners on legal and
regulatory matters.
Regulatory obligations are supported
by policies which define minimum
controls that must be operated to
mitigate risks.
Internal and external programmes are
In place to provide assurance on
regulatory compliance.
Tech ¥
mation Security Risks) is-with-Rop-
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Directors’ Report
The Directors present the Group Annual Report and Financial Statements and Company Financial
Statements for the year ended 31 March 2019.
Expected future developments
Expected future developments are detailed in the Chief Executive's statement on page [X].
Results and dividends
The profit after taxation for the year was £52 million (2018: £17 million). The Directors do not
recommend the payment of a dividend (2018: £nil).
Political contributions
No political contributions were made in the year (2018: £nil).
Research and development
We submitted our first research and development claim during 2018/19 in respect of 2017/18
and 2016/17. The claim relates to IT transformation projects.
Directors and their interests
The following served as Directors during the year:
TC Parker PA Vennelis (resigned 30 April 2019)
ACJ Cameron TK G Cooper
TA Franklin S Khoury-Haq
KS McCall CR Stent
VA Holmes (resigned 27 March 2018) RJ Callard (resigned 27 March 2018)
No Director has a beneficial interest in the share capital of Post Office Limited. The emoluments
of Directors are set out in note [5] to the financial statements on pages [XX] to [XX].
People
People are critical to our success, whether in branch or in our offices. To attract and retain the
right people we:
. Conduct regular employee surveys and use the feedback to make improvements.
* Provide information regularly on company performance, policies and organisational
developments through our intranet, briefing sessions and company-wide emails.
* Have a network of engagement champions representing the voices of colleagues from
each part of the business.
* Are committed to providing a safe working environment that promotes the health,
safety and wellbeing of employees. A range of services is provided to help all employees
stay mentally and physically healthy.
* Operate our Learning Academy to provide high quality learning for all employees and
postmasters, aiming to ensure that everyone is supported into reaching thelr full potential.
Post, Office Limited
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+ Invest in developing the best talent to support our business, including graduate
recruitment and active participation in the apprenticeship programme, available
for new and existing colleagues.
* Promote diversity and inclusion and celebrate the diversity of the workforce and
communities we serve. We have a number of active employee network groups such as:
Women in Leadership, to support and nurture female talent; Prism, which supports and
celebrates our LGBT+ community; BAME (supporting Black, Asian and Minority Ethnic
colleagues) and Return to Work (supporting colleagues returning to work after maternity,
other parental leave and long term absences).
* Proactively communicate that we are a Disability Confident Leader and actively try to
attract talented people to Post Office from diverse backgrounds. We do this through our
corporate careers page, recruitment agencies and other attraction channels such as
Vercida who are the world's leading diversity and inclusion employer brand platform.
* Ask all applicants to inform us of any reasonable adjustments we can make to ensure they
are not disadvantaged due to a particular disability during the selection process.
* Require all Hiring Managers to complete Effective Interviewing and Unconscious Bias
Training to ensure a consistent, fair and unbiased selection process takes place.
* Do not tolerate any form of bullying, harassment, victimisation or discrimination whether
written, verbal, visual or physical. We are committed to taking the necessary action to
ensure that they do not occur, or where they do occur that they are dealt with quickly and
eliminated, by following a consistent, fair and robust Bullying and Harassment Policy and
Procedure. All managers are required to complete Dignity at Work training to ensure they
understand their responsibilities and that they demonstrate the correct behaviours and
treat everyone with dignity and respect at all time.
Disabled employees
As noted above, the Post Office Limited has been recognised as a Disability Confident Leader. We
have a Disability Confidence networking group called ‘Be You’. This group provides support and
advice and helps the business to do the best it can for employees with disabilities. We also make
necessary adjustments for colleagues who are disabled or become disabled during the course of
their employment to allow them to carry out their role and fulfil their potential, including any
specific training needs.
Gender pay gap
Gender pay is not the same as equal pay. Equal pay Is about ensuring men and women are paid
the same for work of equal value, as set out in the Equality Act 2010. At Post Office we support
equal pay through a robust job evaluation process that is free from gender bias.
The gender pay gap relates to the difference between the gross hourly pay of all men and the
gross hourly pay of all women across the organisation. The difference between gender pay and
equal pay is important to understand as you can have a gender pay gap without having equal pay
issues. At Post Office we recognise that more needs to be done to reduce the gender pay gap and
we are committed to doing so.
We continue to make progress. Our gender pay gap Is 0.5% lower than last year, and smaller
than the UK average. We are closer to our goal of filling 50% of senior manager roles with women
which was 39% in our last report and is currently 43%. The number of women holding mid-level
managerial roles has risen by a third in the last year. We provide tailored coaching and mentoring
for female colleagues and run recruitment programmes to encourage more women to pursue
careers in IT and Finance. Our commitment has been recognised by The Times as we made their
list of Top 50 Employers for Women for the third time.
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Both our mean and median hourly gap has reduced. Our median gender pay gap is 7.9%, (as
compared with the national figure of 18.4%) and our mean gender pay gap is 17%. The main
reason for the gap is the lower proportion of women in senior roles relative to men. Another
reason Is part-time working ~ 45% of female colleagues work part-time, compared with only 12%
male colleagues. This especially impacts the bonus pay gap.
However, we are not complacent. There is still work to do to ensure women at Post Office realise
their potential. We are taking actions to reduce the gender pay gap further, such as continuing
to offer tailored mentoring to female colleagues and making sure we have 50/50 gender balanced
shortlists for senior level vacancies and for our next graduate intake. Above all else, we continue
to listen to our colleagues and understand what they need to help them to flourish. We will use
these conversations, alongside the data contained in our full gender pay report, to improve again
next year. Because it is the right thing to do - for the future of Post Office and our people. For
our full gender pay report please see: http://corporate.postoffice.co.uk.
Post balance sheet events
In accordance with the funding agreement with Government, Post Office Limited received a
Network Subsidy Payment of £18%:5 million on 2 April 2019. The Network Subsidy Payment is
received on a quarterly basis and a total of £50 million will be received from Government in
2019/20.
Going concern
After analysis of the financial resources available and cash flow projections for Post Office Limited,
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 1 to the financial statements on page [XX].
Financial instrument risk
The exposure of the Group to market risk, credit risk and liquidity risk has been disclosed in note
16 to the financial statements on pages [XX] to [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
PricewaterhouseCoopers LLP were appointed as the Company's external auditors on 31 July 2018
following a tender process.
By Order of the Board
Veronica Branton
Company Secretary, Post Office Limited (Company Number
2154540) Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ
XX XXX 2019
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Post Office Limited
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Registered Number 2154540
Post Office Limited
Annual Report
& Consolidated Financial
Statements
2018/19
PRESENTED TO PARLIAMENT PURSUANT TO
SECTION 77 OF THE POSTAL SERVICES ACT 2000
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Financial Statements
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report and the financial statements in
accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial 53 week
period. Under that law the Directors have prepared the Group financial statements in accordance
with International Financial Reporting Standards (IFRSs) as adopted by the European Union and
Company financial statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure
Framework”, and applicable law). In preparing the Group financial statements, the Directors have
also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB).
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 Company and of
the profit or loss of the Group and Company for that period. In preparing the financial statements,
the Directors are required to:
e select suitable accounting policies and then apply them consistently;
* state whether applicable IFRSs as adopted by the European Union and IFRSs issued by IASB
have been followed for the Group financial statements and United Kingdom Accounting
Standards, comprising FRS 101, have been followed for the Company financial statements,
subject to any material departures disclosed and explained in the financial statements;
* make judgements and accounting estimates that are reasonable and prudent; and
* prepare the financial statements on the going concern basis unless it is inappropriate to
presume that the Group and Company will continue in business.
The Directors are also responsible for safeguarding the assets of the Group and Company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate accounting records that are sufficient to show
and explain the Group and Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and Company and enable them to ensure that the financial
statements comply with the Companies Act 2006.
The Directors are responsible for the maintenance and integrity of the Company’s website.
Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Directors’ confirmations
In the case of each Director in office at the date the Directors’ Report is approved:
«so far as the Director is aware, there is no relevant audit information of which the Group and
Company’s auditors are unaware; and
e they have taken all the steps that they ought to have taken as a Director in order to make
themselves aware of any relevant audit information and to establish that the Group and
Company’s auditors are aware of that information.
Post Office Limited corporate. postoffice.co.uk I PAGE 1
Bo Post Office
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Independent Auditor’s Report to the members of
Post Office Limited
In our opinion:
e Post Office Limited’s Group financial statements and parent Company financial statements (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 31 March 2019 and of the Group’s and the parent Company’s profit and
the Group’s cash flows for the 53 week period (the “period”) then ended;
« the Group financial statements have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union;
« the parent Company financial statements have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and
e the financial statements have been prepared in accordance with the requirements of the
Companies Act 2006.
We have audited the financial statements, included within the Annual Report & Financial
Statements (the “Annual Report”), which comprise: the Group consolidated and Company balance
sheet as at 31 March 2019; the consolidated income statements and consolidated statement of
comprehensive income, the consolidated statement of cash flows, and the consolidated and
Company statements of changes to equity for the 53 week period then ended; and the notes to the
financial statements, which include a description of the significant accounting policies.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”)
and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’
responsibilities for the audit of the financial statements section of our report. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical
Standard, and we have fulfilled our other ethical responsibilities in accordance with these
requirements.
Conclusions relating to going concern
ISAs (UK) require us to report to you when:
« the Directors’ use of the going concern basis of accounting in the preparation of the financial
statements is not appropriate; or
« the Directors’ have not disclosed in the financial statements any identified material
uncertainties that may cast significant doubt about the Group’s ability to continue to adopt the
going concern basis of accounting for a period of at least twelve months from the date when
the financial statements are authorised for issue.
We have nothing to report in respect of the above matters.
However, because not all future events or conditions can be predicted, this statement is not a
guarantee as to the Group’s ability to continue as a going concern. For example, the terms on
which the United Kingdom may withdraw from the European Union are not clear, and it is difficult
to evaluate all of the potential implications on the Group’s trade, customers, suppliers and the
wider economy.
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Independent Auditor’s Report to the members of Post Office Limited (continued)
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial
statements and our auditors’ report thereon. The Directors are responsible for the other
information. Our opinion on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated
in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If we identify an apparent material inconsistency or material misstatement,
we are required to perform procedures to conclude whether there is a material misstatement of the
financial statements or a material misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the
disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit,
ISAs (UK) require us also to report certain opinions and matters as described below.
Strategic Report and Directors Report
In our opinion, based on the work undertaken in the course of the audit, the information given in
the Strategic Report and Directors’ Report for the period ended 31 March 2019 is consistent with
the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group and its environment obtained in the
course of the audit, we did not identify any material misstatements in the Strategic Report and
Directors’ Report.
Responsibilities of the Directors for the financial statements
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 in accordance with the
applicable framework and for being satisfied that they give a true and fair view. The Directors are
also responsible for such internal control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s
ability to continue as a going concern, disclosing as applicable, matters related to going concern
and using the going concern basis of accounting unless the Directors either intend to liquidate the
Group or to cease operations, or have no realistic alternative but to do so.
Auditor's responsi ies for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on
the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditors’ report.
Post Office
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Independent Auditor’s Report to the members of Post Office Limited (continued)
Use of this report
This report, including the opinions, has been prepared for and only for the parent Company’s
members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no
other purpose. We do not, in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
«we have not received all the information and explanations we require for our audit; or
« 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
« certain disclosures of Directors’ remuneration specified by law are not made; or
e the parent Company financial statements are not in agreement with the accounting records and
returns.
We have no exceptions to report arising from this responsibility.
Andrew Paynter (Senior statutory auditor)
for and on behalf of PricewaterhouseCoopers LLP
Charted Accountants and Statutory Auditors
Leeds
XX XXXX 2019
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Consolidated Income Statement
for the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
2019 2018
£m £m
Note Trading Investments Total Trading Investments Total
Revenue from contracts with
customers 972 - 972 956 - 956
Costs 24 (958) (129) (1,087) (960) (102) (1,062)
(Costs - exceptional items 19 (14) : (14) (3) - (3)
Total costs (972) (129) (1,101) (963) (102) (1,065)
Other operating income 14 - 14 5 - 5
Investment funding 4 - 168 168 - 70 70
Network Subsidy Payment 60 ie 60 70 - 70
Depreciation and amortisation 8,9 (94) - (94) (55) 7 (55)
Share of post tax profit from 10 4 . a 34 . 34
Operating profit / (loss) 3 13 39 52 47 (32) 15
Finance costs 6 (8) (1) (9) (5) (2) (7)
Profit / (loss) before taxation 3 5 38 43 42 (34) 8
Taxation credit 7 9 * cd 9 - 9
profit / (loss) for the i c as on Loe a - Pa Gay >
financial year
For the year ended 31 March 2019 trading profit was £61 million (2018: £35 million).
Trading profit is one of the Group’s key financial measures and is calculated by taking operating
profit before depreciation, amortisation, exceptional items, investments and Network Subsidy
Payment. Further detail is given in note [23].
All amounts relate to continuing operations.
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88 Post Office
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Consolidated Statement of Comprehensive
Income
for the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
2019 2018
Note £m —m
Profit for the financial year 52 17
Items that may be reclassified to profit or loss
Gain on cash flow hedge 16 3 -
Items that will not be reclassified to profit or loss
Re-measurements on defined benefit surpluses 17 (3) 2
Asset ceiling effect 17 os (2)
Other comprehensive income 1 i”
53 17
Total comprehensive income for the year
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 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
2019 2018
—m
Cash flows from operating activities
Operating profit 13 47
Total profit before investments 13 47
Adjustment for:
Share of profit from joint venture 10 (33) (34)
Depreciation and amortisation 8,9 94 55
Pension operating costs 17 13 17
Other gains and losses 7 -
Working capital movements: (30) (2)
‘Increase)/decrease in trade and other receivables (11) 5
Decrease in contract assets 5 -
Decrease in trade and other payables (26) (3)
Decrease/(increase) in inventories a (2)
Decrease in trading provision (1) -
ncrease/(decrease) in provisions for discontinued operations 2 (2)
Pension costs paid (21) (26)
Cash payments in respect of investments items: 49 (46)
nvestment funding 168 70
Restructuring costs (119) (116)
Surrender of tax losses to joint venture 8 9
Net cash inflow from operating activities 100 20
Cash flows from investing activities
Dividends received from joint ventures 10 33 34
Acquisition of businesses (net of cash acquired) 20 (17) (6)
Proceeds from the sale of property, plant and equipment 4 5
Purchase of tangible and intangible non-current assets (149) (135)
Net cash outflow from investing ac! (129) (102)
Net cash outflow before financing act (29) (82)
Cash flows from financing activities
Finance costs paid (8) (5)
Proceeds of borrowings from BEIS 14 (58) 62
Net cash (outflow) /inflow from financing activities (66) 57
Net decrease in cash and cash equivalents (95) (25)
Cash and cash equivalents at the beginning of the year 12 655_ 680
Cash and cash equivalents at the end of the year 12 560 655
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Consolidated Balance Sheet
at 31 March 2019 and 25 March 2018
2019 2018
Note _ £m £m
Non-current assets
Intangible assets 8 291 264
Property, plant and equipment 9 176 148
Investments in joint venture 10 66 66
Retirement benefit surplus 17 1 3
Trade and other receivables 11 oe 12
Total non-current assets 540 493
Current assets
Inventories 8 9
Trade and other receivables ai 344 324
Cash and cash equivalents 12 560 655
Total current assets 912 988
Total assets 1,452 1,481
Current lial ies
Trade and other payables 13 (533) (571)
Financial liabilities - interest bearing loans and borrowings 14 (565) (623)
Provisions 15 (50) (36)
Total current li (1,148) (1,230)
Non-current liabi
Other payables 13 (14) (18)
Provisions 15 (34) (30)
Total non-current liabi (48) (48)
Net assets 256 203
Equity
Share capital 18 - -
Share premium 18 465 465
Accumulated losses (214) (264)
Other reserves 18 5 2
Total equity 256 203
The notes on page [XX] to [XX] form an integral part of the consolidated financial statements.
The financial statements on pages [XX] to [XX] were approved by the Board of Directors on XX
XXX 2019 and signed on its behalf by:
ACJ Cameron
Interim Chief Executive
Post Office Lir
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Consolidated Statement of Changes in Equity
for the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
Share Share — Accumulated Other Total
capital premium losses reserves equity
At 26 March 2018 . 465 (264) 2 203
Profit for the year - - 52 - 52
Other comprehensive income - - (2) 3 i
At 31 March 2019 . 465 (214) 5 256
Share Share = Accumulated Other Total
capital premium losses reserves equity
Note —£m ém ém —£m £m.
At 27 March 2017 - 465 (281) 2 186
Profit for the year - - 17 - 17
Other comprehensive income - - - - -
At 25 March 2018 - 465 (264) 2 203
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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 53 weeks ended 31 March 2019 (2018: 52 weeks ended 25 March 2018).
Basis of preparation
The Group financial statements on pages [XX] to [XX] have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the European Union and with
those parts of the Companies Act 2006 applicable to companies reporting under IFRS. IFRS
interpretations are issued by the International Accounting Standards Board (IASB) and must be
adopted into European Law, referred to as endorsement, before they become mandatory under
the IAS regulation. Unless otherwise stated in the accounting policies below, the financial
statements have been prepared under the historic cost accounting convention.
The principal accounting policies applied in the preparation of these consolidated Financial
Statements are set out below. These policies have been consistently applied to all the years
presented, unless otherwise stated.
The Company is incorporated and domiciled in the United Kingdom. The Group consolidated financial
statements are presented in sterling and all values are rounded to the nearest £ million except
where otherwise indicated. The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
Post Office Limited is a private Company limited by shares incorporated in England and Wales.
The income statement presents the results of the Group in a columnar format - in total and split
between trading and investments. The trading column represents the underlying performance of the
business. Investment funding from Government, restructuring and transformation costs are
separately disclosed in the investments column.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its
subsidiary undertakings as at 31 March 2019. 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 set of financial statements has been prepared for Post Office
Management Services Limited (subsidiary, registered address: Finsbury Dials, 20 Finsbury Street,
London, EC2Y 9AQ) for the 53 weeks ended 31 March 2019. A separate set of financial statements
has also been prepared for Payzone Bill Payments Limited (subsidiary, registered address: Finsbury
Dials, 20 Finsbury Street, London, EC2Y 9AQ), which was acquired on 24 October 2018, see note
[20] for details.
The year-end dates of these subsidiaries are in line with the Company. The subsidiaries use
consistent accounting policies where appropriate and their results have been consolidated into the
Group financial statements. All intra-group balances, transactions, and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
New and amended standards adopted by the Group
The Group applied IFRS 15 and IFRS 9 for the first time. The nature and effect of the changes as
a result of adoption of these new accounting standards are described below.
Several other amendments and interpretations apply for the first time in 2018/19, but do not
have an impact on the financial statements of the Group. The Group has not early adopted any
standards, interpretations or amendments that have been issued but are not yet effective.
IFRS 9 Financial Instruments
IFRS 9 replaces the provisions of IAS 39 Financial Instruments: Recognition and Measurement
that relate to the recognition, classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of financial assets and hedge
accounting.
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Notes to the financial statements (continued)
The adoption of IFRS 9 from 2018/19 has not had a material impact on our results, with the key
issues for Post Office being around documentation of policies and new hedge documentation.
IFRS 9 operates an expected credit loss model rather than an incurred credit loss model.
Providing for loss allowances on our existing financial asset has not had a material impact.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations
and it applies, with limited exceptions, to all revenue arising from contracts with its customers.
IFRS 15 establishes a five-step model to account for revenue arising from contracts with
customers and requires that revenue be recognised at an amount that reflects the consideration
to which an entity expects to be entitled in exchange for transferring goods or services to a
customer.
The Group adopted IFRS 15 using the modified retrospective method of adoption. The standard
has not had a material impact on revenue recognition at Post Office and therefore, on initial
application, no adjustment was required to the opening balance of retained earnings.
Presentational reclassifications on the face of the income statement have been required in
respect of the Network Subsidy Payment and commission income relating to Government
Services. These two items were formerly recognised in revenue and have now been reclassified
to other income as they did not meet the recognition criteria from revenue under IFRS 15. Refer
to page [XX] for further details of the reclassification. The accounting policies for revenue and for
other income are on pages [X] and [X] respectively.
New standards and interpretations not yet adopted
IFRS 16 Leases
IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the
balance sheet by lessees, as the distinction between operating and finance leases is removed. Under
the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals
are recognised. The only exceptions are short-term and low-value leases.
The Group has set up a project team which has reviewed all of the Group’s leasing arrangements
over the last year in light of the new lease accounting rules in IFRS 16. The standard will affect
primarily the accounting for operating leases.
The Group will apply the standard from its mandatory adoption date - for Post Office this is from 1
April 2019. The Group intends to apply the simplified transition approach and will not restate
comparative amounts for the year prior to first adoption. Right-of-use assets will be measured at the
amount of the lease liability on adoption (adjusted for any existing onerous and vacant lease
provisions). The Group therefore expects to recognise right-of-use assets of approximately £[XX]
million on 1 April 2019 and lease liabilities of £[XX] million. The net impact on the income statement
account will be minimal - an increase in trading profit of some £[7-9]m as it will no longer have a
charge for operating leases, matched by increases in depreciation, to recognise the usage of the new
right-of-use assets, and finance costs, to recognise the unwinding of the discount on the lease
liability. There will be no impact on the cash flows of the business.
The Group’s activities as a lessor are not material and hence the group does not expect any
significant impact on the financial statements.
The Group’s current lease commitments are disclosed in note [19].
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 £256 million at 31 March 2019 (2018: £203 million). At 31 March 2019
£385 million of the Group’s working capital facility was undrawn (2018: £327 million). The Group has
also been profitable at a trading profit level with current year profit of £61 million (2018: £35 million)
and has shown a profit after tax of £52 million (2018: £17 million).
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Notes to the financial statements (continued)
We have the following funding agreed with BEIS: a working capital facility of £950 million to 31
March 2021; a further £50 million facility available to provide same day liquidity to 4 April 2020;
Network Subsidiary Payment of £50 million for 2019/20 and 2020/21 respectively; and we also have
investment funding of up to £210 million as required for the period from April 2018 to March 2020.
After careful consideration of the plans for the coming years, the Directors continue to believe that
Post Office will be able to meet its liabilities as they fall due for the next 12 months. Accordingly, on
that basis, the Directors consider that it is appropriate that these financial statements have been
prepared on a going concern basis.
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
gamounts recognised in the financial statements. The most significant areas where judgements and
estimates are made are discussed below:
Critical accounting estimates:
Key assumptions used in impairment tests for non-current assets
The Group assesses whether there are any indicators of impairment for all non-current assets at
each reporting date as well as if events or changes in circumstances indicate that the carrying value
may be impaired. Factors considered important that could trigger an impairment review include the
following:
. Significant underperformance compared to historical or projected future operating results.
. Significant changes in the manner of use of the acquired assets or the strategy of the overall
Group.
. Significant negative micro- or macro-economic trends.
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 (CGU) exceeds its recoverable amount.
The recoverable amount is determined based on value in use calculations which require the use of
assumptions. The calculations use cash flow projections based on financial budgets approved by
management covering a two year period. Cash flows beyond this period are extrapolated using
estimated growth rates. Refer to note [9] for the results of the latest impairment test, including
sensitivity analysis.
Actuarial assumptions
The costs, assets and liabilities of the pensions operated by the Group are determined using
methods relying on actuarial estimates and assumptions.
The 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 and in accordance with published statistics and experience.
Refer to note 17 for details of the key assumptions and sensitivity analysis performed.
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.
Property provisions
The Group recognises provisions for property leases that are onerous. Assumptions are made to
determine whether the unavoidable costs of meeting the obligations of a lease agreement exceed
the economic benefits expected to be received under it. These include estimates around the future
trading performance of the site and cost allocations.
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Notes to the financial statements (continued)
Critical accounting judgements:
The recognition of a contingent liability in respect of the Group Litigation Order is a key accounting
judgement as at the accounting reference date. The key judgement is the level to which a potential
liability is deemed possible versus probable and therefore whether a contingent liability is the correct
accounting treatment.
Revenue
The following revenue accounting policy relates to the prior year only.
Revenue from Retail, Financial Services and Telecoms comprises the value of services provided from
the Group’s principal activities in providing a whole range of services through its physical and digital
channels. Revenue from Financial Services and some Retail services comprises the commission
received. Revenue 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. Revenue
from all other transactions is recognised when the transaction is completed. All revenue is derived
wholly from within the United Kingdom.
Post Office Management Services revenue comprises the value of services provided from the
principal activities in providing insurance intermediary services through its network of Post Office
branches across the UK, online and contact centre channels. Revenue comprises commissions
received from provision of the intermediary services excluding taxes. Revenue from all transactions
is recognised when the transaction is completed.
Revenue from contracts with customers
In 2018/19, the Group adopted IFRS 15.
Retail
The Group provides Mails support services to Royal Mail and Parcelforce. Each Mails product and
service has an associated transaction price. The transaction price may vary due to the volume
transacted in the period. Revenue from providing Mails support services is recognised in the
accounting period in which the services are rendered.
The Group acts as a selling agent and earns commission on the sale of lottery tickets, scratch cards
and gift vouchers. The transaction price is a contractual commission rate, which is based on the
value of sales in the period. Revenue from the sale of lottery tickets, scratch cards and gift vouchers
is recognised in the accounting period in which these sales are made.
Payment services comprise of bill payments (including the subsidiary Payzone Bill Payments
Limited). The transaction price is the fee that the Group earns for each bill paid in a branch. Revenue
from bill payments is recognised in the accounting period in which the service is rendered and is
based on the transaction price multiplied by the volume of bill payments in the period.
Through the Banking Framework Agreement, the Group provides over-the-counter banking services,
such as withdrawals, deposits and balance enquiries, on behalf of banks. A transaction price is
associated with each banking service provided. Revenue is recognised in the accounting period in
which the services are rendered and is based on the transaction price multiplied by the volume of
each service provided in the period.
Identity Services
Identity services are provided under contract to Government departments, such as the DWP, DVLA
and the Home Office. Each Government service has an associated transaction price. Revenue is
recognised in the accounting period in which the services are rendered and is based on the
transaction price multiplied by the volume of each service provided in the period.
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Notes to the financial statements (continued)
Financial Services & Telecoms
Our Financial Services products include mortgages, credit cards, savings, travel and banking. The
Group earns commission on the sale of these products. The transaction price is a contractual
commission rate. This commission rate varies by product and is based on volume or value of
products sold in the period as well as the channel of sale, for example online or through the branch
network. Revenue is recognised in the accounting period in which the new products are sold.
Telecoms includes Post Office HomePhone and Broadband services. The transaction price is the
subscription fee, consisting primarily of charges for access to broadband and other internet access or
voice services. Revenue is recognised as the service is provided because the customer receives and
uses the benefits simultaneously.
Insurance
Through its subsidiary, Post Office Management Services Limited, the Group provides general and
life insurance intermediation. The transaction price is a contractual commission rate. This
commission rate varies by product and is based on the volume or value of products sold in the
period as well as the channel of sale, for example online or through the branch network. Revenue is
recognised in the accounting period in which the new products are sold.
For all the revenue streams noted above, a receivable is recognised when the goods are delivered or
the services are provided, as this is the point in time that the consideration is unconditional, because
only the passage of time is required before the payment is due.
The Group does not expect to have any contracts where the period between the transfer of the
promised goods or services to the customer and the payment by the customer exceeds one year. As
a consequence, the Group does not adjust any of the transaction process for the time value of
money.
Other income
The Network Subsidy Payment is received from Government and is recognised as other income to
match the related costs of making available the network of public Post Offices that the Secretary of
State for BEIS considers appropriate. The subsidy is recognised in the year in which it is received. If
the subsidy were to exceed the cost of making the network available, the excess would be repaid to
Government. Other income also includes commission income relating to Government Services. This
income, along with the Network Subsidy Payment, was previously presented within revenue;
however they do not fall within the scope of IFRS 15. As a result these two items have been
reclassified to other income. Refer to note [16] for further detail.
Investments column in the income statement
Income statement items are presented in the investments column when they are significant in
size or nature, and either they do not form part of the underlying trading of the business or their
separate presentation enhances understanding of the financial performance of the Group.
Investment funding from Government, restructuring and transformation costs are separately
disclosed in the investments column. Refer to note [4] for further detail.
Leases
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. Provision for dilapidation are made where necessary.
Refer to the provisions policy on page [X] and note [15] for further detail.
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Notes to the financial statements (continued)
Taxation
The amount charged or credited as 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:
- On the initial recognition of goodwill.
- On 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.
- On the 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.
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.
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. The joint venture is an integral part of the Group’s operations,
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The
consideration transferred in a business combination is measured at fair value, which is calculated
as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities
incurred by the Group to the former owners of the acquiree and the equity interest issued by the
Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit
or loss as incurred, within the investments column.
Property, plant and equipment
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 are depreciated on a straight-line
basis over the following useful lives:
Range of asset lives
Plant and machinery 3-15 years
Motor vehicles 3-12 years
Fixtures and equipment 3-15 years
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Notes to the financial statements (continued)
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. They are depreciated on a straight-line basis over the following useful lives:
Range of asset lives
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. Where freehold property and long leasehold includes the fit-out of
those properties, then the fit-out is depreciated over its useful economic life in line with fixtures and
fittings.
Assets in the course of construction are carried at cost, with depreciation charged on the same basis
as all other assets once those assets are ready for their intended use.
Intangible assets
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. The Group’s management undertakes an
impairment review annually or more frequently if events or changes in circumstances indicate that
the carrying value may not be recoverable.
Software
Costs associated with maintaining software programmes are recognised as an expense as incurred.
Development costs that are directly attributable to the design and testing of identifiable and unique
software products controlled by the Group are recognised as intangible assets when the following
criteria are met:
. it is technically feasible to complete the software so that it will be available for use
. management intends to complete the software and use or sell it
. there is an ability to use or sell the software
. it can be demonstrated how the software will generate probable future economic benefits
. adequate technical, financial and other resources to complete the development and to use or
sell the software are available, and
. the expenditure attributable to the software during its development can be reliably measured.
Directly attributable costs that are capitalised as part of the software include employee costs and an
appropriate portion of relevant overheads.
Capitalised development costs are recorded as intangible assets and amortised from the point at
which the asset is ready for use.
Research and development
Research expenditure and development expenditure that does not meet the criteria above are
recognised as an expense as incurred. Development costs previously recognised as an expense are
not recognised as an asset in subsequent periods.
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Notes to the financial statements (continued)
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. They
are amortised on a straight-line basis over the following useful lives:
Range of asset lives
Software 3 - 6 years
Customer relationships 5 years
Merchant relationships 5 - 10 years
Brands 15 years
Assets in the course of construction are carried at cost, with amortisation commencing once the
assets are ready for their intended use.
Inventories
Inventories include stationery, retail, lottery and Royal mint coin products and are carried at the
lower of cost and net realisable value after adjusting for obsolete or slow-moving stock.
Trade receivables
Trade receivables are recognised and carried at original invoice amount. An allowance is made
when collection of the full amount is no longer probable. The Group applies IFRS 9 to measure
this allowance for expected credit loses, grouping trade receivables based on shared risk
characteristics and days past due. Bad debts are written off when identified.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and on hand, including cash
in the Post Office network and short-term deposits (cash equivalents) with an original maturity date
of three months or less. 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 subsidiaries Post Office Management Services Limited and Payzone Bill Payments Limited hold
some fiduciary cash balances, these are held on trust on behalf of third parties, see note [12] for
details.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the
Group.
The Group is the principal employer of the Post Office Section of the Royal Mail Pension Plan (RMPP),
and is a participating employer within the Royal Mail Senior Executives Pension Plan (RMSEPP).
RMPP and RMSEPP are both defined benefit plans closed to new members and closed to future
accrual. All members of these plans are contracted out of the earnings-related part of the State
pension scheme.
A Memorandum of Understanding was executed in 2016/17 which removed the unconditional right to
refund from the RMPP. As a result of these events the surplus relating to this Plan was derecognised.
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,
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Notes to the financial statements (continued)
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 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). As noted
above, the RMPP Plan has been closed and no future refunds will be made to the Group.
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. As the Group has no right to a future surplus in the RMPP, an
equal and opposite adjustment to the asset ceiling is recognised in other comprehensive income.
There is no effect on the net assets position of the Group.
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.
Provisions
Provisions are recognised when the Group 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. 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 determined by discounting the expected future
cash flows at an appropriate pre-tax rate.
Financial instruments
Initial measurement of financial instruments
All financial instruments are initially measured at fair value plus or minus, in the case of a
financial asset or financial liability not at fair value through profit or loss, transaction costs.
Subsequent measurement of financial assets
IFRS 9 divides all financial assets into two classifications - those measured at amortised cost and
those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised entirely in profit
or loss (fair value through profit or loss, “FVTPL”), or recognised in other comprehensive income
(fair value through other comprehensive income, “FVTOCI)”.
The classification of a financial asset is made at the time it is initially recognised. If certain
conditions are met, the classification of an asset may subsequently need to be reclassified.
Subsequent measurement of financial liabilities
IFRS 9 divides all financial liabilities into two measurement categories: FVTPL and amortised
cost. All of the Group’s financial liabilities are measured at amortised cost.
Derecognition of financial assets
A financial asset is derecognised when the Group determines that it has transferred substantially
all of the risks and rewards of ownership of the asset.
Derecognition of financial liabilities
A financial liability is removed from the balance sheet when it is extinguished; that is, when the
obligation specified in the contract is either discharged or cancelled or expires.
Derivatives and hedging activities
Derivatives are initially recognised at fair value on the date that a derivative contract is entered
into, and they are subsequently remeasured to their fair value at the end of each reporting
period. The accounting for subsequent changes in fair value depends on whether the derivative is
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Notes to the financial statements (continued)
designated as a hedging instrument and, if so, the nature of the item being hedged. The Group
designates certain derivatives as either:
* Hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value
hedges).
° Hedges of a particular risk associated with the cash flows of recognised assets and liabilities
and highly probable forecast transactions (cash flow hedges).
* Hedges of a net investment in a foreign operation (net investment hedges).
At inception of the hedge relationship, the Group documents the economic relationship between
hedging instruments and hedged items, including whether changes in the cash flows of the
hedging instruments are expected to offset changes in the cash flows of hedged items. The
Group documents its risk management objective and strategy for undertaking its hedge
transactions.
The fair values of derivative financial instruments designated in hedge relationships are disclosed
in note [16]. Movements in the hedging reserve are shown within other reserves in the
statement of changes in equity. The full fair value of a hedging derivative is classified as a non-
current asset or liability when the remaining maturity of the hedged item is more than 12
months; it is classified as a current asset or liability when the remaining maturity of the hedged
item is less than 12 months.
Cash flow hedges that qualify for hedge accounting
The effective portion of changes in the fair value of derivatives that are designated and qualify as
cash flow hedges is recognised in other reserves within equity. The gain or loss relating to the
ineffective portion is recognised immediately in profit or loss.
When the forecast transaction subsequently results in the recognition of a non-financial asset or
non-financial liability, the associated cumulative gain or loss is removed from equity and included
in the initial cost or other carrying amount of the non-financial asset or liability. If a hedge of a
forecast transaction subsequently results in the recognition of a financial asset or financial
liability, the associated gains or losses that were previously recognised in the statement of
comprehensive income are reclassified into the income statement in the same period or periods
during which the asset acquired or liability assumed affects the income statement.
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Notes to the financial statements (continued)
2. Staff costs and numbers
Employment and related costs were as follows:
2019 2018
People costs within trading: £m £m
Wages and salaries 162 154
Social security costs 18
Other pension costs (note [17]) 17
“Jotal people costs withintaang” Se Bois a
Other operating costs within trading 765 771
Total trading costs 958 960
People costs within investments relate to severance costs as part of restructuring and are disclosed
within note [4].
Period end and average monthly employee numbers were as follows:
Period end employees Average monthly employees
2019 2018 2019 2018
Total employees 4,397 5,020 4,703 5,066
Total employee numbers can be categorised as follows:
2019 2018
Administration 1,205 1,205
Directly managed branches (DMB) 2,049 2,707
Supply Chain 854 848
Network programmes 164 213
Post Office Insurance 57 47
Payzone Bill Payments 68 -
Total 4,397 5,020
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Notes to the financial statements (continued)
3. Operating profit
The following items are included within operating profit:
2019 2018
ém £m
Postmasters’ fees 365 371
Depreciation and amortisation (notes [8] and [9]) 94 55
Cost of inventories recognised as an expense 4 4
Loss on disposal of fixed assets 5 1
Operating lease charges - Land and buildings 13 12
Operating lease charges - Motor vehicles 1 1
Fees payable to the Group’s auditor for audit and other services: £000 £000
- parent Company and Group audit 440 773
- audit of subsidiary 85 82
- audit related assurance services * 105
- other assurance services 110 110
4. Investments
2019 2018
£m —m
Investment funding 168 70
Restructuring:
Business transformation (14) (16)
Network programmes. (64) (63)
IT transformation (13) (6)
Severance (38) (17)
Total restructuring costs (129) (102)
Unwinding of discounts on provisions (a) (2)
Total investments income / (charge) 38 (34)
Investment funding: Investment funding is received from BEIS.
Restructuring: Restructuring costs are transformational spend incurred in order to implement the
major transformation programmes. Business transformation is an overarching programme that will
transform the business, driving Post Office toward commercial sustainability through technological
innovation and the fundamental re-envisaging of long-term contracts. Network programmes is a
multi-year initiative designed to simplify the retailer proposition, with key areas of focus being
simplification, automation and the extension of the franchising model to some of our directly
managed branches. IT transformation includes programmes to restructure our IT operating model
and overhaul legacy back office systems, transitioning to a cloud based architecture. As part of the
aforementioned transformational activities, severance costs have been incurred.
Unwinding of discounts on pro’ ns: finance costs incurred in order to unwind the discount on
onerous lease provisions.
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Notes to the financial statements (continued)
5. Directors’ emoluments
Directors accruing pension entitlements during the period under: 2019 2018
. Number Number
Defined benefit schemes . -
Defined contribution schemes 1 1
The Directors received the following emoluments:
Remuneration for each Director for the financial year 2018/19
Name Annualised Actual Cash in lieu
salary/fees salary/fees Benefits of pension sTIP LTIP Total Total
2018/19 (note 1) 2018/19 2018/19 2018/19 2018/19 2018/19 2018/19 2017/18
Non-Executive Directors
Tom Cooper (note 2) - - - - - - i -
Tim Franklin 40,000 39,800 - - - - 39,800 40,000
Virginia Holmes (note 3) 35,700 300 - - - - 300 35,500
Shirine Khoury-Haq 35,000 30,000 - - - - 30,000 -
Ken McCall 50,000 49,800 - - - - 49,800 50,000
Tim Parker (note 4) 19,230 19,300 - - - - 19,300 75,000
Carla Stent 45,000 44,800 - - - - 44,800 45,000
Richard Callard (rote 5) - - - - - - - -
Executive Directors
Paula Vennelis (note 6) 255,000 255,000 9,900 63,800 x x X 718,300
Alisdair Cameron 244,800 244,800 9,900 61,200 x x X 595,900
Note 1: The annualised fees are shown as at 31 March 2019 or at the date of leaving.
Note 2: Tom Cooper is an employee of UK Government Investments Limited (UKGI).
Note 3: Virginia Holmes ceased her role as Non-Executive Director on 27 March 2018.
Note 4: Tim Parker donates the after tax value of his Board fees to charity. From 1 April 2018, Tim’s time
commitment has reduced and there has been a corresponding reduction in his annual fee.
Note 5: Richard Callard was an employee of UKGI and ceased his role as Non-Executive Director on 27
March 2018.
Note 6: Paula Vennells resigned as Group Chief Executive on 30 April 2019.
Remuneration Policy Summary
The table below describes the STIP and LTIP available for the Executive Directors.
The remuneration framework for the Executive Directors requires consent from the Special
Shareholder (BEIS) each year.
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Notes to the financial statements (continued)
Short-Term The STIP drives and rewards performance over the single
Incentive Plan financial year against key financial and operational targets taken
(STIP) 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 objectives.
The target opportunities for the Chief Executive and Chief
Finance and Operating Officer are 48% and 40% of salary, with
a maximum for stretch performance of 80% and 66.66% of
salary respectively.
Long-Term The LTIP is designed to reward and retain key executives and
Incentive Plan senior managers on the achievement of strategic longer term
(LTIP) 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 (BEIS).
The target opportunities for the Chief Executive and Chief
Finance and Operating Officer are 70% and 50% of salary, with
stretch performance of 98% and 70% of salary 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 financial
statements, error or gross misconduct on the part of an Executive Director. These provisions are
structured in line with market best practice.
6. Finance costs
2019 2018
£m ém
Trading:
Interest payable on loans (6) (5)
Finance charges (2) 7
Total - trading (8) (5)
Investments:
Unwinding of discounts on provisions (1) (2)
Total - investments (1) (2)
Total — net finance costs (9) (7)
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Notes to the financial statements (continued)
7. Taxation credit
(a) Taxation recognised in the year
Current and deferred income tax is charged or credited to the income statement as follows:
2019 2018
£m £m
Current income tax:
Corporation tax credit for year (8) (8)
Deferred income tax:
Deferred tax income relating to the utilisation of losses brought forward qa) ()
Taxation credit (9) (9)
The current income tax credit recognised in the income statement is £8 million (2018: £8 million)
and relates to the surrender of tax losses to the joint venture. The deferred income tax credit
recognised in the income statement is £1 million (2018: £1 million) and arises as a consequence of
the acquisition of intangible assets as part of a business combination. It corresponds to the deferred
tax liability recognised in the business combination.
In the current year no deferred income tax has been recognised in other comprehensive income.
No current or deferred tax income tax was recognised directly in equity in the current or prior year.
(b) Factors affecting current tax charge on profit on ordinary activities
As in 2018, the tax assessed for the year differs from the standard rate of corporation tax in the UK
of 19% (2018: 19%). The differences are explained below:
2019 2018
Profit before taxation 43 8
Profit before taxation multiplied by the standard rate of corporation 6 1
tax in the UK of 19% (2018: 19%)
Effect of unutilised losses carried forward 18 29
Decrease in tax charge as a result of change in unrecognised deferred 1 (24)
tax assets
Surrender of tax losses to joint venture (8) (8)
Profits from disposals eligible for relief - -
Tax effect of share of results of joint venture (6) (7)
Taxation credit (9) (9)
(c) Deferred tax
Deferred tax relates to the following:
Consolidated balance sheet___ Consolidated income statement
2019 2018 2019 2018
£m £m £m —m
Acquired intangible assets (2) (1) 1 1
Tax losses 2 1 - -
Deferred tax (liability) / asset - - - :
Deferred tax income . - 1 1
In the current year a deferred tax liability of £2 million (2018: £1 million) has been recognised on
the acquisition of intangible assets as part of a business combination, with a corresponding deferred
tax asset of £2 million (2018: £1 million) recognised for the value losses up to the same liability.
The Group has significant tax losses that are available indefinitely for offsetting against future
taxable profits. As at the balance sheet date no deferred tax asset has been recognised in relation to
these tax losses (2018: Enil).
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Notes to the financial statements (continued)
(d) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £183 million (2018: £190 million), comprising
£148 million (2018: £143 million) relating to tax losses that are available to offset against future
taxable profits, £32 million (2018: £46 million) relating to fixed asset timing differences and £1
million (2018: £1 million) relating to temporary differences on provisions. The Group has rolled over
capital gains of £2 million (2018: £2 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 main rate of corporation tax in the UK will remain at 19% for the year starting 1 April 2019 and
reduce to 17% with effect from 1 April 2020.
The Finance (No.2) Act 2017 was substantively enacted on 16 November 2017. This includes a
restriction on the utilisation of brought forward tax losses and corporate interest in certain
circumstances effective from 1 April 2017.
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Notes to the financial statements (continued)
8. Intangible assets
Other
Software Goodwill intangibles Total
£m £m ém £m
Cost
At 27 March 2017 323 44 - 367
Reclassification (2) . - (2)
Additions 125 1 6 132
At 25 March 2018 446 45 6 497
Reclassification (29) . * (29)
Additions 101 ie 7 101
Added on acquisition 1 8 7 16
Disposals (17) - : (17)
At 31 March 2019 502 53 13 568
Accumulated amortisation
At 27 March 2017 200 - - 200
Reclassification 6 - - 6
Amortisation 27 - : 27
At 25 March 2018 233 = > 233
Added on acquisition 1 . i 1
Amortisation $5 5 3 58
Disposals (15) - i (15)
At 31 March 2019 274 he 3 277
Net book value
At 31 March 2019 228 53 10 291
At 25 March 2018 213 45 6 264
Other intangibles includes customer relationships, merchant relationships and brands.
During the current and prior year, a review of property, plant and equipment and intangible assets
took place and resulted in reclassifications between categories.
Additions to software relate to IT transformation projects undertaken during the current year.
Additions to goodwill and other intangibles relate to the Payzone Bill Payments Limited (“Payzone”)
business combination disclosed within note [20]. Goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that the carrying value may not be
recoverable. Management determined that no impairment was necessary for the current year (2018:
Enil).
Goodwill was not considered to be impaired at the date of the last review. Refer to note [9] for
details of the impairment review performed during the year.
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Notes to the financial statements (continued)
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 —m =m ém
Cost
At 27 March 2017 45 41 23 26 1 795 931
Reclassification 1 1 1 - - (4) 2
Additions - - - 1 - 18 19
Disposals (6) (3) (2) (2) - (7) (20)
he EE
Reclassification 2 . : 2 : 27 29
Additions 1 1 1 e . 35 38
Added on acquisition : . . : a 4 4
Disposals (4) (1) (2) . ie (22) (29)
At 31 March 2019 39 39 21 25 1 849 974
Accumulated depreciation
At 27 March 2017 32 14 23 26 1 677 773
Reclassification - - - - - (6) (6)
Depreciation 1 2 - - - 25 28
Disposals (4) - (2) (2) - (3) (11)
At 25 March 2018 29 16 21 24 1 693 784
Depreciation 1 2 : . . 33 36
Disposals (2) (1) (2) - - (17) (22)
At 31 March 2019 28 17 19 24 1 709 798
Net book value
At 31 March 2019 a. 22 2 1 - 140 176
At 25 March 2018 11 23 1 1 - 112 148
Depreciation rates are disclosed on page [XX] within the accounting policies note. No depreciation is
provided on freehold land, which represents £2 million (2018: £2 million) of the total cost of
properties.
During the current and prior year, reviews of property, plant and equipment and intangible assets
took place and resulted in reclassifications between categories.
An impairment test was performed during the year. Intangible assets and property, plant and
equipment were tested for impairment by comparing the carrying amount of each Cash
Generating Unit (CGU) with the recoverable amount determined from value in use calculations.
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Notes to the financial statements (continued)
Post Office has determined that it has two CGUs: Post Office Limited and Post Office Management
Services Limited. Post Office Management Services Limited is a standalone entity with an
identifiable asset base and therefore is deemed one CGU. Post office Limited runs a national
network of branches which provide a distinct retail offering resulting in a fluid customer base
across the network. As such the network as a whole is deemed to be one CGU.
The discounted net cash flows from the value in use calculations were used to determine the
recoverable amount of the CGU’s identified, being Post Office Limited and Post Office
Management Services Limited. Value in use is determined using the Group’s net cash inflows
from the continued use of the assets within each CGU over a two year period (and then
continued into perpetuity), with no nominal growth rate assumed outside of this period. Pre-tax
discount rates for Post Office Limited of 9.5% (2018: 9%) and for Post Office Management
Services Limited of 12% (2018: 12%) have been used to discount the forecasted cash flows.
A sensitivity analysis has been performed in assessing the value in use of property, plant and
equipment and intangible assets. This has been based on changes in key assumptions considered
to be possible by management. This included an increase in the discount rate of up to 12%, zero
growth rate and a decrease in forecasted EBITDA by 5%. The sensitivity analysis showed that no
impairment would arise under each or a combined scenario.
Management therefore believes that any reasonably possible change in the key assumptions
would not cause the carrying amount of any CGU’s to exceed their carrying value.
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Notes to the financial statements (continued)
10. Investments in joint ventures
The following entity has been included in the consolidated financial statements using the equity
method:
Joint ventures
During the current and prior year, 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, Brentford, Middlesex, TW8 9DF.
The principal activity of First Rate Exchange Services Holdings Limited is the supply of foreign
currency in the UK, which is seen as complementing the Group’s operations and contributing to.
achieving the Group’s overall strategy. The principal risks of the Group are disclosed on pages [XX]
to [Xx].
The financial year-end date of First Rate Exchange Services Holdings Limited is 31 March. For the
purposes of applying the equity method of accounting, the financial statements of First Rate
Exchange Services Holdings Limited for the year ended 31 March 2019 have been used.
2019 2018
Joint venture Joint venture
£m £m
Share of net assets
Total net investment at 26 March 2018, 27 March 2017 66 66
Share of post-tax pre dividend profit 33 34
Dividend (33) (34)
Total net investment at 31 March 2019, 25 March 2018 66 66
2019 2018
Joint venture Joint venture
Share of assets and liabilities: £m £m
Receivables 193 220
Cash and cash equivalents 22 14
Non-current assets 7 8
Share of gross assets 222 242
Current liabilities (156) (176)
Share of net assets 66 66
Share of revenue and profit:
Revenue 82 84
Profit after tax 33 34
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Notes to the financial statements (continued)
11. Trade and other receivables
2019 2018
Current:
Trade receivables 97 81
Accrued income 71 78
Prepayments 19 17
Client receivables 138 132
Other receivables 19 16
Total 344 324
Non-current:
Accrued income 2 2
Prepayments 4 10
Total 6 12
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]).
£5m (2018: £4m) has been recognised within current prepayments for costs incurred to fulfil
contracts. Non-current prepayments constitute costs incurred to fulfil contracts, in both the current
and prior year.
The Group applies IFRS 9 when measuring expected credit losses. Trade receivables have been
grouped based on shared credit risk characteristics and the days past due to measure the expected
credit losses. The loss allowance for the current and prior year has been determined as follows:
>30 days >60 days
and <60 and <120
days past days past >120 days
31 March 2019 Current due due past due Total
Expected loss rate 21% 65%
Gross carrying amount - £m - . 1 18 19
Loss allowance - £m - - 1 18 19
>30 days >60 days
and <60 and <120
days past days past >120 days
25 March 2018 Current due due past due Total
Expected loss rate - - - 95%
Gross carrying amount - £m - - - 19 19
Loss allowance - £m - - - 19 19
There is a loss allowance in the current, more than 30 days and more than 60 days ageing
categories, however it is immaterial for disclosure.
The closing loss allowance for trade receivables as at 31 March 2019 reconciles to the opening loss
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Notes to the financial statements (continued)
allowance as follows:
2019 2018
£m £m
Opening loss allowance 19 14
Increase in loss allowance 9 14
Receivables written off as uncollectible (7) (5)
Unused amounts reversed (2) (4)
Closing loss allowance 19 19
The fair value of trade and other receivables is not materially different from the carrying value.
12. Cash and cash equivalents
2019 2018
£m £m
Cash in the Post Office Limited network 537 643
Short-term bank deposits 14 9
Fiduciary cash balances held on behalf of third parties 9 3
Total cash and cash equivalents 560 655
Cash in the Post Office Limited network represents the note and coin in circulation in branches and
cash centres. Refer to note [22] for further detail.
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 or Payzone Bill
Payments Limited and are held on trust on behalf of third parties and cannot be called upon should
either company become insolvent.
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Notes to the financial statements (continued)
13. Trade and other payables
2019 2018
£m ém
Current:
Trade payables 61 45
Accruals 118 160
Deferred income 20 32
Social security 8 8
Client payables 312 306
Capital accruals a1 20
Other payables 3 -
Total — _ ae a
Ds a naa
Other payables 14 18
Total 14 18
The fair value of trade and other payables is not materially different from the carrying value.
14. Financial liabilities — interest bearing loan and borrowings
2019 2018
£m £m
Department for Business, Energy and Industrial Strategy 565 623
The loan under the facility is short dated on a programme of liquidity management and matures 1
day after the year-end (2018: 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 2021. The undrawn committed facility, in respect of
which all conditions precedent had been met at the balance sheet date, is £385 million (2018: £327
million). The average interest rate on the drawn down loans is 1.1% (2018: 0.8%).
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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Notes to the financial statements (continued)
15. Provisions
Network
Programmes Property Severance Other Total
—m £m £m —£m =m
At 26 March 2018 18 32 7 9 66
Charged to investments 30 25 43 . 98
Charged to trading - - - 9 9
Transfers * 2 5 3 3
Utilisation (36) (9) (24) (6) (75)
Provisions released in the year — . (7) (4) ay (42)
Cowen released in the year . L . (5) (5)
At 31 March 2019 12 41 22 9 84
Network
Programmes Property Severance Other Total
—m £m £m —m £m
Disclosed as:
At 31 March 2019
Current 6 14 22 8 50
Non-current 6 27 . £ 34
12 41 22 9 84
At 25 March 2018
Current tt it 7 7 36
Non-current 7 21 - 2 30
18 32 7 9 66
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.
The Network Programmes provision relates to payments due to postmasters in relation to the major
transformation programme. Provisions are recognised when either postmasters agree to terminate
their existing contracts or sign the new format contracts under Network Transformation.
Property provisions relate to vacant and onerous leases and dilapidations. Vacant and onerous lease
provisions are recognised on leasehold properties when the unavoidable costs of meeting the
obligations of the lease agreement exceed the benefits expected to be received under it.
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.
Other provisions of £9 million includes £1 million for personal injury claims and £2 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.
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Notes to the financial statements (continued)
16. Financial assets and liabilities
a. Financial assets and liabilities by category
The breakdown of the Group’s financial instruments at 31 March 2019 and 25 March 2018 is shown
below:
2019 2018
Non - Non -
Current current Total Current current Total
£m £m £m ém ém ém
Financial assets
Trade and other receivables 325 2 327 307 2 309
Cash and cash equivalents 543 - 543 655 - 655
Financial liabilities
Trade and other payables (505) (3) (508) (531) (4) (535)
BEIS loan (565) . (565) (623) - (623)
Total financial liabi (202) es) (203) (192) (2) (194)
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.
All of the Group’s financial assets and liabilities are considered to be Level 2 in the fair value
hierarchy. The nature of the inputs used in determining the values of the financial assets and
liabilities are those other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
The Group has no Level 1 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 and
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, current
account balances, and commission income. 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 an £7 million
favourable impact on the Group’s equity and income statement. A 50 basis point decrease would
have resulted in a £7 million adverse impact on the Group’s equity and income statement.
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Notes to the financial statements (continued)
In 2018/19, to hedge its exposure to the variability of commission income linked to 1-month Libor,
the Group entered into a three year amortising interest rate swap which has the effect of fixing a
proportion of the interest commission income. The qualifying criteria for hedge accounting were met
and in accordance with IFRS 9 the swap was designated as the hedging instrument in a cash flow
hedge. At year end, the hedging instrument had a fair value of £3 million and has been included
within trade and other receivables on the balance sheet.
Foreign currency risk
The Group is exposed to foreign currency risk resulting from balances held to operate Bureau de
Change services.
The currencies in which these transactions are primarily denominated are 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.
Strengthening Effect on Strengthening Effect on
7 (weakening) profit Effect / (weakening) profit Effect
in US dollar rate before tax on equity in euro rate before tax on equity
% ém —m % ém £m
Increase / Increase / —_ Increase / Increase / Increase / Increase /
(decrease) __ (decrease) _ (decrease) (decrease) (decrease) _ (decrease)
2019 10 1 Bt 10 2 2
(10) q) (1) (10) (2) (2)
2018 10 1 1 10 3 3
(10) (1) (1) (10) (3) (3)
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in
financial loss to the Group. Financial credit risk arises from cash balances (including bank deposits
and cash and cash equivalents) held by the Group and business credit risk arises from exposures to
customers. Business risk includes commission receivable and client related settlements for amounts
paid out of the Post Office network on their behalf.
The Group aims to minimise its financial credit risk through the application of risk management
policies approved by the Board. Counterparties are limited to major banks and financial institutions.
The policy restricts the exposure to any one counterparty by setting appropriate credit limits. The
maximum exposure to credit risk is limited to the carrying value of each class of asset summarised
in note [11].
Business credit risk is monitored centrally. The level of bad debt provision is 2% (2018: less than
2%) of revenue.
Capital management
The Group’s objectives when managing capital (defined as the net of borrowings 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.
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Notes to the financial statements (continued)
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 reserves to meet operating requirements in the next 12 months.
At 31 March 2019 the Group has unused facility of £385 million (2018: £327 million). The working
capital facility expires in 2021.
In addition to the security interest provided to BEIS in connection with the £950 million Working
Capital Facility (note [14]), Post Office Limited has also created a first floating charge over its
assets as security for the payment and discharge of certain liabilities arising in the normal course
of its client-related activity. The charge under these arrangements is restricted in its ability to
take an acceleration action in relation to its debt. As at the balance sheet date the outstanding
liabilities amounted to £95 million (2018: £100 million).
The tables below analyse 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.
12 1-2
Months Years Total
At 31 March 2019 —m ém £m
Financial assets
Trade and other receivables 325 2 327
Cash and cash equivalents 543 a 543
Financial liabilities
Trade and other payables (505) (3) (508)
Interest bearing loan (565) - (565)
Total financial assets/(liabi (202) (1) (203)
12 1-2
Months Years Total
At 25 March 2018 —£m £m —£m
Financial Assets
Trade and other receivables 307 2 309
Cash and cash equivalents 655 - 655
Financial Liabilities
Trade and other payables (531) (4) (535)
Interest bearing loan (623) - (623)
Total financial assets/(liabilities) (192) (2) (194)
Prepayments, social security and deferred income have been excluded from the table above. There
were no financial assets or liabilities in the current or prior year that were due to mature after two
years.
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Notes to the financial statements (continued)
17. Retirement benefit surplus
The disclosures in this note reflect the two defined benefit schemes: the Post Office section of the
Royal Mail Pension Plan (RMPP) which is independent from the Royal Mail section of the RMPP,
and a 7% share of the Royal Mail Senior Executives Pension Plan (RMSEPP). Royal Mail Group Ltd
is the principal employer of RMSEPP and Post Office Limited became a participating employer
with effect from 1 April 2012. This disclosure also includes the Post Office Pension Plan (POPP),
which is a defined contribution scheme.
The disclosures in this note show the value of the assets and liabilities that have been calculated
at the balance sheet date.
Post Office participates in pension schemes as detailed below.
Name Eligibility Type
Royal Mail Pension Plan (RMPP)* UK employees Defined benefit
Royal Mail Senior Executives Pension Plan (RMSEPP) UK senior executives Defined benefit
Post Office Pension Plan (POPP) UK employees. Defined contribution
*The RMPP closed to future accrual on 31 March 2017.
Defined Contribution
The charge in the income statement for the defined contribution scheme was £13 million (2018:
£17 million) and the Group contributions to this scheme were £20 million (2018: £20 million)
during the year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate Trust
administered funds. It should be noted that the assumptions used for these pension disclosures
are not the same as the assumptions used for funding the plans. The latest full actuarial funding
valuation of the RMPP was carried out as of 31 March 2018 using the projected unit method. For
RMPP, this valuation was concluded at £20 million surplus (31 March 2015 valuation: £63 million
surplus) on a Technical Provisions basis. Valuations are carried out triennially.
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.
e Section B is for members (or beneficiaries of members) who joined after 1 December
1971 and before 1 April 1987 or to Section A members 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.
The latest full actuarial funding valuation for RMSEPP was carried out as at 31 March 2018 using
the projected unit method. For 100% of RMSEPP, the valuation concluded at £49 million surplus
(31 March 2015 valuation: £17 million surplus) on a Technical Provisions basis.
A series of changes to RMPP and RMSEPP have taken effect since 1 April 2008.
The changes encompassed are:
« The Plans closed to new members from 31 March 2008.
e All pensions and benefits earned before 1 April 2008 retained a link to final pensionable
salary, benefits accrued from 1 April 2008 were earned on a “career average pensionable
salary” basis.
« RMPP employees can continue to take their pension on reaching age 60 but the normal
retirement age increased to age 65 for benefits earned from 1 April 2010.
« From 1 April 2010 it was possible to draw pension earned before the change to normal
retirement age at age 55 (subject to an actuarial reduction in the pension benefit), and
continue working while still contributing to the RMPP until the maximum level of benefits
was reached.
* RMSEPP was closed to future accrual on 31 December 2012.
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Notes to the financial statements (continued)
« Liabilities accrued in the RMPP to 31 March 2012 were largely transferred to the Royal
Mail Statutory Pension Scheme. The pre-31 March 2012 liabilities are substantially no
longer an obligation of Post Office and the transfer therefore resulted in a significant
removal of pension risk for Post Office.
«In relation to RMPP only, from 1 April 2014 pensionable salary was amended to the
amount in force as at 31 March 2014, increasing each 1 April thereafter in line with RPI
(up to 5% each year), with allowance for certain promotional increases.
« The Post Office section of the RMPP closed to future accrual on 31 March 2017 and so no
further defined benefits have accrued in respect of Post Office employment after that
date; however for as long as a member remains in employment with the Group or has not
taken pension, pre-1 April 2012 pension benefits are linked to pensionable salary and
post-31 March 2012 benefits receive in-deferment increases (linked to CPI). Closure to
future accrual means that no contributions in respect of normal service accrual are
required after 31 March 2017. However there were redundancy payments of £1 million
(2018: £5 million) made to the RMPP during 2018/19, which were paid in order to fund
enhanced benefits for the members concerned.
« On 21 March 2017 Post Office executed a Memorandum of Understanding with the Trustee
of the RMPP. This clarified the Trustee’s powers to distribute surplus without Post Office’s
agreement and Post Office concluded that it no longer had an unconditional right to
refund from the Plan. In light of this, in accordance with IFRIC 14, the RMPP pension
surplus was derecognised as at 26 March 2017.
Even though RMSEPP had a funding surplus on a Technical Provisions basis at the date of the
latest full actuarial funding valuation, under the associated Schedule of Contributions, payments
of £1 million per annum has been made. Post Office’s share of these payments is 7% of the total.
The payments will continue to 31 March 2025.
The weighted average duration of the Post Office section of the RMPP is around 25 years, and for
RMSEPP is around 20 years.
In July 2017 the Trustee of the RMPP invested in two bulk annuity policies with Rothesay Life.
Those policies provide an income to the Post Office section of the RMPP that matches the vast
majority of the required benefit payments; as shown in the following disclosures, the estimated
value of those policies (on the IAS 19 assumptions as at 31 March 2019) is £292 million (2018:
£272 million), compared to the RMPP defined benefit obligation of £320 million (2018: £298
million). The £28 million difference in these figures is due to a £20 million reserve for future
administration expenses (which are not matched by the annuity policies), plus £8 million in
respect of small differences between the insured benefits and the actual benefit obligation.
A bulk annuity policy (with Scottish Widows) is also held by the Trustee of the RMSEPP. As shown
in the following disclosures, the estimated value of that policy, on the IAS 19 assumptions as at
31 March 2019, is £28 million (2018: £12 million), compared to the RMSEPP defined benefit
obligation of £29 million (2018: £27 million).
Therefore, as at 31 March 2019, 92% of the aggregate defined benefit obligation (i.e. £320
million out of the £349 million) is matched by bulk annuities that provide income matching the
required benefit payments. As such, the majority of the investment and longevity risk associated
with Post Office’s obligations in respect of the defined benefit plans has been removed (noting
that the bulk annuity policies are subject to protection from insurance regulations, including
access to the Financial Services Compensation Scheme, in the event of insurer insolvency).
Nevertheless, to the extent that 8% of the defined benefit obligation is not matched by bulk
annuities, some risk remains in respect of that 8%, in particular the risk that members with
uninsured benefits live for longer than expected, the risk that inflation is higher than expected,
leading to higher than expected increases to the uninsured benefits, the risk that the assets in
excess of the bulk annuity polices generate poor investment returns, and the risk that
administration expenses are higher than anticipated. However, these risks are expected to be
mitigated by the surplus assets shown in the disclosures (before allowing for the fact that the
RMPP surplus is not recognised on Post Office’s balance sheet due to the Memorandum of
Understanding described above).
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Notes to the financial statements (continued)
The following disclosures relate to the gains/losses and surplus/deficit in respect of Post Office’s
obligations to RMPP and RMSEPP:
Major long-term assumptions
The size of the defined benefit obligation shown in the financial statements is materially sensitive
to the assumptions adopted. Small changes in these assumptions could have a significant impact
on this value. The overall income statement charge and past service adjustment in the income
statement are also sensitive to the assumptions adopted. However, the majority of any change in
the defined benefit obligation due to changes in assumptions, will be matched by a corresponding
change in the value in the bulk annuity policies (described above).
The major long-term assumptions in relation to both RMPP and RMSEPP were:
At 31 March 2019 At 26 March 2018
°% pa % pa
Increases to benefits that retain a link to pensionable pay 3.4 3.3
Rate of pension increases - RMPP sections A/B 2.4 2.2
Rate of pension increases - RMPP section C 3.4 3.3
Rate of pensions increases - RMSEPP members transferred 2.4 2.2
from Section A or B of RMPP
Rate of pension increases - RMSEPP all other members 3.4 3.3
Rate of increase for deferred pensions 2.4 2.2
Discount rate 2.4 25
Inflation assumption (RPI) - RMPP & RMSEPP 3.4 3.3
Inflation assumption (CPI), - RMPP_& RMSEPP a ee Co . 2.2
The following table shows the potential impact on the value of Post Office’s defined benefit
obligation in respect of RMPP and RMSEPP of changes in key assumptions. As noted above, the
bulk annuities held by the arrangements provide an income that matches the vast majority of the
RMPP benefit payments, and a significant proportion of the RMSEPP benefit payments. Therefore
the following changes in the defined benefit obligation would be largely offset by a corresponding
change in the asset values.
2019 2018
£m ém
Changes in RPI and CPI inflation of +0.1% pa (8) (8)
Changes in discount rate of +0.1% pa 8 8
Changes in CPI assumptions of +0.1% pa 3 (3)
An additional one year life expectancy 11 (9)
The sensitivity analysis has been prepared using projected benefit cash flows 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 cash flows
have changed since those valuations although any change is not expected to be material in the
context of the above sensitivity analysis.
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Notes to the financial statements (continued)
Mortal
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The mortality assumptions used to calculate the value of Post Office’s defined benefit
obligation in respect of RMPP and RMSEPP are based on the latest self-administered pension
scheme (SAPS “S2” series) mortality tables as shown in the following table:
Base mortality tables 2019
2018
Male members
Male dependants
Female members
100% x S2PMA 100% x S2PMA
100% x S2PMA
100% x S2PFA
100% x S2PMA
100% x S2PFA
100% x S2PFA
CMI 2018 Core Projections with
a 1.5% pa long-term trend
100% x S2DFA
CMI 2016 Core Projections
with a 1.5% pa long-term trend
Female dependants
Future improvements
Average expected life expectancy from age 60: 2019 2018
For a current 60 year old male RMPP member 27 years 27 years
For a current 60 year old female RMPP member 29 years 29 years
For a current 40 year old male RMPP member 28 years 29 years
For a current 40 year old female RMPP member 31 years 31 years
b) Plans’ assets
The assets in the plans for the Group were:
Market value 2019 Market value 2018
Sectionalised RMPP £m £m.
Corporate bonds - 16
Private Equity 4 6
Cash and cash equivalents 43 28
Bond/fixed interest funds 9 1
Other loan/debt funds 10 10
Alternative asset funds 4 5
Bulk annuity policies* 292 272
Fair value of RMPP assets 362 338
Present value of RMPP liabilities (320) (298)
Surplus in plan before asset ceiling adjustment 42 40
Less effect of asset ceiling (42) (40)
Surplus in plan after asset ceiling adjustment
* As described above, the Post Office section of the RMPP holds two bulk annuity policies with Rothesay Life
PLC. The value ascribed to the policies has been calculated using the same assumptions as used to calculate
the present value of the defined benefit obligation.
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Notes to the financial statements (continued)
Market value 2019 Market value 2018
Share of RMSEPP. a oo 1. a EM.
Overseas equities e 8
Government bonds : 17
Cash and cash equivalents - 1
Alternative asset funds . (8)
Property 1 2
Bulk annuity policy* 28 12
Fair value of share in plan assets for RMSEPP 29 32
Present value of share in plan liabilities for RMSEPP. (29) (27)
Surplus in plan for the share of RMSEPP before asset
ceiling adjustment
Less effect of asset ceiling 1 (2)
Surplus in plan for share of RMSEPP after asset
ceiling adjustment
*As described above, RMSEPP holds a bulk annuity policy with Scottish Widows. The value ascribed to this
policy has been calculated using the same assumptions as used to calculate the present value of the defined
benefit obligation.
= 5
1 3
As described above, no surplus is recognised for RMPP because the Group no longer has an
unconditional right to refund from the Plan. A retirement benefit surplus of £1 million is disclosed
on the balance sheet, representing the surplus in the RMSEPP only.
There is no element of the above present value of liabilities that arises from plans that are wholly
unfunded. With the exception of the bulk annuity policy described above, all RMPP and RMSEPP.
assets are securities with a quoted price in an active market.
c) Movement in plans’ assets and li ities
Changes in the fair value of the plans’ assets are analysed as follows:
Assets Sectionalised Sectionalised
RMPP RMPP
2019 2018
£m ém
Assets in sectionalised RMPP at beginning of period 338 532
Contributions paid 1 5
Finance income 7 7
Actuarial gains/(losses) 21 (201)
Benefits paid to members (5) (5)
Assets in sectionalised RMPP at end of period 362 338
Share of Share of
A RMSEPP RMSEPP
ssets 2019 2018
£m ém
Share of assets in RMSEPP at beginning of period 32 32
Contributions paid - 1
Finance income 1 1
Actuarial losses (2) (1)
Benefits paid to members Q) (1)
29 32
Share of assets in RMSEPP at end of period
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Notes to the financial statements (continued)
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Changes in the present value of the defined benefit pension obligations are analysed as follows:
Sectionalised Sectionalised
Liabilities
RMPP RMPP
2019 2018
Liabilities in sectionalised RMPP at beginning of period (298) (322)
Past service cost (2) (4)
Finance cost (7) (7)
Experience adjustments on liabilities (6) (2)
Financial assumption changes (18) 23
Demographic assumption changes 4 9
Benefits paid [oe 5
Liabilities in sectionalised RMPP at end of period (320) (298)
Liabilities Share of Share of
RMSEPP RMSEPP
2019 2018
£m £m
Share of liabilities in RMSEPP plans at beginning of period (27) (31)
Finance cost (1) (4)
Experience adjustments on liabilities (1) -
Financial assumption changes Q) 3
Demographic assumption changes 1 1
Benefits paid 1 1
(29) (27)
Share of liabilities in RMSEPP at end of period
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Notes to the financial statements (continued)
d) Recognised charges
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An analysis of the separate components of the amounts recognised in the performance
statements of the Group is as follows:
Sectionalised
Sectionalised
RMPP RMPP.
2019 2018
£m ém
Analysis of amounts recognised in the income statement
Analysis of amounts charged to investments:
Loss due to curtailments a 4
Total charge to operating profit 1 4
Analysis of amounts (credited)/charged to net pensions interest:
Interest on plan liabilities 7 7
Interest income on plan assets (7) (7)
Net pensions credit to financing = a
Net charge to the income statement. 000 oo ae
Analysis of amounts recognised in the statement of
comprehensive income
Actual return on plan assets 28 (194)
Less: expected interest income on plan assets (7) (7)
Actuarial gains/(losses) on assets (all experience adjustments) 21 (201)
Actuarial gains arising from changes in demographic assumptions + 9
Actuarial (gains)/losses arising from changes in financial assumptions (18) 23
Actuarial losses arising from experience adjustment (6) (2)
Actuarial (gains)/losses on liabilities (20) 30
Effect of the asset ceiling Q) 170
Total actuarial losses recognised in the statement of S (1)
comprehensive income
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Notes to the financial statements (continued)
Share of Share of
RMSEPP RMSEPP
2019 2018
£m ém
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 (4) (1)
Net pensions credit to financing - :
Net charge to the income statement before deduction for tax 2 -
Analysis of amounts recognised in the statement of
comprehensive income
Actual return on plan assets (1) -
Less: expected interest income on plan assets @) (1)
Actuarial losses on assets (all experience adjustments) (2) @)
Actuarial gains arising from changes in demographic assumptions a 1
Actuarial (losses)/gains arising from changes in financial assumptions (2) 3
Actuarial losses arising from experience adjustment (1)
Actuarial (gains)/losses on liabilities @) 4
Total actuarial (gains)/losses recognised in the statement of
comprehensive income before effect of asset ceiling (4) 3
Effect of the asset ceiling 1 (2)
Total actuarial (gains)/losses recognised in the statement of
comprehensive income after effect of asset ceiling G3) 1
18. Equity
Called up share capital:
2019 2018
£ £
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
Totai 50,003 50,003
Other reserves:
Other reserves of £2 million (2018: £2 million) relate to First Rate Exchange Services Holdings
Limited, the joint venture entity, and £3 million (2018: £nil) relates to a cash flow hedge.
Share premium:
On 7 August 2007 one ordinary share of £1 was issued in return for £313 million cash paid by the
Secretary of State for Business, Enterprise and Regulatory Reform. A share premium of £313 million
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, Energy and Industrial Strategy. A share
premium of £152 million resulted from this subscription.
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Notes to the financial statements (continued)
19. Commitments and contingent liabilities
The Group is also committed to the following minimum lease payments under non-cancellable
operating leases:
Land and buildings Motor vehicles
2019 2018 2019 2018
£m £m £m £m
Within one year iL 13 1 1
Between one and five years 24 34 1 -
Beyond five years 18 33 - -
Total 53 80 2 1
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 postmaster misconduct, including non-compliance
with policies and improper use or disclosure of our assets or confidential information.
On 11 April 2016, a High Court claim was issued on behalf of a number of postmasters against Post
Office in relation to various legal, technical and operational matters, many of which have been the
subject of significant external focus for a number of years. Post Office is robustly defending the
claim, believes it lacks merit, but welcomes the opportunity to have these matters resolved through
the Court managed Group Litigation Order.
The Court has ordered two trials to be heard in 2018-19 to determine a subset of the preliminary
issues in dispute between the parties. The Court has not yet ordered a process for determining any
issues of liability or quantum. To date, the Claimants have not asserted the aggregate value of their
claims in any of the Particulars of Claim filed in the litigation.
While the Directors recognise that an adverse outcome could be material, they are currently
unable to determine whether the outcome of these proceedings would have a material adverse
impact on the consolidated position of the Group, and are unlikely to be able to do so until the
Court has made further determinations and the Claimants have provided the necessary
information about the value of their claims. The Directors continue to keep this under close
review.
The costs of £14 million included in exceptional items relate to Post Office defending the Post Office
Group Litigation (2018: £3 million). These have been disclosed as exceptional items because we
expect costs to remain significant in 2019/20 and 2020/21.
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Notes to the financial statements (continued)
20. Business combinations
On 24 October 2018, the Group acquired Payzone Bill Payments Limited (“Payzone”) for cash
consideration of £16 million. Further consideration of £3 million is contingent on the future
performance of certain Payzone revenue streams. £1 million has been paid as at 31 March 2019. The
acquisition developed the bill payments business and has been accounted for under IFRS 3 Business
Combinations.
The fair values of the identifiable assets and liabilities of the business as at the date of acquisition
were:
2018
—m
Property, plant and equipment 4
Trade and other receivables
Cash and cash equivalents 1
Trade and other payables (6)
Net assets acquired 5
Intangible assets - merchant relationships
Intangible assets ~ brand 1
Deferred tax liability on acquired intangible assets (1)
Goodwill 8
Total consideration 19
Consideration is represented by: oe
Cash 16
Contingent consideration 3
Total consideration 19
The goodwill arising from the acquisition represents the opportunity to integrate technology and
combine the Group’s existing bill payments business with Payzone in order to compete for new and
bigger bill payment contracts from a stronger position. The goodwill arising on acquisition is not
deductible for income tax purposes, Goodwill has been reviewed for impairment at acquisition and
during the year and on both occasions the amount is considered to represent fair value. There are no
indicators of impairment.
Associated acquisition expenses were immaterial and have been charged to the income statement,
within the investments column.
From the date of acquisition to 31 March 2019, the Payzone business has contributed £4 million of
revenue and £1 million to trading profit.
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Notes to the financial statements (continued)
21. 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. Summarised financial information for the joint venture is
included in note [10].
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 Purchases / related party related party
to related recharges from including including
party related party outstanding loans outstanding loans
2019 2018 2019 2018 2019 2018 2019 2018
ém —m £m —£m £m —£m £m —m
First Rate
Exchange Services
Holdings Limited 36 34 112 118 2 8 6 4
The sales to and purchases from related parties are made at normal market prices. Balances
outstanding at the year-end are unsecured, interest free and settlement is made by cash. First Rate
Exchange Services Holdings Limited is a joint venture of the Group.
The Ggoup trades with numerous Government bodies on an arm’s length basis, such as the DWP,
the DVLA and the Home Office. 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 (page [XX]).
. The Group has received investment funding from Government of £168 million (2018: £70
million), all of which was recognised through the income statement.
. The Group has received the Network Subsidy Payment from Government (page [XX]).
Key management personnel comprises the Executive and Non-Executive Directors of the Post
Office Limited Board at 31 March 2019. The remuneration of the key management personnel of
the Post Office Group is disclosed in note [5] on pages [XX] and [Xx].
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Notes to the financial statements (continued)
22. Membership of the Bank of England’s Note Circulation
Scheme
Post Office Limited is a member of the Bank of England (the ‘Bank’) Note Circulation Scheme (the
‘NCS’) which governs the custody of Bank of England notes that are not in issue. The NCS promotes
efficiency in the distribution and processing of notes by allowing approved commercial organisations,
engaged in the wholesale distribution and processing of cash, such as the Post Office, to hold notes
owned by the Bank.
The continued participation in the NCS ensures that Post Office Limited has an adequate supply of
notes to meet customer demand across its network.
The NCS mechanisms that enable Post Office Limited to hold Bank of England owned notes comprise
of two elements:
Bond Facility Cash (the ‘Bond’) - this is cash that is permanently owned by the Bank and is stored in
secure vaults at our cash centres, physically separate from other cash. Post Office Limited buys cash
from and sells cash to the Bond.
Note Recirculation Facility Cash (the ‘NRF’) - this is cash that is held securely, either in our NCS cash
centres or in the branch network and that is sold to the Bank at the end of each day with a
commitment from Post Office Limited to buy it back the next morning. In order to sell notes in this
way to the Bank, Post Office Limited must ensure that Gilts are lodged each night as collateral. Our
ability to sell notes to the Bank under the NRF is constrained by:
a) The amount of eligible notes available for sale.
b) The collateral available.
c) An annual limit imposed by the Bank dependent upon the volume of notes sorted and issued
from our cash centres.
In order to support its participation in the NCS, Post Office Limited has bank facilities of up to £400
million in place (the ‘Facilities’), comprising:
a) An overnight collateral facility.
b) An intra-day overdraft facility.
The Facilities may be cancelled by the lender with 60 days’ notice.
At the end of the year £227 million (2018: £238 million) were held in this way.
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Notes to the financial statements (continued)
23. Alternative performance measures
An alternative performance measure is a financial measure of historical or future financial
performance, position or cash flows of the Group which is not a measure defined or specified in
IFRS.
Trading profit
Trading profit is one of the Group’s key financial measures and is calculated by taking operating
profit from continuing operations before depreciation, amortisation, exceptional items, closure of
activities, investments and Network Subsidy Payment. The table below summarises the calculation of
operating profit before exceptional items, trading profit before Network Subsidy Payment and trading
profit.
2019 2018
£m —m.
Operating profit 52 15
Adjusted for:
Exceptional items 14 3
Operating profit before exceptional items 66 18
Depreciation and amortisation 94 55
Investments (39) 32
Trading profit before Network Subsidy Payment 121 105
Network Subsidy Payment oo (60) (70)
Trading profit 61 35
24. Post balance sheet events
In accordance with the Funding Agreement with Government signed on 30 March 2017, Post
Office Limited received a Network Subsidy Payment of £18 million on 2 April 2019. The Network
Subsidy Payment is received on a quarterly basis and a total of £50 million will be received from
Government in 2019/20.
25. Ultimate controlling party
The Post Office Limited was a wholly owned subsidiary of Postal Services Holding Company
Limited until it entered voluntary liquidation in June 2017 and the shares in Post Office Limited
were transferred to the Secretary of State for BEIS.
BEIS holds a special share in Post Office Limited and the rights attached to that special share are
enshrined within Post Office Limited Articles of Association. BEIS, through UK Government
Investments Limited (UKGI), has no day to day involvement in the operations of Post Office
Limited or in the management of its branch network and staff. As such, at 31 March 2019, the
Directors regarded Post Office Limited as the immediate and ultimate parent Company.
The largest Group to consolidate the results of the Company is Post Office Limited, a company
registered in the United Kingdom. Post Office Limited financial statements can be obtained from
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Post Office Limited
Company
Financial Statements
2018/19
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Company balance sheet
at 31 March 2019 and 25 March 2018
2019 2018
Note £m —£m
Non-current assets
Intangible assets 3 215 211
Property, plant and equipment 4 173 148
Investment in subsidiaries 5 74 50
Investments in joint venture 6 66 66
Retirement benefit surplus 12 1 3
Trade and other receivables 7 6 12
Total non-current assets 535 490
Current assets
Inventories 8 9
Trade and other receivables 7 344 323
Cash and cash equivalents 8 541 644
Total current assets 893 976
Total assets 1,428 1,466
Current liabilities
Trade and other payables 9 (523) (565)
Financial liabilities - interest bearing loans and borrowings 10 (565) (623)
Provisions 41 (49) (35)
Total current liabilities (1,137) (1,223)
Non-current liabilities
Other payables 9 (14) (18)
Provisions 11 (33) (30)
Total non-current liabilities (47) (48)
Net assets 244 195
Equity
Share capital 13 - -
Share premium 13 465 465
Accumulated losses (226) (272)
Other reserves 5 2
Total equity 244 195
The notes on page [XX] to [XxX] form an integral part of the financial statements.
The result dealt with in the financial statements of the Company amounted to a profit of £[48]
million (2018: £15 million).
The financial statements on pages [XX] to [XX] were approved by the Board of Directors on XX
XXX 2019 and signed on its behalf by:
ACJ Cameron
Interim Chief Executive
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Post Office
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Company statement of changes in equity
for the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
Share Share = Accumulated Other Total
capital Premium losses reserves equity
£m £m £m £m £m
At 26 March 2018 - 465 (272) 2 195
Profit for the year - - 48 - 48
Gains on cash flow hedges - - - 3 3
Re-measurements on defined - - (3) - (3)
benefit surplus
Asset ceiling effect - - 1 - 1
At 31 March 2019 - 465 (226) 5 244
Share Share Accumulated Other Total
capital Premium losses reserves equity
£m £m £m £m £m
At 27 March 2017 - 465 (287) 2 180
Profit for the year - - 15 - 15
Re-measurements on defined - - 2 - 2
benefit surplus
Asset ceiling effect - - (2) - (2)
At 25 March 2018 - 465 (272) 2 195
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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 Company financial
statements for the 53 week period ended 31 March 2019.
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are
made up to the 53 weeks ended 31 March 2019 (2018: 52 weeks ended 25 March 2018).
Authorisation of financial statements
The parent Company financial statements of Post Office Limited (the ‘Company’) for the year ended
31 March 2019 were authorised for issue by the Board of Directors on XX XXX 2019 and the balance
sheet was signed on the Board's behalf by A C J Cameron. Post Office Limited is a company limited
by share capital, incorporated and domiciled in England and Wales. The address of the registered
office is given on page [Xx].
Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101
Reduced Disclosure Framework (“FRS” 101). These financial statements are prepared under the
historical cost convention. The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
As permitted by Section 408 of the Companies Act 2006 Post Office Limited has not presented its
own income statement.
The results of Post Office Limited are included in the consolidated financial statements of Post Office
Limited 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:
a. paragraph 73(e) of IAS 16 ‘Property, Plant and Equipment’.
b. paragraph 118(e) of IAS 38 ‘Intangible Assets’.
(d) the requirements of paragraphs 10(d), 10(f), 39(c), 40.A and 134-136 of IAS 1 ‘Presentation
of Financial Statements’.
(e) the requirements of IAS 7 ‘Statement of Cash Flow’s.
(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
The Company had net assets of £244 million at 31 March 2019 (2018: £195 million). At 31 March
2019 £385 million of the Company’s working capital facility was undrawn (2018: £327 million). The
Company has also shown a profit for the year of £48 million (2018: £15 million).
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Notes to the financial statements (continued)
We have the following funding agreed with BEIS: a working capital facility of £950 million to 31
March 2021; a further £50 million facility available to provide same day liquidity to 4 April 2020;
NSP of £50 million
for 2019/20 and 2020/21 respectively; and we also have investment funding of up to £210 million as
required for the period from April 2018 to March 2020.
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 Directors consider that it is appropriate that these financial
statements have been prepared on a going concern basis.
Accounting policies
The following accounting policies are consistent with those of the Group as detailed in note 1 of the
Group financial statements:
« Critical accounting estimates and judgements in applying accounting policies.
* Revenue.
« Investments column in the income statement.
+ Leases.
* Taxation.
+ Investments in joint venture.
« Business combinations.
« Property, plant and equipment.
e Intangible assets.
« Inventories.
* Trade receivables.
e Cash and cash equivalents.
e Pensions and other post-retirement benefits.
* Foreign currencies.
« Provisions.
¢ Financial instruments.
«Derivatives and hedging activities.
Auditors’ remuneration
The remuneration paid to auditors is disclosed in the Group financial statements (note [3]).
Directors’ emoluments
The emoluments paid to Directors are disclosed in the Group financial statements (note [5]).
Directors for the Company are the same as Group.
Investment in subsidiaries
Investment in subsidiaries are carried at cost less accumulated impairment losses.
Post Office Li
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Notes to the financial statements (continued)
2. Staff costs and numbers
Employment and related costs were as follows:
2019 2018
People costs within trading: £m £m
Wages and salaries 157 151
Social security costs 17 18
Other pension costs (note [17]) 13 16
Total people costs within trading 187 185
Other operating costs within trading as 751
Total trading costs 920 936
Period end and average employee numbers were as follows:
Period end employees Average employees
2019 2018 2019 2018
Total employees are 4,973 4,623 5,022
Total employee numbers can be categorised as follows:
2019 2018
Administration 1,205 1,205
Directly managed branches (DMB) 2,049 2,707
Supply Chain 854 848
Network programmes 164 213
Total 4,272 4,973
Post Office Li
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Notes to the financial statements (continued)
3. Intangible assets
Other
Software Goodwill Intangibles Total
£m £m £m £m
Cost
At 27 March 2017 314 - - 314
Reclassification (2) - - (2)
Additions 122 1 6 129
NUE MIs ee. oe eae ea arnniee
Reclassification (29) : - (29)
Additions 90 e = 90
Disposals (17) . : (17)
At 31 March 2019 478 1 6 485
Accumulated amortisation and impairment
At 27 March 2017 199 - - 199
Reclassification 6 - - 6
Amortisation 25 - - 25
At 25 March 2018 230 e - 230
Amortisation 52 e 3 55
Disposals (15) - - (15)
At 31 March 2019 267 ~ 3 270
Net book value
At 31 March 2019 211 a 3 215
At 25 March 2018 204 1 6 2it
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Notes to the financial statements (continued)
4. Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold vehicles machinery equipment Total
ém ém £m ém —m —m £m
Cost
At 27 March 2017, : : 45 _ 41 : : 23 : : 26 : : A — 795 ~~ “931.
Reclassification 1 1 1 - - (1) 2
Additions - - - 1 - 18 19
Disposals (6) (3) (2) (2) - (7) (20)
At 25 March 2018 40 a 22 25 1 805 932
Reclassification 2 7 : : : 27 29
Additions 1 1 1 > = 35 38
Disposals (4) (1) (2) . B (22) (29)
At 31 March 2019 39 39 21 25 1 845 970
Accumulated depreciation and impairment
ay ng OE ggg poe
Reclassification - - - - - (6) (6)
Depreciation 1 2 - - - 25 28
Disposals (4) - (2) (2) - (3) (11)
At 25 March 2018 29 16 21 24 us 693 784
Depreciation 1 2 . . . 32 35
Disposals (2) (4) (2) : - (17) (22)
At 31 March 2019 28 17 19 24 1 708 797
Net book value
At 31 March 2019 it 22 2 1 ~ 137 173
At 25 March 2018 11 23 1 1 - 112 148
Depreciation rates are disclosed on page XX within the Group accounting policies note. No
depreciation is provided on freehold land, which represents £2 million (2018: £2 million) of the total
cost of properties.
During the current and prior year, a review of property, plant and equipment and intangible assets
took place and resulted in reclassifications between categories.
An impairment test was performed during the year. Intangible assets and property, plant and
equipment were tested for impairment by comparing the carrying amount of each Cash Generating
Unit (CGU) with the recoverable amount determined from the value in use calculations.
The discounted net cash flows from the value in use calculations were used to determine the
recoverable amount of the CGU’s identified, being Post Office Limited. Value in use is determined
using the Group’s net cash inflows from the continued use of the assets within each CGU over a
two year period (and then continued into perpetuity), with no nominal growth rate assumed
outside of this period. Pre-tax discount rates for Post Office Limited of 9.5% (2018: 9%) have
been used to discount the forecasted cash flows.
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Notes to the financial statements (continued)
A sensitivity analysis has been performed in assessing the value in use of property, plant and
equipment and intangible assets. This has been based on changes in key assumptions considered
to be possible by management. This included an increase in the discount rate of up to 12%, zero
growth rate and a decrease in forecasted EBITDA by 5%. The sensitivity analysis showed that no
impairment would arise under each or a combined scenario.
Management therefore believes that any reasonably possible change in the key assumptions
would not cause the carrying amount of any CGU’s to exceed their carrying value.
5. Investment in subsidiaries
The carrying value of £74 million relates £55 million to the Company’s investment in Post Office
Management Services Limited, a 100% subsidiary of the Company with 55,000,000 shares at a
nominal value of £1 and 1 share with a nominal value of £100; and £19 million, in Payzone Bill
Payments Limited, a 100% subsidiary of the Company with 1 share at a nominal value of £1. The
registered address of both Post Office Management Services Limited and Payzone Bill Payments
Limited is Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
6. Investments in joint ventures
2019 2018
£m £m
Investment in joint ventures 66 66
During the current and prior year, 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 £66 million (2018: £66 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.
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Notes to the financial statements (continued)
7. Trade and other receivables
2019 2018
£m ém
Current:
Trade receivables 90 78
Amounts owed by group undertakings 8 6
Accrued income 70 74
Prepayments 19 17
Client receivables 138 132
Other receivables 19 16
Total 344 323
Non-current:
Accrued income 2 2
Prepayments 4 10
Total 6 12
8. Cash and cash equivalents
2019 2018
—m é£m
Cash in the Post Office Limited network 537 643
Short-term bank deposits 4 1
Total 541 644
9. Trade and other payables
2019 2018
£m —£m
Current:
Trade payables 53 40
Amounts owed to group undertakings 4 4
Accruals 113 155
Deferred income 20 32
Social security 8 8
Client payables 312 306
Capital payables 10 20
Other Payables . 8 -
Total 523 565
Non-current:
Other payables 14 18
Total 14 18
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Notes to the financial statements (continued)
10. Financial liabilities — interest bearing loans and
borrowings
2019 2018
£m £m
Department for Business, Energy and Industrial 565 623
Strategy
The loan under the facility is short dated on a programme of liquidity management and matures 1
day after the year-end (2018: 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 2021. The undrawn committed facility, in respect of
which all conditions precedent had been met at the balance sheet date, is £385 million (2018: £327
million). The average interest rate on the drawn down loans is 1.1% (2018: 0.8%).
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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Notes to the financial statements (continued)
11. Provisions
Network
Programmes Property Severance Other Total
£m £m £m £m £m
At 26 March 2018 18 32 7 8 65
Charged to investments 30 25 43 = 98
Charged to trading = - > 5 5
Transfers : 2 2 3 3
Utilisation (36) (9) (24) (3) (72)
Provisions released in the year -
investments ” (4) @) G2)
Provisions released in the year - : : a
trading (5) (5)
At 31 March 2019 12 41 22 7 82
Network
Programmes Property Severance Other Total
ém £m ém ém ém
Disclosed as:
At 31 March 2019
Current 6 14 22 7 a9
Non-current 6 27 = 33
12 a1 22 7 82
At 25 March 2018
Current 11 11 7 6 35
Non-current 7 21 - 2 30
18 32 7 8 65
Details of the provisions are included in note [15] in the Group financial statements.
12. Pensions
The Company pension’s disclosure is consistent with the Group disclosure included in note [17] on
pages [XX] to [XxX]
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Notes to the financial statements (continued)
13. Equity
Called up share capital:
2019 2018
£ £
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 one ordinary share of £1 was issued in return for £313 million cash paid by the
Secretary of State for Business, Energy and Industrial Strategy. A share premium of £313 million
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, Energy and Industrial Strategy. A share
premium of £152 million resulted from this subscription.
14. Commitments and contingent liabilities
Details of the Company commitments under non-cancellable operating leases and Company
contingent liabilities are disclosed in the Group financial statements (note [19]).
15. Related party disclosures
Details of transactions with related parties are disclosed in the Group financial statements (note
[21]).
16. Investments expenditure
Details of operating investments expenditure is disclosed in the Group financial statements (note
(4).
17. Taxation
Details of the taxation gains recognised in the year are disclosed in the Group financial statements
(note [7]).
18. Business combination
Details of the business combination are included in note [20] in the Group financial statements.
19. Post balance sheet events
Details of post balance sheet events are included in note [24] in the Group financial statements.
On 1 April 2019 Post Office Management Services Limited issued 5,000,000 ordinary shares with a
value of £1 each to Post Office Limited.
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Notes to the financial statements (continued)
20. Ultimate controlling party
The Post Office Limited was a wholly owned subsidiary of Postal Services Holding Company Limited
until it entered voluntary liquidation in June 2017 and the shares in Post Office Limited were
transferred to the Secretary of State for BEIS.
BEIS holds a special share in Post Office Limited and the rights attached to that special share are
enshrined within Post Office Limited Articles of Association. BEIS, through UK Government
Investments Limited (UKGI), has no day to day involvement in the operations of Post Office Limited
or in the management of its branch network and staff. As such, at 31 March 2019, the Directors
regarded Post Office Limited as the immediate and ultimate parent Company.
The largest Group to consolidate the results of the Company is Post Office Limited, a company
registered in the United Kingdom. Post Office Limited financial statements can be obtained from
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Corporate information
Registered Office Actuary
Post Office Limited Towers Watson Limited
Finsbury Dials Watson House
20 Finsbury Street London Road
London Reigate
EC2Y 9AQ Surrey
RH2 9PQ
Independent Auditor Consumer Body
PricewaterhouseCoopers LLP Consumer Focus
29 Wellington St 4th Floor
Leeds Artillery House
LS1 4DL Artillery Row
London
SwW1P 1RT
Solicitor
Linklaters LLP
One Silk Street
London
EC2Y 8HQ
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Post Office Limited is registered in England and Wales. Registered number
2154540.
Registered Office is Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ.
Post Office and the Post Office logo are registered trademarks of Post Office
Limited.
Copyright 2019 The Post Office.
Post Office Limited corporate. postoffice.co.uk I PAGE 65
Registered Number 2154540
Post Office Limited
Annual Report
& Consolidated Financial
Statements
2018/19
PRESENTED TO PARLIAMENT PURSUANT TO
SECTION 77 OF THE POSTAL SERVICES ACT 2000
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Financial Statements
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report and the financial statements in
accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial 53 week
period. Under that law the Directors have prepared the Group financial statements in accordance
with International Financial Reporting Standards (IFRSs) as adopted by the European Union and
Company financial statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure
Framework", and applicable law). In preparing the Group financial statements, the Directors have
also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB).
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 Company and of
the profit or loss of the Group and Company for that period. In preparing the financial statements,
the Directors are required to:
+ select suitable accounting policies and then apply them consistently;
+ state whether applicable IFRSs as adopted by the European Union and IFRSs issued by IASB
have been followed for the Group financial statements and United Kingdom Accounting
Standards, comprising FRS 101, have been followed for the Company financial statements,
subject to any material departures disclosed and explained in the financial statements;
+ make judgements and accounting estimates that are reasonable and prudent; and
+ prepare the financial statements on the going concern basis unless It is inappropriate to
presume that the Group and Company will continue in business.
‘The Directors are also responsible for safeguarding the assets of the Group and Company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for keeping adequate accounting records that are sufficient to show
and explain the Group and Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and Company and enable them to ensure that the financial
statements comply with the Companies Act 2006.
The Directors are responsible for the maintenance and integrity of the Company's website.
Legisiation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Directors’ confirmations
In the case of each Director in office at the date the Directors’ Report is approved:
+ so far as the Director is aware, there is no relevant audit information of which the Group and
Company’s auditors are unaware; and
+ they have taken all the steps that they ought to have taken as a Director in order to make
themselves aware of any relevant audit information and to establish that the Group and
Company's auditors are aware of that information.
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Independent Auditor’s Report to the members of
Post Office Limited
In our opinion
+ Post Office Limited’s Group financial statements and parent Company financial statements (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 31 March 2019 and of the Group's and the parent Company's profit and
the Group's cash flows for the 53 week period (the “period”) then ended;
+ the Group financial statements have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union;
+ the parent Company financial statements have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 “Reduced Disclosure Framework", and applicable law); and
+ the financial statements have been prepared in accordance with the requirements of the
Companies Act 2006.
We have audited the financial statements, included within the Annual Report & Financial
Statements (the "Annual Report”), which comprise: the Group consolidated and Company balance
sheet as at 31 March 2019; the consolidated Income statements and consolidated statement of
comprehensive income, the consolidated statement of cash flows, and the consolidated and
Company statements of changes to equity for the 53 week period then ended; and the notes to the
financial statements, which include a description of the significant accounting policies.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)")
and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’
responsibilities for the audit of the financial statements section of our report. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group In accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical
Standard, and we have fulfilled our other ethical responsibilities in accordance with these
requirements.
Conclusions relating to going concern
ISAs (UK) require us to report to you when
+ the Directors’ use of the going concern basis of accounting in the preparation of the financial
statements is not appropriate; or
+ the Directors’ have not disclosed in the financial statements any Identified material
uncertainties that may cast significant doubt about the Group's ability to continue to adopt the
going concern basis of accounting for a period of at least twelve months from the date when
the financial statements are authorised for issue.
We have nothing to report in respect of the above matters.
However, because not all future events or conditions can be predicted, this statement is not a
guarantee as to the Group's ability to continue as a going concern. For example, the terms on
Which the United Kingdom may withdraw from the European Union are not cleat, and it is difficult
to evaluate all of the potential implications on the Group's trade, customers, suppliers and the
wider economy.
PAGE 2
Office Limited corpo
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Independent Auditor's Report to the members of Post Office Li
Reporting on other information
The other information comprises all of the Information in the Annual Report other than the financial
statements and our auditors’ report thereon. The Directors are responsible for the other
information. Our opinion on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated
in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility Is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If we Identify an apparent material inconsistency or material misstatement,
we are required to perform procedures to conclude whether there is a material misstatement of the
financial statements or a material misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report based on these responsibilities,
With respect to the Strategic Report and Directors’ Report, we also considered whether the
disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit,
ISAs (UK) require us also to report certain opinions and matters as described below.
Strategic Report and Directors Report
In our opinion, based on the work undertaken in the course of the audit, the information given in
the Strategic Report and Directors’ Report for the period ended 31 March 2019 is consistent with
the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group and its environment obtained in the
course of the audit, we did not identify any material misstatements in the Strategic Report and
Directors’ Report.
Responsibilities of the Directors for the financial statements
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 in accordance with the
applicable framework and for being satisfied that they give a true and fair view. The Directors are
also responsible for such internal control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group's
ability to continue as a going concern, disclosing as applicable, matters related to going concern
and using the going concern basis of accounting unless the Directors either intend to liquidate the
Group or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’
report that includes our opinion, Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements Is located on
the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditors’ report.
Post Office Limited corporate.postotfice.co.uk
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Independent Auditor's Report to the members of Post Office Li
Use of this report
This report, including the opinions, has been prepared for and only for the parent Company's
members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no
other purpose. We do not, in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion
* we have not received all the information and explanations we require for our audit; or
* 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
+ certain disclosures of Directors’ remuneration specified by law are not made; or
+ the parent Company financial statements are not in agreement with the accounting records and
returns.
We have no exceptions to report arising from this responsibility.
Andrew Paynter (Senior statutory auditor)
for and on behalf of PricewaterhouseCoopers LLP
Charted Accountants and Statutory Auditors
Leeds
XX XXXX 2019
Post Office Limited corporate.postotfice.co.uk
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Consolidated Income Statement
for the 53 weeks ended 31 March 2019 and S2 weeks ended 25 March 2018
2019 2018
£m ém
Note Trading Investments Total Trading Investments Total
Revenue from contracts with a Py ose Sse
Kosts 24 (858) (428) (4,087) (960) (102) (1,082)
ests - exceptional items 4) -_ ®)
Total costs (972) (128) (4,101) (863) (102) (4,065)
Other operating income 14 - as - 5
Investment funding 4 ee gea aee - 7 © 70
Network Subsidy Payment 60 - 60 = 70 - 70
Depreciation and amortisation 8,9 (94) = (84) (55) - (55)
Shave of posttex prof om 34 4a
Operating proft / (loss) 47 (32) 15
Finance costs 6 © Qa
Profit / (loss) before taxation 3 42 (34) 8
Taxation credit 7 9 : 9 9 : 9
Profit / (loss) for the ras st G4) v
financial year
For the year ended 31 March 2019 trading profit was £61 million (2018: £35 million).
Trading profit is one of the Group's key financial measures and is calculated by taking operating
profit before depreciation, amortisation, exceptional items, investments and Network Subsidy
Payment. Further detail is given in note [23].
All amounts relate to continuing operations.
corag
co.tik I PAG
{ Office Limiled
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Consolidated Statement of Comprehensive
Income
for the 53 weeks ended 31 Mar
ch 2019 and $2 weeks ended 25 March 2018
2019 2018
a) £m
Profit for the financial year 82 7
Items that may be reclassified to profit or loss
Gain on cash flow hedge 16 3 -
Items that will not be reclassified to profit or loss
Re-measurements on defined benefit surpluses 7 @) 2
Asset ceiling effect 47 1 (2)
Other comprehensive income 1 -
Total comprehensive income for the year 53 7
There are no other comprehensive income items that will be reclassified to the profit and loss in future
periods.
postoffic
co.uk I PAGE 6
Consolidated Statement of Cash Flows
for the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
2019 2018
Note _ ém_ £m
Cash flows from operating activities
Operating profit, 13 47
Total profit before investments 13 a7
Adjustment for:
Share of profit from joint venture 10 (33) (34)
Depreciation and amortisation 89 94 55
Pension operating costs 7 13 7
Other gains and losses 2 -
Working capital movements: (30) (2)
{Increase)/decrease in trade and other receivables qa 5
Decrease in contract assets 5 -
Decrease in trade and other payables (28) (3)
Decrease/(increase) in inventories 1 a)
Decrease in trading provision @ -
Increase/(decrease) in provisions for discontinued operations 2 2)
Pension costs paid (2) (26)
Cash payments in respect of investments items: 49 (48)
Investment funding 168 70
Restructuring costs (219) (116)
Surrender of tax losses to joint venture 8 9
Net cash inflow from operating activities 100 20
Cash flows from investing activities
Dividends received from joint ventures 10 33 34
Acquisition of businesses (net of cash acquired) 20 a7) )
Proceeds from the sale of property, plant and equipment 4 5
Purchase of tangible and intangible non-current assets ag) (135)
Net cash outflow from investing activities Oe) (102)
Net cash outflow before financing activities (29) (82)
Cash flows from financing acti
Finance costs paid (8) ()
Proceeds of borrowings from BEIS. 14 (58) 62
Net cash (outflow) /inflow from financing activi (68) 57
Net decrease in cash and cash equivalents : (95) (25)
Cash and cash equivalents at the beginning of the year 12 655 680
Cash and cash equivalents at the end of the year 12 560 655
Post Office Limited
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Consolidated Balance Sheet
1 March 2019 and 25 March 2018
2019 2018
Note ém ém_ +
Non-current assets
Intangible assets 8 294 264
Property, plant and equipment 9 176 148
Investments in joint venture 10 se 66
Retirement benefit surplus 7 . 3
Trade and other receivables it 6 2
Total non-current assets 540 493
Current assets
Inventories 8 9
Trade and other receivables it 344 324
Cash and cash equivalents 12g 28 560 655
Total current assets 912 988
Total assets 4,452 1,481
Current liabilities
Trade and other payables 13 (533) (871)
Financial liabilities - interest bearing loans and borrowings 14 (565) (623)
Provisions 45 (50) (36)
Total current liabilities (4,148) (1,230)
Non-current
Other payables 13 (aa) (18)
Pr . (34) (30) _
Total non-current liabilities (48) (48)
Net assets 256 203
Equity
Share capital 18 . -
Share premium is 465 465
Accumulated losses (214) (264)
Other reserves 18 s 2
Total equity 256 203
The notes on page [XX] to [XX] form an integral part of the consolidated financial statements.
The financial statements on pages [XX] to [XX] were approved by the Board of Directors on XX
XXX 2019 and signed on its behalf by:
ACJ Cameron
Interim Chief Executive
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Consolidated Statement of Changes in Equity
for the 53 weeks ended 31 March 2019 and KS ended 25 March
Share Share Accumulated ‘other Total
capital premium losses reserves equity
Note £m em ém ém ém
At 26 March 2018 - 465 (264) 2 203
Profit for the year - - 52 - 52
Other comprehensive income + . @) 3 1
At 31 March 2019 : 465 (244) 5 256
Share Share Accumulated Other Total
capital premium losses reserves equity
More £m £m, £m ém £m,
At 27 March 2017 - 465 (281) 2 186
Profit for the year - - 17 - 17
Other comprehensive income : : : : :
At 25 March 2018 : 465 (264) 2 203
fice Limited corporate postoffice.co.uk I PA
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 53 weeks ended 31 March 2019 (2018: 52 weeks ended 25 March 2018).
Basis of preparation
The Group financial statements on pages [XX] to [XX] have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the European Union and with
those parts of the Companies Act 2006 applicable to companies reporting under IFRS. IFRS
Interpretations are issued by the International Accounting Standards Board (IASB) and must be
adopted into European Law, referred to as endorsement, before they become mandatory under
the IAS regulation, Unless otherwise stated In the accounting policies below, the financial
statements have been prepared under the historic cost accounting convention.
The principal accounting policies applied in the preparation of these consolidated Financial
Statements are set out below. These policies have been consistently applied to all the years
presented, unless otherwise stated.
The Company is incorporated and domiciled in the United Kingdom. The Group consolidated financial
statements are presented in sterling and ail values are rounded to the nearest £ million except
Where otherwise indicated, The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
Post Office Limited is a private Company limited by shares incorporated in England and Wales.
The income statement presents the results of the Group in a columnar format - in total and split
between trading and investments. The trading column represents the underlying performance of the
business. Investment funding from Government, restructuring and transformation costs are
separately disclosed in the investments column.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its
subsidiary undertakings as at 31 March 2019. 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 set of financial statements has been prepared for Post Office
Management Services Limited (subsidiary, registered address: Finsbury Dials, 20 Finsbury Street,
London, EC2Y 9AQ) for the 53 weeks ended 31 March 2019. A separate set of financial statements
has also been prepared for Payzone Bill Payments Limited (subsidiary, registered address: Finsbury
Dials, 20 Finsbury Street, London, EC2Y 9AQ), which was acquired on 24 October 2018, see note
[20] for details.
The year-end dates of these subsidiaries are in line with the Company. The subsidiaries use
consistent accounting policies where appropriate and their results have been consolidated into the
Group financial statements. All intra-group balances, transactions, and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
New and amended standards adopted by the Group
‘The Group applied IFRS 15 and IFRS 9 for the first time. The nature and effect of the changes as
a result of adoption of these new accounting standards are described below.
Several other amendments and interpretations apply for the first time in 2018/19, but do not
have an impact on the financial statements of the Group. The Group has not early adopted any
standards, interpretations or amendments that have been issued but are not yet effective.
IFRS 9 Financial Instruments
IFRS 9 replaces the provisions of IAS 39 Financial Instruments: Recognition and Measurement
that relate to the recognition, classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of financial assets and hedge
accounting.
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Notes to the financial statements (continued)
The adoption of IFRS 9 from 2018/19 has not had a material impact on our results, with the key
issues for Post Office being around documentation of policies and new hedge documentation.
IFRS 9 operates an expected credit loss model rather than an incurred credit loss model.
Providing for loss allowances on our existing financial asset has not had a material impact.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations
and it applies, with limited exceptions, to all revenue arising from contracts with its customers.
IFRS 15 establishes a five-step model to account for revenue arising from contracts with
customers and requires that revenue be recognised at an amount that reflects the consideration
to which an entity expects to be entitled in exchange for transferring goods or services to a
customer.
‘The Group adopted IFRS 15 using the modified retrospective method of adoption. The standard
has not had a material impact on revenue recognition at Post Office and therefore, on initial
application, no adjustment was required to the opening balance of retained earnings.
Presentational reciassifications on the face of the income statement have been required in
respect of the Network Subsidy Payment and commission income relating to Government
Services. These two items were formerly recognised in revenue and have now been reclassified
to other income as they did not meet the recognition criteria from revenue under IFRS 15. Refer
to page [XX] for further details of the reclassification. The accounting policies for revenue and for
other income are on pages [X] and [X] respectively.
New standards and interpretations not yet adopted
IFRS 16 Leases
IFRS 16 was issued In January 2016. It will result in almost all leases being recognised on the
balance sheet by lessees, as the distinction between operating and finance leases is removed. Under
the new standard, an asset (the right to use the leased item) and a financial lability to pay rentals
are recognised. The only exceptions are short-term and low-value leases.
The Group has set up a project team which has reviewed all of the Group’s leasing arrangements
over the last year in light of the new lease accounting rules in IFRS 16. The standard will affect
primarily the accounting for operating leases.
The Group will apply the standard from its mandatory adoption date - for Post Office this is from 1
April 2019. The Group intends to apply the simplified transition approach and will not restate
comparative amounts for the year prior to first adoption. Right-of-use assets will be measured at the
amount of the lease liability on adoption (adjusted for any existing onerous and vacant lease
provisions). The Group therefore expects to recognise right-of-use assets of approximately £[XX]
million on 1 April 2019 and lease liabilities of £[XX] million. The net impact on the income statement
account will be minimal - an increase in trading profit of some £[7-9]m as it will no longer have a
charge for operating leases, matched by increases in depreciation, to recognise the usage of the new
right-of-use assets, and finance costs, to recognise the unwinding of the discount on the lease
liability. There will be no impact on the cash flows of the business.
The Group's activities as a lessor are not material and hence the group does not expect any
significant impact on the financial statements.
The Group's current lease commitments are disclosed in note [19].
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 £256 million at 31 March 2019 (2018: £203 million). At 31 March 2019
£385 million of the Group's working capital facility was undrawn (2018: £327 million). The Group has
also been profitable at a trading profit level with current year profit of £61 million (2018: £35 million)
and has shown a profit after tax of £52 million (2018: £17 million).
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Notes to the financial statements (continued)
We have the following funding agreed with BEIS: a working capital facility of £950 million to 31
March 2021; a further £50 million facility available to provide same day liquidity to 4 April 2020;
Network Subsidiary Payment of £50 million for 2019/20 and 2020/21 respectively; and we also have
Investment funding of up to £210 million as-reeisecava'ian'e for the period from April 2018 to
March 2020.,lavestnen! fundee of £188. ¢ was cece! 2
After careful consideration of the plans for the coming years, the Directors continue to believe that
Post Office will be able to meet its liabilities as they fall due for the next 12 months. Accordingly, on
that basis, the Directors consider that it is appropriate that these financial statements have been
prepared on a going concern basis.
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
gamounts recognised In the financial statements. The most significant areas where judgements and
estimates are made are discussed below:
Critical accounting estimates:
Key assumptions used in impairment tests for non-current assets
The Group assesses whether there are any indicators of impairment for all non-current assets at
each reporting date as well as if events or changes in circumstances indicate that the carrying value
may be impaired. Factors considered important that could trigger an impairment review include the
following
‘+ Significant underperformance compared to historical or projected future operating results.
+ Significant changes in the manner of use of the acquired assets or the strategy of the overall
Group.
* Significant negative micro- or macro-economic trends.
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 (CGU) exceeds its recoverable amount.
The recoverable amount is determined based on value in use calculations which require the use of
assumptions. The calculations use cash flow projections based on financial budgets approved by
management covering a two year period. Cash flows beyond this period are extrapolated using
estimated growth rates. Refer to note [9] for the results of the latest impairment test, including
sensitivity analysis.
Actuarial assumptions
The costs, assets and liabilities of the pensions operated by the Group are determined using
methods relying on actuarial estimates and assumptions.
The 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 and in accordance with published statistics and experience
Refer to note 17 for details of the key assumptions and sensitivity analysis performed.
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.
Property provisions
The Group recognises provisions for property leases that are onerous. Assumptions are made to
determine whether the unavoidable costs of meeting the obligations of a lease agreement exceed
the economic benefits expected to be received under it. These include estimates around the future
trading performance of the site and cost allocations.
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Notes to the financial statements (continued)
Critical accounting judgements:
The recognition of a contingent liability in respect of the Group Litigation Order is a key accounting
judgement as at the accounting reference date. The key judgement is the level to which a potential
liability is deemed possible versus probable and therefore whether a contingent liability is the correct
accounting treatment.
Revenue
The following revenue accounting policy relates to the prior year only.
Revenue from Retail, Financial Services and Telecoms comprises the value of services provided from
the Group's principal activities in providing a whole range of services through its physical and digital
channels. Revenue from Financial Services and some Retail services comprises the commission
received. Revenue 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. Revenue
from all other transactions is recognised when the transaction is completed. All revenue is derived
wholly from within the United Kingdom.
Post Office Management Services revenue comprises the value of services provided from the
principal activities in providing insurance intermediary services through Its network of Post Office
branches across the UK, online and contact centre channels. Revenue comprises commissions
received from provision of the intermediary services excluding taxes. Revenue from all transactions
is recognised when the transaction is completed.
Revenue from contracts with customers
In 2018/19, the Group adopted IFRS 15.
Reti
The Group provides Mails support services to Royal Mail and Parcelforce. Each Mails product and
service has an associated transaction price. The transaction price may vary due to the volume
transacted in the period. Revenue from providing Mails support services is recognised in the
accounting period in which the services are rendered.
The Group acts as a selling agent and earns commission on the sale of lottery tickets, scratch cards
and gift vouchers. The transaction price is a contractual commission rate, which is based on the
value of sales in the period. Revenue from the sale of lottery tickets, scratch cards and gift vouchers
Is recognised in the accounting period in which these sales are made.
Payment services comprise of bill payments (including the subsidiary Payzone Bill Payments
Limited). The transaction price is the fee that the Group earns for each bill paid in a branch. Revenue
from bill payments is recognised in the accounting period in which the service is rendered and is
based on the transaction price multiplied by the volume of bill payments in the period.
Through the Banking Framework Agreement, the Group provides over-the-counter banking services,
such as withdrawals, deposits and balance enquiries, on behalf of banks. A transaction price Is
associated with each banking service provided. Revenue is recognised in the accounting period in
Which the services are rendered and is based on the transaction price multiplied by the volume of
each service provided in the period.
Identity Services
Identity services are provided under contract to Government departments, such as the DWP, DVLA
and the Home Office. Each Government service has an associated transaction price. Revenue is
recognised in the accounting period in which the services are rendered and is based on the
transaction price multiplied by the volume of each service provided in the period.
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Notes to the financial statements (continued)
Financial Services & Telecoms
Our Financial Services products include mortgages, credit cards, savings, travel and banking. The
Group earns commission on the sale of these products. The transaction price is a contractual
commission rate. This commission rate varies by product and is based on volume or value of
products sold in the period as well as the channel of sale, for example online or through the branch
network. Revenue is recognised in the accounting period in which the new products are sold.
Telecoms includes Post Office HomePhone and Broadband services. The transaction price is the
subscription fee, consisting primarily of charges for access to broadband and other internet access or
voice services. Revenue is recognised as the service is provided because the customer receives and
uses the benefits simultaneously.
Insurance
Through its subsidiary, Post Office Management Services Limited, the Group provides general and
life insurance intermediation. The transaction price is a contractual commission rate. This
commission rate varies by product and is based on the volume or value of products sold in the
period as well as the channel of sale, for example online or through the branch network. Revenue is
recognised in the accounting period in which the new products are sold.
For all the revenue streams noted above, a receivable is recognised when the goods are delivered or
the services are provided, as this is the point in time that the consideration is unconditional, because
only the passage of time is required before the payment is due
The Group does not expect to have any contracts where the period between the transfer of the
promised goods or services to the customer and the payment by the customer exceeds one year. AS
a consequence, the Group does not adjust any of the transaction process for the time value of
money.
Other income
The Network Subsidy Payment is received from Government and is recognised as other income to
match the related costs of making available the network of public Post Offices that the Secretary of
State for BEIS considers appropriate. The subsidy is recognised in the year in which it is received, If
the subsidy were to exceed the cost of making the network available, the excess would be repaid to
Government. Other income also includes commission income relating to Government Services. This
income, along with the Network Subsidy Payment, was previously presented within revenue;
however they do not fall within the scope of IFRS 15. As a result these two items have been
reclassified to other income, 38, oravicusly ceferenged in. : "
: Formatted: Highlight
Investments column in the income statement
Income statement items are presented in the investments column when they are significant in
size or nature, and either they do not form part of the underlying trading of the business or their
separate presentation enhances understanding of the financial performance of the Group.
Investment funding from Government, restructuring and transformation costs are separately
disclosed in the investments column. Refer to note [4] for further detail.
Leases
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. Provision for dilapidation are made where necessary.
Refer to the provisions policy on page [X] and note [15] for further detail.
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Notes to the financial statements (continued)
Taxation
‘The amount charged or credited as 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:
= On the i
itial recognition of goodwill
= On 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.
- On the 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.
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
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. The joint venture is an integral part of the Group's operations,
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The
consideration transferred in a business combination is measured at fair value, which is calculated
as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities
incurred by the Group to the former owners of the acquiree and the equity interest issued by the
Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit,
or loss as incurred, within the investments column.
Property, plant and equipment
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 are depreciated on a straight-line
basis over the following useful lives:
Range of asset lives
Piant and machinery 3-15 years
Motor vehicles 3 12 years
Fixtures and equipment 3 - 15 years
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Notes to the financial statements (continued)
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. They are depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Freehoid iand 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, Where freehold property and long leasehold includes the fit-out of
those properties, then the fit-out is depreciated over its useful economic life in line with fixtures and
fittings.
Assets in the course of construction are carried at cost, with depreciation charged on the same basis
as all other assets once those assets are ready for their intended use.
Intangible assets
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. The Group's management undertakes an
impairment review annually or more frequently if events or changes in circumstances indicate that
the carrying value may not be recoverable.
Software
Costs associated with maintaining software programmes are recognised as an expense as incurred.
Development costs that are directly attributable to the design and testing of Identifiable and unique
software products controlled by the Group are recognised as intangible assets when the following
criteria are met:
+ itis technically feasible to complete the software so that it will be available for use
* management intends to complete the software and use or sell it
+ there is an ability to use or sell the software
+ it can be demonstrated how the software will generate probable future economic benefits
* adequate technical, financial and other resources to complete the development and to use or
sell the software are available, and
* the expenditure attributable to the software during its development can be reliably measured
Directly attributable costs that are capitalised as part of the software include employee costs and an
appropriate portion of relevant overheads.
Capitalised development costs are recorded as intangible assets and amortised from the point at
which the asset is ready for use.
Research and development
Research expenditure and development expenditure that does not meet the criterla above are
recognised as an expense as incurred. Development costs previously recognised as an expense are
not recognised as an asset in subsequent periods.
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Notes to the financial statements (continued)
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. They
are amortised on a straight-line basis over the following useful lives:
Range of asset lives
Software 3- 6 years
‘Customer relationships 5 years
Merchant relationships 5 - 10 years
Brands 15 years
Assets in the course of construction are carried at cost, with amortisation commencing once the
assets are ready for their intended use.
Inventories
Inventories include stationery, retail, lottery and Royal mint coin products and are carried at the
lower of cost and net realisable value after adjusting for obsolete or slow-moving stock.
Trade receivables
Trade receivables are recognised and carried at original invoice amount. An allowance is made
When collection of the full amount is no longer probable. The Group applies IFRS 9 to measure
this allowance for expected credit loses, grouping trade receivables based on shared risk
characteristics and days past due. Bad debts are written off when identified.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and on hand, including cash
in the Post Office network and short-term deposits (cash equivalents) with an original maturity date
of three months or less. 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 subsidiaries Post Office Management Services Limited and Payzone Bill Payments Limited hold
some fiduciary cash balances, these are held on trust on behalf of third parties, see note [12] for
details,
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the
Group.
The Group is the principal employer of the Post Office Section of the Royal Mail Pension Plan (RMPP),
and Is a participating employer within the Royal Mail Senior Executives Pension Plan (RMSEPP).
RMPP and RMSEPP are both defined benefit plans closed to new members and closed to future
accrual. All members of these plans are contracted out of the earnings-related part of the State
pension scheme.
A Memorandum of Understanding was executed In 2016/17 which removed the unconditional right to
refund from the RMPP. As a result of these events the surplus relating to this Plan was derecognised.
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.
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Notes to the financial statements (continued)
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 Group, the recognised asset is limited to the present value of any future
refunds of the pian or reductions in future contributions to the plan (the asset ceiling). As noted
above, the RMPP Pian has been closed and no future refunds will be made to the Group.
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. As the Group has no right to a future surplus in the RMPP, an
equal and opposite adjustment to the asset ceiling is recognised in other comprehensive income.
There is no effect on the net assets position of the Group.
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.
Provisions
Provisions are recognised when the Group 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. 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 determined by discounting the expected future
cash flows at an appropriate pre-tax rate.
Financial instruments
Initial measurement of financial instruments
All financial instruments are initially measured at fair value plus or minus, in the case of a
financial asset or financial liability not at fair value through profit or loss, transaction costs,
Subsequent measurement of financial assets
IFRS 9 divides all financial assets into two classifications - those measured at amortised cost and
those measured at fair value.
Where assets are measured at fair value, gains and losses are either recognised entirely in profit
or loss (fair value through profit or loss, "FVTPL”), or recognised in other comprehensive income
(fair value through other comprehensive income, "FVTOCI)".
The classification of a financial asset is made at the time it is initially recognised. If certain
conditions are met, the classification of an asset may subsequently need to be reclassified.
Subsequent measurement of financial liabilities
IFRS 9 divides all financial liabilities into two measurement categories: FVTPL and amortised
cost. All of the Group's financial liabilities are measured at amortised cost,
Derecognition of financial assets
A financial asset is derecognised when the Group determines that it has transferred substantially
all of the risks and rewards of ownership of the asset.
Derecognition of financial liabilities
A financial liability is removed from the balance sheet when it is extinguished; that is, when the
obligation specified in the contract is either discharged or cancelled or expires.
Derivatives and hedging acti
Derivatives are Initially recognised at fair value on the date that a derivative contract is entered
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Notes to the financial statements (continued)
into, and they are subsequently remeasured to their fair value at the end of each reporting
period. The accounting for subsequent changes in fair value depends on whether the derivative is
designated as a hedging instrument and, if So, the nature of the item being hedged. The Group
designates certain derivatives as either:
‘+ Hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value
hedges).
‘+ Hedges of a particular risk associated with the cash flows of recognised assets and liabilities
and highly probable forecast transactions (cash flow hedges).
‘+ Hedges of a net investment in a foreign operation (net investment hedges).
At inception of the hedge relationship, the Group documents the economic relationship between
hedging instruments and hedged items, including whether changes in the cash flows of the
hedging instruments are expected to offset changes in the cash flows of hedged items. The
Group documents its risk management objective and strategy for undertaking its hedge
transactions
The fair values of derivative financial instruments designated in hedge relationships are disclosed
in note [16]. Movements in the hedging reserve are shown within other reserves in the
statement of changes in equity. The full fair value of a hedging derivative is classified as a non-
current asset or liability when the remaining maturity of the hedged item is more than 12
months; it is classified as a current asset or liability when the remaining maturity of the hedged
item is less than 12 months.
Cash flow hedges that qualify for hedge accounting
The effective portion of changes in the fair value of derivatives that are designated and qualify as
cash flow hedges is recognised in other reserves within equity. The gain or loss relating to the
ineffective portion is recognised immediately in profit or loss.
When the forecast transaction subsequently results in the recognition of a non-financial asset or
non-financial liability, the associated cumulative gain or loss is removed from equity and included
in the initial cost or other carrying amount of the non-financial asset or liability. If a hedge of a
forecast transaction subsequently results in the recognition of a financial asset or financial
liability, the associated gains or losses that were previously recognised in the statement of
comprehensive income are reclassified into the income statement in the same period or periods
during which the asset acquired or liability assumed affects the income statement.
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Notes to the financial statements (continued)
2. Staff costs and numbers
Employment and related costs were as follows:
2019 2018
People costs within trading: ém £m
Wages and salaries 162 154
Social security costs as 18
Other pension costs (note [171) 13 v7
Total people costs within trading 193 189
Other operating costs within trading 765 77
Total trading costs 958 960
People costs within investments relate to severance costs as part of restructuring and are disclosed
within note [4].
Period end and average monthly employee numbers were as follows:
Period end employees Average monthly employees
2019 2018 2019 2018
Total employees 4,397 5,020 4,703 5,066
Total employee numbers can be categorised as follows:
2019 2018
‘Administration 1,205 1,205
Directly managed branches (DMB) 2,049 2,707
‘Supply Chain 854 848
Network programmes 164 213
Post Office Insurance 57 47
Payzone Bill Payments
Total
5,020
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Notes to the financial statements (continued)
3. Operating profit
The following items are included within operating profit
2019 2018
ém ém
Postmasters’ fees 365 371
Depreciation and amortisation (notes [8] and [9]) : 94 55
Cost of Inventorles recognised as an expense I a 4
Loss on disposal of fixed assets 5 1
Operating lease charges ~ Land and buildings 13 12
Operating lease charges ~ Motor vehicles a 1
Fees payable to the Group's auditor for audit and other services: £000 £000
= parent Company and Group audit I 440 773
- audit of subsidiary 85 82
~ audit related assurance services - 105
= other assurance services 110 110
4. Investments
2019 2018
ém £m
Investment funding i 188 70
Restructuring:
Business transformation aa) (16)
Network programmes. (64) (63)
TT transformation (13) (6)
Severance (38) (a7)
Total restructuring costs (429) (102)
Unwinding of discounts on provisions @) )
Total investments income / (charge) 38 (34)
Investment funding: Investment funding is received from BEIS.
Restructuring: Restructuring costs are transformational spend incurred in order to implement the
major transformation programmes. Business transformation is an overarching programme that will
transform the business, driving Post Office toward commercial sustainability through technological
Innovation and the fundamental re-envisaging of long-term contracts. Network programmes is a
multi-year initiative designed to simplify the retailer proposition, with key areas of focus being
simplification, automation and the extension of the franchising model to some of our directly
managed branches. IT transformation includes programmes to restructure our IT operating model
and overhaul legacy back office systems, transitioning to a cloud based architecture. As part of the
aforementioned transformational activities, severance costs have been incurred.
Unwinding of discounts on provisions: finance costs incurred in order to unwind the discount on
onerous lease provisions.
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Notes to the financial statements (continued)
5. Directors’ emoluments
Directors accruing pension entitlements during the period under: 2019 2018
Number Number
Defined benefit schemes. a -
Defined contribution schemes 1 1
The Directors received the following emoluments:
Remuneration for each Director for the financial year 2018/19
Name Annualised Actual Cash in Hew
salary/fees salary/fees Benefits of pension STIP_ = LTIP_—Total_~—Total
2018/19 (rote 1) 2018/19 2018/19 2018/19 2018/19 2018/19 2018/19 2017/18
Non-Executive Directors
Tom Cooper (ncte2) : - : - - - . -
Tim Franka 40,000 39,800 - - - = 39,800 40,000
Virginia Holmes jes) 35,700 300 - - - - 290 35,500
Shirine Khoury-Haq 35,000 30,000 - - - - 30,000
Ken meCall 50,000 49,800 - - - = 49,800 50,000
Tim Parker inte 19,230 19,300 : : - - 19,300 75,000
Carla Stent 45,000 44,800 : : : ~ 48,800 45,000
Richard Callard (oie) - - - - - - : .
Executive Directors
Paula Vennells (ie 255,000 255,000 9,900 63,800 x x x 718,300
Alisdair Cameron 244,800 244,800 _9,900___61,200 x x X 595,900
Note 1: The annualised fees are shown as at 31 March 2019 or at the date of leaving.
Note 2: Tom Cooper is an employee of UK Government Investments Limited (UKGI).
Note 3: Virginia Holmes ceased her role as Non-Executive Director on 27 March 2018.
Note 4: Tim Parker donates the after tax value of his Board fees to charity. From 1 April 2018, Tim's time
‘commitment has reduced and there has been a corresponding reduction in his annual fee.
Note 5: Richard Callard was an employee of UKGI and ceased his role as Non-Executive Director on 27
March 2018.
Note 6: Paula Vennells resigned as Group Chief Executive on 30 April 2019,
Remuneration Policy Summary
The table below describes the STIP and LTIP available for the Executive Directors,
‘The remuneration framework for the Executive Directors requires consent from the Special
Shareholder (BEIS) each year.
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Notes to the financial statements (continued)
Short-Term The STIP drives and rewards performance over the single
Incentive Plan _ financial year against key financial and operational targets taken
(sT1P) 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 objectives.
The target opportunities for the Chief Executive and Chief
Finance and Operating Officer are 48% and 40% of salary, with
a maximum for stretch performance of 80% and 66.66% of
salary respectively.
Long-Term The LTIP is designed to reward and retain key executives and
Incentive Plan senior managers on the achievement of strategic longer term
(LTIP) 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 (BEIS).
The target opportunities for the Chief Executive and Chief
Finance and Operating Officer are 70% and 50% of salary, with
stretch performance of 98% and 70% of salary 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 financial
statements, error or gross misconduct on the part of an Executive Director, These provisions are
structured in line with market best practice.
6. Finance costs
2019 2018
ém £m
Trading:
Interest payable on loans tO) 3)
Finance charges (2) a
Total - trading (8) @)
Investments:
Unwinding of discounts on provisions a @
Total ~ investments Low e)
Total ~ net finance costs Lo a)
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Notes to the financial statements (continued)
7. Taxation credit
(a) Taxation recognised in the year
Current and deferred income tax is charged or credited to the income statement as follows:
2019 2018
£m em
Current income tax: 7
Corporation tax credit for year (8) (8)
Deferred income tax:
Deferred tax Income relating to the utilisation of losses brought forward
Taxation cred
(9) (9)
The current income tax credit recognised in the income statement is £8 million (2018: £8 million)
and relates to the surrender of tax losses to the joint venture. The deferred income tax credit
recognised in the income statement is £1 million (2018: £1 million) and arises as a consequence of
the acquisition of intangible assets as part of a business combination. It corresponds to the deferred
tax liability recognised in the business combination.
In the current year no deferred income tax has been recognised in other comprehensive income.
No current or deferred tax income tax was recognised directly in equity in the current or prior year.
(b) Factors affecting current tax charge on profit on ordinary activities
As in 2018, the tax assessed for the year differs from the standard rate of corporation tax in the UK
of 19% (2018: 19%). The differences are explained below:
2019 2018
Profit before taxation
Profit before taxation multiplied by the standard rate of corporation . 1
tax in the UK of 19% (2018: 19%)
Effect of unuttllsed losses carried forward 18 29
Decrease in tax charge as a result of change In unrecognised deferred =
tax assets Go en
‘Surrender of tax losses to joint venture we (8)
Profits from disposals eligible for rellef - -
Tax effect of share of results of joint venture I (6) @
Taxation credit L @) ©)
(c) Deferred tax
Deferred tax relates to the following:
Consolidated balance sheet ___ Consolidated income statement
2019 2018 2019 2018
£m. em em £m
Acquired Intangible assets Q) Mee 1 1
Tax losses 2 i - -
Deferred tax (liability) / asset ee - :
Deferred tax income oe : 1
In the current year a deferred tax liability of £2 million (2018: £1 million) has been recognised on
the acquisition of intangible assets as part of a business combination, with a corresponding deferred
tax asset of £2 million (2018: £1 million) recognised for the value losses up to the same liability.
The Group has significant tax losses that are available indefinitely for offsetting against future
taxable profits. As at the balance sheet date no deferred tax asset has been recognised in relation to
these tax losses (2018: nil).
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Notes to the financial statements (continued)
(d) Factors that may affect future tax charges
‘The Group has unrecognised deferred tax assets of £183 million (2018: £190 million), comprising
£148 million (2018: £143 million) relating to tax losses that are available to offset against future
taxable profits, £32 million (2018: £46 million) relating to fixed asset timing differences and £1
million (2018: £1 million) relating to temporary differences on provisions. The Group has rolled over
capital gains of £2 million (2018: £2 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 main rate of corporation tax in the UK will remain at 19% for the year starting 1 April 2019 and
reduce to 17% with effect from 1 April 2020.
The Finance (No.2) Act 2017 was substantively enacted on 16 November 2017. This includes a
restriction on the utilisation of brought forward tax losses and corporate interest in certain
circumstances effective from 1 April 2017.
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Notes to the financial statements (continued)
8. Intangible assets
Other
Software Goodwill intangibles Total
£m £m £m £m
Cost
‘At 27 March 2017 323 44 - 367
Reclassification (2) - - @Q)
Additions 425 a 6 132
‘At 25 March 2018 446 45 6 497
Reclassification (29) a . (29)
Additions I ae ae - 101
‘Added on acquisition 1 a 7 16
Disposals an : - a7)
At 34 March 2019 I 502 53 13 568
‘Accumulated amortisation
‘At 27 March 2017 200 - 200
Reclassification 6 - - 6
Amortisation 27 - - 27
AEDS Watch 2018 Pry) z = 233
‘Added on acquisition 4 : . a
‘Amortisation 58 - 3 58
Disposals (as) - - as)
At 31 March 2019 Eee ae
Net book value
At 34 March 2019, mss 2008
At 25 March 2018 213 45 6 264
Other intangibles includes customer relationships, merchant relationships and brands.
During the current and prior year, a review of property, plant and equipment and intangible assets
took place and resulted in reclassifications between categories.
Additions to software relate to IT transformation projects undertaken during the current year.
Additions to goodwill and other intangibles relate to the Payzone Bill Payments Limited ("Payzone”)
business combination disclosed within note [20]. Goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that the carrying value may not be
recoverable. Management determined that no impairment was necessary for the current year (2018:
Enil).
Goodwill was not considered to be impaired at the date of the last review. Refer to note [9] for
details of the impairment review performed during the year.
Office Limited cores
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Notes to the financial statements (continued)
9. Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold vehicles machinery equipment Total
ém ém ém ém em em ém
Cost
At 27 March 2017 45 41 23 26 1 795 931
Reclassification 1 1 1 - - [oy 2
Additions : : : 1 - 18 19
Disposals © @) 2) @) : ” (20)
AL25 March 2018 re er) 25 a 805 932
Reclassification 2 : - : . 27 29
Additions 1 1 1 A 4 35 38
‘Added on acquisition - oe : ces 4 4
Disposals eo : :
At 31 March 2019 oe ae 24 25
Accumulated depreciation
‘At27 March 2017 32 14 23 26 1 677 773
Reclassification - - - - ~ (6) (6)
Depreciation 1 2 - - - 25 28
Disposals (4) : @ 2 : @ (11)
At 25 March 2018 29 16 21 24 1 693 784
Depreciation a Ce ae - 33 36
Disposals Q) @) @) : : a7 (22)
At 31 March 2019 28 a7 a9 24 1 709 798
Net book value
At 31 March 2019 a ma 2 se 440 176
At 25 March 2018 fel 23 1 1 : 112 148
Depreciation rates are disclosed on page [XX] within the accounting policies note. No depreciation is
provided on freehold land, which represents £2 million (2018: £2 million) of the total cost of
properties.
During the current and prior year, reviews of property, plant and equipment and intangible assets
took place and resulted in reclassifications between categories.
An impairment test was performed during the year. Intangible assets and property, plant and
equipment were tested for impairment by comparing the carrying amount of each Cash
Generating Unit (CGU) with the recoverable amount determined from value in use calculations.
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Notes to the financial statements (continued)
Post Office has determined that it has two CGUs: Post Office Limited and Post Office Management
Services Limited. Post Office Management Services Limited is a standalone entity with an
identifiable asset base and therefore is deemed one CGU. Post fice Limited runs a national
network of branches which provide a distinct retail offering resulting in a fluid customer base
across the network. As such the network as a whole is deemed to be one CGU.
ce. Lo
The discounted net cash flows from the value in use calculations were used to determine the
recoverable amount of the CGU's identified, being Post Office Limited and Post Office
Management Services Limited. Value in use Is determined using the Group's net cash inflows
from the continued use of the assets within each CGU over a two year period (and then
continued into perpetuity), with no nominal growth rate assumed outside of this period. Pre-tax
discount rates for Post Office Limited of 9.5% (2018; 9%) and for Post Office Management
Services Limited of 12% (2018: 12%) have been used to discount the forecasted cash flows.
‘A sensitivity analysis has been performed in assessing the value in use of property, plant and
equipment and intangible assets. This has been based on changes in key assumptions considered
to be possible by management. This included an increase in the discount rate of up to 12%, zero
growth rate and a decrease in forecasted EBITDA by 5%. The sensitivity analysis showed that no
impairment would arise under each or a combined scenario,
Management therefore believes that any reasonably possible change in the key assumptions
would not cause the carrying amount of any CGU’s to exceed their carrying value.
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Notes to the financial statements (continued)
10. Investments in joint ventures
The following entity has been included in the consolidated financial statements using the equity
method:
Joint ventures
During the current and prior year, 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, Brentford, Middlesex, TW8 9DF,
The principal activity of First Rate Exchange Services Holdings Limited is the supply of foreign
currency in the UK, which is seen as complementing the Group’s operations and contributing to
achieving the Group’s overall strategy. The principal risks of the Group are disclosed on pages [XX]
to [Xx].
The financial year-end date of First Rate Exchange Services Holdings Limited is 31 March. For the
purposes of applying the equity method of accounting, the financial statements of First Rate
Exchange Services Holdings Limited for the year ended 31 March 2019 have been used.
2019 2018,
Joint venture —_Joint venture
—m £m
Share of net assets
Total net Investment at 26 March 2018, 27 March 2017 66 66
Share of post-tax pre dividend profit 33 34
Dividend (33) (34)
Total net investment at 31 March 2019, 25 March 2018 66 66
2019 2018
Joint venture Joint venture
Shar
Receivables
Cash and cash equivalents 22 14
Non-current assets 7 8
‘Share of gross assets 222 242
Current tabilities (156) (176)
Share of net assets 66 66
Share of revenue and pr
Revenue 82 84
Profit after tax 33 34
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Notes to the financial statements (continued)
11. Trade and other receivables
2019 2018
Current:
Trade receivables : 97 81
‘Accrued income : 7 78
Prepayments : 19
ient receivables ane
Other receivables
Total 344
Non-current:
Accrued income oe 2
Prepayments . 4 10
Total 6 12
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]).
£5m (2018: £4m) has been recognised within current prepayments for costs incurred to fulfil
contracts. Non-current prepayments constitute costs incurred to fulfil contracts, in both the current
and prior year.
The Group applies IFRS 9 when measuring expected credit losses. Trade receivables have been
grouped based on shared credit risk characteristics and the days past due to measure the expected
Credit losses. The loss allowance for the current and prior year has been determined as follows:
>30 days — >60 days
and <60 and <120
days past days past >120 days
34 March 2019 Current due due____past due Total
Expected loss rate 21% 65%
Gross carrying amount - £m : : 1 18 19
Loss allowance - £m ve = a 18 19
>30days — >60 days
and <60 and <120
days past days past >120 days
25 March 2018 Current due due past due Total
Expected loss rate : : - 95%
Gross carrying amount - £m : : : 19 19
Loss allowance - £m : : : 19 19
There is a loss allowance in the current, more than 30 days and more than 60 days ageing
categories, however it is immaterial for disclosure.
Office Limited cores
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Notes to the financial statements (continued)
The closing loss allowance for trade receivables as at 31 March 2019 reconciles to the opening loss
allowance as follows:
2019 2018
ém ém
Opening loss allowance 19 14
Increase in loss allowance 9 14
Recelvables written off as uncollectible e4) (5)
Unused amounts reversed Q) @)
Closing loss allowance 19 19
The fair value of trade and other receivables is not materially different from the carrying value.
12. Cash and cash equivalents
2019 2018
ém £m
Cash In the Post Office Limited network 537 643
Short-term bank deposits 14 9
Fiduciary cash balances held on behalf of third parties 9 3
Total cash and cash equivalents 560 655
Cash in the Post Office Limited network represents the note and coin in circulation in branches and
cash centres. Refer to note [22] for further detail.
Where interest is earned itis 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 or Payzone Bill
Payments Limited and are held on trust on behalf of third parties and cannot be called upon should
either company become insolvent.
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Notes to the financial statements (continued)
13. Trade and other payables
2019 2018
ém ém
Current:
Trade payables et 45
Accruals Fer) 160
Deferred income 20 32
Social security 8 8
Client payables 312 306
Capital accruals at 20
Other payables 3 -
Total 533 svi
Non-current: :
other payables 14 1s
Total 14 18
The fair value of trade and other payables is not materially different from the carrying value.
14. Financial liab 's — interest bearing loan and borrowings
2019 2018
em £m
Department for Business, Energy and Industrial Strategy 565 623
The loan under the facility is short dated on a programme of liquidity management and matures 1
day after the year-end (2018: 1 day). The fair value of borrowings approximate thelr 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 2021. The undrawn committed facility, in respect of
which ail conditions precedent had been met at the balance sheet date, is £385 million (2018: £327
million). The average interest rate on the drawn down loans is 1.1% (2018: 0.8%)
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.
Office Limited
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Notes to the financial statements (continued)
15. Provisions
Network
Programmes Property Severance Other_—sTotal
em ém ém ém ém
‘At 26 March 2018, 18 32 7 9 66
Charged to Investments : 30 25 “8 : 98
Charged to trading . oe 9 9
Transfers . _. 2 3
Utilisation bs O © a)
Provisions released inthe year I i o a a a
Brovson released inthe year ~ oo oo i 5
‘At 31 March 2019 oe “ae 9 84
Network
Programmes Property Severance Other_-—=——Total
ém ém em ém ém
Disclosed as:
At 34 March 2019
current ee ue 8 50
Non-current ee Cas 1 34
: 2 41 eo 9 a4
At 25 March 2018
current ut Ft 7 7 36
Non-current 7 aa - 2 30
18 32 7 9 66
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.
The Network Programmes provision relates to payments due to postmasters in relation to the major
transformation programme. Provisions are recognised when either postmasters agree to terminate
their existing contracts or sign the new format contracts under Network Transformation.
Property provisions relate to vacant and onerous leases and dilapidations. Vacant and onerous lease
provisions are recognised on leasehold properties when the unavoidable costs of meeting the
obligations of the lease agreement exceed the benefits expected to be received under it.
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.
Other provisions of £9 million includes £1 million for personal injury claims and £2 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.
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Notes to the financial statements (continued)
16. Financial assets and liabilities
a. Financial assets and liabilities by category
The breakdown of the Group’s financial instruments at 31 March 2019 and 25 March 2018 is shown
below:
2019 2018
Non - Non -
Current current =Total. = Current’ current Total
=m em £m ém £m ém
Financial assets
Trade and other receivables 2 327 307 2 309
Cash and cash equivalents ~ Beaseo 655 - 655
Trade and other payables, (505) 3) (508) (31) (4) (535)
BEIS loan (65) - (565) (623) = (623)
Total financial liabilities (202455 Gesise
i @) ) (192) @ (494)
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,
All of the Group’s financial assets and liabilities are considered to be Level 2 in the fair value
hierarchy. The nature of the inputs used in determining the values of the financial assets and
liabilities are those other than quoted prices inciuded within Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
The Group has no Level 1 and Level 3 financial instruments and there have been no transfers
between the levels of fair value hierarchy during the perlod
b. Financial risk management objectives and policies
The Group is exposed to a variety of financial risks: market risk (including foreign currency risk and
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, current
account balances, and commission income. 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 an £7 million
favourable impact on the Group’s equity and income statement. A 50 basis point decrease would
have resulted in a £7 million adverse impact on the Group’s equity and income statement.
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Notes to the financial statements (continued)
In 2018/19, to hedge its exposure to the variability of commission income linked to 1-month Libor,
the Group entered into a three year amortising interest rate swap which has the effect of fixing a
proportion of the interest commission income. The qualifying criteria for hedge accounting were met
and in accordance with IFRS 9 the swap was designated as the hedging instrument in a cash flow
hedge. At year end, the hedging instrument had a fair value of £3 million and has been included
within trade and other receivables on the balance sheet,
Foreign currency risk
The Group is exposed to foreign currency risk resulting from balances held to operate Bureau de
Change services
The currencies in which these transactions are primarily denominated are 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.
Strengthening Effect on Strengthening Effect on
7 (weakening) profit Effect / (weakening) profit Effect
In US dollar rate before tax on equity ineurorate before tax on equity
ém ém % Em £m
Increase / Increase /_ Increase / Increase / Increase / Increase /
cooper dectense). decrease) (decrease) __ (decrease) (decrease) __ (decrease)
2019 I 10 2. 1 10 2 2
(20) @ @ (10) Q) @)
2018 10 1 1 10 3 3
(19) a) a) (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 2% (2018: less than
2%) of revenue.
Capital management
The Group's objectives when managing capital (defined as the net of borrowings 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.
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Notes to the financial statements (continued)
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 reserves to meet operating requirements in the next 12 months.
At 31 March 2019 the Group has unused facility of £385 million (2018: £327 million). The working
capital facility expires in 2021
In addition to the security interest provided to BEIS in connection with the £950 million Working
Capital Facility (note [14]), Post Office Limited has also created a first floating charge over its
assets as security for the payment and discharge of certain liabilities arising in the normal course
of its client-related activity. The charge under these arrangements is restricted in its ability to
take an acceleration action in relation to its debt. As at the balance sheet date the outstanding
liabilities amounted to £95 million (2018: £100 million)
The tables below analyse 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.
12 12
Months Total
At 31 March 2019 . _ _ £m
Financial assets
Trade and other receivables a 2 327
Cash and cash equivalents 543 - 543
Finan
Trade and other payables (eos) twp
Interest bearing loan en (665)
Total financial assets/ (Ii (202) ow (203) ©
12 12
Months Years Total
At 25 March 2018 Em ém £m
Financial Assets
Trade and other recelvables 307 2 309
‘Cash and cash equivalents 655 - 655
Financial Liabilities
Trade and other payables (531) 4) (535)
Interest bearing loan (623) - (623)
Total financial assets/(liabilities) (192) Q) (194)
Prepayments, social security and deferred income have been excluded from the table above. There
were no financial assets or liabilities in the current or prior year that were due to mature after two
years.
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Notes to the financial statements (continued)
17. Retirement benefit surplus
The disclosures in this note reflect the two defined benefit schemes: the Post Office section of the
Royal Mail Pension Plan (RMPP) which is independent from the Royal Mail section of the RMPP,
and a 7% share of the Royal Mail Senior Executives Pension Plan (RMSEPP). Royal Mail Group Ltd
is the principal employer of RMSEPP and Post Office Limited became a participating employer
with effect from 1 April 2012. This disclosure also includes the Post Office Pension Plan (POPP),
which is a defined contribution scheme.
‘The disclosures in this note show the value of the assets and liabilities that have been calculated
at the balance sheet date.
Post Office participates in pension schemes as detailed below.
Name Eligibility Type.
Royal Mall Pension Plan (RMPP)* UK employees Defined benefit
Royal Mail Senior Executives Pension Plan (RMSEPP) _UK senlor executives Defined benefit
Post Office Pension Plan (POPP) UK employees Defined contribution
#The RMPP closed to future accrual on 31 March 2017.
Defined Contribution
The charge in the income statement for the defined contribution scheme was £13 million (2018:
£17 million) and the Group contributions to this scheme were £20 million (2018: £20 million)
during the year.
Defined Benefit
Both RMPP and RMSEPP are funded by the payment of contributions to separate Trust
administered funds. It should be noted that the assumptions used for these pension disclosures
are not the same as the assumptions used for funding the plans. The latest full actuarial funding
valuation of the RMPP was carried out as of 31 March 2018 using the projected unit method. For
RMPP, this valuation was concluded at £20 million surplus (31 March 2015 valuation: £63 million
surplus) on a Technical Provisions basis. Valuations are carried out triennially.
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 Section A members who chose to receive Section B
benefits.
‘+ Section Cis for members (or beneficiaries of members) who joined after 1 April 1987 and
before 1 April 2008.
The latest full actuarial funding valuation for RMSEPP was carried out as at 31 March 2018 using
the projected unit method. For 100% of RMSEPP, the valuation concluded at £49 million surplus
(31 March 2015 valuation: £17 million surplus) on a Technical Provisions basis.
A series of changes to RMPP and RMSEPP have taken effect since 1 April 2008.
The changes encompassed are:
‘+ The Plans closed to new members from 31 March 2008.
‘+ All pensions and benefits earned before 1 April 2008 retained a link to final pensionable
salary, benefits accrued from 1 April 2008 were earned on a “career average pensionable
salary” basis.
‘* RMPP employees can continue to take their pension on reaching age 60 but the normal
retirement age increased to age 65 for benefits earned from 1 April 2010.
‘+ From 1 April 2010 it was possible to draw pension earned before the change to normal
retirement age at age 55 (subject to an actuarial reduction in the pension benefit), and
continue working while still contributing to the RMPP until the maximum level of benefits
was reached,
‘+ RMSEPP was closed to future accrual on 31 December 2012.
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Notes to the financial statements (continued)
+ Liabilities accrued in the RMPP to 31 March 2012 were largely transferred to the Royal
Mail Statutory Pension Scheme. The pre-31 March 2012 liabilities are substantially no
longer an obligation of Post Office and the transfer therefore resulted in a significant
removal of pension risk for Post Office.
‘+ In relation to RMPP only, from 1 April 2014 pensionable salary was amended to the
amount in force as at 31 March 2014, increasing each 1 April thereafter in line with RPI
(up to 5% each year), with allowance for certain promotional increases.
‘+ The Post Office section of the RMPP closed to future accrual on 31 March 2017 and so no
further defined benefits have accrued in respect of Post Office employment after that
date; however for as long as a member remains in employment with the Group or has not
taken pension, pre-1 April 2012 pension benefits are linked to pensionable salary and
post-31 March 2012 benefits receive in-deferment increases (linked to CP1). Closure to
future accrual means that no contributions in respect of normal service accrual are
required after 31 March 2017. However there were redundancy payments of £1 million
(2018: £5 million) made to the RMPP during 2018/19, which were paid in order to fund
enhanced benefits for the members concerned.
* On 21 March 2017 Post Office executed a Memorandum of Understanding with the Trustee
of the RMPP. This clarified the Trustee’s powers to distribute surplus without Post Office’s
agreement and Post Office concluded that it no longer had an unconditional right to
refund from the Plan. In light of this, in accordance with IFRIC 14, the RMPP pension
surplus was derecognised as at 26 March 2017.
Even though RMSEPP had a funding surplus on a Technical Provisions basis at the date of the
latest full actuarial funding valuation, under the associated Schedule of Contributions, payments
of £1 million per annum has been made. Post Office’s share of these payments is 7% of the total.
The payments will continue to 31 March 2025.
The weighted average duration of the Post Office section of the RMPP is around 25 years, and for
RMSEPP is around 20 years.
In July 2017 the Trustee of the RMPP invested in two bulk annuity policies with Rothesay Life.
Those policies provide an income to the Post Office section of the RMPP that matches the vast
majority of the required benefit payments; as shown in the following disclosures, the estimated
value of those policies (on the IAS 19 assumptions as at 31 March 2019) is £292 million (2018:
£272 million), compared to the RMPP defined benefit obligation of £320 million (2018: £298
million). The £28 million difference in these figures is due to a £20 million reserve for future
administration expenses (which are not matched by the annuity policies), plus £8 million in
respect of small differences between the insured benefits and the actual benefit obligation.
A bulk annuity policy (with Scottish Widows) is also held by the Trustee of the RMSEPP. As shown
in the following disclosures, the estimated value of that policy, on the IAS 19 assumptions as at
31 March 2019, is £28 million (2018: £12 million), compared to the RMSEPP defined benefit
obligation of £29 million (2018: £27 million).
Therefore, as at 31 March 2019, 92% of the aggregate defined benefit obligation (i.e. £320
million out of the £349 million) is matched by bulk annuities that provide income matching the
required benefit payments. As such, the majority of the investment and longevity risk associated
with Post Office’s obligations in respect of the defined benefit plans has been removed (noting
that the bulk annuity policies are subject to protection from insurance regulations, including
access to the Financial Services Compensation Scheme, in the event of insurer insolvency).
Nevertheless, to the extent that 8% of the defined benefit obligation is not matched by bulk
annuities, some risk remains in respect of that 8%, in particular the risk that members with
uninsured benefits live for longer than expected, the risk that inflation is higher than expected,
leading to higher than expected increases to the uninsured benefits, the risk that the assets in
excess of the bulk annuity polices generate poor investment returns, and the risk that
administration expenses are higher than anticipated. However, these risks are expected to be
mitigated by the surplus assets shown in the disclosures (before allowing for the fact that the
RMPP surplus is not recognised on Post Office’s balance sheet due to the Memorandum of
Understanding described above).
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Notes to the financial statements (continued)
The following disclosures relate to the gains/losses and surplus/deficit in respect of Post Office’s
obligations to RMPP and RMSEPP:
Major long-term assumptions
The size of the defined benefit obligation shown in the financial statements is materially sensitive
to the assumptions adopted. Small changes in these assumptions could have a significant impact
on this value. The overall income statement charge and past service adjustment in the income
statement are also sensitive to the assumptions adopted. However, the majority of any change in
the defined benefit obligation due to changes in assumptions, will be matched by a corresponding
change in the value in the bulk annuity policies (described above).
‘The major long-term assumptions in relation to both RMPP and RMSEPP were!
At34March 2019 At 26 March 2018
% pa % pa
Increases to benefits that retain a link to pensionable pay ae 33
Rate of pension increases ~ RMP sections A/B ge 2.2
Rate of pension increases ~ RMPP section C SS 33
Rate of pensions increases ~ RMSEPP members transferred sip 22
from Section A or B of RMPP
Rate of pension Increases ~ RMSEPP all other members I I a4 3.3
Rate of Increase for deferred pensions 24 22
Discount rate 24 25
Inflation assumption (RPI) - RMPP & RMSEPP a 3.3
Inflation assumption (CPI) ~ RMPP.& RMSEPP 24 2.2
The following table shows the potential impact on the value of Post Office’s defined benefit
obligation in respect of RMPP and RMSEPP of changes in key assumptions. As noted above, the
bulk annuities held by the arrangements provide an income that matches the vast majority of the
RMPP benefit payments, and a significant proportion of the RMSEPP benefit payments. Therefore
the following changes in the defined benefit obligation would be largely offset by a corresponding
change in the asset values.
2019 2018
ém. ém
‘Changes in RPI and CPI Inflation of +0.1% pa I I (8) (8)
‘Changes in discount rate of +0.1% pa 8 8
Changes In CPI assumptions of +0.1% pa I 3 @)
An additional one year life expectancy i aa 9)
The sensitivity analysis has been prepared using projected benefit cash flows 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 cash flows
have changed since those valuations although any change Is not expected to be material in the
context of the above sensitivity analysis.
Office Limited cores
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Notes to the financial statements (continued)
Mortality: The mortality assumptions used to calculate the value of Post Office's defined benefit
obligation in respect of RMPP and RMSEPP are based on the latest self-administered pension
scheme (SAPS "S2” series) mortality tables as shown in the following table:
Base mortality tables 2019 2018
Male members oS I 100% x S2PMA 100% x S2PMA
Male dependants 8 100% x S2PMA 100% x S2PMA
Female members : 100% x S2PFA 100% x S2PFA
Female dependants 100% x S2PFA 100% x S2DFA
‘CMI 2018 Core Projections with CMI 2016 Core Projections
Future improvements a 1.5% pa long-term trend _ with a 1.5% pa long-term trend
Average expected Ife expectancy from age 60: 2019 2018
For a current 60 year old male RMPP member 27 years 27 years
For a current 60 year old female RMPP member 29 years 29 years
For a current 40 year old male RMPP member 28 years 29 years
For @ current 40 year old female RMPP member 34 years 31 years
b) Plans’ assets.
The assets in the plans for the Group were:
Market value 2019 Market value 2018
Sectionalised RMPP. ém £m,
Corporate bonds oe 16
Private Equity 4 6
Cash and cash equivalents 43 28
Bond/fixed interest funds 9 1
Other loan/debt funds 10 10
Alternative asset funds 4 5
Bulk annuity policies* 292 272
Fair value of RMPP assets 362 338
Present value of RMPP liabilities (320) (298)
Surplus in plan before asset ceiling adjustment 40
Less effect of asset ceiling (40)
Surplus in plan after asset ceiling adjustment oo
As described above, the Post Office section of the RMP? holds two bulk annuity policies with Rothesay Life
PLC. The value ascribed to the policies has been calculated using the same assumptions as used to calculate
the present value of the defined benefit obligation.
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Notes to the financial statements (continued)
Market value 2019 Market value 2018
Share of RMSEPP ém £m
Overseas equities - 8
Government bonds : 17
Cash and cash equivalents - 1
Alternative asset funds i . (8)
Property a 2
Bulk annuity policy* 28 12
Fair value of share in plan assets for RMSEPP 29 32
Present value of share in plan liabilities for RMSEPP. 9) 27)
‘Surplus in plan for the share of RMSEPP before asset, . 5
celling adjustment
Less effect of asset ceiling @
Surplus in plan for share of RMSEPP after asset oe 3
ceiling adjustment
FAs described above, RMSEPP holds a bulk annuity policy with Scottish Widows. The value ascribed to this
policy has been calculated using the same assumptions as used to calculate the present value of the defined
benefit obligation.
As described above, no surplus is recognised for RMPP because the Group no longer has an
unconditional right to refund from the Plan. A retirement benefit surplus of £1 million is disclosed
on the balance sheet, representing the surplus in the RMSEPP only.
There is no element of the above present value of liabilities that arises from plans that are wholly
unfunded. With the exception of the bulk annuity policy described above, all RMPP and RMSEPP
assets are securities with a quoted price in an active market.
c) Movement in plans’ assets and I jes,
Changes in the fair value of the plans’ assets are analysed as follows
Assets Sectionalised Sectionalised
RMPP RMPP
2019 2018
ém £m
‘Assets In sectlonalised RMPP at beginning of period 338 532
Contributions pald 4 5
Finance income 7 7
‘Actuarial gains/(losses) 24 (201)
Benefits paid to members @) (5)
Assets in sectionalised RMPP at end of period eee 338
‘Share of Share of
as: RMSEPP RMSEPP
sets 2019 2018
ém £m
‘Share of assets in RMSEPP at beginning of period 32 32
Contributions paid - 1
Finance income 1 1
Actuarial losses 2) (1)
Benefits pald to members (2) Q)
29 32
Share of assets in RMSEPP at end of period
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Notes to the financial statements (continued)
Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabilities Sectionalised Sectionalised
RMPP RMPP
2019 2018
ém em
Liabilities in sectionalised RMPP at beginning of period (298) (322)
Past service cost @ @
Finance cost @ a
Experience adjustments on tlabilities (6) @)
Financial assumption changes (482) 23
Demographic assumption changes 4 9
Benefits pald 6s 5
Liabilities in sectionalised RMPP at end of period (3299) (298)
Liabilities Share of Share of
RMSEPP RMSEPP
2019 2018
ém ém
Share of liabilities in RMSEPP plans at beginning of period 7) 1)
Finance cost @) a)
Experience adjustments on llabilities me : ee
Financlal assumption changes (22) 3._-{ Formatted: Not Highlight
Demographic assumption changes aa 1
Benefits paid
Share of lia
RMSEPP at end of period
af Af Formatted: Not Highlight
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}
(29) 27)
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Notes to the financial statements (continued)
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
2018
ém
Analysis of amounts recognised in the income statement
Analysis of amounts charged to investments:
Loss due to curtailments a 4
Total charge to operating profit i 4
Analysis of amounts (credited) /charged to net pensions interest:
Interest on plan liabilities 7 7
Interest Income on plan assets i @) @
‘Net pensions credit to financing : :
Net charge to the income statement : 3 4
Analysis of amounts recognised in the statement of
comprehensive income
‘Actual return on plan assets 28 (194)
Less: expected interest income on plan assets 7) @
Actuarial gains/(losses) on assets (all experience adjustments) ote (201)
‘Actuarial gains arising from changes in demographic assumptions 4 9
I Actuarial (gains)/losses arising from changes in financial assumptions (178) 23
‘Actuarial losses arising from experience adjustment 8) Q)
I “Actuarial (gains) /losses on tablities __as36) 30
Effect of the asset celling 170
I Total actuarial losses recognised in the statement of ii ()
comprehensive income
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Notes to the financial statements (continued)
Share of Share of
RMSEPP RMSEPP
2019 2018
ém ém
Analysis of amounts recognised in the income statement
Analysis of amounts charged to net pensions interest:
Interest on plan llabllties i 2 1
Interest income on plan assets @) a
Net pensions credit to financing Oe :
Net charge to the income statement before deduction for tax : 2
Analysis of amounts recognised in the statement of
comprehensive income
Actual return-on-plar-assets- eo -
‘Actual return on plan assets : mw 2--~»{ Formatted: Not Highlight }
Less: pected taest Income_on_plan_assetstess:expected-inter 4 (a) Fonmateds not ighight }
Actuarial losses on assets (all expertence adjustments) —2e (1) (Formatted: Not Highight }
‘Actuarial gains arising from changes in demographic assumptions 2 1
Actuarial (losses)/gains arising from changes in financial assumptions (2) 3
Actuarial (gains)/losses on liabilities
I “Total actuarial (gains)/losses recognised in the statement of Ga 3 :
comprehensive income before effect of asset celng -—-[FormatindsNothighio_
Effect of the asset celling ere @
Total actuarial (gains) /losses recognised in the statement of
I comprehensive income after effect of asset ceiling @s) 1_--(Formatted: Not Highlight )
18. Equity
Called up share capi
2019 2018
€ £
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 (2018: £2 million) relate to First Rate Exchange Services Holdings
Limited, the joint venture entity, and £3 million (2018: Enil) relates to a cash flow hedge.
Share premium:
(On 7 August 2007 one ordinary share of £1 was issued in return for £313 million cash paid by the
Secretary of State for Business, Enterprise and Regulatory Reform. A share premium of £313 million
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, Energy and Industrial Strategy. A share
premium of £152 million resulted from this subscription.
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Notes to the financial statements (continued)
19. Commitments and contingent liabilities
The Group is also committed to the following minimum lease payments under non-cancellable
operating leases:
Land and buildings Motor vehicles
2019 2018 2019 2018
£m ém £m ém
within one year re re 1
Between one and five years & 34 Fy -
Beyond five years 18 33 : :
Total ss 0 1
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 postmaster misconduct, including non-compliance
with policies and improper use or disclosure of our assets or confidential information.
On 11 April 2016, a High Court claim was issued on behalf of a number of postmasters against Post
Office in relation to various legal, technical and operational matters, many of which have been the
subject of significant external focus for a number of years. Post Office Is robustly defending the
claim, believes it lacks merit, but welcomes the opportunity to have these matters resolved through
the Court managed Group Litigation Order.
The Court has ordered two trials to be heard in 2018-19 to determine a subset of the preliminary
issues in dispute between the parties. The Court has not yet ordered a process for determining any
issues of liability or quantum. To date, the Claimants have not asserted the aggregate value of their
claims in any of the Particulars of Claim filed in the litigation,
While the Directors recognise that an adverse outcome could be material, they are currently
unable to determine whether the outcome of these proceedings would have a material adverse
impact on the consolidated position of the Group, and are unlikely to be able to do so until the
Court has made further determinations and the Claimants have provided the necessary
information about the value of their claims. The Directors continue to keep this under close
review.
The costs of £14 million included in exceptional items relate to Post Office defending the Post Office
Group Litigation (2018: £3 million). These have been disclosed as exceptional items because we
expect costs to remain significant in 2019/20 and 2020/21
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Notes to the financial statements (continued)
20. Business combinations
On 24 October 2018, the Group acquired Payzone Bill Payments Limited ("Payzone") for cash
consideration of £16 million. Further consideration of £3 million is contingent on the future
performance of certain Payzone revenue streams. £1 million has been paid as at 31 March 2019. The
acquisition developed the bill payments business and has been accounted for under IFRS 3 Business
Combinations.
‘The fair values of the identifiable assets and liabilities of the business as at the date of acquisition
were:
2018
em
Property, plant and equipment i 4
Trade and other receivables 6
Cash and cash equivalents a
Trade and other payables (6)
Net assets acquired 5
Intangible assets ~ merchant relationships 6
Intangible assets - brand a
Deferred tax lability on acquired Intangible assets @
Goodwill 8
Total consideration 19
Consideration is represented by:
Cash 16
Contingent consideration 3
The goodwill arising from the acquisition represents the opportunity to integrate technology and
combine the Group’s existing bill payments business with Payzone in order to compete for new and
bigger bill payment contracts from a stronger position. The goodwill arising on acquisition is not
deductible for income tax purposes. Goodwill has been reviewed for impairment at acquisition and
during the year and on both occasions the amount is considered to represent fair value. There are no
indicators of impairment.
Associated acquisition expenses were immaterial and have been charged to the income statement,
within the Investments column.
From the date of acquisition to 31 March 2019, the Payzone business has contributed £4 million of
revenue and £1 million to trading profit
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Notes to the financial statements (continued)
21. Related party disclosures
Joint venture
The following Company is a joint venture of the Group:
Company Country of incorporation % Holding
First Rate Exchange
Services Holdings Limited
Principal activities
United Kingdom 50 Bureau de Change
Ail shareholdings are equity shares. Summarised financial information for the joint venture is
included in note (10).
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 Purchases / related party related party
to related recharges from Including Including
party related party outstanding loans __outstanding loans
2019 2018.«=—«2019 2018 +=—«2019 2018 2019 2018
ém £m ém £m, £m £m. ém, ém
First Rate a :
Exchange Services
Holdings Limited 36 34 118 8 4
The sales to and purchases from related parties are made at normal market prices. Balances
outstanding at the year-end are unsecured, interest free and settlement is made by cash. First Rate
Exchange Services Holdings Limited is a joint venture of the Group.
The Ggoup trades with numerous Government bodies on an arm’s length basis, such as the DWP,
the DVLA and the Home Office. Transactions with these entities are not disclosed owing to the
significant volume of transactions that are conducted,
Separatel
+ The Group has certain loan facilities with Government (page [XX]).
* The Group has received investment funding from Government of £168 million (2018: £70
million), all of which was recognised through the income statement.
+ The Group has received the Network Subsidy Payment from Government (page [XX]).
Key management personne! comprises the Executive and Non-Executive Directors of the Post
Office Limited Board at 31 March 2019. The remuneration of the key management personnel of
the Post Office Group is disclosed in note [5] on pages [XX] and [XX].
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Notes to the financial statements (continued)
22. Membership of the Bank of England's Note Circulation
Scheme
Post Office Limited is a member of the Bank of England (the ‘Bank’ Note Circulation Scheme (the
“NCS') which governs the custody of Bank of Engiand notes that are not in issue. The NCS promotes
efficiency in the distribution and processing of notes by allowing approved commercial organisations,
engaged in the wholesale distribution and processing of cash, such as the Post Office, to hold notes
owned by the Bank.
The continued participation in the NCS ensures that Post Office Limited has an adequate supply of
notes to meet customer demand across its network.
The NCS mechanisms that enable Post Office Limited to hold Bank of England owned notes comprise
of two elements:
Bond Facility Cash (the "Bond’) - this is cash that is permanently owned by the Bank and is stored in
secure vaults at our cash centres, physically separate from other cash. Post Office Limited buys cash
from and sells cash to the Bond
Note Recirculation Facility Cash (the ‘NRF’) ~ this is cash that is held securely, either in our NCS cash
centres or in the branch network and that is sold to the Bank at the end of each day with a
commitment from Post Office Limited to buy it back the next morning. In order to sell notes in this
way to the Bank, Post Office Limited must ensure that Gilts are lodged each night as collateral. Our
ability to sell notes to the Bank under the NRF Is constrained by:
a) The amount of eligible notes available for sale.
b) The collateral available.
) An annual limit imposed by the Bank dependent upon the volume of notes sorted and issued
from our cash centres.
In order to support its participation in the NCS, Post Office Limited has bank facilities of up to £400
million in place (the ‘Facilities’), comprising:
a) An overnight collateral facility.
b) An intra-day overdraft facility.
The Facilities may be cancelled by the lender with 60 days’ notice
At the end of the year £227 million (2018: £238 million) were held in this way.
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Notes to the financial statements (continued)
23. Alternative performance measures
An alternative performance measure Is a financial measure of historical or future financial
performance, position or cash flows of the Group which is not a measure defined or specified in
IFRS.
Trading profit
Trading profit is one of the Group’s key financial measures and is calculated by taking operating
profit from continuing operations before depreciation, amortisation, exceptional items, closure of
activities, investments and Network Subsidy Payment. The table below summarises the calculation of
operating profit before exceptional items, trading profit before Network Subsidy Payment and trading
profit.
2019 2018
ém £m
Operating profit I 52 15
Adjusted for:
Exceptional items 14 3
Operating profit before exceptional items 66 18
Depreciation and amortisation 94 55
Investments Gs) 32
Trading profit before Network Subsidy Payment 424 105
Network Subsidy Payment (60) (70)
Trading profit 61 35
24. Post balance sheet events
In accordance with the Funding Agreement with Government signed on 30 March 2017, Post
Office Limited received a Network Subsidy Payment of £18 million on 2 April 2019. The Network
Subsidy Payment is received on a quarterly basis and a total of £50 million will be received from
Government in 2019/20.
25. Ultimate controlling party
The Post Office Limited was a wholly owned subsidiary of Postal Services Holding Company
Limited until it entered voluntary liquidation in June 2017 and the shares in Post Office Limited
were transferred to the Secretary of State for BEIS.
I The Secretary of State for BEIS holds a special share in Post Office Limited and the rights
attached to that special share are enshrined within Post Office Limited Articles of
Association. BEIS, through UK Government Investments Limited (UKGI), has no day to day
involvement in the operations of Post Office Limited or in the management of its branch network
and staff. As such, at 31 March 2019, the Directors regarded Post Office Limited as the
immediate and ultimate parent Company.
The largest Group to consolidate the results of the Company is Post Office Limited, a company
registered in the United Kingdom. Post Office Limited financial statements can be obtained from
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Post Office Limited
Company
Financial Statements
2018/19
Company balance sheet
at 31 March 2019 and 25 March 204)
2019 2018
Note em m
Non-current assets
Intangible assets 3 215 211
Property, plant and equipment: 4 173 148
Investment in subsidiaries 5 7 50
Investments in folnt venture 6 66 6s
Retirement benefit surplus 2 1 3
Trade and other receivables 7 6 2
Total non-current assets 535 490
Inventories 8 9
Trade and other receivables 7 34a 23
Cash and cash equivalents 8 541 644
Total current assets 393 976
Total assets 1,428 1,466
Gurrent labiites
Trade and other payables 9 (523) (565)
Financial liabilities - Interest bearing loans and borrowings 10 (565) (623)
Provisions i (49) (35)
Total current liabilities (1,137) (1,223)
Non-current labities
other payables (aa) as)
Provisions i (33) (30)
Total non-current liabilities (47) (48)
Net assets 2aa 195
Equity
Share capital 3 : ;
Share premium B 465 465
Accumulated losses (226) (272)
Other reserves 5 2
Total equity 2aa 195
The notes on page [XX] to [XX] form an integral part of the financial statements.
The result dealt with in the financial statements of the Company amounted to a profit of £[48]
million (2018: £15 million).
The financial statements on pages [XX] to [XX] were approved by the Board of Directors on XX
XXX 2019 and signed on its behalf by:
ACJ] Cameron
Interim Chief Executive
e Limited
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Company statement of changes in equity
for the 53 weeks ended 31 March 2019 and 52 weeks ended 25 March 2018
Shere Share Accumulated _—other-—‘Total
capital premium losses reserves equity
I ote £m ém m £m ém
{At 26 March 2018 : 465 (272) 2. «tes
Profit for the year * - 48 - 48
Gains on cash flow hedges : : : 3 3
I Re-measurements on defined : - @) Le
benefit surplus
I Asset ceiling effect a = = a is 1
At 31 March 2019 7 465 (226) 5s 244
Share Share Accumulated other-—Total
capital Premium losses reserves equity
I r em em em tm nem
At 27 March 2017 - 465, (287) 2 180
Profit for the year - - 15 - 4s
I Re-measurements on defined % - . 2 : 2
benefit surplus
I Asset ceting eect B . : @) re)
At 25 March 2018 - 465 (272) 2 195
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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 Company financial
statements for the 53 week period ended 31 March 2019,
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are
made up to the 53 weeks ended 31 March 2019 (2018: 52 weeks ended 25 March 2018)
Authorisation of financial statements
The parent Company financial statements of Post Office Limited (the Company’) for the year ended
31 March 2019 were authorised for issue by the Board of Directors on XX XXX 2019 and the balance
sheet was signed on the Board's behalf by A C ] Cameron. Post Office Limited is a company limited
by share capital, incorporated and domiciled in England and Wales. The address of the registered
office is given on page [XX].
Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101
Reduced Disclosure Framework (“FRS” 101). These financial statements are prepared under the
historical cost convention. The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
As permitted by Section 408 of the Companies Act 2006 Post Office Limited has not presented its
‘own income statement.
The results of Post Office Limited are included in the consolidated financial statements of Post Office
Limited 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:
a. paragraph 73(e) of IAS 16 ‘Property, Piant and Equipment’
b. paragraph 118(e) of IAS 38 “Intangible Assets’.
() the requirements of paragraphs 10(d), 10(F), 39(c), 40.A and 134-136 of IAS 1 ‘Presentation
of Financial Statements’.
(e) the requirements of IAS 7 ‘Statement of Cash Flow’s.
(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
The Company had net assets of £244 million at 31 March 2019 (2018: £195 million). At 31 March
2019 £385 million of the Company's working capital facility was undrawn (2018: £327 million). The
Company has also shown a profit for the year of £48 million (2018: £15 million)
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Notes to the financial statements (continued)
We have the following funding agreed with BEIS: a working capital facility of £950 million to 31
March 2021; a further £50 million facility available to provide same day liquidity to 4 April 2020;
NSP of £50 million
for 2019/20 and 2020/21 respectively; and we also have investment funding of up to £210 million as
required for the period from April 2018 to March 2020
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 Directors consider that it is appropriate that these financial
statements have been prepared on a going concern basis.
Accounting policies
‘The following accounting policies are consistent with those of the Group as detailed in note 1 of the
Group financial statements:
(Formatted: Font: Not Bold
‘+ Critical accounting estimates and judgements in applying accounting policies.
«Revenue.
‘+ Investments column in the income statement,
+ Leases.
+ Taxation
‘+ Investments in joint venture.
+ Business combinations,
‘+ Property, plant and equipment.
‘+ Intangible assets,
© Inventories.
+ Trade receivables,
‘+ Cash and cash equivalents.
‘+ Pensions and other post-retirement benefits.
+ Foreign currencies.
+ Provisions.
‘+ Financial instruments.
+ Derivatives and hedging activities.
Auditors’ remuneration
The remuneration paid to auditors is disclosed in the Group financial statements (note (31)
Directors’ emoluments
The emoluments paid to Directors are disclosed in the Group financial statements (note [5]).
Directors for the Company are the same as Group.
Investment in subsi
jaries
Investment in subsidiaries are carried at cost less accumulated impairment losses.
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Notes to the financial statements (continued)
2. Staff costs and numbers
Employment and related costs were as follows:
2019 2018
People costs within trading: . __ém ém,
Wages and salaries 157 151
Social security costs 17 18
I Other pension costs (note (121) a 433 16. Formatted: Highlight }
Total people costs within trading 185
Other operating costs within trading 733 751
Total trading costs 920 936
Period end and average employee numbers were as follows:
Period end employees Average employees
2019 2018 2019 2018
Total employees 4,272 4,973 4,623 5,022
Total employee numbers can be categorised as follows:
2019 2018
Administration 1,205, 1,205
Directly managed branches (DMB) (2,049 2,707
Supply Chain 854 848
Network programmes 164 213
Total 4,272 4,973
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Notes to the financial statements (continued)
3. Intangible assets
other
Software Goodwill Intangibles Total
em em em em
Cost
‘At 27 March 2017 314 : : 314
Reclassification @) - - @)
Additions 122 1 6 129
At 25 March 2018 434 1 6 441
Reclassification (29) : : 29)
Additions 90 L 90
Disposals (17) - + (17)
AE Si Watch 3618 478 i é 485
‘Accumulated amortisation and impairment
‘At 27 March 2017 199 : : 199
Reclassification 6 . . 6
Amortisation 25 - - 25
At 25 March 2018 230 bee is 230
Amortisation 52 i 3 55
Disposals as) - : as)
At 34 March 2019 267 - ee
Net book value
At 31 March 2019 1 3 215
At 25 March 2018 1 6 211
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Notes to the financial statements (continued)
4. Property, plant and equipment
Land and Buildings
Plant Fixtures
Lor Short Motor an
Freehold leasehold leasehold vehicles machinery equipment Total
em em em, em em em em,
Cost
At 27 March 2017 45 41 23 26 1 795 931
Reclassification 1 1 1 ~ - @) 2
Additions . : - 1 . 18 19
Disposals (6) (3) (2) Q) - @) (20)
At 25 March 2018 40 ee Sg 805 932
Reclassification 2 + . i ~ 27 29
Additions 1 1 1 : : 35 38
Disposals () Oo eB. : Le (22) (29)
‘At31 March 2019 39 39 24 25 a 845 970
Accumulated depreciation an
{At 27 March 2017 32 23 26 1 677 773
Reclassification - - - - - (6) (6)
Depreciation 1 2 - - - 25 28
Disposals (4) - (2) Q) - (3) (11)
At 25 March 2018 29 16 21 24 1 693 784
Depreciation 1 2 - - 32 as
Disposals Q) a (2) : : a7 (22)
At 34 March 2019 28 7 19 24 i 708 797
Net book value
At3iMarch2019 41. 22 2 1 - 41370473
At 25 March 2018 it 23 1 1 - 112 148
Depreciation rates are disclosed on page XX within the Group accounting policies note. No
depreciation is provided on freehold land, which represents £2 million (2018: £2 million) of the total
cost of properties.
During the current and prior year, a review of property, plant and equipment and intangible assets
took place and resulted in reclassifications between categories.
An impairment test was performed during the year. Intangible assets and property, plant and
equipment were tested for impairment by comparing the carrying amount of each Cash Generating
Unit (CGU) with the recoverable amount determined from the value in use calculations.
The discounted net cash flows from the value in use calculations were used to determine the
recoverable amount of the CGU’s identified, being Post Office Limited. Value in use Is determined
using the Group's net cash inflows from the continued use of the assets within each CGU over a
two year period (and then continued Into perpetuity), with no nominal growth rate assumed
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Notes to the financial statements (continued)
outside of this period. Pre-tax discount rates for Post Office Limited of 9.5% (2018: 9%) have
been used to discount the forecasted cash flows
A sensitivity analysis has been performed in assessing the value in use of property, plant and
equipment and intangible assets. This has been based on changes in key assumptions considered
to be possible by management. This included an increase in the discount rate of up to 12%, zero
growth rate and a decrease in forecasted EBITDA by 5%. The sensitivity analysis showed that no
impairment would arise under each or a combined scenario.
Management therefore believes that any reasonably possible change in the key assumptions
would not cause the carrying amount of any CGU’s to exceed their carrying value.
5. Investment in subsidiaries
The carrying value of £74 million relates £55 million to the Company's investment in Post Office
Management Services Limited, a 100% subsidiary of the Company with 55,000,000 shares at a
nominal value of £1 and 1 share with a nominal value of £100; and £19 million, in Payzone Bill
Payments Limited, a 100% subsidiary of the Company with 1 share at a nominal value of £1. The
registered address of both Post Office Management Services Limited and Payzone Bill Payments
Limited is Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
6. Investments in joint ventures
2019 2018
ém em
Investment in joint ventures 66 66
During the current and prior year, 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 £66 million (2018: £66 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.
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Notes to the financial statements (continued)
7. Trade and other receivables
2019 2018
£m £m
Current:
Trade receivables 90 78
Amounts owed by group undertakings 8 6
Accrued income 70 74
Prepayments 19 7
Client recelvables 138 132
Other recelvables 19 16
Total 344 323
Non-current!
Accrued income 2 2
Prepayments 4 to
Total 6 12
8. Cash and cash equivalents
2019 2018
£m £m
Cash in the Post Office Limited network 537 643
Short-term bank deposits 4 1
Total Bai 644
9. Trade and other payables
2019 2018
£m €m
Current
Trade payables 53 40
Amounts owed to group undertakings 4 4
Accruals 113 155
Deferred income 20 32
Social security 8 8
Client payables 312 306
Capital payables 10 20
Other Payables :
Total 565
Non-current:
Other payables 44 18
Total 14 18
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Notes to the financial statements (continued)
10. Financial liabilities —- interest bearing loans and
borrowings
2019 2018,
em £m
Department for Business, Energy and Industrial
Strategy ‘565 623
The loan under the facility is short dated on a programme of liquidity management and matures 1
day after the year-end (2018: 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 2021. The undrawn committed facility, in respect of
which all conditions precedent had been met at the balance sheet date, is £385 million (2018: £327
million). The average interest rate on the drawn down loans is 1.1% (2018: 0.8%)
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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26
Notes to the financial statements (continued)
11. Provisions
Network
Programmes Property Severance Other Total
ém ém £m £m, £m
At 26 March 2018 18. 32 7 8 65
Charged to investments 30 25 43 : 98
Charged to trading . : - 5 5
Transfers - - - 3 3
Utilisation (36) @) (24) (6) (22)
Provisions released In the year - : @) a @ ta
frovistons released In the year : : : 6) ©
At 31 March 2019 12 at 22 7 82
Network
Programmes Property Severance Other Total
£m £m ém_ £m. ém_
Disclosed as:
At 31 March 2019
Current 6 14 22 7 49
Non-current 6 27 - : 33
12 an 22 7 82
At 25 March 2018
Current it it 7 6 35
Non-current 7 24 - 2 30
18 32 7 8 65
Details of the provisions are included in note [15] in the Group financial statements.
12, Pensions
‘The Company pension’s disclosure is consistent with the Group disclosure included in note [17] on
pages [XX] to [XX]
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Notes to the financial statements (continued)
13. Equity
Called up share capital:
2019 2018
authorised
Ordinary shares of £1 each 51,000 51,000
Fotar 51,000 31,000
Ailotted and Tesued
Ordinary shares of £1 each
Total
50,003
50,003
Share premium:
On 7 August 2007 one ordinary share of £1 was Issued in return for £313 million cash paid by the
Secretary of State for Business, Energy and Industrial Strategy. A share premium of £313 million
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, Energy and Industrial Strategy. A share
premium of £152 million resulted from this subscription.
14. Commitments and contingent liabilities
Details of the Company commitments under non-cancellable operating leases and Company
contingent liabilities are disclosed in the Group financial statements (note [19])..
15. Related party disclosures
Details of transactions with related parties are disclosed in the Group financial statements (note
[21))
16. Investments expenditure
Details of operating investments expenditure Is disclosed in the Group financial statements (note
{4)).
17. Taxation
Details of the taxation gains recognised in the year are disclosed in the Group financial statements
(note (71)
18. Business combination
Details of the business combination are included in note [20] in the Group financial statements,
19. Post balance sheet events
Details of post balance sheet events are included in note [24] in the Group financial statements.
On 1 Apri! 2019 Post Office Management Services Limited issued 5,000,000 ordinary shares with a
value of £1 each to Post Office Limited,
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Notes to the financial statements (continued)
20. Ultimate controlling party
The Post Office Limited was a wholly owned subsidiary of Postal Services Holding Company Limited
until it entered voluntary liquidation in June 2017 and the shares in Post Office Limited were
transferred to the Secretary of State for BEIS.
‘The Secretary of State for BEIS holds a special share in Post Office Limited and the rights attached
to that special share are enshrined within Post Office Limited Articles of Association. BEIS, through
UK Government Investments Limited (UKGI), has no day to day involvement in the operations of
Post Office Limited or in the management of its branch network and staff. As such, at 31 March
2019, the Directors regarded Post Office Limited as the immediate and ultimate parent Company
The largest Group to consolidate the results of the Company is Post Office Limited, a company
registered in the United Kingdom. Post Office Limited financial statements can be obtained from
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Corporate information
Registered Office
Post Office Limited
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ
Independent Auditor
PricewaterhouseCoopers LLP
29 Wellington St
Leeds
LS1 4DL
Solicitor
Linklaters LLP
One Silk Street
London
EC2Y 8HQ
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
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Post Office Limited is registered in England and Wales. Registered number
2154540.
Registered Office is Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ.
Post Office and the Post Office logo are registered trademarks of Post Office
Limited.
Copyright 2019 The Post Office.
Limited orate postofiice.co.uk I
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Post Office Limited
Audit, Risk and Compliance Committee
53 weeks ended 31 March 2019
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Page
1. Glossary 3
2. Introduction 4
3. Primary Statements 5
4. Operating Profit 8
5. Revenue 10
6. Costs 14
7. Quality of Earnings 18
8. Business Combinations 19
9. Pensions 20
10. Investment expenditure 24
11. Interest, Cash, Debt, Funding and Hedging 26
12. Fixed assets 27
13. Investments in joint ventures 32
14. Working capital 33
15. Provisions 38
16. Litigation and Claims- Potential Claims regarding Horizon 39
17. ‘Taxation 42
18. Future Change in Accounting Policies 43
19. PO Insurance 44
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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
AEL Applicant Enrolment Identification
ATM Automated Teller Machine
BACS. Bankers' Automated Clearing Services
BEIS Department for Business, Energy & Industrial Strategy
BOI Bank of Ireland
CPL Consumer Price Index
DMB Directly Managed Branch (formerly Crowns)
DVLA Driver & Vehicle Licensing Authority
Dwpe 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
EBITDAS Earnings Before Interest Tax Depreciation Amortisation and Subsidy
EU BRP. European Union Biometric Residents’ Permit
FRES First Rate Exchange Services, our foreign currency joint venture with Bol
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
IRIS Restructuring of the Supply Chain to removal external service
NBV Net Book Value
NS&I National Savings & Investments
NSP Network Subsidy Payment
POCA Post Office Card Account, a mechanism for Government to pay benefits to
people without bank accounts
PFS Personal Finance Services
POFS Post Office Financial Services
RMPP. Royal Mail Pension Plan, defined benefit pension plan for Post Office
employees (closed from 31 March 2017)
RMSEPP Royal Mail Senior Executive Pension Plan, defined benefit pension plan for
Post Office Senior Executives (closed)
POPP Post Office Pension Plan, defined contribution pension plan for all other
Post Office employees
RBS Royal Bank of Scotland
RPI Retail Price Index
SGEI Services of General Economic Interest, part of our social purpose
commitment to Government
OSOP Organisation Structure Optimisation Project, the removal of 20% of non-
front office roles in H1 2017
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2. Introduction
This Briefing Book has been prepared to explain the Post Office Limited Group results
for the 53 weeks ended 31 March 2019. It is a summary analysis of the key data and
trends which readers may find useful. It should be read in conjunction with the Annual
Report and Accounts (ARA).
Analysis is presented based on a comparison of 2018/19 results to those of the prior
year.
Comparison against budget has been discussed in the Monthly Performance Report
presented to the Post Office Limited Board and is therefore excluded from the Briefing
Book.
The 2018/19 financial numbers are subject to completion of outstanding audit
procedures.
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).
Accounting policies and estimates have been applied consistently from the prior year,
with the exception of IFRS 15 and IFRS 9 which have been applied for the first time.
IFRS 9 replaces the provisions of IAS 39 Financial Instruments: Recognition and
Measurement that relate to the recognition, classification and measurement of
financial assets and financial liabilities, de-recognition of financial instruments,
impairment of financial assets and hedge accounting.
The adoption of IFRS 9 from 2018/19 has not had a material impact on our results,
with the key issues for Post Office being around documentation of policies and new
hedge documentation.
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related
Interpretations and it applies, with limited exceptions, to all revenue arising from
contracts with its customers. IFRS 15 establishes a five-step model to account for
revenue arising from contracts with customers and requires that revenue be
recognised at an amount that reflects the consideration to which an entity expects to
be entitled in exchange for transferring goods or services to a customer.
IFRS 15 has not had a material impact on revenue recognition at Post Office and
therefore, on initial application, no adjustment was required to the opening balance of
retained earnings. Presentational reclassifications on the face of the income statement
have been required in respect of the Network Subsidy Payment and Post Office Card
Account commission income. These two items were formerly recognised in revenue
and have now been reclassified to other income.
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3. Primary Statements
3.1 Consolidated Income Statement
2019 2018
—£m —£m
Note Trading Investments Total Trading Investments Total
Revenue from contracts with
customers 972 = 972 956 - 956
(Costs (958) (129) (1,087) (960) (102) (1,062)
\Costs - exceptional items (14) - (14) (3) - (3)
Total costs (972) (129) (1,101) (963) (102) (1,065)
Other operating income 14 - 14 5 - 5
Investment funding - 168 168 - 70 70
Network Subsidy Payment 60 - 60 70 - 70
Depreciation and amortisation (94) e (94) (55) - (55)
Share of post-tax profit from : .
joint venture 33 cae 34 34
Operating profit / (loss) 13 39 52 47 (32) 15
Operating profit / (loss) before
exceptional items cee ble 66 50 (32) 18
Finance costs (8) (a) (9) (5) (2) (7)
Profit / (loss) before taxation 5 38 43 42 (34) 8
Taxation credit 9 = 9 9 - 9
Profit / (loss) for the
financial year 14 38 52 51 (34) 7
Trading Profit (EBITDAS) 61 35
Trading represents the underlying trading of the business excluding investment funding,
restructuring and transformation costs.
Investments comprises investment funding and transformational spend.
Trading profit is one of the Group’s key financial measures and is calculated by taking
operating profit before depreciation, amortisation, operating exceptional items, closure of
activities, investments and Network Subsidy Payment. For the 53 weeks ended 31 March 2019
trading profit was £61 million (2018: £35 million).
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3.2 Consolidated statement of cash flows
2019 2018
£m £m
Cash flows from operating acti
Operating profit 13 47
Total profit before investments 13 47
Adjustment for:
Share of profit from joint venture (33) (34)
Depreciation and amortisation 94 55
Pension operating costs 13 17
Other gains and losses te -
Working capital movements: (30) (2)
(Increase)/decrease in trade and other receivables q1) 5
Decrease in contract assets 5 -
Decrease in trade and other payables (26) (3)
Decrease/(increase) in inventories 1 (2)
Decrease in trading provision (1) -
Increase/(decrease) in provisions for discontinued operations 2 (2)
Pension costs paid (21) (26)
Cash payments in respect of investments items: ao (46)
Investment funding 168 70
Restructuring costs (119) (116)
Surrender of tax losses to joint venture 8 9
100 20
Net cash inflow from operating acti:
Cash flows from investing acti’
Dividends received from joint ventures 33 34
Acquisition of businesses (net of cash acquired) (17) (6)
Proceeds from the sale of property, plant and equipment 4 5
Purchase of tangible and intangible non-current assets (149) (135)
Net cash outflow from investing activities Ce) (102)
Net cash outflow before financing activities (29) (82)
Cash flows from financing activities
Finance costs paid (8) (5)
Proceeds of borrowings from BEIS (58) 62
Net cash (outflow) /inflow from financing acti (66) 57
Net decrease in cash and cash equivalents (95) (25)
Cash and cash equivalents at the beginning of the year 655 680
Cash and cash equivalents at the end of the year 560 655
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3.3 Consolidated balance sheet
2019 2018
£m £m
Non-current assets
Intangible assets 291 264
Property, plant and equipment 176 148
Investments in joint venture 66 66
Retirement benefit surplus 1 3
Trade and other receivables 6 12
Total non-current assets 540 493
Current assets
Inventories 8 9
Trade and other receivables 344 324
Cash and cash equivalents. 560 655
Total current assets 912 988
Total assets 1,452 1,481
Current liabilities
Trade and other payables (533) (571)
Financial liabilities - interest bearing loans and borrowings (565) (623)
Provisions (50) (36)
Total current liabilities (1,148) (1,230)
Non-current liabilities
Other payables (14) (18)
Provisions (34) (30)
Total non-current liabilities (48) (48)
Net assets 256 203
Equity
Share capital - -
Share premium 465 465
Accumulated losses (214) (264)
Other reserves 5 2
Total equity 256 203
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4. Operating Profit
The following bridges show the key movements that drive performance in the
year when compared to the prior year closing position.
Analysis of revenue and costs underpinning the below tables are included in
section 5 (revenue) and section 6 (costs).
4.1 Operating profit waterfall (£m)
20:8 NetTrading = NSP Postmasters People Other Group Depreciation 2019
Income Coss Goss Operating Litigation
‘Gets ss
4.2 Trading profit waterfall (£m)
2018 Net Trading Postmasters Costs People Costs Other Operating 2019
Income Gots
4.3 Operating profit reconciles to trading profit as follows:
£m
Operating profit 13
Add back depreciation 94
Less network subsidy (60)
Add exceptional items 14
EBITDAS 61
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Revenue Cost of Gross GP GP Margin Variance
Sales Profit Margin 2018 YoY
ém ém —m % % %
Retail
Mails 350 - 350 100 100 -
Retail & Lottery 42 (1) 41 98 91 7
Payment Services 27 - 27 100 100 -
Cash & Banking Services 161 (19) 142 88 87 1
Financial Services &
Telecoms
Financial Services 113 - 113 100 100 -
Telecoms 153 (91) 62 41 46 (5)
Insurance 55 (11) 44 80 81 (1)
Identity 58 (6) 52 90 88 2
Other 13 - 13 100 100 -
Total 972 (428) 844 87 87 =
The revenue streams above are net of commission where relevant, which means
that Cost of Sales on some products are held in the client’s p&l account.
Overall, Telecoms gross profit is down year on year and PO Insurance gross profit
is relatively flat. See section 19 for more detail on PO Insurance.
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5. Revenue
2019 2018 Variance Variance
Notes £m £m £m %
Retail 5.1
Mails 5S... 350 334 16 5
Retail & Lottery 5.1.2 42 45 (3) (7)
Payment Services 5.1.3 27 27 - -
Banking Services 5.1.4 102 88 14 16
POCA 5.1.5 30 40 (10) (25)
ATMs 5.1.6 29 30 (1) (3)
Financial Services & Telecoms 5.2
Financial Services 5.2.1 113 127 (14) (11)
Telecoms 5.2.2 153 147 6 4
Insurance 5.3 55 48 7 16
Identity 5.4 58 54 4 7
Other 5.5 13 16 (3) (19)
Turnover 972 956 16 2
Network Subsidy Payment 60 70 (10) (14)
Revenue 1,032 1,026 6 1
Trading revenue increased year on year by £16 million to £972 million. Growth
was driven by our Identity (7%) and Insurance (15%) business areas, with
continued growth also noted within Banking Services (15%). This was partly
offset by the anticipated decline in our card account income stream (down 25%).
Mails trading turnover saw 5% growth year on year, which is a significant
achievement in a competitive market.
5.1 Retail
5.1.1 Mails (£16.0m increase year on year)
Volumes
2019 = 2018 Variance variance 2019 2018 variance
£m £m £m % m m %
Parcelforce 21 20 1 5 4 4 -
Special Delivery 51 49 2 4 50 50 -
International Priority & 39 39 -
Standard Y 34 34 - .
Stamps (1st & 2nd Class plus 23 23 . _ 449° 468 (4)
other stamps)
Labels (1st & 2nd Class) 96 91 5 5 167 161 4
RM Signed For 23 23 - - 80 79 1
Home Shopping Returns 23 18 5 28 48 38 26
Mails Other (trading) 21 16 5 31 16 14 14
Annual fee 48 50 (2) (4) n/a n/a n/a
Mailwork 10 10 : : n/a n/a n/a
Total 350 334 16 5 n/a n/a n/a
Overall Mails volumes are generally in decline, but were offset by a 3.4% RPI
increase impact, a 53rd week of trading, £1.5m accrual release from successful
corpor:
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Royal Mail negotiations, and £2.4m contractual decline in annual fixed fee. Pick-
up/Drop-off products, such as Home Shopping Returns, and Click & Collect (Mails
Other) have shown volume growth in year, including a £5.2m increase in Home
Shopping Returns driven by 21% year on year volume growth.
There was a £2.0m increase in Special Delivery from continuous service this year
after weather disruption in prior year hindered operations.
Stamps revenue has remained stable year on year, assisted by strong finish to
the year as a result of buy forward activity in advance of price increase (3p
increase on 1st and 2nd class stamps).
5.1.2 Retail and Lottery (£2.6m reduction year on year)
e Decrease in Retail (£3.1m) due to a smaller number of DMBs.
e Lottery sales increased by £0.5m, as higher number of rollovers helped
to mitigate the impact of market switch to online sales.
5.1.3 Payment Services (flat year on year)
« (£4.0m) decline in payment services, driven by 9% market decline
together with loss of Allpay reseller housing contracts.
« £4,.3m revenue from Payzone acquisition in 18/19. Refer to section 8
regarding business combinations.
5.1.4 Banking Services (£13.7m increase year on year)
« £13.7m increase in Banking Services fueled by branch closures, but
also driven by successful automation of deposit transactions for two
major banks which doubled the level of weekly transactions. 15
additional banks have also joined the banking framework.
5.1.5 POCA (£10.3m decrease year on year)
« (£10.3m) reduction in POCA revenue as DWP actively reduce number
of active accounts. Reduction in line with budget expectation.
5.1.6 ATMs (£1.0m decrease year on year)
e (£1.0m) reduction in ATMs income of (3%), which is less than (6%)
declining market trend. Availability of ATM network has been increased
from 92% to 94%.
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5.2 Financial Services & Telecoms
5.2.1 Financial Services
2019 2018 Variance ~—_—Variance
£m ém £m %
PO Money 46 58 (12) (21)
Travel Money 28 28 - -
Moneygram 26 26 - -
Postal Orders 13 15 (2) (13)
Total 113 127 (14) (11)
« PO Money decrease impacted by £12m Value Share agreement with
Bol in 17/18; Enil in 18/19.
e The competitive, customer and regulatory environments remain tough:
the continued low rate environment and BoE funding scheme are
putting pressure on Mortgage margins and Savings rates; Mortgages
are challenged due to Bol pricing but the expansion into Broker channel
is partially offsetting this.
« Travel Money is flat year on year, with the 53 week masking an
underlying decrease as travel market trend continues at a 10% decline.
« Moneygram revenue includes £2.4m additional commissions from new
deal, offsetting an underlying £2.0m reduction caused by volume
decline to Eastern Europe.
« (£1.5m) decrease on Postal Orders, consistent with expected volume
decline.
5.2.2 Telecoms
2019 2018 Variance Variance
£m £m £m %
Homephone 28 70 (42) 60
Dual 117 75 42 55
Fibre 7 1 6 600
Other 1 1 - -
Total 153 147 6 4
The Telecoms Services pillar includes the Post Office Homephone,
Broadband and Fibre services, as well as sales of mobile top-ups and
phonecards.
Telecoms revenue increased £5.7m year on year. Growth was driven by
higher customer numbers, caused in part by the annualised effect of
acquiring the customer base of the residential broadband and home phone
provider New Call in the prior year, and the use of growth fund marketing
in prior year. Average Revenue per User (ARPU) was adversely impacted
by renewing customers at cheaper rate.
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5.3
5.4
5.5
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Insurance
2019 2018 Variance ~—_—Variance
£m £m £m %
Travel 19 15 4 27
General 23 24 (1) (4)
Life - Over 50s 9 6 3 50
Life - SLI 3 2 1 50
Other 1 : :
Total 55 48 7 16
« £4.4m increase in Travel insurance due to re-engineering of business
to gain greater control of client servicing and improve margins.
« (£0.6m) reduction on General insurance predominantly from Home
Insurance, as work progresses on the future operating model.
« £3.1m increase in Life Over 50s insurance resulting from change to
new supplier (Royal London) with better terms and higher margin.
Identity
2019 2018 Variance Variance
ém £m ém %
Home Office 28 32 (4) (12)
DVLA 9 7 2 28
Identity Services 5 1 25
Verify 15 10 5 50
Environment Agency 1 1 - -
Total 58 54 4 7
« (£4.0m) decrease in Home Office due to (£6.5m) reduction in paper
passports as market share reduced driven by online and digital
channels. Digital passports £1.6m increase and UKVI £0.9m increase
to offset.
e« £2.0m increase in DVLA driven by international driving permit
applications as a result of Brexit.
« £5.3m increase in Verify caused by significant volume growth due to
launch of universal credit. Reduced pricing with GDS from November
18; average margin per transaction for 19/20 will be £1.17 compared
to £17.00 before pricing change.
Other Income
Other income of £13.3m relates to Supply Chain
income (£10m)
predominantly for warehousing for Royal Mail stock, transport of high value
mails, and the release of Bank of Ireland deferred income (£3m).
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6.
6.1
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Costs
Total Trading Costs Analysis
2019 2018 Variance Variance
Notes £m. £m £m %
COST OF SALES 6.1 (130) (121) (9) (7)
Wages & Salaries (131) (129) (2) (2)
Pensions (13) (16) 3 19
Overtime (5) (5) - -
Bonus & Productivity (19) (15) (4) (27)
Employers NI (18) (18) - -
Temporary Resource (7) (5) (2) (40)
PEOPLE COSTS 6.2 (193) (188) (5) (3)
Postmasters pay 6.3 (365) (371) 6 2
Legal Costs (2) (4) 2 50
Staff & Agent Related Costs (10) (10) - -
Compliance and Advice Services (7) (6) (1) (17)
Brand & Marketing (25) (18) (7) (39)
Property & Facilities Management 6.4 (32) (41) 9 22
IT Infrastructure & IT Services 6.5 (91) (96) 5 6
Finance & Losses 6.6 (24) (28) 4 14
Other Operating Costs 6.7 (75) (73) (2) (3)
Vehicles (4) (4) - -
TOTAL COSTS (958) (960) 2 -
Underlying people costs have reduced £2m when excluding the 53" week,
bonus and temporary resource. Non-staff costs of £270m have reduced
£10m from prior year, with larger underlying reduction when excluding the
increase in brand and marketing.
Cost of Sales (£8.7m increase year over year)
The table below
movement comparison.
includes revenue movement to show cost of sales
Revenue
2019 2018 Variance Variance Variance
£m ém ém % ém
Telecoms (91) (82) (11) (13) 6
Cash & Banking Services (19) (22) 3 14 3
PO Insurance (41) (9) (2) (22) 7
Identity (6) (4) (2) (50) 4
Retail & Lottery (4) (4) 3 75 e))
Payzone (2) - (2) (100) 4
Total (130) = (121) (9) (7) 21
Increase in Telecoms cost of sales due to more customers switching from
Homephone to Dual package which carries greater cost. Also increased
Homephone cost implemented by Talk Talk. Costs associated with
Payzone acquisition revenues also flowed through in year.
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6.2 People Costs (2019 £193m vs 2018 £188m)
People costs represent 20.1% (2018: 19.5%) of the cost base.
Average headcount reduced by 363 to 4,703 reflecting efficiency savings
across DMBs and the effect of the Network and DMB transformation
programmes. Closing headcount for the year was 4,397 (2018: 5,020),
with 68 employees in 2019 relating to Payzone.
See analysis below:
« Wages & salaries have increased by £2.1m (1.6%) as a result of pay
increases issued during the year (£5m), 53 week (£1m), Payzone
(£1m) and growth in marketing function (£1m), offset by reduced
headcount savings of £6m (annualised impact of headcount reduction
£9m).
e Pension costs have decreased by £2.8m (17%) reflecting the reduction
in headcount.
¢ Temporary Resource has increased by £1.4m (25%) due to greater use
of contractors.
Total employee numbers can be categorised as follows:
2019 2018 Variance Variance
%
Administration 1,205 1,205 - -
Directly managed branches 2,049 2,707 (658) (24)
Supply Chain 854 848 6 1
Network programmes 164 213 (49) (23)
Post Office Insurance 57 47 10 21
Payzone Bill Payments 68 - 68 100
Total - Period End 4,397 5,020 (623) (12)
Total - Average 4,703 5,066 (363) 7
Payzone was acquired during 2019 hence no employees listed for 2018.
6.3 Postmaster pay (£6.0m decrease year on year)
2019 2018 Variance Variance
é£m £m £m %
Agents Variable Costs (316) (315) (1) (4)
Agents Fixed Costs (43) (49) 6 12
Agents WHS Costs (4) (4) - -
Agents Tax (2) (3) 1 33
Postmaster Costs (365) (371) 6 2
Agents’ variable remuneration as a percentage of variable revenue for
18/19 was 35.4%, down from 36.1% in 17/18. Mails dropped from 64.2%
to 61.5% due to an increase in Home Shopping returns, which attract lower
rates of Agents remuneration than stamps or labels. Most other product
areas have remained at similar levels year on year.
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6.4 Property & Facilities Management (£9.2m reduction year on year)
2019 2018 Variance Variance
£m —m £m %
Property (12) (47) 5 29
Property Charge (12) (15) 3 20
Utilities (2) (3) 1 33
Security (3) (3) - -
Maintenance Office Equipment (3) (3) = =
Property & Facilities Management __ (32) __(41) 9 22
Property costs reduction due to landlord compensation of £2.9m received
in relation to Trafalgar Square and Poplar in 18/19. Also a result of
property portfolio decreasing from 405 in April 18 to 341 in March 19.
6.5 IT Infrastructure & IT Services costs (£5.9m) reduction year on
year)
2019 2018 Variance Variance
£m £m £m %
(91) (96) 6 6
Total IT Infrastructure and IT
Services
Overall reduction in IT costs due to cost savings implemented with Fujitsu
and Computacenter (both 20% reductions year on year), offset by £0.7m
of Payzone IT costs in year. Further cost savings planned for 19/20.
6.6 Finance & Losses (£4.2m reduction year on year)
2019 2018 Variance Variance
ém ém £m %
VAT Recovery 7 4 3 75
Finance Costs (18) (19) 1 5
Other (13) (13) -
Finance & Losses (24) (28) 4 14
Additional £3.0m VAT refund from historic understatement of recovery
rate.
Finance costs includes £12.3m (2018: £12.2m) of card and cheque
processing costs, £2.8m (2018: £3.7m) insurance premiums, £1.2m for
the apprenticeship levy and £0.7m of bank charges.
Key items within other costs include former agents’ losses of £4.4m (2018:
£4.1m) and robbery and theft of £1.8m (2018: £3.0m). Telecoms bad debt
provision of £1.9m (2018: £2.2m) is also included.
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6.7. Other Operating costs (£2.4m increase year on year)
2019 2018 Variance Variance
£m £m ém %.
Managed Services & Customer Management (28) (29) 1 3
Shared Services (11) (10) (60) (10)
Logistics (22) (19) (3) (16)
Contract Penalties (5) (5) - -
Stationery & Other (9) (10) 1 10
Total Other Operating Costs (75) (73) (2) (3)
Logistics increase caused by PSD2 regulation to send POCA statements
monthly, rather than twice a year as previously. Contract penalties relates
to £4.8m for mails segregation. Stationery & other includes £6.3m
stationery expense, £0.7m equipment costs and £1.5m non-capital
building expense. Stationery expense has increased £0.9m from prior year,
as a result of higher printer cartridge costs from faster and more reliable
branch printers being rolled out, along with an increase in label printing.
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7. Quality of Earnings
Quality of earnings shows the underlying financial performance at EBITDAS
level adjusted for one-off items.
2019 2018 Variance Variance
£m —m —m %
Profit before exceptional items 27, 49 (22) (45)
Network Subsidy Payment (60) (70) 10 14
Add back depreciation 94 56 38 68
Reported EBITDAS 61 35 26 74
Historic VAT recovery (3)
ATM reconciliation 1
FRES marketing recharge 1
Banking deferred income (1)
FRES bad debt release (1)
BOI Value Share provision 1
Total adjustments (1) (t)
Adjusted to exclude one-offs 60 34 26 76
Bonus stretch 4 3
Adjusted EBITDAS 64 37 27 73
Historic VAT recovery
We incur VAT on all sorts of spend types which are not directly related to an
exempt activity or a taxable activity, so it is partly recoverable. We
therefore calculate the proportion we can claim through a partial exemption
method. Following a review of this method, it was found that prior years had
been under claimed, with the £3m historic recovery relating to 15/16, 16/17
and 17/18.
ATM reconciliation
A provision was raised against an aged POLSAP ATM balance which cannot
be sufficiently verified.
FRES marketing recharge
Following a thorough review of the marketing balance, a historic figure which
cannot be recharged to FRES has been written off.
Bonus stretch
Bonus stretch is achieved when actual EBITDAS growth is greater than or
equal to 20% above budget target.
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8.
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Business Combinations
On 24 October 2018, the Group acquired Payzone Bill Payments Limited
for cash consideration of £16 million. Further consideration of £3 million is
contingent on the future performance of certain Payzone revenue streams.
£1 million has been paid as at 31 March 2019. The acquisition helped to
grow the bill payments business and has been accounted for under IFRS 3
Business Combinations.
The fair values of the identifiable assets and liabilities of the business as at the
date of acquisition were:
2018
£m
Intangible assets - software
Property, plant and equipment 4
Trade and other receivables
Cash and cash equivalents 1
Trade and other payables (6)
Net assets acquired 5
Intangible assets —- merchant relationships
Intangible assets — brand 1
Deferred tax liability on acquired intangible assets (1)
Goodwill 8
Total consideration 19
Consideration is represented by:
Cash 16
Contingent consideration 3
Total con:
The goodwill arising from the acquisition represents the opportunity to
integrate technology and combine the Group’s existing bill payments
business with Payzone in order to compete for new and bigger bill payment
contracts from a stronger position. The goodwill arising on acquisition is
not deductible for income tax purposes. Goodwill has been reviewed for
impairment at acquisition and during the year and on both occasions the
amount is considered to represent fair value. There are no indicators of
impairment.
Associated acquisition expenses were immaterial and have been charged
to the income statement, within the investments column.
From the date of acquisition to 31 March 2019, the Payzone business has
contributed £4.3m of revenue and £1m to trading profit.
corporate. postoffice.co.uk I PAGE 19
9.
9.1
9.2
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Pensions
Background
The Post Office participates in pension schemes as detailed below. The
RMPP closed to future accrual on 31 March 2017.
Scheme Eligibility Type
Royal Mail Pension Plan UK employees Defined benefit
(RMPP) (closed)
Royal Mail Senior UK senior Defined benefit
Executive Pension Plan executives
(RMSEPP) (closed)
Post Office Pension Plan UK employees Defined
(POPP) contribution
Assumptions
IAS 19 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 (Willis Towers Watson). The key
assumptions for the year to 31 March 2019 are set out in the table below.
March March
% pa RMPP Post Office Section 2019 2018
Inflation (RPI) 3.4 3.3
Inflation (CPI) 2.3 2.2
Discount rate (i.e. bond rate) 2.4 2.5
Rate of increase in Pensionable salaries 3.4 3.3
Rate of pension increases - RMPP A/B 2.3 2.2
Rate of pension increases - RMPP C 3.4 3.3
Rate of increases in deferred pensions 2.3 2.2
Demographic assumptions, for example mortality, remain aligned with
the assumptions used for the actuarial valuation.
9.2.1 Inflation - RPI
The RPI inflation assumption is set with reference to the breakeven long
term rate of RPI inflation derived from the relative yields on long-dated
fixed interest and inflation-linked gilts at the measurement date, taking
account of the term of the liabilities.
9.2.2 Inflation - CPI
The margin between RPI and CPI inflation of 1.1% is the same as that
adopted in prior year. This lies within the Willis Towers Watson range for
the best-estimate of around 0.9% pa to 1.1% pa. Based upon the Willis
Towers Watson assessment of the underlying differences between RPI
and CPI, a long-term assumption for the margin between RPI and CPI
inflation of up to 1.1% pa remains a credible best estimate.
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9.2.3 Discount rate
Under IAS19, the discount rate should be based on the rate of return at
the valuation date on high quality (AA rated, or equivalent status)
corporate bonds of equivalent currency and term to the plan liabilities.
The discount rate used reflects the Willis Towers Watson RATE:Link
model. This model derives a discount rate from a corporate bond yield
curve (based on market data) by matching the curve to projected benefit
payments. The model is based on an extrapolation of corporate bond
yields beyond the term that current corporate bonds extend over.
The approach taken to determining the discount rate in the current year
is consistent with the prior year. Given the uncertainty of extrapolation
performed in the model used, it is considered appropriate to be
consistent with the prior year and continue to apply a prudent approach
in the current year.
9.2.4 Rate of increase in pensionable salaries
As consistent with the last year-end, the assumption has been set at the
same level as assumed RPI inflation.
9.2.5 Other increases to benefits
At current levels of inflation it remains appropriate to set the increases in
line with the relevant inflation measure.
9.3. Movements in the RMPP defined benefit surplus
The movement in the RMPP defined benefit accounting surplus during the
year to 31 March 2019 is detailed below.
2019 2018
£m £m
Opening sectionalised RMPP net retirement
benefit surplus - 210
Current service cost - -
Effect of redundancies - (4)
Net financing credit - -
Employers contributions 1 5
Impact of closure - -
Actuarial gain/(losses) a1 (471)
Closing RMPP net retirement benefit surplus 42 40
Effect of asset ceiling
(42) (40)
Closing net retirement benefit surplus -
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9.4
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As consistent with prior year, the surplus is restricted to £nil by the asset
ceiling adjustment; this means that no surplus is recognised on the balance
sheet in respect of RMPP. This is as a result of the Memorandum of
Understanding signed on 21 March 2017, which stated that Post Office no
longer has an unconditional right to refund from the Plan; the accounting
impact of this was to de-recognise the pension accounting asset in the prior
year, and to hold no surplus on the balance sheet going forwards.
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
19 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.
There is no current service cost or net financing income in the current year
due to the closure of the plan in the prior year.
The past service cost in the current year is in relation to additional
benefits granted on redundancy in the year; some members were
provided enhanced pensions as a result of redundancy and that Post
Office paid contributions to in order to fund those enhancements. The
contributions were determined using terms set by the Trustee, and the
£1m past service cost is the cost of the enhancements on an IAS19
basis.
Actuarial gains and losses are recorded directly in the statement of changes
in equity (and not the income statement).
RMPP pension buy-in
Although there was an investment by the Post Office section of the RMPP.
in 17/18, no such investment was made in 18/19.
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9.5 Movements in the RMSEPP defined benefit surplus
The movement in the RMSEPP defined benefit accounting surplus during
the year to 31 March 2019 is detailed below.
2019 2018
£m —m
Opening sectionalised RMSEPP net retiremen’
benefit surplus 3 1
Employers contributions - 1
Actuarial gain/(losses) (3) 3
Closing RMSEPP net retirement benefit surplt - 5
Effect of withholding tax 1 (2)
Closing net retirement benefit surplus 1 3
The reason for the decrease in the RMSEPP surplus this year is due to a
change in market conditions resulting in a lower discount rate compared
to prior year. This has acted to increase RMSEPP liabilities by around £2m
(£27m to £29m).
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10. Investment expenditure
This section discusses the investment items on the income statement.
The following investment items were recognised in the consolidated
income statement for the years ended 31 March 2019 and 25 March
2018.
2019 2018
é£m —m
Investment funding 168 70
Restructuring:
Business transformation (14) (16)
Network programmes (64) (63)
IT Transformation (13) (6)
Restructuring - severance (38) (12)
Total restructuring costs (129) (102)
Unwinding of discount on provisions (2) (2)
Total investments (charge)/income (38) (34)
10.1 Government Grants: During 2018/19 the Post Office received investment
funding totalling £168m from the Government, (17/18: £70m) to fund
capital projects and transformation work.
10.2 Restructuring costs can be broken down as follows:
« Business transformation costs relate to various transformational
projects across the business predominantly in Retail and FS&T, with
key items being:
o Re-negotiating the fundamental bedrock long-term contracts
with BOI and Royal Mail (£4.0m),
o Payzone integration costs (£3.4m),
o The transformation of our telecoms customer offer (the Project
Galaxy initiatives) in response to changes to our key markets
driven by unprecedented regulatory intervention (£2m),
o Costs around vacating premises at Trafalgar square (£1.9m).
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« Network programme costs can be broken down as follows:
o Network Transformation £24m: The costs relate to
compensation payments made to agents, as along with the
implementation costs of the transformation programme.
o Network Development £12m: This is the next phase of Network
Transformation. It is a multi-year programme designed to
simplify the retailer proposition. Costs have decreased as
expected due to the nearing completion of Network
Transformation.
o Directly Managed Branch Transformation £28m: The
programme costs include onerous property provisions, for
future non-profitable contractual spend. The main reason for
the increase in the current year is due to a larger number of
branches franchised. This resulted in an increase to the onerous
lease provision.
« IT Transformation programme costs of £13m (2018: £6m) have
increased due to Back Office systems transformation and cloud
enablement work.
« Redundancy costs of £38m (2018: £17m) are higher than 2017/18
due to the restructure programmes in HR and Operations in addition
to £13.7m Group Litigation costs.
postoffice.co.uk I PAGE 25.
11. Interest, Cash, Debt, Funding and Hedging
11.1 Net finance costs (£2m increase year on year)
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2019 2018 Variance Variance
£m —m £m %
Interest payable on loans (6) (5) (1) (20)
Finance charges (2) a (2) (100)
Total - trading (8) (5) (3) (60)
Unwinding of discounts on provisions (1) (2) 1 50
Total - investments q@) (2) 1 50
Total — net finance costs (9) (7) (2) (12)
Interest payable on the BEIS Loan has increased year on year due to
increase in interest rates.
Other finance charges include commitment fees to BEIS for the Post Office
credit facility. Prior year charge of £0.4m does not show due to rounding.
Increase attributed to rise in interest rates in 18/19.
Unwinding of discounts on provisions relates to onerous and vacant leases,
in line with DMB franchising programme rollout.
11.2 Cash, cash equivalents and debt on the balance sheet
2019 2018 Variance Variance
£m ém. £m %,
Cash in the Post Office Limited network 520 643 (123) (19)
Short-term bank deposits 14 9 5 55
Fiduciary cash balances held on behalf
of insurance third parties 2 3 6 200
Total cash and cash equivalents 543 655 (112) (19)
Department for Business, Energy and
Industrial Strategy aie 623 58 19
Net cash, cash equivalents and (22) 32 (54) (169)
debt
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12. Fixed assets
Depreciation rates are disclosed within accounting policies. No depreciation
is provided on freehold land, which represents £2 million (2018: £2 million)
of the total cost of properties.
An impairment test was performed during the year. Intangible assets and
property, plant and equipment were tested for impairment by comparing the
carrying amount of each Cash Generating Unit (CGU) with the recoverable
amount determined from value in use calculations.
Our depreciation and amortisation policies are as follows.
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 are 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 3 - 12 years
Fixtures and equipment 3-15 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. They are depreciated on a straight-line basis over the following useful
lives:
Range of asset lives
~pisehoid eng Giok 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. Where freehold property
and long leasehold includes the fit-out of those properties, then the fit-out is
depreciated over its useful economic life in line with fixtures and fittings.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially
recognised at cost. They are amortised on a straight-line basis over the
following useful lives:
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Range of asset lives
Software 3-6 years
Customer relationships 5 years
Merchant relationships 5 - 10 years
Brands 15 years
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.
The Group’s management undertakes an impairment review annually or
more frequently if events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important that
could trigger an impairment review include the following:
e Significant underperformance compared to historical or projected future
operating results.
e Significant changes in the manner of use of the acquired assets or the
strategy of the overall Group.
¢ Significant negative micro- or macro-economic trends.
Goodwill was not considered to be impaired at the date of the last review.
Non-current assets within subsidiaries
Post Office’s subsidiary is considered a separate cash generating unit. The
need for impairment of assets is considered within the subsidiary and is
dependent on whether indicators of impairment exist within that subsidiary.
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12.1 Intangible assets
Other
Software Goodwill Intangibles Total
£m £m £m £m
Cost
At 27 March 2017 323 44 - 367
Reclassification (2) - = (2)
Additions 125 1 6 132
At 25 March 2018 446 45 6 497
Reclassification (29) - 7 (29)
Additions 101 101
Added on acquisition ‘ 8 738
Disposals (17) : Slay
At 31 March 2019 502 53 13 568
Amortisation
At 27 March 2017 200 - - 200
Reclassification 6 - - 6
Amortisation 27 - - 27
At 25 March 2018 233 - = 233
Added on acquisition Fl 4 : 1
Amortisation 55 :
Disposals (15)
PTET 6 ee
Net book value
At 31 March 2019 228 53 10 «291
At 25 March 2018 213 45 6 264
Other intangibles includes customer relationships, merchant relationships
and brands.
Additions to software relate to IT transformation projects undertaken during
the current year.
Additions to goodwill and other intangibles relate to the Payzone Bill
Payments Limited (“Payzone”) business combination. Goodwill is tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the carrying value may not be recoverable.
Management determined that no impairment was necessary for the current
year (2018: Enil).
Net book value at 31 March 2019 predominantly made up of Belfast
refurbishment (£25m), Verizon networks (£22m) and Back office
transformation (£17m).
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12.2 Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold vehicles machinery equipment Total
ém £m —m —£m —£m —m —m
Cost
At 27 March 2017 45 41 23 26 1 795 931
Reclassification 1 1 1 - - (4) 2
Additions : - - 1 - 18 19
Disposals (6) (3) (2) (2) - (7) (20)
At 25 March 2018 40 39 22 25 t 805 932
Reclassification 2 : i : : 27 29
Additions 1 1 1 - > 33 36
Added on acquisition . a . . * 4 4
Disposals (4) (6b) (2) . Q (22) (29)
At 31 March 2019 39 39 21 25 1 847 972
Depreciation
At 27 March 2017 32 14 23 26 1 677 773
Reclassification - - - - - (6) (6)
Depreciation 1 2 - - - 25 28
Disposals (4) - (2) (2) : (3) (11)
At 25 March 2018 29 16 21 24 ¢ 693 784
Depreciation 1 2 - - - 33 36
Disposals (2) (65) (2) : : (17) (22)
At 31 March 2019 28 17 19 24 £ 709 798
Net book value
At 31 March 2019 a1 22 2 4 - 138 174
At 25 March 2018 11 23 1 1 - 112 148
Net book value at 31 March 2019 predominantly made up of Branch
technology refresh (£16m), Finsbury Dials fit out (£7m) and EUC (End User
Computing) additional activities (£5m).
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12.3 Capital expenditure
Capital spend has been greatest in the following areas:
Back Office Transformation £19.3m ~— removal of POLSAP and
transformation of CFS
EUC Branch Deployment £10.8m - Modernising branch equipment
Solar £10.4m
IT cloud enablement £9.7m
Risk and resilience £6.8m — service level risk reduction investments
Migration of home insurance to Duck creek system £7.1m
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13. Investments in joint ventures
Investments in joint ventures and associates
2019 2018
£m £m
Investment in joint ventures 66 66
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’ 2018-19 post tax profit was £33m,
with £33m being received as a dividend during the year creating a Enil
movement in the carried value in the balance sheet.
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14. Working capital
Refer to Consolidated Balance Sheet in section 3.3 for overview.
14.1 Inventories
2019 2018
£m —£m
Scratch Cards 6 6
Retail 2 3
Total 8 9
Retail stock includes a £2m provision for Royal Mint coins.
14.2 Trade and other receivables (Current)
2019 2018
a ne Oem
Trade receivables 14.2.1 97 81
Client receivables 14.2.2 138 132
Prepayments and accrued income 14.2.3 90 95
Other receivables 14.2.4 19 16
Total 344 324
14.2.1 Trade receivables
2019 2018
£m £m
Sales ledger 27 28
Homephone debtors 6 7
Postmaster debt 2 2
Uncleared debit, credit cards 38 27
Bank of Ireland, FRES cost recovery 13 13
Other i 3
Total 97 81
The Bank of Ireland cost recovery debtor relates to marketing and
promotional spend incurred on their behalf.
corporate. postoffice.co.uk I PAGE 33.
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A profile of the sales ledger within trade receivables is as follows:
Trade receivables
2019 2018
£m £m
Bank of Ireland 4 4
Banking services 6 5
Government & DVLA 3 6
PoCA 2 3
ATMs 2 2
Other 10 8
Total 27 28
Ageing of Trade receivables:
Debtors over 60 days overdue: March 2019: £nil (March 2018: £1m).
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.
14.2.2 Client receivables
Analysis of client balances at year end is as follows:
2019 2018
ém £m
ATM (Bank of Ireland) 81 78
Card Account (JP Morgan) 18 21
Others 29 33
Total 138 132
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248 of B46
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14.2.3 Prepayments and accrued income
2019 2018
£m —m
Accrued income 71 78
Prepayments 19 17
Total 90 95
Accrued income at 31 March 2019 predominantly made up of Banking
Services (£13.0m), Bank of Ireland (£5.7m), and Telecoms (£2.6m).
Telecoms balance consistent with prior year (£3m) after late adjustment for
error reduced balance from £8m. £39m of the balance relates to automated
accruals created by realtime Horizon transactions in branch, which are then
billed out on a monthly basis.
Prepayments are consistent at a holistic level year on year and
predominantly comprise:
o Telephony pre-contract costs with Fujitsu is £4m at March 2019
(March 2018: £3m).
o £6m of IT prepayments (March 2018: £7m).
o £4m of property cost prepayments (March 2018: £4m).
14.2.4 Other receivables at March 2019 £20m (March 2018 £16m)
Other receivables largely consists of FRES tax losses debtor, which has
increased by £1.2m.
14.2.5 Non-current receivables at March 2019 £6m (March 2018 £12m)
This represents £2m Gift vouchers and £2m Fujitsu invest to save
prepayments. The remaining £3m is for telephony contracts with Fujitsu
which are amortised over the life of the contract (£3.7m cost to p&l in
the year).
14.3 Payables: amounts due within one year
2019 2018
Section £m —m
Trade payables 14.3.1 51 45
Accruals 14.3.4 119 160
Client payables 14.3.2 312 306
Advance customer
payments 14.3.3 30 32
Capital payables 14.3.1 11 20
Social security 8 8
Other payables 3
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Total 533 571
14.3.1 Trade payables and accruals
2019 2018
£m £m
Trade payables 51 45
Accruals, GRNI 85 81
Postmaster, employee pay
balances 15 56
Productivity, bonus schemes. 17 17
Others 9 7
ACE
Capital accruals 11 20
Total Trade payables and
accruals 181 225
Decrease in postmaster and employee pay balances due to timing of year end
with actual payment to agents and staff.
14.3.2 Client payables
2019 2018
—£m —m
Santander 95 100
DVLA 23 12
Utility companies.
Bank of Ireland 3
BACS 20 21
Royal Mail 24 28
Lottery 4 2
Others 137 131
Total 312 306
The increase in DVLA payables is driven by higher volumes around associated
products, predominantly international driving permits.
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14.3.3 Advanced customer payments
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This category also includes specific, non-client, creditors as follows:
2019 2018
£m £m
Advanced customer payments 1 1
Uncashed postal orders 11 ai
Drop and Go 2 1
Gamma 4 4
Telephony credit balances 3 3
Homephone line rental advance payments 9 12
Total 30 32
No significant movements to note.
14.4 Payables: amounts due after one year
Payables due after one
year
2019 2018
£m £m
Rent-free incentives 3 3
Bank of Ireland deferred
income (Gamma) 14 15
Total 14 18
The rent free incentive creditor relates to buildings with an initial rent free
period where the rent free incentive is spread evenly over the life of the lease.
Bank of Ireland deferred income is recognised in line with an agreed
amortisation schedule through to 2022-23.
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Provisions (March 2019: £84m vs March 2018: £66m)
Netwo
rk
Progr
amme Onerous
s Leases Severance Other Total
£m £m £m ém —m
At 26 March 2018 18 32 7 9 66
Charged to investments 30 25 43 * 98
Charged to trading . : : 9 9
Transfers : 2 3 3 2
Utilisation (36) (9) (24) (6) (75)
Provisions released in the year - .
investments o (4) (1) (2)
Provisions released in the year ~ trading - - - (5) (5)
At 31 March 2019 12 41 22 9 84
Netwo
rk
Progr
amme Onerous
s Leases Severance Other Total
—m —m ém £m ém
Disclosed as:
At 31 March 2019
Current 6 14 22 8 50
Non-current 6 27 - 1 34
12 at 22 9 84
At 26 March 2018
Current 11 11 7 7 36
Non-current 7 21 - 2 30
18 32 7 9 66
The Network Programmes provision relates to payments due to postmasters in
relation to the major transformation programme. Provisions are recognised when
either postmasters agree to terminate their existing contracts or sign the new
format contracts under Network Transformation.
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.
Other provisions of £9 million includes a number of smaller provisions including:
e £1 million for personal injury claims;
« £2 million relates to the repayment of commission received in the event
of the cancellation of insurance policies (POI);
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16. Litigation and Claims- Potential Claims regarding Horizon
Background
16.1 In 2009, Post Office Ltd received claims from postmasters alleging
defects in the Horizon system and Post Office's internal processes.
16.2 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.
16.3 On 8 July 2013, Second Sight published a Report asserting shortcomings
in Post Office’s internal training and support to postmasters on the
Horizon system, but that there were no systemic problems with Horizon
itself.
16.4 Following Second Sight’s July 2013 Report, on 27 August 2013 Post
Office launched a Complaint Review and Mediation Scheme (“The
Scheme”) aimed at understanding and resolving individual complaints
made about Horizon.
Mediation Scheme
16.5 The Scheme received 150 applications, 136 of which were investigated in
detail (the remainder being either ineligible or swiftly resolved). The
cases were all progressed through the Scheme and were concluded by 1
February 2016.
Legal Activity
16.6 On 11 April 2016 a Claim Form in Bates & Others v. Post Office Limited,
Claim No. HQ16X01238, was issued in the High Court, Queen’s Bench
Division (the “Group Litigation”). The first named Claimant is Alan Bates
of the JFSA.
16.7 The Claim Form was formally served on Post Office on 5 August 2016 on
behalf of 198 claimants. On 22 March 2017 a Group Litigation Order was
made for the management of issues common to all claimants, and on 31
March 2017 Mr Justice Fraser was nominated to be the Managing Judge.
Further Claim Forms were filed on 24 July 2017 and 23 November 2017.
As of 15 May 2019, the total number of Claimants is 555.
16.8 The claimants allege Post Office has acted in breach of contractual and/or
tortious and/or fiduciary duties and is also liable for deceit, negligent
misstatement, misrepresentation, harassment, malicious prosecution and
/or unjust enrichment. Initial claims for misfeasance in public office,
conspiracy and contravention of the European Convention on Human
Rights have been withdrawn but could be restated.
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16.9 The Group Litigation is being managed through a series of trials:
16.9.1The Common Issues Trial, which took place in November and December
2018 concerning the legal relationship between Post Office and
postmasters. Judgment on the Common Issues was handed down on 15
March 2019 and was adverse to Post Office but did not make any findings
of liability. Post Office can seek permission to appeal the judgment at a
hearing before the Managing Judge on 23 May 2019, or if that is refused,
directly from the Court of Appeal.
16.9.2The Horizon Issues Trial, which commenced on 11 March 2019
addressing technical issues concerning the “Horizon” IT system. The
evidence of factual witnesses for both parties concluded on 11 April 2019,
and the trial will resume with expert evidence in the weeks commencing
4 and 11 June 2019. Closing arguments will be made in the week
commencing 1 July 2019.
16.9.3The Further Issues Trial, which is listed to take place in November 2019
and is currently intended to address specific issues concerning limitation
periods and quantification of financial loss and damage. The directions for
this trial may be affected by an appeal of the Common Issues judgment.
16.9.4A “Fourth Trial” has been scheduled to take place in March 2020 which
should consider whether Post Office has in fact acted in breach of
contract (including whether postmasters were held wrongly liable for
losses in their branches) and if so with what financial and other
consequence. No directions have yet been made by the Court to prepare
for this trial.
16.10Following the handing down on 15 March 2019 of the Common Issues
judgment, on 21 March 2019 Post Office applied for the Managing Judge
to be recused on the grounds of apparent bias (the “Recusal
Application”), The Managing Judge refused that application on 9 April
2019. Permission to appeal that refusal was denied by the Managing
Judge on 9 April and by the Court of Appeal on 10 May 2019.
16.11The Claimants have not yet provided a combined value for their claims,
but the directions for the Further Issues and Fourth Trials should assist in
this valuation.
16.12The Claimants have asked Post Office to pay their legal costs of the
Common Issues Trial (£7.7m) and Recusal Application (£454k). The
Managing Judge should decide how these costs are to be treated on 23
May 2019.
Media Activity
16.13The Group Litigation has received some media coverage in the national
press. It is also frequently commented on by a small group of interested
journalists and postmasters on social media. Post Office teams continue
to monitor and manage media and communications activity.
Criminal Cases Review Commission (“CCRC”)
16.14Post Office is engaging with the CCRC in relation to applications from 34
former postmasters for the CCRC to review convictions obtained against
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them following Post Office-led prosecutions. 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.
16.15Post 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 substantial documentation to the CCRC for review.
16.16There is no estimated date for the completion of the CCRC’s reviews. The
CCRC has however indicated that it would await the outcome from the
Horizon Issues Trial in the Group Litigation before concluding its reviews.
Employment Tribunal Proceedings
16.170n 9 July 2018 Post Office received a claim in the Employment Tribunal
from 123 agency postmasters under the name Mr M Baker & 122 Others
v Post Office Ltd (Case No. 1402149/2018).
16.18The claimants are claiming they are not “self-employed” agents but
rather they are Post Office’s “workers” and, as such, they are due certain
worker rights, for example holiday pay. It is understood the claim is
funded and supported by the Communication Workers Union. The
claimants have not yet valued their claims.
16.19Post Office filed its response to the claim on 2 August 2018 denying the
claimants are workers based on previous Tribunal rulings. The first case
management hearing is listed for 3 June 2019, at which further directions
and, possibly, a date for a hearing will be fixed. Post Office has
instructed leading employment barrister Chris Jeans QC to act for it in
this matter.
Political Activity
16.20The complaints underlying the Group Litigation and Post Office's response
to them 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.
16.21There has however been no recent political activity concerning the Group
Litigation. Post Office teams continue to work with BEIS and UKGI
officials to keep them appraised of developments.
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17. Taxation
Income statement
A breakdown of the tax credit for the year is shown below:
2019-2018
£m —£m.
Current income tax:
Corporation tax credit for year (8) (8)
Deferred income tax:
Deferred tax income relating to the utilisation of losses brought forward q@) (1)
Taxation credit (9) (9)
The current income tax credit recognised in the income statement is £8 million
(2018: £8 million) and relates to the surrender of tax losses to the joint
venture. The deferred income tax credit recognised in the income statement is
£1 million (2018: £1 million) and arises as a consequence of the acquisition of
intangible assets as part of a business combination. It corresponds to the
deferred tax liability recognised in the business combination.
In the current year no deferred income tax has been recognised in other
comprehensive income.
No current or deferred tax income tax was recognised directly in equity in the
current or prior year.
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18. Future Change in Accounting Policies
IFRS 16 Leases
IFRS 16 was issued in January 2016. It will result in almost all leases being
recognised on the balance sheet by lessees, as the distinction between
operating and finance leases is removed. Under the new standard, an asset
(the right to use the leased item) and a financial liability to pay rentals are
recognised. The only exceptions are short-term and low-value leases.
The Group has set up a project team which has reviewed all of the Group’s
leasing arrangements over the last year in light of the new lease accounting
rules in IFRS 16. The standard will affect primarily the accounting for
operating leases.
The Group will apply the standard from its mandatory adoption date — for Post
Office this is from 1 April 2019. The Group intends to apply the simplified
transition approach and will not restate comparative amounts for the year
prior to first adoption. Right-of-use assets will be measured at the amount of
the lease liability on adoption (adjusted for any existing onerous and vacant
lease provisions). The net impact on our income statement account will be
minimal — an increase in trading profit of some £9m as we will no longer have
a charge for operating leases, matched by increases in depreciation, to
recognise the usage of the new right-of-use assets, and finance costs, to
recognise the unwinding of the discount on the lease liability. There will be no
impact on the cash flows of the business.
The Group’s activities as a lessor are not material and hence the Group does
not expect any significant impact on the financial statements.
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.
postoffice.co.uk I PAGE 43,
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19. PO Insurance
Full year EBITDA of £5.6m has reduced £1.9m from FY17/18.
2019 2018 YoY
PO Insurance P&L £m £m %
Gross income 55.5 47.8 16.1%
Cost of sales (10.9) (8.9) (22.5%)
Net income 44.6 38.9 14.7%
Staff costs (6.0) (4.0) (50.0%)
Non-staff costs (18.8) (15.3) (22.9%)
POL commission (14.2) (12.1) (17.4%)
Total Expenditure (39.0) (31.4) (24.2%)
EBITDA 5.6 7.5 (25.3%)
Turnover consists of commission earned from sales and renewals of general
insurance and life insurance products, principally travel, motor, home and
life insurance products.
Reported turnover increased 16% year on year due to improved
performance in Travel and Protection products partially offset by declining
Home insurance revenues.
There is a project ongoing which is looking at migrating the Home insurance
product from a third party operator to the Duck Creek system, currently used
for Travel insurance.
Staff costs increased year on year due to flow through of new hires in 17/18
to 18/19.
Decrease in operating profit was due to a significant increase in expenses as
the company invests in its capability and expands its distribution foot print
in line with its strategic objectives.
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www.pwe.co.uk
Post Office Limited Audit and Risk
Committee Report
Year ended 31 March 2019
29 May 2019
pwe
Andrew Paynter
Partner
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The Audit and Risk Committee
Post Office Limited
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ.
Dear Members of the Audit and Risk Committee,
1am pleased to share with you our report on the year end audit of the Post Office Limited and its subsidiaries (“Post Office” or “the
Group”) for the period ended 31 March 2019.
In our Audit Plan submitted to the January 2019 Audit and Risk Committee, we set out the obje dit, our approach,
including an assessment of the significant and elevated risks relevant to the audit, and our proposed responses. There have been no
significant changes to our plan.
At the time of writing we are still progressing our audit work across a number of areas. We have focussed our efforts on key judgments
and areas of significant and elevated risk and this report discusses our work to date on such matters. On completion of our audit work
we will update the Committee either verbally and/or through further written communication.
The contents of the attached report have been discussed with Alisdair Cameron and Michael Passmore, and where applicable, their
comments have been reflected in the text.
Iam pleased to report that our first audit of Post Office Limited is progressing smoothly and I would like to record our thanks to the
various members of your staff who have assisted us during the process. The tone set by senior members of the Finance team in respect
of accounting and disclosure has been excellent and their willingness to engage early in the key areas of judgement has had a very
positive impact. This has helped us focus our audit work in the right areas and resulted in a positive and collaborative process.
We look forward to discussing our report with you on 29 May 2019.
Yours sincerely,
Andrew Paynter
Pricewaterhous
Coopers LLP, 29 Wellington Street, Leeds, LS1 4DL
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC30:
Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Fina
‘The registered office of PricewaterhouseCoopers LLP is 1
yaduct Authority for designated investment business,
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1. At a glance
Scope and
status
Overview and
status
At the date of
writing, our work
in anumber of
areas remains
ongoing. We have
however focused
our work to date on
key judgemental
areas, and areas of
significant and
elevated risk.
Scope and risk
assessment
Our assessment of
tisks has not
changed since we
issued our Audit
Plan in January
2019.
Materiality
Our overall
materiality has
been set at £9.7
million, which is
consistent with the
materiality level
communicated in
our Audit Plan.
‘This is calculated
as 1% of reported
revenue.
Impairment of tangible and intangible assets
As al 31 March 2019, the Group holds an intangible asset balance of £293 million
(2017/18: £264 million) and a property, plant and equipment balance of £174
million (2017/18: £148 million), Management has performed its annual
impairment assessment over these assets and has concluded that no impairment
charge is required for the year (2017/2018: £nil). We have reviewed impairment in
detail, including assessing the reasonableness of the assumptions used in the
iscounted cash flow models, and our work to date suggests that the position
adopted by management is reasonable.
Property provisioning (onerous lease, dilapidations and vacant
possession)
‘There has been a net charge of £9 million in the year (2017/18: net charge of £11
million), resulting in an overall £41 million (2017/18: £32 million) provision at the
year end. A provision for vacant properties of £8 million (2017/18: £9 million) i
included within this balance. Other property related provisions include £21 million
for onerous leases (2017/18: £16 million) and £12 million (2017/18: £8 million) for
dilapidations on a number of leasehold branches. Our work on property
provisioning is ongoing at the time of writing this report, and we will verbally
update the Audit and Risk Committee as to our findings next week.
Assumptions in the pension schemes’ liabilities
The Group has recognised a net pension asset of £1 million (2017/2018: net asset of
£3 million) in relation to the Royal Mail Senior Executive Pension Plan, Consistent
with the treatment applied in previous years, the net pension asset of £42 million
(2017/2018: £40 million) relating to the POL fund of the Royal Mail Pension Plan is
not recognised on the balance sheet in accordance with IFRIC 14 as the Group does
not have an unconditional right to refund from the Plan. We have reviewed this
treatment, along with the assumptions applied by the actuaries. We are still
completing our detailed testing, however our work to date suggests that the position
adopted is reasonable.
Fair value of Payzone assets acquired
‘ost Office acquired the entire share capital of Payzone for cash
consideration of vith additional contingent consideration ranging from
+
__IRRELEVANT. ]
od used by the Group are
rue). We have conelaced that the valusHORRIE
appropriate,
Presentation and disclosure items
IFRS 16
Management will be applying the modified retrospective transition approach to
implementing IFRS 16 in the 2019/20 financial statements and will not be
restating comparative amounts for the year prior to first adoption. Following an
exercise supported by Grant Thornton, management is determining the expected
impact to be disclosed within the 2018/19 financial statements. ‘This will include
significant amounts in relation to the inclusion of a gross right of use asset offset by
impairment, and lease liabilities, along with a pre-tax income statement impact. At
the time of writing, we are reviewing the detailed calculations supporting the
transition to IFRS 16 and will update the Committee once this work is complete.
Classification and recognition of Trading Profit
‘The Group uses a three column format in the income statement in order to
segregate what it considers to be the underlying results of the business. Total
investment expenditure in the year of £129 million (2017/18: £102 million) has
been recognised in the financial statements, of which £64 million relates to
network programs and £27 million to business and IT transformation. We are
currently testing the classification of these amounts to ensure that they meet both
the definition of the Group’s accounting policy and the FRC’s guidelines in this
area. Our work has uncovered no issues to date.
Postmasters’ Group Litigation Order GLO")
‘There are many uncertainties in relation to the potential outcome of the trials in
the GLO. Whilst it is possible that a present obligation exists, management does
not consider it probable and at this stage is unable, in their opinion, to reliably
estimate the potential quantum of any future liability. We will continue to monitor
the progress of the case and work with management to ensure that the disclosures
made in the Annual Report are reflective of the latest position at the point of
signing.
Auditing Standards require us to focus in particular on two areas of
fraud — management override of controls and the risk of fraud in revenue
recognition. We have no exceptions to report from our work in either of these areas
to date.
t sco ~ We confirm we are independent of the Group and we will
include a summary of non-audit services and related fees within our July Andit and
Risk Committee report. 1
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2. Scope and status
Materiality
Status We calculate Group materiallity by reference to reported revenue of £972 million
We have focused our work to date on areas of judgment/complexity and areas of significantand (2017/18: £956 million).
elevated risk. We have completed the majority of our work however our work here and in a
number of other areas remains ongoing. We have therefore applied an overall materiality of £9.7 million (2017/18: BY £9.3
million) based on 1% of the above measure and have used a performance materiality
of £6.1 million (2017/18: EY £4.6 million) to direet our testing.
We have not identified any material adjustments during the course of our audit work to date.
We have included the summary of uncorrected misstatements in Appendix 2.
Risk assessment
As communicated in our Audit Plan, our risk assessment is detailed below:
We have used a de minimis threshold for reporting to the Audit and Risk Committee
any uncorrected misstatements in excess of £490,000 (2017/18: EY £470,000). A
summary of uncorrected misstatements can be found in Appendix 2.
: PP Scope 8
Ei 2018/19 Bemaides ‘The scope of work we have performed across the Group is in line with that 3
Risk Risk communicated in our Audit Plan, with the exception of work relating to Post Office
Management Services Limited (“Post Office Insurance”). We initially considered this
could be a significant component of the Group and therefore that it would require a
full seope audit, however we have concluded that only certain balances are material,
assessment —_assessment
Management override of controls* Significant Significant therefore specified procedures have been performed over these areas in support of the
ey a ee ae Group audit. However alongside the work performed for the Group audit, we are also
Bee ess eran en eee baal performing a full statutory audit of the Post Office Insurance entity to its own much
Impairment of tangible assets Significant Significant lower materiality levels.
Impairment of intangible assets subject to amortisation Significant Significant Independence and non audit fees
Auditing standards require that we consider whether adequate arrangements are in
place to safeguard the objectivity and independence of the firm,
pitalisation of intangible assets Elevated
Impairment of goodwill Hlevated ‘We confirm that appropriate safeguards remain in place in respect of all non-audit
work we have performed and that in our professional judgement, as at the date of this
report, we are independent of the Group, and that the objectivity of the audit partner
Elevated
Valuation of onerous lease provis
Disclosure impact of IFRS 16 Elevated and audit staff is not impaired in any way.
Fair value of assets relating to the Payzone acquisition Elevated We will submit an Independence Letter to the July Audit and Risk Committee, which
. a I will include a summary of the non-audit fees in respect of services provided to the
Assumptions in the pension schemes’ liabilities Elevated Group during the period ended 31 March 2019, as well as the safeguards in place to
Classification and recognition of Trading Profit Elevated Significant Mure Hat those services did not impact our mdependence,
VAT accounting Elevated Hovated
Postmasters’ Group Litigation Order Elevated
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3. Accounting and reporting matters
Significant risk - Impairment of tangible and intangible assets
‘The Group holds significant amounts of tangible assets, intangible assets and goodwill on the balance sheet. At the
goodwill (£53 million), intangible assets such as software (£293 million) and property, plant and equipment (£174 million) held across the network of 11,500 branches and head offices and
concluded that no impairment charge was required for the year, as the discounted eash flow assessments showed headroom versus the carrying value of these assets.
Post Office
Post Offic:
Insurance
em
Limited
Software i
Goodwill i
Other intangible assets
Property, plant and equipment
‘Total fixed assets
Investmer
n joint ventures
IRRELEVANT
Long term receivables
Long term provisions
Capital payables
‘otal assets:
Discounted cash flows - original
Headroom/(impairment)
“Discounted cash flows - final i
*Headroom/(impairment) - final i
Key assumption - Cash Generating Units (CGUs”)
‘onsistent with previous years, two CGUs have been identified by the Post Office,
being Post Office Limited and Post Office Insurance. We have considered whether
this judgement is reasonable and meets the requirements of accounting standards and
challenged management as to whether an individual branch would be a more
appropriate CGU. Due to the distinct nature of the services provided and the
extensive Post Office network, upon closure of a branch, customers will locate to their
next nearest branch, suggesting a clear and significant interdependence between
branches. We also challenged management as to whether the new Payzone entity
should be considered to be a separate CGU, as it has its own separately identifiable
assets and cash flows. Management has provided a high level assessment to show that
Payzone’s assets are clearly supported by the Payzone cash flows and that the residual
impact on the overall impairment assessment is immaterial. We have therefore
concluded that management's conclusion of two CGUs is reasonable and appropriate.
We have encouraged increased disclosure of the judgements made in defining these
CGUs within the accounting policy in the Annuai Report.
-ar end, management performed its annual impairment assessment over
Key assumption - value in use
‘The mechanics of the impairment model are broadly consistent with previous years. ‘The value in use
calculations are based on an overall statutory entity discounted cash flow analysis. We have tested the
mathematical accuracy of the calculations derived from the eash flow forecasts and have assessed key
inputs in the calculations, such as discount rate and growth assumptions, by reference to board approved
forecasts, industry reports and our own expertise.
Key assumption - free cash flows
‘The model uses Group EBITDA (‘trading profit’) of RRELEVANT/in 2019/20 as a proxy for free cash flows.
In some cases, adjustments would also be made for working capital movements, however no such
adjustments are made by Post Office. We are currently working through this judgement with &
management and will report our findings to the Audit and Risk Committee if we disagree with the stance
taken.
@
Key assumption - growth assumptions
‘The model assumes growth in Group EBITDA of Hrom 2018/19 to 2019/20, a further increase
in EBITDA of I lin the following year and then no growth into perpetuity including a 0%
long-term growl financial plan that will be presented to the May Board is in line with the
forecasts used in management's impairment assessment. We have spent time with management to
understand the key drivers of the increase to EBITDA (which include the impact of the new Banking
Framework agreement and the change benefits associated with the Group's continued strategy to close
directly managed branches (“DMBs”)) and have included this reconciliation on the following page.
Key assumption - Network Subsidy Payment
Akey change in assumptions from the prior year is the exclusion of the Network Subsidy Payment
(“NSP”). In 2017/18, management made the assumption that the NSP would be received into perpetuity.
‘The original forecasts used in the 2018/19 impairment assessment excluded the £50 million NSP
receivable in both 2019/20 and 2020/21, as management wanted to evidence that underlying trading,
before NSP, generates sufficient headroom. We challenged management as to whether this should be
included for the next two years as itis essentially a confirmed cash inflow that supports the loss-making
branches included within the forecast EBITDA. Management has since updated the model to include the
NSP cash flows for 2019/20 and 2020/21.
Key assumption - discount rate
A pre-tax discount rate of 9% (2017/18: 9%) had been used in the impairment model that supports the
Post Office Limited CGU. Although this assumption is not particularly sensitive, as an acceptable range
determined by our valuations experts was between 9.496-11.49%, management has changed the discount
rate applied in the model to 9.5%, which does not result in an impairment charge. ‘The discount rate used
in the Post Office Insurance impairment assessment of 12% (2017/18: 12%) is at the top end of our
acceptable range (10% - 12%) determined specifically for this CGU. Management should continue to
assess the appropriateness of the discount rates used in both models in light of any changes in market
conditions.
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3. Accounting and reporting matters (continued)
Significant risk - Impairment of tangible assets and intangible assets (continued) 5
detailed bridge from the 2018/19 actual EBITDA of;
Management has prep:
£m £m
forecast EBITDA of IRRELEVANT! in 2019/20. We have included the details of this in the table to the left
- and highlight some key information below. Group EBITDA (Trading profit) 2018/19
3S Banking framework agreement updates
One of the main drivers of the growth in EBITDA comes from the updated Banking Framework ‘Verify’ Price Reduction
have now signed up to the new
in the rate applied
agreement. At the time of writing, all but two of the national ban
agreement. The new contract incorporates additional fixed fees as well as an inerea:
to variable income. The new rates are applicable from January 2020 and the rowth is
therefore representative of the three months to the 2019/20 year end. We understand that Post Office Total contractual changes
has also factored in an outflow to cover improved agents rates as a result of this from October 2019 Marketing,
onwards.
Discontinuation of UK Visas and Immigration
‘New Bank of Ireland deal
change benefits (see breakdow! is below}
Management has built in an EBITDA reduction from the loss of the UK Visas and Immigration contract Ch@n8¢ benefits (see breakdown of this below)
(such as the provision of resident permits). ‘The Group has also seen a price reduction in their ‘Verify’
services which has been factored into the budget. Other
‘Total change and trading
Budgeted Group EBITDA 2019/20
Improving agents’ relationships
\gement has estimated
When reviewing the breakdown of the [1
million revenue growth and is expecting to reduce staff costs of I IRRELEVANT Management has al
estimated an increase in costs in relation to agents’ pay as staff 65S Teduee in directly managed
branches, as they continue to close and move to the franchise model. We have considered the sensitivity
of these EBITDA forecasts on the following page and are continuing to work with management to fully
understand and verify these amounts - including obtaining evidence that the change benefits are not
reliant on any expenditure not factored into the models. Cost reduction
i New recurring cost
IRRELEVANT,
Change benefits
Revenue growth
Staff cost reduction FRRELEVANTI
& Agent's pay
zone
‘otal change benefits
Description of issue including judgements and . ; g
estimates made by management ARC pp rorss Audit conclusion 8
¢ There is a risk that goodwill, property, plant and © We have obtained management's discounted eash flow models and understand the rationale jj.) ai the tine of
equipment and other intangible assets (such as behind the assumptions applied. Re Gee ue
sofiware) carrying values are overstated. © We have obtained a bridge from 2018/19 reported Group EBITDA to the budgeted 2019/20 W?/#RG oP work over
* The carrying value of goodwill and other assets should Group EBITDA and challenged management on the key drivers Iniparrmment nemanus pngonigy
be compared to its recoverable value which is the © We have engaged with our valuations specialists to review the discount rates used by the judgements taken appear
higher of fair value less costs to sell or value in use. management to ensure they are appropriate. tohe reasonable. We are still
Impairment involves high levels of management We have performed sensitivities over the main assumptions applied in the models. inailising our andit work in
judgement with key assumptions relating to growth ~~ We have reviewed the disclosures provided in the financial statements and are working with “pejztioy; to eorroburating the
and the discount factor. management to ensure these are robust and comply with the requirements of the standard. Li eBPPDAL OS”
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3. Accounting and reporting matters (continued)
Significant risk - Impairment of tangible assets and intangible as
We have summarised the results of our sensitivity analysis
sets (continued)
for both Post Office Limited and Post Office Insurance below.
Sensitivity analysis
The impairment model is, as expected, sensitive to movements in the assumptions. We have assessed all the assumptions made by management and, at the time of writing, are largely
comfortable with the judgements that have been made in the final models, as discussed on the previous page (with some final corroboration to obtain for elements of the drivers in EBITDA
growth). Our sensitivity analyses have been performed for what we consider to be reasonably possible changes, in aggregate, in the key assumptions. In determining our sensitivities, we have
considered the 2018/19 results, held meetings with the divisional directors and reviewed results since the year end, along, with considering whether there is any contradictory evidence, to
understand performance in 2019/20. A summary of these sensitivities is set out below.
Discount rate
In the original model, a discount rate of 9% was used for the Post Office Limited CGU. F«
lowing the work performed by our valuations experts, management has increased this to 9.5%, which
decreases the headroom by £41 million to £282 million. We note that a highly unrealistic increase in the discount rate of 6% (taking the discount rate to 15%) would be necessary to result in
an impairment charge for the Post Office Limited CGU. Management is planning on disclosing the impact of a percentage change in discount rate within the financial statements, as required
by the standards, but at the date of writing, we have not seen the final disclosure or performed work over it.
Growth a:
umptions
‘The growth assumptions assume an increase in EBITDA to} i lin year one and an additional increase to ' into perpetuity with 0% long term growth. The initial growth in
the first two years could be viewed as optimistic when compared to current industry expectations, however it would not be unreasonable to expect some element of long term growth, so we
consider 0% into perpetuity is a prudent judgement. From the work we have performed, we note that the growth assumptions, whilst significant, are not of themselves needed to deliver
headroom as there is suffici if the Post Office were to continue at current profitability levels. In addition, we have assessed the impact if the Post Office were not able to sustain
its current profitability of
Post Office Insurance (“POI”)
We have run sensitivities on the Post Office Insurance CGU which are detailed in the table below. ‘The dis ;plable range and therefore we have focussed our
sensitivity analysis on the growth assumptions. Our analysis demonstrates that if budgeted EBITDA of I IRRELEVANT tis not met then impairment could occur.
Discounted cash flow Headroom/(impairment)
POL-EBITDA assumption NSP assumption Long term growth Discount rate assumption
£m £m
IRRELEVAN I
IRRELEVANT
Overall conchision - Scnsitivily analysis
‘The sensitivity analysis indicates that for the Post Office Limited CGU the break point arises when there is a significant reduction in forecast
Banking Framework Agreement, this is not considered to be a realistic scenario.
BITDA. Given the annualised impact of the new
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3. Accounting and reporting matters (continued)
Significant risk - Impairment of intangible assets
‘The Group has invested significantly in its operational systems in recent years through a
number of different projects and the net book value of software development costs at the
year end is £230 million (2017/18: £213 million). Management will perform an impairment
review of these projects to demonstrate that the carrying value of these assets continues to
be supported, and we will review this and report back to the Audit and Risk Committee at a
later date.
Software Goodwill Other Total
£m £m £m
Summary of intangible
Balance brought forward at 26 March
2018
Additions on acquisition of Payzone
Disposals
Ree
fications
Amortisation (inel. disposal)
NBV carried forward at 31 March
2019
IRRELEVANT
Audit approach
© We have held discussions with management to understand the progress of different
projects and discuss any potential impairment indicators.
© We have assessed Payzone specific assets by using Payzone specific cash flows and
no impairment has been identified.
© Wewill challenge management as to whether the development of new software or
systems supersedes or impairs any other assets on the balance sheet. We are
currently awaiting management's analysis to support this. We will then apply our
own understanding of new and existing projects and consider whether, in our view,
there are any projects where the software is no longer in use or its life was shortened
by any development activity. We will report back to the Audit and Risk Committee if
we find any such item:
© Inaddition, management's discounted cash flow impairment mod
and 5) demonstrate that there is sufficient residual cash flows avail
the carrying value of these intangible assets.
els (see pages 4
ible to support
Elevated risk - Capitalisation of intangible assets
Accounting standards dictate specific criteria that costs need to meet in order to be capitalised
as an intangible asset and this creates a risk of misstatement. ‘The value of such additions in
the year is £104 million (2017/18: £125 million).
adit approach
© We have performed testing over the additions in the year ensuring they meet the
criteria for capitalisation. We have traced a sample of additions to supporting
documentation, such as invoices or payroll reports and obtained evidence that the staff
member was working on the relevant project.
© We have ensured that no projects are being amortised until 100% complete, and once
they are complete that they are then amortised.
© We have assessed the design, implementation and operating effectiveness of
management's key controls over the impairment and capitalisation of costs associated
with IT development and noted no areas of concern. We are in the process of
sessing the outcome of prior year budgets and forecasts to identify whether previous
costs capitalised were in-line with the planned spend, in order to assess for the
possibility of impairment.
Elevated risk - Impairment of good
Ata Post Office Insurance level there is
IRRELEVANT
I IRRELEVANT I
adit approach
© Our component team has held discussions with management to understand the
model that supports thi goodil balance and the underlying assumptions within it,
‘There ist Ybased on the current model, suggesting no
impairment is required. They have reviewed the inputs into this model, assessed its
mathematical accuracy, considered the reasonableness of cash flow forecasts along
with other assumptions used and have performed a sensitivity analysis over the
model. Our valuations experts have reviewed the 12% discount rate applied with no
issues noted. Our component team is finalising its testing I
its work in relation to sensitivities, which shows that the}
IRRELEVANT
Conclusion
At the date of writing this report, we are still finalising our testing over capitalisation of
intangible assets and impairment of intangible assets. Our work to date has uncovered no
issues.
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3. Accounting and reporting matters (continued)
levated risk - Oncrous lease provisioning
‘The Group's leasehold stores are assessed by management to identify any where the expected future benefits from trading are forecast to be less than the future lease commitments, indicating that
‘an onerous lease provision may be required.
Property provision
2018/19 2017/18 hes
reconciliation
Property provision breakdown
km £m
Balance brought forward at 26
@n March 2018
Dilapidations (12) (8)
n (8) (8)
Onerous lease
New provisions charged
Provisions released in the year
Vacant poss
ROE BRNpCey Gaus Gs (2) Net charge to investments
. Utilisation
Current portion ag) ay
Balance carried forward at 31
Non current portion (27) (2) March 2019
Key assumption - identification of loss-making branches
The Group identifies directly managed branches (“DMBs”) for inclusion within the onerous lease provision
when they have met the following criteri
1) The branch has been announced for closure and there are plans to open a franchise in the area in
lieu of the DMB
2) The identified branch is loss-making and expecting to continue to incur losses
We have raised with management that, in line with accounting standards, loss-making branches should be
considered for an onerous lease provision irrespective of whether they are announced for closure or not. As
a result, we have identified ¢.100 branches at the 2018/19 year end (2017/18: c.120) that were not
announced for closure and therefore may require an onerous lease provision. In addition, we have identified
ix franchises (2017/18: six) where Post Office holds the lease agreement and these branches should also be
included within management's assessment. We are working through these points to assess whether there
could be a material impact on the level of provision required both in the current or the prior period.
Key assumption - cost and income allocation
Management uses each individual branch profit and loss account as the starting point in identifying
loss-making branches. Directly attributable costs (such as property and staff costs) are allocated, as well as
certain specific central costs based on the branch's proportion of turnover; we are currently as
whether such costs should be included in this assessment in accordance with LAS 37.
Key assumption - discount rate
Adiscount rate of 3.5% (the government ‘Greenbook’ rate) ha
vacant lease provision, whereas LAS 37 is clear that a risk free rate should be applied. As the cash flows used
by management to account for the onerous lease are not risk adjusted, we would expect a risk free rate of
1.6% (UK Gilt 30 year yield) to be used. The impact of this would be an increase in the current onerous lease
provision of £3,7 million, however this may change depending on the outcome of the branches we have
found are not currently included in the provision (see ‘Identification of loss-making branches’ above).
been used when calculating the onerous and
Key assumption - Network Subsidy Payment (“NSP”)
Management has not included an allocation of NSP when calculating their onerous lease provision.
ynable assumption, as the NSP is not allocated to speeific branches.
reas
Summary of Directly Managed
Cbitbe 2018/19
2017/18
Branche
7 1g
. Branches closed in the year 0) (26)
* Branches announced for franchising 2 2
° r Closing onerous branches 89 47
o) Profitable branches 19 19
Branches not announced for closure 80 119
a ‘Total number of open DMBs 188 255
Key assumption - future cash flows/lease commitments
‘The basis for the calculation of the onerous lease provision is the forecast rental commitment for each branch,
discounted over the length of the lease. We have challenged management as to whether this is appropriate as
we would expect the Group to provide for the unavoidable costs under a contract, which are defined as being
the least net cost of exiting the contract. This should be the lower of the cost to exit or breach the contract and
the cost of fulfilling it, Management should therefore forecast the expected losses incurred if the branch were
to continue to trade, discounted until the lease bre: ind provide for this amount (if it is lower than the rental
commitment). We have been made aware that once branches are advertised for closure and to be franchised,
they are generally closed within six to nine months and therefore move into the vacant possession provision.
‘Where branches close shortly after announcement, we believe providing for the rental commitment is a
reasonable and appropriate assumption. However, where branches continue to trade for a sustained period of
time we would expect the provision to be based on forecast losses. Management is currently assessing whether
these changes will have a material impact on the provision.
Key assumption - dilapidations assumptions
sion when properties have been identified as loss-making for the
;nnounced for closure) or when they become vacant, as this is the point at which
they deem the dilapidations provision to become probable. Branches thal are excluded from this are expected
to continue to trade into the long term. Management uses actual assessments carried out by BNP Paribas, who
act as property manager for the Group, to calculate the provision, or where this has not been performe
management makes an estimate at 80% of the rental commitment. ‘The minimum provision per branch
£50,000. We are working through these assumptions at the date of writing and will verbally update the Audit
and Risk Committee in the meeting.
Key assumption - vacant possession
‘The model includes 118 branches (2017/18: 111) within the vacant possession model. ‘This provision relates to
branches that the Group are no longer trading from, or using for other business purposes and the unavoidable
costs exceed the benefits of the contracts, Consistent with the onerous lease provision, this is calculated as the
cost of fulfilling the contract up to the lease end date, or the break date should one exist.
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3. Accounting and reporting matters (continued)
Elevated risk - Onerous lease provisioning (continued)
IOnerous leas 10 br 8 . tes
On eo Areas of outstanding work - onerous lease provision
3 The City of London (2.08)
2 Camden High Stree 6 We have identified a number of factors that may that have an impact on the overall onerous lease provision position at the year
3 amden High Street (1.62) end, We are unable to quantify this impact at the time of writing, however we have requested management to provide updated
: Glasgow (1.35) workings and corroborating support so that we are able to verbally update the Committee at the meeting. As noted on the prior
Baker Street (1.23) page, key areas outstanding relate to; &
Broadway (1.04) © the completeness of loss-making branches (which could increase the provision required); g
Edinburgh City (0.90) ¢ the basis of calculating the provision (which potentially could decrease the provision required); and S
. * © the discount rate used (which increases the provision required). g
Cambridge City (0.84) &
Islington (0.82) We hope to be able to summarise the financial impact of this at the Audit and Risk Committee. g
Redditch (0.7)
Great Portland Street (0.72)
Total top 10 branches (11.37)
Description of issue including judgements and
Andit approach
estimates made by management PP
Audit conclusion
© Onerous lease provisioning involves significant. + We have obtained management's assessment of loss-making branches yyy» s/f working through manceement’
management judgement regarding assumptions and assessed this for completeness. We are still working with assessments in relation to onerous lease
g such as sales and margin growth and the management to quantify the impact of certain branches which we melee rae i eatiel mah ,
a discount factor. A continued challenging believe should be included in the Group's assessment. . At the date of umiting this report, we
: trading environment is an indicator of an © Weare testing the mathematical accuracy of the calculations in the
increased number of branches with onerous cash flow forecasts and are assessing key inputs to the calculations,
leases. such as the discount rate and sales assumptions, by reference to
management's forecasts and our own expertise, with no issues noted at
n usin ing onera
© There is a completeness risk that there are the time of writing. as noted above management is providing é
unidentified loss-making stores that requirean ¢ ~—- We have challenged management on the key assumptions SH Goel islet eee cts
onerous lease provision. underpinning the model, including whether management should be“ 247 uPduted ealeulations 1h Wis area se is
providing for the forecast losses rather than the committed rental number ts kel to cannge. We willl report fart iier
expense. We are working closely with management to assess the findings in this area verbally to the Audil and Risk
impact of this. Committee next week,
© We have engaged with our valuations experts to review the discount
rate used of 3.5% and have concluded that the appropriate risk free
rate to use is 1.6%. ‘The current impact of this is an increase in the
provision of £3.7 million (see Appendix 2).
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3. Accounting and reporting matters (continued)
Jevated risk - Assumptions in the pension schemes’ liab’
‘The Group has two defined benefit schemes; the POL fund of the Royal Mail Pension Plan (RMPP) and Post Office Limited’s share of the assets and liabilities of the Royal Mail Senior Executive
Pension Plan (RMSEPP) (together “the Plans”). In aggregate, these show a net surplus of £1.2 million (2017/18: £3 million) on the balance sheet at the year end, net of asset ceiling adjustments.
We have prepared a bridge which reconciles the position of the schemes for the period 25 March 2018 to 31 March 2019:
O18/19 2017/18
POL a
id
‘J £i
Fair value of plan assets 362. 338.0 °
Defined benefit obligation (320.4) (297.8) 2
Effect of asset ceiling G9) Go.2)
Defined benefit position 0S
eueeee 2018/19 2017/18 6}
£m ém
Fair value of plan assets 20.1 "1
‘Defined benefit obligation (27.9) (27.4) fond
Surplus ~ nt aero
Effect of asset ceiling = G7
Defined benefit position eS “30
Assumption (%p.a) 2018/19 2017/18
Discount rate 2.40% 2.50%
RPI inflation 3.40% 3.30%
CPI inflation 2.40% 2.20%
‘The assumptions adopted for both the POL fund and
the RMSEPP are consistent.
a Deseription of issue including judgements and Pi vat approach Audit results/PwC
‘ estimates made by management conclusion
. Pension accounting in relation to defined © We have obtained the IAS 19 report and consulted with our independent actuarial specialists to a: ‘The results we h
benefit schemes is complex and there are a the above assumptions that have been applied to determine the costs of meeting future obligations. ommuoticated are
number of judgements made when calculating Overall, the assumptions sit towards the prudent end of the range. This is due to a relatively low tive conchisi
the liabili In addition there is a judgement count rate, combined with a high RPI inflation assumption and a prudent mortality assumption. me ATE CUTE
made in relation to the recognition or not of any ‘The methodologies used to derive the assumptions appear to be consistent with last year and we are our testing of the
surplus finalising our conclusions on their reasonableness at the date of writing. assumptions and,
. ‘There is a risk that the pension liability is plana
incorrectly valued at year end resulting in a
material liability balance being understated.
. This is a key area of focus due to the magnitude
of the balances and the judgemental nature of
the estimates associated with the liabili
ar value
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3. Accounting and reporting matters (continued)
Elevated risk - Assumptions in the pension schemes’ labilitics (continued)
Spread of discount rate assumptions adopted by PwC clients at Spread of inflation (RPD) assumptions adopted by PwC clients at
33/03/2019 31/03/2019
me 0
> ee
gs z
z 36
a g
& &
+
od _ . I os
2510258 2a teas astoase gatogag 3303.99 3403.49
Discount rate (9. " ‘,
Prudent oe. C2 Optimistic Optimistic Jnflation. 26), Pradent
ese ea toes 2 ctestanuepese ‘Seer dene: optuee § Get tsamgece
Papert ened EX pect rberes an ede Baportng Pes gaaga009 {Ex penaon shares ene date
Our initial assessment of the discount rate of 2.4% is in the low to middle of the range of Our initial assessment of the RP1 inflation assumption of 3.4% pa is towards the top (prudent)
assumptions that we have observed at 31 March 2019. Last year, the discount rate was slightly _end of the range of assumptions that we have observed at 31 March 2019. Last year, the RPI
more towards the bottom (prudent) end and therefore the discount rate is slightly more inflation assumption was also towards the prudent end of the expected range and therefore the
optimistic than last year. inflation assumption is comparable to last year.
TFRIC 14
We note that the two defined benefit schemes are in a net asset position at the balance sheet date. Under IFRIC 14, management is required to consider the recoverability of these ass
a refund or reduction in future contributions. The Group does not have an unconditional right to refund from the POL fund of the RMPP, and has therefore not recognised the net pension asset
of £42 million (2017/18: £40 million) on the balance sheet. We have reviewed this treatment, along with the assumptions applied by the actuaries, and are comfortable with this treatment.
Guaranteed Minimum Pension (°GMP”) Equalisation
Following a ruling by the High Court on 26th October 2018, pension schemes are required to recalculate their obligations for the impact of guaranteed minimum pensions which were provided
by schemes that were contracted-out of the State Earnings-Related Pension Scheme up until 5 April 1997. These benefits were inherently unequal between males and females because of their
different state pension retirement ages.
In line with advice from the Scheme aetuary, the main scheme will not be in scope for GMP as the acerual relating to this was transferred to the government when the Post Office was privatised
in 2012. The RMSEPP scheme is in scope for equalisation and we have been informed that the impact is around 0.1% of liabilities, which would result in an amount of £279,000 being provided.
4 Based on a high level calculation using 3% as a worst case scenario, the potential maximum exposure that we expect on the income statement would be £837,000, which is immaterial. At the
2 time of writing, we are performing our review over the GMP assumption and will report our final analysis at a later date.
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3. Accounting and reporting matters (continued)
Elevated risk - Fair value of assets relating to Payzone acquisition ia
During October 2018/19, Post Office acquired Payzone Bill Payments Limited (“Payzone”) for' ash consideration, and a maximum of,
Management has engaged with Smith & Williamson to support them with their valuation of the intangible assets acquired as part of this transaction, 2
Discount rate
‘The WACC used by Smith & Williamson in order to discount future cash flows associated with the business and
intangible assets identified is 10.5%. A relative risk adjustment has then been applied to the discount rate used in
valuing the merchant relationships. Our valuations experts have reviewed the WACC used and deem it to be
reasonable and appropriate.
Fair value % Fair value
Summary of acquisition
of fea £m allocated
Working capital
Fixed assets
Merchant contracts & related relationships:
‘The majority of merchant relationships are
exclusive, unlike the service providers who work
with PayPoint. Smith & Williamson used a i
Multi-period Excess Earnings Method (MEEM)
and attrition assumptions based on management
discussions, qualitative factors, and analysis of -
historical customer sales data to value the h
intangible, and estimated a useful economic life of
six years.
Other intangibles (capitalised software)
eed
i
° a=
S & @payzone <—
sets
Deferred tax liability on intangible
‘th
Net tangible a
-
Merchant contract
relationships
IRRELEVANT
Payzone brand
Intangible assets
Payzone brand
‘The Payzone brand has been in use since its registration by Alphyra
in 1999 and is dual purpose - being a Business-to-Consumer brand
driving end-consumers to the terminals, and acting as a
Business-to-Business brand to merchants and service providers.
Smith & Williamson have used a relief-from-royalty approach and
applied a 3% royalty rate to Payzone’s expected sales.
Assembled workforce
Implied goodwill (excluding workforce)
Total implied goodwill
Total enterprise value (EV)
Description of issue including judgements and I Audit results/Pwe
estimates made by management Audit Appronch conchision
We have obtained the Smith & Williamson report and engaged with our valuations specialists
© IFRS 3 Business Combinations outlines the .
ing our 8
accounting when an acquirer obtains control of
a business (e.g. an acquisition or merger). Such
business combinations are accounted for using
the ‘acquisition method’, which generally
requires assets acquired and liabilities assumed
to be measured at their fair values at the
acquisition date and to be separately
recognised from goodwill.
‘There is a risk that there are unidentified fair
value adjustments, or assets/liabilities on
acquisition.
to ensure the methodologies used when valuing intangible assets identified are reasonable and
appropriate. We have also assessed other inputs, such as growth rates and asset charges for
reasonableness.
We have used our valuations specialists to assess the discount rates used in each of the
valuation models.
We have benchmarked the royalty rates used and also comparable transaction intangibles
allocation,
We have reviewed the fair value adjustments for reasonableness and completeness.
We have verified that the acquisition and integration costs of £3.4 million have been expensed
through the Income Statement. ‘These have been recognised within the ‘Investments’ column,
as they predominantly relate to advisory/consultancy costs and the acquisition relates to the
Group's strategy to transform the business and improve their commercial sustainability.
Ab the tine of wr
report, we have vo
discount rates used and growth
rates used by Smith &
wluded
Williamson are appropriate and
reasonable. We are still
forming our w
cash flows used as part of the
jon and the assianptions
applied.
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3. Accounting and reporting matters (continued)
Elevated risk - VAT accounting
Due to the different divisions and revenue streams within the Post Office, there are a number of arrangements in relation to VAT which make this a complex area.
Description of issue inchiding judgements and saults J
timates made by management Audit Approach Audit results/Pw€ conclusion
+ There isa risk that the liability at year end is :
misstated due to the complexities in relation to the
various VAT arrangements that are in place.
+ Misstatements could occur due to complexity
arising from the significant number of goods and
services sold through the business which require :
appropriate VAT rates to be identified and applied. ,
+ Misstatements could also arise from special rate
arrangements in place with HMRC.
We are obtaining the VAT arrangements in place and will review the latest
correspondence with HMRC.
We have engaged with VAT speci
and assist in testing compliance.
to review complex arrangements
We are tracing the liability in place at year end to post year end payments.
We are testing a sample of transactions, with reference to the VAT
arrangements in place, and ensure they have been correctly treated within
the general ledger and also the VAT return.
nd Risk Cony
have completed our work in this area.
wh
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4. Presentation and disclosure tiems
Hlevated risk - Disclosure of expected impact of IFRS 16
Under IAS 17, lessees are required to make a distinction between a finance lease (which is held on the balance sheet) and an operating lease (which is held off balance sheet). IFRS 16 requires
lessees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. ‘The standard is effective for Post Office for the 2019/2020 year end.
Description of risk includingjudgements and Wit approach ‘Audit results/Pwe conciasion
estimates made by management
Management will be applying the modified We have performed the following procedures with no significant issues to puny
retrospective transition approach to implementing report to date; TERS 1
IFRS 16 in the 2019/2020 financial statements. Inline
with the requirements of IAS 8, management has
mair
Obtained and reviewed a sample of original lease contracts, including uucie and Risk ¢
included disclosure of the expected impact on adoption amendments to verify the accuracy of inputs into the model; siren ance the mark 16 v0
in their financial statements for 2018/2019. There area ~—-‘Recalculated a sample of leases and compared the outcome to the
number of judgemental assumptions in relation to the Grant Thornton model used by the Group;
implementation of IFRS 16, including the discount rate ~—_Our valuations experts are working through building up an
used.
appropriate discount rate to compare this to the rate applied by
management; and
Verified the completeness of leases included in the IFRS 16
assessment.
At the time of writing, management is in the process of g
finalising the relevant disclosure including, quantifying,
the impact for inclusion in the Annual Report.
Overview of risk and audit strategy
As communicated in our Audit Plan at the January Audit and Risk Committee, we assessed the risk for our audit in relation to this area as elevated, given the complexities of the new standard,
the anticipated sensitivity of key assumptions and the magnitude of the expected impact. For context, given the detailed disclosures presented by the Group in the financial statements, our
audit procedures are required to be full scope in nature, and as such, we have audited the amounts presented, as if they has been adopted in 2018/2019 by Post Office. This has been a
significant project for the Post Office and the audit procedures we are required to carry out to gain comfort over the implementation of the new standard, are also significant.
[Summary of expected impact an the
Key assumption - Discount rate
2018/2019 financial statements IFRS 16 states that when readily available, the rate implicit in a lease is to be used to discount the future lease payments,
back to their present day value, When the rate implicit in a lease is not readily determined the lessee may use the
3ross rigl o assets Incremental Borrowing Rate (‘IBR’). The IBR is the rate of interest that a lessee would have to pay to borrow, over a
Gross right of use assets G) ee ‘e ? ‘ ‘ ‘i
: o similar term and with a similar seeurity, the funds necessary to obtain an asset of a similar value to the right-of-use asset
Impairment of right of use assets ©] ina similar economic environment.
Lease liability ibs]
- z Post Office has used a discount rate of 3.5% for each lease in calculating the lease liability required. ‘This does not comply
Derecognition of onerous lease liability ib]
with the requirements of the standard, which notes four factors that need to be built up when formulating the IBR.
Net income statement impact (pre-tax) [x] These are; to start with a risk free rate, add in a country risk premium, add a credit risk factor and finally to make an
asset specific adjustment (depending on the eategory of asset in question to reflect the borrowing rates implicit in that
asset). We have engaged our valuations experts to build up a notional IBR across a sample of 30 leases (which vary in
category) in order to assess the reasonableness of the 3.5% applied across the board by management. Our work in this
area is ongoing however an initial view is that the discount rate applied is at the lower end of the spectrum, particularly
for longer term property leases. ‘This could have a significant impact on the amounts to be disclosed in the Annual
Report.
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4. Presentation and disclosure items (continued)
Elevated risk - Classification and recognition of trading profits
‘The Group uses a three column approach in its income statement in order to segregate what it considers underlying results from net income and expenditure associated with business
transformation activities and the associated government funding.
Description of risk including judgements and Audit Approach Audit results/Pwe
y management conclusion
estimates made
‘The Group uses "Trading Profit" as its key alternative ¢ We have obtained an understanding of management's approval process in relation to ie nallne
profit measure and it is calculated by taking operating, investment expenditure. Shek the dis theutis
profit from continuing operations before depreciation, . We have obtained an understanding of management's criteria and accounting policy in a imaaiiaen
relation to recognising costs within the ‘Investments’ column of the Income Statement.
We are currently corroborating a sample of these costs (across a number of different
projects, including smaller ones) to supporting documentation to ensure they meet the
criteria and that they are not inappropriately classified within ‘Investments’.
‘ion, operating exceptional items, closure of
, investments and Network Subsidy Payment. .
‘There i is judgement in the classification of relevant costs
and income which therefore carries audit risk.
the investment volunin,
Investment funding and expenditure policies and process
‘The Post Office receives money each year from the Department for Business, Energy & Industrial Strategy (“BEIS”), which is disclosed as ‘Investment Funding’ in the financial statements. A
total of £210 million has been secured with £168 million being drawn down in 2019. The funding has been provided on the basis that it enables the Post Office Limited to transform its network of
branches across the UK. Project proposals are prepared by individual business units and then submitted to the Investment Committee, with anything above £5 million requiring approval by the
board. Investment and project spend is monitored on a quarterly basis by the board, which includes a UKGI representative. Further updates of the key projects are provided to BEIS on a
monthly basis to monitor progress.
Summary of Network
Investment funding and expenditure 2018/19
We have understood the key objectives of the main elements of the investment ‘ Em
expenditure. There are a significant number of ‘sub-projects’ for each area of spend
201 201A
om oe
Summary of Investments’
Investment funding. 168 70 which we are in the process of understanding in more detail. DMB - predominantly property 26.4
Expenditure provisions .
Business transformation a4) (6) Business Transformation: ‘This relates to an overarching programme that will drive Network development - staff and
is : ; Post Office towards commercial sustainability, through technological innovation and the consultancy costs 47
Network programs (04) (63) fundamental re-envisaging of long-term contracts. This includes re-negotiations with Network ty an
IT transformation 43) (6) Bank of Ireland, updates to the telecoms business to meet regulatory changes and HR ‘twork transformation - includes, 18.9
H Up Bi ry 8 compensation to agents
Severance (38) 7) programs such as Success Factors for payroll. , disposal
‘Total restructuring costs (129) (102) Network Programs: This is a multi-year initiative designed to simplify the retailer asses on disposal 4.0
proposition, with key areas of focus being simplification, automation and the extension _‘Total network programs 64.0
Unwinding of discounts on w ® of the franchising model to some of the Post Office directly managed branches.
Provisions IT Transformation: ‘This relates to programmes to restructure the Post Office's IT.
Total investment . operating model and overhaul legacy back office systems, transitioning to a cloud based
income/(charge) 38 Ga architecture.
Capital expenditure (133) (7) Severance: ‘These costs include retail severance within DMBs as well as HR, supply
chain and Financial Services and Telecoms through travel hub.
Total investment charge (95) (43)
Exceptional items
Exceptional items are disclosed separately to the ‘investments’. All costs relate to the Group Litigation Order (see page 15 for further details). Costs for 2018/19 were £13.7 million and this
expenditure was predominantly driven by legal costs, travel costs and payroll costs associated with the ongoing litigation.
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4. Presentation and disclosure tiems
Elevated risk - Postmasters’ Group Litigation Order (“GLO”)
‘The Post Office has an ongoing litigation with a number of postmasters which was highlighted as a contingent liability in 2017/18. Since we presented our Audit Plan in January 2019, the first
trial whieh was in relation to the legal construction of the contract between the Post Office and agents (the ‘Common Issues’ trial), has concluded, with the judgement in the claimant's favour.
Following the judgement, the Post Office made an application to the Court for the sitting judge who would be presiding over the remaining trials to be recused. ‘This was rejected by the judge and
taken to the Court of Appeal. On 10 May, the Court of Appeal rejected the Post Office legal team’s appeal against the judge’s decision not to remove himself from the Horizon IT system trial. The
Post Office is now in the process of appealing the ruling given in the first trial with the expected outcome to be released on 23 May 2019.
Description of risk includingjudgements ait approach Andit results/Pw
and estimates made by management
‘The GLO is a highly uncertain situation which © We have held a number of discussions with the Post Office legal team and On:
could, based on past events, lead to a material reviewed the various public legal documents in order to ensure we are fully
economic outflow from the Group. At this time, aware of the latest developments;
management's position is consistent with the prior We will be circulating legal letters to and holding discussions with the
year; losing the trial/needing to settle is not yet Group’s legal representatives in order to obtain third party confirmation of
considered a ‘probable’ outcome and, even if it was, the information that we are being provided with by management;
it is not possible to make a reliable estimate of any We have reviewed the requirements of IAS 37 and will ensure that the latest
future economic loss at this stage. On these situation at the point of signing has been taken into account when
grounds, management expects to continue to independently as
ig the need for a provision or a contingent liability. We
disclose a contingent liability (as opposed to Will also ensure that any associated disclosure is sufficient to inform the
recognising a provision) in the accounts, however reader of the current situations and management's approach;
the position will be re-assessed prior to signing the ¢ We will consider the need for a provision for legal costs associated with the
financial statements. first trial which may be instructed by the court to be paid in the near future.
New standards
IFRS 15 “Revenue from contracts with customers” has replaced IAS 18 “Revenue” and 1AS 11 “Construction contracts” and IFRS 9 “Financial Instruments” has replaced LAS 39 “Financial
Instruments Recognition and Measurement.” ‘The Group has adopted both new standards in the current financial period.
TERS 15
‘The Group adopted IFRS 15 using the modified retrospective method, Post Office has assessed the requirements of the standard for each of its revenue streams and concluded that there is no =
material impact on revenue recognition, other than the presentational reclassifications relating to the Network Subsidy Payment and Post Office Card Account commission income, which were
previously disclosed as revenue but are now classified as ‘other operating income.’ We have reviewed management's impact assessment and materially agree with their assessment. We have also
tested the potential impact of the standard by reviewing the underlying contracts, for a sample of transactions as a part of revenue testing. Our work in this area is ongoing however an initial view
is that there are no material misstatements on transition to the new standard, although we have noted some small differences in the Telco revenue stream,
In addition, we have identified an adjustment to operating costs, in relation to aggregator fees paid by Post Office Insurance (‘POI’). Under IFRS 15, POI should capitalise these fees as a contract
asset which is then released in line with expected customer attrition rates. Management has modelled the outcome which includes a £6.6 million (2017/18: £6.5 million) contract asset on the
balance sheet and an impact to Group EBITDA of £0.1 million (2017/18: £3.1 million), however we have not yet audited these numbers. As we continue to work through the audit of revenue, if
there are other such items of note, we will highlight these to the Audit and Risk Committee.
IFRS g
Management has assessed the impact of the standard and concluded that it has not had a material impact. We have tested the potential impact of the standard through our financial asset and
liability testing procedures. Furthermore, we have reviewed the hedge documentation and effectiveness of the Interest Rate Swap instrument started in 2018/19. Our work in this area is ongoing,
however an initial view is that there are no material misstatements in this regard. 5
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jority of the Group's revenue is
n receivable based on
volumes/values of products sold by the Post
Office on behalf of a number of suppliers. As
detailed in our Audit Plan, given the volume Retail 581 564
of revenue transactions across a variety of
different streams (including retail, financial Financial Services
services and telecoms, and insurance) this and Telecoms 266 274
has been an area of focus, with the relevant
certion for all streams being curane.
existence/occurrence. Insurance 55 48
Due to the high volume/low value nature of gentity 58 5
revenue, we rebutted the fraud risk at an
individual transactional level, however we .
4 Other (supply chain
assess the fraud risk does exist at the point 51°" 13 17
where management could introduce income,
fraudulent invoices or other journal postings
into revenue accounts in the centralised Total a 973) 987
financial reporting process.
We have considered each revenue stream in isolation and performed detailed walkthroughs
to understand the design and effectiveness of the controls in place.
We are testing a sample of revenue transactions and agreeing the commission rates applied
to contractual terms and the basis of invoicing (volumes or values) to underlying contracts.
We will recalculate the revenue for our selected sample and are tracing to cash receipt in
bank.
Where revenue is calculated using volumes/values driven by sales in branches, we expect to
gain comfort over the accuracy and completeness of this data through the ITGCs obtained
over the Horizon system. ‘This includes testing over the interfaces between Horizon,
Credence and CFS.
For each revenue stream we will carry out procedures over cut off and completeness of
revenue.
Our work in these areas to date h
uncovered no instances of fraud.
In the prior year, management identified a £5 million error in relation to accrued telco income
reported from Fujitsu, At 31 March 2019, the accrued income relating to telco is £2 million,
which is below our testing threshold.
of fraud in relation to management override of controls and the risk of fraud in revenue recognition. Relevant audit procedures
We have performed detailed testing of key year end reconciliations, reviewed areas of
management judgment such as impairment, provisions, pensions assumptions and other
accounting estimates, are testing journal entries recorded within the financial period and
additionally have incorporated an element of unpredictability into our testing. We are
utilising data auditing, including use of our data interrogation tool ‘Halo’, to audit both
automated and manual journals posted throughout 2018/2019. Our testing is focussing
on journals we consider to be higher risk based on our fraud risk assessment procedures,
such as, journals posted by those in a position of influence, unexpected credits to the
profit and loss account, and journals with unusual descriptions and account
combinations. Our work considers both the misappropriation of assets and fraudulent
financial reporting. No instances of fraud or error have yet been detected as a result of the
work we have performed. We are continuing to work through this testing and will
highlight any issues if they arise.
We have not identified any significant matters involving actual or suspected
non-compliance with laws and regulations or the entity's articles of association.
Auditing standards require us to formally consider management's going concern
assessment and lo ensure it covers a period of al least 12 months from the date of signing
the financial statements.
Post Office has a working capital facility from the Department Of Business, Energy and
Industrial strategy (“BEIS") of £950 million which expires on 31 March 2021 and a
further £50 million facility available to provide same day liquidity to 4 April 2020. In
addition, they will receive £50 million in both 2019/2020 and 2020/2021 in the form of
the Network Subsidy Payment (“NSP”) to subsidise the loss-making branches they have to
keep open to comply with the terms of the NSP. As at 31 March 2019, the Group had
£385 million (2017/2018: £327 million) of its working capital facility as undrawn.
We have corroborated the existence of the above facilities to the underlying agreements.
Our work is also focussed on assessing the budgets and cash flow forecasts prepared by
management, including an assessment of downside scenarios (for example the Group's
ability to withstand a significant downside scenario in respect of the GLO litigation).
We will continue to assess the Group's ability to continue as a going concern up to the
date of signing the financial statements.
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Type of cash held 2018/19 2017/18
Breakdown of cash held in Amounts counted by
£m £m
PwC
£m
cash centres (counts attended)
Cash in bank accounts 49.5 London 11.4
Cash held at branches 346.2 Birmingham 25.4
Cash held in cash and coin centres 89.8 Glasgow 76
Cash in transit 75.2 Hemel Hempstead oa
Total cash 560.7 Total cash 44-7
s a member of the Bank of England’s Note Circulation Scheme (“NCS”), which allow:
tions or whilst in transit. There are two main elements of the NCS:
Bond Facility Cash (“the Bond”) - cash held within the Bond (secure vaults at Post Office cash centres) is the property of the Bank of England and is not recognised on the Post Office's
balance sheet.
2) Note Recirculation Facility - this cash is held securely either in the Bond or in the branch network. It is sold to the Bank at the end of each day, with a commitment from the Post Office
to buy it back the next morning, The Post Office is required to lodge gilts with the Bank to the value of what is sold each night. ‘The Post Office has a contract with RBS to use their gilts
s £350 million. There is an annual limit (“the Cap”) imposed by the Bank, dependent upon the volume of notes sorted and
s members to hold sterling notes within Cash Centres, or, under certain conditions, at
and the contracted value that they are able to lodge overnight is
issued from Post Office cash centres. At the year end, £230 million (2017/18: £238 million) was held in this way; the amount is disclosed in the Annual Report but is not recognised as
Post Office's
ash.
Description of issue including
[judgements and estimates
Audit Approach
made by management
Audit results/PwC
conclusion
. ‘There is a risk that cash is .
Bank accounts - we have obtained bank reconciliations for all accounts at year end and agreed balance per bank statement
misstated in the
to external confirmations. We have tested a sample of reconciling items to supporting documentation and ensured they are
locations it is held at the Post correctly classified as reconciling items.
Office. © Cash in branches - we have attended 25 branches to observe and re-perform the daily cash count and Horizon declaration : ded
© The volume of cash in the procedures. We have also attended three monthly stock and cash counts and inspected the results of an additional 22 equivalenis, inclu
network and the level of monthly stock and cash counts. We have held meetings with the Fraud Analysis’Team and reviewed results of a sample of ihe recogr
transactions which pass the internal audits that they have performed. treatment of
through the business means Cash in cash and coin centres - We attended the full year end ca ailed above.
fraud and/or error could © Cash in transit - We have traced a sample of cash in iransit at year end to evidence of receipt of cash at the branch/cash
occur in a variety of areas. centre, within a reasonable time frame, post year end.
© Other During the year, as part of the Back Office ‘Transformation project, the cash centres moved to a new system, “CWC”
to record their transactions. During the transition to CWC, issues arose in relation to the interfacing of the transactions
into CFS. Asa result, management has processed manual journals to correct the split of eash between cash in branch, cash
in transit and cash in cash centres. We are currently testing these journals at the point of writing our report.
pres
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A significant portion of inventory relates to Camelot scratchcards and as
held with management, we have identified the following two challenges:
1. Do the Camelot scratch cards meet the definition of inventory?
2. Should Post Office be recognising amounts in relation to Camelot scratch cards on the balance sheet at all?
Post Office recognises scratch eards as inventory once they have been delivered and subsequently ‘activated’. At the year end, there will be
an element of ‘unactivated’ scratch cards whieh have are not recognised on the balance sheet. We have concluded that these unactivated
serateh cards do not meet the definition of inventory, as control over the scratch cards ultimately remains with Camelot, even though they
have been physically delivered to the Post Office branches. The key factors that show Camelot retains control are:
1 Camelot is able to get the Post Office to return inventory or transfer inventory without compensation.
2. The Post Office is unable to transfer seratch eards between locations
3. Post Office is unable to determine pricing of the products
Whilst Post Office does bear an element of risk, as it is liable for any loss, damage or theft of scratch cards, as per the accounting standard
this is of lesser importance. We have therefore raised an adjustment to reclassify this balance from inventory to prepayments (see
Appendix 2).
‘The Group is currently holding deferred income of £14 million whieh is being released to revenue at £4 million per annum until 2022/23.
‘This amount reflects contractual relationships with the Bank or Ireland dating back to 2008, where Post Office have been required to
provide certain intermediary services in its branches. Amounts totalling £85 million were received upto and including 2015 and the
accounting treatment to defer and spread this income was agreed specifically with the previous auditor.
At the time of writing, we
in accordance with these contractual relationships; such ongoing obligations are usually required in order to support an accounting
i i ittee regarding this ind :
treatment of def We will update the Ce tt
are working with management in order to obtain evidence that the Group has an ongoing performance obligation
2018/19 2017/18
Summary of inventory
ee # £m £m
Camelot - seratch cards 6.2 6.0
Royal Mint 3.2 2.6
Other inventory 1.8 17
Inventory provision (Royal
Mint)
Within Post Office Management Services Limited
and Payzone Bill Payments Limited there are
fiduciary cash balances that are held on trust on
behalf of third parties and cannot be called upon
should either Company become insolvent. Our
component team has held discussions with
management to understand the nature of these
balances. We understand this relates to the
monies collected from customers on behalf of s
insurers relating to the travel insurance products. ©
We have obtained the contracts with insurers and
are reviewing them to ensure that appropriate risk
transfer has occurred and it is not client money
and that recognition on balance sheet is
appropriate.
Whilst our testing is not yet in a place for us to form a final conclusion as to the design and operating effectiveness of the controls to meet all of the Bank of England's seven control objectives for
the Note Circulation Scheme (“NCS”), our findings to date suggest that:
© — Our opinion will need to be qualified in relation to Control Objective 1 (in relation to staff training and staff ac
of the Notes Recirculation Facility (“NRF”) forecasts against actuals, and any adjustments made to the forecasts as a result);
© — We have also identified some findings on the management review controls in relation to Control Objecti
stems) and Control Objective 3 (in relation to review
es 2. and 4 (which consider the NRF and Cash Centre Outflow declarations,
respectively) ~ we are still investigating these findings and considering whether mitigating or compensating controls exist so as to form a conclusion around the achievement of these
control objectives; and
© — Weare still midway through testing for Control Objecti
s 5 (around the bond itself), 6 (around the Non-investment Product System (“NIPS") Code of Connection) and 7 (which relates to
Disaster Recovery) - we expect to have a firmer picture as to these Control Objectives to verbally update the Audit and Risk Committee on 29 May 2019, subject to requested evidence
being provided.
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firm (Ernst & Young). ‘The final audited version of the report is issued to Post Office and it contains the results of the controls’ design and operating effectiveness. PwC has obtained a copy of
the ISAE 3402 report and Bridging Letter for the period in scope and verified that no exceptions were noted for Fujitsu's ITGCs, and so reliance can be placed upon it for our audit.
‘As per the ISAE 3402 report, Fujitsu’s controls do not apply to Logical Access Management controls at the entity level, which relate to Post Office controls that should be designed and
implemented to ensure its users’ access to the Horizon Online system are appropriate. Based on this statement, PwC proceeded to evaluate the design and implementation of the access
controls listed in the table below. In our view, this further work is necessary for us to rely on Horizon ITGCs, although it has not been performed historically by the previous auditor.
Our work in this areas remains ongoing. We are working closely with management to obtain sufficient evidence that the points identified below do not indicate significant control weaknesses g
and that I'TGCs can be relied on. This continues to be a time consuming process and is reflective of the fact that such testing he
verbally with the status of our work in this area at our meeting.
not been performed historically. We will update the Committee
‘We verified the following aspects in the Access Granting process for Horizon:
Ongoing
3 a, We identified 5,934 active SmartIDs that have at least more than one Horizon 1D assigned.
3 ‘Access Granting _ >, We also identified 4,423 active SmartIDs that have been assigned to Horizon IDs in more than one branch.
q Access in branches is granted by the Branch Manager and not controlled by Post Office. We did not identify there was a process in place to ensure that
these SmartlDs assigned to multiple Horizon users and branches were appropriate. ‘These items are being discussed with the HR and IT team,
Fa We verified the following aspects in the Access Revoking process for Horizon: Ongoing
a, We matched the leavers list to the active SmartID users list and identified 77 potential exceptions. ‘These users are still under management
‘ analysis.
Access Revoking — We used the “Branch User Last Logon date” to filter active SmartIDs that had not been used in any Horizon 1D user for more than 90 days. Asa
result, we verified 1,706 potential dormant SmartIDs, HR monitors the dormant SmartID accounts which should be disabled after between 60 to
90 days of inactivity. ‘These items are being discussed with the HR and the IT team,
We verified the following aspects in the Global Users process for Horizon: Ongoing
a. There is no timely review in order to make sure thal access to Global Users are removed whenever an employee with this access left the company
Global Users b. There is no timely review to ensure that Global Users aecess is still appropriate based on the employee function
¢. ‘There is no timely review to ensure that all Global Users access in the system is appropriate. ‘This would be recommended for users with roles
“Setup” (who can create Manager Users in Horizon) and “Auditor £” (who obtain full managerial and accounting facilities access).
a :
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[
Appendices
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Appendix 1: Risk strategy summary
Planned substantive
Controls reliance
Inherent risk
FSLI
High
High
None
Fraud risk
None
Going concern
Moderate
None
High
None
Impairment of intangible assets
Moderate
None
Disclosure impact of IFRS 16
z
2
None
Postmaster litigation
None
Low
Low
Partial
None
High
None
Moderate
None
2 2 2 2
BEAB
Low
None
Low
None
Low
None
Related party transactions
Cash and cash equivalents
Property, plant and equipment
Impairment of fixed assets
Valuation of onerous lease provisi
les and allowance for bad debts
Investments in subsidiaries and joint ventures
Prepaid expenses & other debtors
Client receivables
z
2
ient payables
Derivatives
Inventory
¢
Intercompany accounts
Accruals, provisions and other liabilities
Income taxes and deferred taxes
None
VAT accounting
None
ble, long-term debt and interest expense
Moderate
None
Assumptions in the pension schemes liabilities
Low
Low
Partial
None
Share capital and other equity accounts
Revenue
High
None
Fraud in revenue recognition
Low
None
Cost of sales
Low
Low
None
rartial
gs
o;
Sa
Moderate
None
Classification and Recognition of Trading Profit
Low
None
Exceptional items
Moderate
None
es relating to Payzone acqui
Fair value of assets and liabili
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Appendix 2: Summary of uncorrected misstatements
f greater than £490,000 which have been identified during the course of our audit are set out below. We accept management's decision not to adjust these
items on the basis that none are material individually or in aggregate. We will notify those charged with governance should any further items be identified prior to signing the financial
statements.
Income Statement Balance Sheet
Accounts affected DR cR DR
£m £m £m
No
. Finance costs
ount rate of 1.6% inst
5% in the
1 i . provisions and other
onerous lease provision caleulation* ne G7)
liabilities
Total uncorrected misstatements. 37 (3.7)
Impact on ‘investments’ column 37
Impact on ‘trading’ column
adjustment is currently based on the exis
version (see page 7 for further details).
ing onerous lease model provided by management. We expect the impact of this will change when man:
gement provides us with a final
22
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Appendix 3: Summary of corrected misstatements
‘The corrected mis
statement
‘tatements of greater than £490,000 which have been identified during the course of our audit are set out below. Mana;
We will notify those charged with governance should any further items be identi
ed prior to signing the financial statements.
ement has corrected these in their financial
Income Statement Balance Sheet
Description of misstatement Accounts affected DR cR DR
£m £m £m
conor Inventor
1 Reclassification of Camelot stock to prepayments Prepayments 62 (6.2)
2 Reclassification of assets under construction not in the ‘Tangible assets 2a
correct asset category Intangible assets (24)
Total corrected misstatements
22
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Appendix 3: Required communications to those charged with governance
Required communication Audit plan nd report
Copy of engagement letter to those charged with governance v
Independence and objectivity confirmation v
Detail of all non-audit work performed by the firm worldwide and related fees v
Nature and scope of work together with timing of expected reports Vv
Expected modifications to the auditors’ report v v
Uncorrected misstatements v
Material weaknesses in internal control identified during the audit v
Views about the qualitative aspects of the entity’s accounting practices and financial reporting v
Matters specifically required by other ISAs to be communicated to those charged with governance v v
Final draft of representation letter
Any other audit matters of governance interest v v
23
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We have prepared this report solely for the use of Post Office Limited. This report forms pact of the continuing dialogue between the Group and us and therefore if is not intended to include every matter, whether
large or stnall, that has come to our attention, Ror this reason, this report should oot be rade available to third parties, and if any third party were to obtain a copy without prior written consent, we would not
Accept any responsibility for any reliance that they might place on it,
) 2019 PricewaterhouseCoopers LLP. All rights reserved, In this document, "PwC" cefers to the UK member firm, and may sometimes refer to the PwC network. I firm is a separate legal entity, Please
see wovw pwe.com/structure for further details
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POST OFFICE LIMITED PAGE 1 OF 1
AUDIT, RISK & COMPLIANCE COMMITTEE DECISION PAPER
External Auditor Re-Appointment
tant Company Secretary Sponsor: Veronica Branton, Head of Secretariat
Author: Elizabeth Hallissey, Senior Ass
Meeting date: 29 May 20:
Executive Summary
Context
The Company’s external auditor, PricewaterhouseCoopers LLP were appointed by the
Board on 31 July 2018.
In accordance with the Companies Act 2006, Section 485, an auditor must be appointed
for each financial year of the Company, within the period for appointing auditors. It is
proposed that the auditor remains PricewaterhouseCoopers LLP, and approval is sought
to satisfy the Companies Act 2006 requirements. The Terms of Reference include a duty
that the Committee will review and recommend to the Board the nomination or
discharge of the independent external auditors.
The period for appointing auditors is either 28 days after the statutory financial
statements are filed at Companies House, or 28 days after the end of the period for
filing accounts.
The directors have authority to appoint an auditor of the Company, in accordance with
the Companies Act 2006, Section 485 (3). Additionally, the Companies Act 2006,
Section 487 requires that the auditors must be re-appointed by the directors annually.
This annual re-appointment will be included on the forward agenda for the Committee
and the Board, to coincide with the consideration and recommendation of the annual
statutory financial statements.
Contractual Arrangements
The contract between Post Office Limited and PricewaterhouseCoopers LLP commenced
on 1 October 2018, initially for 2 years until 1 October 2020. There is an extension
option for a further 2 years until 1 October 2022. 3 months’ notice is required to agree
the 2 year extension, and should be confirmed by 1 July 2020.
Input Sought
The Committee is requested to consider, and if thought fit, approve the
recommendation to the Board the appointment of PricewaterhouseCoopers LLP as the
external auditor for the Company for the financial year 2019/20, effective on the date
the Companies’ statutory financial statements for the current period are filed at
Companies House.
Strictly Confide
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POST OFFICE
AUDIT AND RISK COMMITTEE
PCI Compliance Status Update.
Author: Liz Robson Sponsor: Rob Houghton
Date: 17% May 2019
Executive Summary
Context
Further to the update on the PCI Programme that was issued to ARC on the 25" April
2019, this paper provides a progress update, specifically on the alternative approach
to process banking and retail transactions, the progress of the Point-to-Point
Encryption (P2PE) deployment across the pin-pad estate and the overall plan timeline
to achieve full PCI compliance.
Questions this paper addresses
1. What is the progress of the alternative technical design to simplify the processing
of banking and retail transactions from the pin-pad?
2. What’s the status and outcome of the data audit?
3. How will we change our operating model to ensure process/procedures are in place
to maintain PCI compliance?
4, What is the overall timeline for achieving full PCI compliance, including progress of
the Point-to-Point Encryption (P2PE) deployment?
Conclusion
1. The alternative design is progressed enough with Ingenico, Fujitsu and Vocalink to
know that it is technically feasible and we can proceed to detailed design and
implementation. The advantage of this approach, whilst delaying us, saves
considerable effort, both unknown and known, in making the POL environment PCI
compliant with Fujitsu and avoids costs in the future data centre cloud migration.
2. The data audit is 85 % complete, with the outstanding actions to be completed by
the end of May. The findings have so far identified low or no instances of PCI-
related data. The low number of occurrences found have been in the Office 365
area, held within emails or documents. Remediation actions have been to delete
this data and educate users to prevent future occurrences.
3. Our operating model will be updated to include the necessary processes and
procedures to monitor and manage ongoing adherence to PCI regulation. These
will identify and impact assess any future changes in PCI scope, and maintain
periodic scanning of our systems estate to assure no further instances of PCI-
related data being held.
4, We need to do more work on the detailed design planning with Ingenico, on the
alternative design, to get a better estimate of the dates. Current plan shows
2Q/2020 to 4Q/2020 with more work being done to narrow this down.
Strictly Confidential Page 1 of 4 ARC PC.
S Paper
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Context
1. We have three transaction types that are within scope of PCI compliance:
1. Retail transactions: for payment transactions via credit card
2. Banking transactions: for cash withdrawals, balance enquiries, pin changes
and deposits
3. Bill payments and non-chip and pin transactions (for example, scanning
barcodes to pay utility bills - the barcode can often include PAN number for
use in transaction execution)
2. Our solutions to ensure PCI compliance are:
2.1 Point-to-Point Encryption (P2PE) at the point of entry into our estate: the pin-
pad devices in branch. The rollout of P2PE across the estate is underway with
the agreed plan for shipment, firmware upgrade and in-branch device swap-out
agreed and progressing with delivery partners, Ingenico and
Computacenter/Buybox.
2.2. A joint solution with Ingenico, Vocalink (Santander) and Fujitsu that will see all
transactions (banking and retail) be directed from the pin-pad through to an
Ingenico Cloud solution (Axis) for onward transmission to the Banks via the
Vocalink/Santander networks for banking, and to Global Payments for retail
transactions. Our Quality Security Assessor (QSA) has indicated that the new
solution is an improved route to pursue than the previously proposed approach.
2.3 Client engagement (e.g All4One) to see changes to their cards to include PCI
compliant account/customer numbers; a proposal to manage prepay card
transactions as per banking transactions; a review of all card data ingested by
swiping the card at branch, to identify any further product amendments that
may be required to ensure PCI compliance.
3. The delivery of these solutions will enable POL to achieve the Reports of
Compliance required as Merchant and Banking Services provider.
4. The Data Audit of our systems estate has progressed with our key vendor partners
- Fujitsu, Accenture, Computacenter and Atos. The work is now 85%
complete overall. Fujitsu and ATOS have completed their work and the
outstanding activity remains with Computacenter and Accenture, which will be
completed by the end of May. The results of the systems scans so
far have revealed low or no instances of PCI-related data. Where any instances
have been identified, e.g. in MS365 emails/documents, steps have been taken to
remove the data and educate users to prevent future occurrences.
5. The PCI Programme includes a work-stream of activity focused on the Target
Operating Model, to ensure we have the processes and procedures in place to
monitor and manage our ongoing adherence to PCI regulation. This will include
the remit to notify any changes to PCI scope as a result of any future version
change and to assess the impact to systems and processes in order to maintain
compliance. Ongoing periodic scanning of our systems estate to identify instances
of PCI-related data will also be included in the future processes.
DSS Paper
Strictly Confidential Page 2 of 4 ARC PCI
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6. The overall timeline to achieve full PCI Compliance - that is, receiving Reports of
Compliance for both Merchant and Banking services - is forecast between Q2-Q4
2020, based on all the estate being primed for activity by the end of 2019. Whilst
the deployment of P2PE is understood and underway, we have still to finalise the
development and deployment timeline of the new solution with Ingenico and
Vocalink — this is an entirely new development for Ingenico and we are working
with their senior team to influence their prioritisation and allocation of key
resources to the development of this solution.
Current status
1. Alternative Banking Services Solution:
1.1. Since the update at the end of April, the team have worked closely with
Ingenico, Vocalink and Fujitsu to successfully complete a feasibility review and
high level design on a solution that removes the requirement for POL systems
to process PCI data.
1.2 Once deployed, this solution will ensure that from the point of pin-pad entry in
the branch environment, both banking and retail transactions will be processed
through the Ingenico Cloud service, for onward transmission to either
Vocalink/Santander networks for banking, or Global Payments for retail
transactions.
1.3. The transaction information will still be registered in POL back-end systems for
reconciliation purposes, but as this data is not under PCI regulation, this
alternative approach effectively removes POL back-end systems from PCI
scope. This reduces the PCI compliance footprint across our overall systems
estate now and in the future.
1.4 The team are now at the detailed design stage and we are engaging with the
senior team at Ingenico to influence their prioritisation of this work —
specifically, as early inclusion in their product development timetable as
possible, and the allocation of key development resources to achieve a timely
delivery of the solution.
2. Point-to-Point Encryption Deployment
2.1 Work to deploy Point-to-Point Encryption (P2PE) to our pin-pad estate continues
with partners, Computacenter/Buybox and Ingenico. The deployment timetable
will see the upgrade to pin-pad firmware and device swap-out in branch run
from September 2019 to March 2020. Timelines are based on lead-time for
Ingenico to order hardware to support the rollout, the pin-pads being shipped
back to Ingenico for the PCI compliant software to be installed and the devices
redeployed back to all our branches.
2.2 Having been informed that the PCI accreditation of the version of the Pin-Pad
device we have in our estate expires in the next 12 months, we have taken
steps to agree with our acquirer, Global Payments, to extend the accreditation
of this version of the device, such that once it is accreditation tested, it will be
covered to 2023. The accreditation cover comes with the proviso that no
further software changes are made to the Pin-Pad device beyond P2PE - there
are no plans currently in place for any further software updates. This approach
has now been ratified by Global Payments with Visa and Mastercard.
S Paper
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2.3
In the meantime, the Branch Device Strategy review and paper will advise on
the future Pin-Pad device for our branch estate, along with other devices, such
as Paystations. An update is expected by the end of May to advise on this.
3 PCI Card Data Scan
3.1
3.2
3.3
3.4
3.5
Strictly Confidential Page 4 of 4
Fujitsu - complete. Results indicate a small known number of reported
instances of card data. With Fujitsu. Likely little remediation needed outside of
AP-ADC which we are pursuing separately
Accenture - Common Digital Platform (website) scan complete and all
remediation activities have been successfully completed. Scanning of back
office environment due to conclude by the end of May.
Computacenter - to be completed by the end of May. The majority of
databases have been scanned, with the few remaining to be completed shortly.
The results so far show there is no card data held in the databases. The scan
of unstructured data files has identified 339 instances of card data - emails and
documents within Office 365 — remediation has been to delete the data and
educate users not to hold PAN data.
Atos AP-ADC scripts - complete. 65 instances of the 1300 scripts scanned.
The team will now analyse the results and confirm if processes
(systems/people) need to be adjusted to ensure PCI-related data is handled in
a compliant way.
The team continue to engage with both our Quality Security Assessor (QSA)
Nettitude and our Acquirer, Global Payments to ensure our remediation
activities will result in required Reports of Compliance.
DSS Paper
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POST OFFICE LIMITED PAGE 1 OF 6
AUDIT RISK & COMPLIANCE COMMITTEE
Cyber Security Update
Author: David Meldrum Sponsor: Rob Houghton Meeting date: 29" May 2019
Executive Summary
Context
in this paper we outline the progress we have made with the Security Strategy that was shared with ARC in
January 2019, incorporating the findings from the Deloitte Cyber Security Maturity review. We provide an
update on the remedial activities following the security incidents that occurred at the start of the year. The
paper also outlines the vulnerabilities that were discovered during the penetration testing of the Payzone
environment and the identified remediation activities to remediate those vulnerabilities.
Questions this paper addresses
What progress have we made on implementing the Security strategy?
What have we done to improve our cyber security maturity following the Deloitte assessment?
What is the progress of the implementation of Archer?
What further remedial activities have we carried out as a result of the security incidents at the start of
the year?
*® What vulnerabilities were discovered during the penetration testing of the Payzone environment and
what is the plan to mitigate them?
eo eee
Conclusion
1 We continue to make progress on our Security Strategy. We have incorporated the findings from the
Deloitte review and the focus continues on the 3 identified areas of improving the reach and
capability of the SOC; improving our Data Security posture; and improving the governance around
our 3" parties with regards to Cyber Security.
2. We have agreed a number of actions and a targeted security maturity position over the next 12
months with Deloitte.
3. RSA Archer has been implemented for use on the SOC and the rollout of the additional risk modules
including third party assurance and top-down risk will commence in June.
4. We have documented and implemented a Cyber Security Incident Response Team (CSIRT) capability.
The process and team has already been created to minimise the impact of security incidents by
identifying the approach for preparing, identifying, containing, eradicating and recovering from
security incidents. The CSIRT process was followed during the NCSC password incident that occurred
in February, and the Payzone security incident following their initial Pen test results.
5. IRM have completed a planned penetration test in the Payzone environment including infrastructure,
devices, applications and the network devices. A risk treatment plan has been created for all actions
required as a result. The progress to close all issues identified is well underway and reported and
reviewed on a weekly basis. It is anticipated that all action will complete by the end of 2019.
Input Sought
The ARC is requested to note the progress made and provide feedback on the report.
"ly Confidential Page 1 of 6 ACC Security Update Paper
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Jpdaie
Report
What progress have we made on implementing the Security
strategy?
1. We have improved the coverage and capability of the new security operations centre (SOC). Work is
ongoing with Payzone, Post Office Insurance, Accenture CDP, Branch Hub and Fujitsu to plan and
design the integration of their security logs with the Post Office SOC. These areas will be on-boarded
over the coming months increasing the visibility for the Post Office Security team across the Post
Office estate. Security alerts will be managed and co-ordinated through the Post Office SOC invoking
the CSIRT (Cyber Security incident Response Team) process where required.
2. At the last ARC meeting, we discussed the c140k of unstructured Data files we discovered during
scans of our 0365 environment using new data discovery tools that were being tested, which
equated to 8% of the estate with c10% of all files containing data that could be viewed as being
sensitive (e.g. documents that are classified as confidential or highly confidential). Investigation of
the files highlighted that this data were files such as word documents, spreadsheets and presentation
documents. Further review indicated that this is in line with most organisations, and the documents
were being shared with critical suppliers who are governed by contracts to ensure they protect our
data. To further assure and protect unstructured Data sources, we have commenced work to more
effectively manage this data by discovering the data business owners for each data asset, and
validating and classifying this data. This work will include setting validation metrics on all
unstructured data sources to ensure there is no transfer of sensitive data. This work is expected to
be completed by September 2019.
3. Whilst we have commenced regular Security reviews with our major suppliers to assure they are
governing themselves we will in addition be implementing the RSA Archer Third-Party Risk modules
in June to improve the overall visibility of our Third-Party vendor risks. The questionnaires that were
completed initially in OneTrust by the suppliers and the manual reporting that has been used will be
ported into RSA Archer to ensure one source of the truth for the Third-Party security risks.
4. We have recently implemented Recorded Futures as our Threat intelligence partner which provide
additional Third-Party Risk scores that can be used within RSA Archer.
5. Tony Jowett has been recruited as CISO (Chief Information Security Officer) and started on the 21%
May 2019. Tony has obtained insight into the Post Office as he was part of the Deloitte audit team
that performed the cyber security maturity assessment earlier this year. He will report directly into
Rob Houghton (Chief Operating Officer) and his remit will be to pull together the disparate
information and cyber security teams into one operational organisation. He will also work with the
project teams and the Third-Party Supplier teams to ensure the delivery of all aspects of the Security
Strategy through the IT Security Transformation Programme.
6. The following table shows the progress that has been made with the various Security Strategy
initiatives:
Initiative Time Line Status Outcome
Recruitment of CISO January ~May 2019 Completed Recruitment of Group CISO to provide added focus on
end to end security activity
Recruitment of April 2019 Completed Recruitment of Programme Manager to drive the IT
Programme Manager Security Transformation Programme
‘Multi-factor November 2018 Completed Ensuring all remote login’s to Post Office environment
authentication requires a multi-factor authentication code
ctly Confidential
ACC Security Update Paper
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Security Operations November 2018 Completed Centralised security management into joint Verizon /
Centre Go-Live Post Office Security Operations Centre
Recruitment of SOC January 2019 Completed Recruitment of Post Office SOC Lead to drive continual
Lead improvement
Creating Post Office March 2019 Completed Cyber Security Incident Response Team to manage
CSIRT security incidents and issues
Password Audits December 2018 — Completed Proactive cracking of Post Office password directory to
March 2019 identify scale of issue with weak internal passwords
Disabled all users with December 2018- Completed Disabling all users found to have a weak password.
weak Passwords April 2019 Being reviewed on a weekly basis.
Password Strength Tool I GoLive March 2019 Completed Subsequent deployment of password strength tool,
Deployment enforcing use of strong passwords
Microsoft Advanced ‘Commenced Inflight Security insight on employee office 365 security —
Threat Analytics February 2019 multiple logins in different locations, login whilst on
leave ete
Threat Intelligence April 2019 Completed IReplaced Digital Shadows with Recorded Futures for anI
Platform improved Threat Intelligence
zScalar SSL Interception June 2019 Inflight Interception of Encrypted traffic to determine if Post
Office data is being removed from the environment
Data Discovery Phase 1 February 2019 Completed Proactive scan of our active directory and share point
environment to identify scale of unstructured data
Data Discovery Phase 2 April 2019 Inflight ider scan and auto-classification of data based on the
results of Phase 1
Proactive Phishing February 2019 Continuous Measuring the susceptibility of Post Office user base to
Campaigns simple phishing campaign
Red Teaming exercise October 2018 Completed Proactive Ethical hacking exercise simulating internet-
based attack of Post Office
Deloitte Audit January onwards I Completed/Ongoing End-End Security assessment against industry
standards and reviewing progress made in 2016
Deloitte Audit
Symantec Endpoint ‘Commenced Inflight/Complete Improving and updating the anti-virus and laptop
Protection Upgrade February 2019 End of May 2019 protection suite for Post Office end users
Culture and January 2019 ‘Ongoing Regular messaging from Post Office leadership
Communications highlighting expectations around key security themes
Data Security December 2019 Inflight Launched to deliver holistic data classification,
Transformation protection and management
Programme
Third-party governance January 2019 Ongoing Measuring and managing the compliance of our 3
commenced parties to internal security policies and standards
Security Enterprise Risk February 2019 Completed Quantifying and managing residual risk to report to
Management ARC
Data Loss Prevention Commenced April Business Case __I To automatically prevent the egress of confidential or
Suite (DLP) 2019 Approved/inflight sensitive data from Post Office
Data Classification Tool_ I Commenced April Business Case Users will be forced to security classify documents
2019 Approved/inflight __I before they can save/print — enabling the DLP tooling
Security Operations Commenced April Business Case Ensuring full coverage of all critical systems and
Centre Enhancement 2019 Approved/inflight services in the SOC
Archer Risk Commenced April Business Case Expanding the current use of Archer within the SOC
Management Platform 2019 Approved/inflight into wider security management like 3rd Party
assurance
What have we done to improve our cyber security maturity
following the Deloitte assessment?
7. In December 2018, the POL Board commissioned Deloitte to assess the maturity of Post Office’s
Cyber Security capabilities. The review was carried out in two phases. Phase one enabled rapid
reporting of provisional maturity scores to the ARC in January 2019. Phase two involved an in-depth
validation of maturity, the development of detailed recommendations for each area and allowed POL
Strictly Confidential Page 3 of 6 ACC Security Update Paper
10.
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to select maturity targets through discussions with Deloitte. The review covered 34 cyber capabilities
across 4 top level domains:
a. Governance — how the organisation is set up to address cyber security.
b. Secure - what proactive protection is in place to defend against cyber threats.
c. Vigilant — how the organisation detects malicious, unknown or unauthorised activity.
d. Resilient — whether the organisation can respond quickly and appropriately when a risk
materialises.
Deloitte leveraged their Cyber Security Framework (CSF) and supporting tool to provide an objective
and repeatable assessment of cyber maturity. Strong buy-in and support from the business, in
particular the IT Security, IT Risk, Information Protection and Assurance, and Physical Security teams
allowed Deloitte to quickly identify relevant information and provide a focused analysis of strengths
and opportunities. Deloitte concluded that Post Office has made significant progress over the last 12
months in developing its IT and information security capabilities. Increases in maturity scores
between phases one and two of this review confirmed progress made in the first 3 months of 2019.
Nevertheless, a total of 224 recommendations were identified across 34 cyber domains to improve
the Post Office cyber maturity to the agreed Target maturity.
Average Cyber Maturity
AVERAGE SCORE
wPOcurrent #POtarget BRetallsector WFS sector
Phase two of the assessment identified that Post Office cyber maturity had increased 12% from phase
one and our current cyber maturity is 83% of our target maturity.
Deloitte identified 10 overarching actions that would have the most significant impact in moving Post
Office towards its chosen target cyber security maturity level and would reduce the overall cyber
risk. The following actions were identified as a priority, with a target date of the end of May for
completion, and we are currently on track to meet this deadline:
a. Create a prioritised list of “crown jewels”
b. Agree target maturity levels for all Cyber Security Domains (complete)
c. Perform a gap analysis between the IT Security Transformation Programme (ITSTP) and the
recommendations from this review
d, Update the ITSTP to address any gaps from the gap analysis
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11. Work has already commenced on the other 6 overarching actions that have a target date later in the
year to ensure we remain on track to adequately improve the security posture within the agreed
timeframes.
12. _ Internal Audit will have the responsibility to test and sign-off the remediated actions to ensure the
controls have been implemented correctly and are working. This will be an ongoing process as actions
are remediated.
13. An initial analysis was performed on the findings and recommendations in the report and 24% of the
capabilities, where a maturity shortfall was identified, are covered by other areas of the business,
however we will track these capabilities to ensure those areas of the business focus on the
remediation tasks necessary to improve security within their area. The plan is to achieve the PO
target maturity within the next 18 months.
14, The prioritised list of crown jewels will permit Post Office to ensure focus on the correct areas of the
business to assess the critical data to ensure it has the correct security controls in place to
appropriately protect it. This work has already commenced through the Data Governance and GDPR
projects.
What is the progress of the implementation of Archer?
15. The Security Operations Centre (SOC) Analysts continue to use the platform for managing security
incidents that are raised from the Post Office Security Information and Event Management (SIEM)
tool.
16. Discussions and workshops have been held between the Risk function, IT Security and RSA Archer.
An agreement has been reached that Archer will be rolled out for Governance, Risk and Compliance
(GRC) and all the commercials have been signed-off. We will commence the implementation of the
third party assurance, security controls assurance and top-down risk modules in May 2019.
17. The implementation of RSA Archer will be performed by an RSA business partner who are subject
matter experts in the implementation and configuration of the tool. There will be two tracks of work
that will be executed in parallel:
a. The first track will implement and configure the Top-Down Risk module which will be used
by the Risk function to document risks and controls throughout Post Office
b. The second will implement Third-Party Risk and IT Controls Assurance allowing the IT
Security function to appropriately govern our third party suppliers, documenting their risks
and ensuring adherence to Post Office policies and standards. All third party suppliers’
contracts existing and new will include (where they do not already) that they must comply
with Post Office policies and standards including remediation and audit rights if they fail to
comply with the Security standards
What further remedial activities have we carried out as a result
of the security incidents at the start of the year?
18. Building upon the Security Operations Centre (SOC) we have created the CSIRT (Cyber Security
incident Response Team) Plan ensuring Post Office is prepared to react and manage Cyber Security
incidents in an effective and efficient manner. This will be tested regularly both internally and with
suppliers to ensure all areas responsible for Security at Post Office are fully prepared to respond to
incidents.
19. At the end of December 2018 we were alerted to 50 PO accounts being available, through an Iranian
state exploit of multiple companies, by the National Cyber Security Centre (NCSC). All 50 accounts
had weak passwords and as users continue to be our greatest threat we have now implemented the
Microsoft Password Strength tool which checks the strength of a users’ password and blocks them
from changing it to a weak one.
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20. NCSC have completed investigations on the Post Office cyber-attack in December and did not find
any evidence to indicate any further breaches and are satisfied with the remedial actions that Post
Office have implemented to prevent similar attacks in the future. The NCSC have also agreed to Post
Office’s revised legal consent letter with regards to future data exchanges which will permit a quicker
engagement and support from the NCSC if necessary.
21. We have implemented the services of Recorded Futures as a Threat Intelligence platform that has
replaced Digital Shadows. Recorded Futures use machine learning and natural language processing
to enable it to perform automated collection and processing of data at massive scale enabling them
to provide alerts in matter of minutes rather than days. They also provide real-time contextualized
intelligence highlights on our third parties alerting when they have vulnerabilities or actively under
attack which in turn could affect Post Office.
What vulnerabilities were discovered during the penetration
testing of the Payzone environment and what is the plan to
mitigate them?
22. IRM were contracted to perform a penetration test of the Payzone environment to identify security
vulnerabilities that could pose a risk to the business and included the following areas:
Internal infrastructure
External infrastructure
Branch devices
Android tablets and applications
Network device configuration
Build reviews
moans
23. During the above testing a number of high priority issues came to light concerning patching of
servers, use of unsupported operating systems, and weak security controls around tablets and
applications. In response to this a security upgrade plan has been formulated in conjunction with
Payzone and IRM. Whilst these remediation efforts continue on plan to complete by October,
enhanced transactional and financial monitoring has been put in place by Payzone to mitigate the
risks associated with these vulnerabilities in the interim.
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Risk, Compliance and Audit Report
Author: Jenny Ellwood, Jonathan Hill, Johan Appel Sponsor: Jane Macleod Meeting date: 29 May 2019
Executive Summary
Context
This paper provides an update on the key and emerging risks and issues the Post
Office is managing and an update on the latest Audit position.
Questions this paper addresses
. What are the key risks facing the business and what is being done to address
these?
. What are the emerging risks we face in both the short and medium term and
what are we doing to address these?
° What are key compliance issues and what is the business doing to address
these?
. What is the forward-looking regulatory agenda?
What progress has been made with the internal audit plan and what key
messages have been reported?
Conclusion
° Within this paper there are two ‘red’ principal risk categories within the
heatmap relating to three key risks namely PCI, Information Security and
the GLO (see appendix 1). In terms of Brexit, the risk of a ‘No Deal’ has been
receded to 31 October and confidence has increased in terms of how we
would manage a ‘No Deal’ scenario. That said, the extension and the
problems faced in agreeing a deal does increase the possibility of a General
Election and a change in Government.
° Within ARC reporting there are separate papers on the following key risks:
PCI, and Cyber Security. Additionally within the Board reports the
postponement of Belfast Exit is covered and an update item on the GLO.
° In terms of emerging/future risks the paper notes the challenge of people
risks following recent and planned structural and organisational design
changes. Additionally, we are maintaining a watching brief on the Loyalty
Super Complaint. Whilst the outcome is still awaited, Ofcom have unveiled
new rules requiring broadband, phone and TV firms to inform customers of
their best deals.
° Funding has been approved for Archer (GRC Tool). A project team has been
stood up and we are now drafting a roadmap and plan for implementation. A
full update will be given in July.
° Within the Compliance dashboard (appendix 2) there are no ‘red’ areas
identified this reporting period. We have the received the Ofcom Text relay
investigation request and we are preparing our response. HMRC has
confirmed that branch registration will increase from £130 to £300 per
annum which is expected to have a significant impact on our annual renewal
fees on 1% June.
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A further 7 internal audits reports have been issued, with no adverse
(red/amber) ratings. The last 7 reports are in final stages of being cleared
with management. No audit actions are currently overdue.
The Cyber Security maturity assessment has concluded that Post Office has
made significant progress over the last 12 months in developing its IT and
information security capabilities. Actions are already underway to address
gaps in 76% of the capabilities, where a maturity shortfall was identified.
Input Sought
There are no decisions required at this time. The Committee is requested to note
this paper.
The Report
What are the key risks facing the business and what is being done to
address these?
1.
There are two areas reported ‘red’ on the heatmap status: Legal and
Regulatory and Strategic (see appendix 1). A principal risk on third parties
is now incorporated and has been populated for each Business Area.
PCI remains a ‘red’ risk and a separate paper provides the latest position.
We will continue to report until we gain confidence in solution and timeline.
IT Security’s 19/20 Security Improvement Plan is progressing. A separate
paper provides further detail.
In relation to Payzone a risk relating to general security controls is being
managed following the results of a planned Penetration test of their devices
and front-end Network. It flagged that the device used to make bill payments
was insecure and could be manipulated by testers. The risk relates to all
devices, however they would have to be individually compromised and this
significantly reduces the risk of a single coordinated attack across Payzone’s
payment network.
A comprehensive remediation plan is in flight to address the vulnerabilities
in order of their criticality. It is likely these actions will continue until October
2019. Work is also underway to assign a Risk Business Partner from the
Central Risk team to support Payzone to implement risk management
practices aligned to the Post Office Framework.
Under Legal and Regulatory elements of the heatmap, the Banking Director
has reported there has been heightened interest from the banks regarding
cash withdrawal card transactions. Point of sale card transactions carry a
merchant charge whilst cash withdrawal card transactions do not. The latter
also creates an increase in remuneration for the Postmaster. Given this there
is a risk the transactions may not be processed correctly by the Postmaster.
Work is underway to assess the volume of potential transactions processed
incorrectly and further communications and training are in development.
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10.
11.
12.
In terms of Litigation risk, a range of workstreams are being mobilised as
part of an Operations Transformation Programme. The programme is
organised into 4 value streams to reflect the end to end lifecycle of an agent.
A full business case is expected to be ready by the end of June.
The second High Court trial relating to Horizon is due to resume on 4 June
and conclude week commencing 1 July. We have asked Deloitte, who have
a team with relevant experience in crisis preparedness and response work,
to assist us prepare for a potentially adverse judgment on Horizon issues.
In the January 2019 ARC, the Central Risk team was asked to consider the
severity of AML and whether this would lend itself to be listed separately from
Financial Crime as a principal risk on the heatmap. There has been
significant improvements to the control environment for AML which is now
rated ‘amber.’ These improvements include stronger mandatory Compliance
training and monitoring and profiling of ‘bureau de change’ data. Given this
we recommend not to separately categorise AML at this time.
In terms of Change, the overall status of the portfolio is unchanged at
‘amber’. By P12, actual realised benefits for 2018/19 were £37.5m (6.7%
below baselined plan). The overall portfolio continues to be prioritised to
ensure benefits over the next 3 years are secured. By P12 actual 2018/19
investment was ‘amber’. Although the end year position was in line with the
revised 9+3 forecast it actually exceeded the original 2018/19 budget.
Portfolio prioritisation for 2019/20 has been revisited to ensure there is
appropriate focus on GLO outcomes along with recommendations from the
McKinsey work on a new target operating model.
There is a risk that some branches may fail the Fit & Proper (F&P) test or fail
to respond to the required registration requests. Resulting in us switching off
Forex capability, which may adversely impact POL and FRES revenue. This
risk is currently scored at 5:3. Work is underway to reduce this risk by
tackling those agents that process the most FC business and to improve
communications and escalation processes. The outstanding returns volumes
will be provided at the meeting.
A summary of the current key ‘Platinum and Gold’ change programmes and
their current reporting status is provided at Appendix 3. 7 projects are
reporting ‘red’ RAG status. Key ones are:
. Back Office Transformation (All RAG statuses ‘red’): An update is
provided in the Board CEO report.
. Data Analytics (Benefits and Risk ‘red’ RAG): Programme funding
significantly reduced in prioritisation. Programme is now being changed
with data governance and MI moving into BAU and work is underway.
with POI to deliver a POL-wide ‘Data Lake’ architecture. This is to be
scoped within 6/2019 which will improve the RAG rating.
. PCI Compliance (Benefits, Delivery, and Risk ‘red’ RAG): A separate
paper provides an update on this programme.
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What are the emerging risks we face in both the short and medium term and what
are we doing to address these?
13.
14.
15.
There have been significant people changes in critical roles and further
organisational design changes are planned. A paper on succession planning
is being presented to the Board in May to consider capacity required from
GE-1 to step into such roles, We will further consider whether there are any
wider risks from the changes, particularly from a governance perspective.
In terms of the political landscape, Brexit continues to create uncertainty and
the possibility of a General Election is still being discussed. The
Communication Workers Union and Democracy Collaborative presented a
report to the Labour Party around developing a new public Banking
Ecosystem’. This report has been reviewed to identify the risks this may
create to Post Office and its strategy. Those which would most significantly
impact our strategy and operating model include:
° creation of Post Bank to provide a full range of retail banking services
through the Branch Network (PO products would be transferred to Post
Bank); and
° Post Bank would be separate legal entity that will pay an annual access
payment to Post Office for use of assets.
In April, Treasury launched a consultation outlining how ministers will
introduce a £95k redundancy cap on pay outs for public sector workers. Post
Office are taking part in the consultation and are lobbying to be excluded
from these arrangements.
What are key compliance issues and what is the business doing to address these?
Telecoms Compliance Text Relay
16.
17.
Ofcom has now issued a formal information request notice to support its
investigation into the text relay issue and we are working with Fujitsu to
ensure we meet Ofcom's requirements. Ofcom has recognised the actions
we have already taken to fix the text relay calls issue, our commitment to
reimbursing impacted customers and that we have self-reported, which is
anticipated to help reduce any penalty the regulator may seek to impose.
Further reductions may be offered through a possible early settlement
agreement. We have made a £200k provision based on Legal advice and
comparison with penalties Ofcom has imposed on other firms.
We will be compensating customers. Fujitsu is producing the data extract to
enable us to identify impacted customers.
Telecoms Complaints
18.
19.
The customer complaints data for Q3 18/19 was published by Ofcom in mid-
April and shows that Post Office continues to be under the industry average
for both landline and broadband.
Ofcom has published its Comparing Service Quality Report, which shows that
Post Office has one of the shortest call waiting times in the industry.
However, it has also reported that Post Office landline customers are most
likely to have reasons to complain but this is based on data from December
2017 and does not reflect the improvements made: Between Q4 2017 and
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Q4 2018, we have seen our Ofcom complaints for our Landline service drop
by 62%, bringing us below the industry average.
Data Protection
20. At the end of 2018 we were alerted by the National Cyber Security Centre
(NCSC) to 50 Post Office accounts being available through an Iranian state
exploit of multiple companies. On notification all 50 accounts were all locked
down. They had very weak passwords, which we have now strengthened.
The NCSC has advised it is satisfied that there was no evidence of a further
hack and is satisfied with our protection measures against a repeat event.
21. In February Verizon Cyber Risk Program advised Post Office that a collection
of 29 billion stolen users’ credentials (usernames and passwords) had been
published in the Dark Web in January. 40 appeared to be from Post Office.
Sky News reported this, highlighting that Post Office (and other companies)
were affected. However, there has been no noticeable increase in requests
as a result.
Information Protection Assurance Compliance
22. We are preparing for our next IS027001 audit due in June, to be conducted
by Lloyds Register. We do not anticipate any issues will be raised at this
audit.*
Compliance with Money Laundering Regulations
23. Between 25" February and 23 April 2019, 68 new Bureau de Change non-
conformance cases were identified. During the same period 81 open cases
were resolved, of which 24 related to customers who had purchased in excess
of €15k in 90 days, which breached the regulatory limit and mitigating
actions have been taken.
24. At the beginning of April, the Data Centre of Excellence provided resource to
resolve the outstanding issues with the Bureau de Change transaction
monitoring system and to develop the additional reports agreed with HMRC.
Good progress has already been made with some minor issues rectified and
some of the new reports built and tested.
Anti-Bribery and Corruption (“ABC”)
25. ABC training completion is at 98%. Monitoring continues around the reporting
of Gifts and Hospitality and errors and non-conformance are still being
identified. A further communication has been issued about not accepting
cash. The Financial Crime team will commence monitoring the Selenity
expenses report in Q1 to help identify any further potential discrepancies.
1 The 1S027001: 2013 is an international standard for Information Security enabling Post
Office to demonstrate ongoing commitment to information and cyber security. It is an
operational requirement to be certified the UKVI service.
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Whistleblowing
26.
No material issues to report. Analysis of February’s Whistleblowing survey
has been undertaken and we are now working with HR and a newly formed
Ethic’s Code of Business Task Force on how to promote the key messages
and improve the service.
Fit and Proper (F&P
27.
28.
29.
30.
31.
32.
MI on our data gathering progress is being collected weekly and shared
regularly with HMRC. As a result, HMRC has agreed to an extension to
September 2019 should we need it. However we are still working to achieve
the June target.
The Commercial Partners have continued to assist in obtaining complete
returns. For returns for Non-Commercial Partner, a Chesterfield team (13
FTE) has cleared a backlog of c.1000 responses and are focusing on outbound
phone contact with Agents who have submitted partial responses, or raised
queries. Network Area Managers are also providing support.
Reminders have been sent to non-responders, although those now constitute
a small proportion of the at-risk income, compared to the partial responses.
Efforts remain prioritised on those Agents with the highest at-risk income.
Alongside the data gathering, a bulk revoke and reinstate solution for
branches is in development. The technical solution will be supported by
governance and processes will be in place to decide whether services will be
revoked and how changes will be communicated (i.e. data supply to the
correct stakeholders, communications to affected Agents and briefing to and
preparation for impacted POL business areas - e.g. NSBC).
Even though progress with returns may support deferring the deadline for
revoking branches’ Travel Money capability, the project team is working to
prepare the revoke and reinstate functionality and the supporting process
model so that it is ready ahead of the June HMRC report production cycle.
We wrote to HMRC in March setting out our legal view in relation to the F&P
requirements for Officers in Charge/Agent Branch Managers (a requirement
that would have given rise to significant additional cost). HMRC has now
replied, accepting our view but has reserved the right to review the position
regarding staff undertaking branch management roles as part of any future
compliance activity and may require us, in specific instances, to submit their
details as part of the agent list.
Financial Crime Regulation
33.
We have received confirmation from HMRC on 4 April that branch registration
fees are increasing from £300 per annum from 1 May 19 (150% increase).
The payment for this year increases to £3,194,700 from £1.4m in 18/19.
Corporate Affairs has already reached out to BEIS and ongoing discussions
continue internally between the Legal and the Travel Money teams to
consider whether we have a right to appeal and next steps.
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34. HMT has published the consultation paper on the transposition of SMLD into
UK law. We have until 10 June to respond and are engaging with product
teams including Travel Money, Moneygram, Insurance, e-Money, Giftcards
and eKYC for Identity.
Financial Crime External Threats
35. A meeting was held with Santander’s MLRO to discuss the ongoing concerns
with the continuing high levels of Financial Crime investigations
predominately relating to business cash deposits. Santander advised that
they are currently testing whether they can restrict the daily amount their
customers can deposit over Post Office counter which should reduce the risk
to POL.
Financial Crime Internal Threats
36. Financial Crime risk assessments and re-assessments have been completed
for 30 products and services. No major internal threats have been identified,
and the outcomes have been shared with the Central Risk team to ensure
that any risks are identified and reflected in functional RACMs. The Partner
Banking Framework Services reassessment is expected to be completed by
the end of May.
Supply Chain Compliance
37. 4 audits were completed in the three months to April. 14 Improvement Needs
were identified, with a combined audit score of 28, averaging 3.5
Improvement Needs and an audit score of 7, which is fractionally higher than
the rolling average for all Supply Chain sites keeping them in the Satisfactory
category for both measures. No significant or recurring issues.
Notification of Approved Person for Financial Services
38. Following his appointment as Interim Chief Executive; Al Cameron has
agreed to be the FCA Approved Person in respect of the Appointed
Representative Function (CF3 Chief Executive AR) for Bol and POMS. A
briefing in respect of the duties and responsibilities of an Approved Person
was provided by the Compliance team. The requisite notifications for
approval will be made to the FCA via our two Principals who will also meet Al
Cameron for separate briefing(s).
Credit Cards
39. We continue to work with our legal advisors, product teams and the new
potential Principal on an Appointed Representative Agreement (ARA) with
Cap One. This will also entail changes to the existing ARAs with Bol and
POMS. As well as a new Multi Principal Agreement (MPA) between all the
Principals. The MPA is to ensure that boundaries of regulatory responsibility
are clear between Principals and are largely dividing responsibility along
product lines.
40. Any new Principal agreement needs to be consistent with the approach taken
with our existing regulatory Principals to ensure consistency of application
and purpose. Following the agreement on the ARA we will need to put in
place a Regulatory Guidance Manual with Cap One that outlines the key
responsibilities PO has to put in place to maintain compliance.
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Current Account withdrawal
41. The PO Money current account was withdrawn from sale in March and the
existing 21,500 customers have been written to confirming that Bol is closing
their account with closure aimed at 11th September 2019.
42. The communications plans for the withdrawal of sale of current accounts were
agreed by the Compliance team. All 39 branches offering current accounts
received a personal visit from a senior manager to explain the change and
Horizon screens were updated to effect the withdrawal. So far we are
unaware of any spikes in complaints related to this closure but it is early
days.
Conduct Risk Mystery Shopping
43. Both video mystery shopping for Customer Relationship Managers and
Counter mystery shops (non-video) are trending within appetite.
Network management changes
44. We are working with the Network and Network Operations teams on the
changes they are making to their branch management approach, including
CRMs. The aim being to maintain appropriate oversight and conduct
management but reduce the burden on the network teams.
Vulnerable Customers
45. Aseries of ‘One’ communications have been being issued to raise awareness
and flag sources of external support. The PO graduates are working on a
branch check list initiative working with the Alzheimer’s Society to help
provide guidance to make Post Offices more dementia friendly. This was
presented together with the Alzheimer’s Society at the NFSP conference.
46. An external accessibility expert Kate Nash Associates is currently reviewing
the PO Vulnerable Customer Policy for completeness. We hope this work will
extend to gain an independent view on Post Office’s vulnerability approach
and how we can improve.
47. The new Vulnerable Customer e-learning Module and test was launched on
20° May. This will include communications and Team Talks for those that do
not have access to Success Factors. The Alzheimer’s Society has praised the
work done “as a great example of Dementia Friends within an e-learning
module”.
Citizens’ Advice (CA) Super Complaint to Competition and Markets Authority
(CMA) relating to the ‘loyalty penalty’
48. CA raised concerns in November 2018 about long term customers paying
more for goods and services, which it refers to as ‘the loyalty penalty’. CA
had identified five key markets where it has concerns about the loyalty
penalty: broadband, mortgages, cash savings, insurance, and mobile. The
CMA has strongly supported the CA complaint and is pursuing actions via the
different regulators.
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Telecoms/Broadband
49.
50.
51.
Ofcom had already planned to introduce end of contract notifications and
annual best tariff reminders for customers who are out of contract. At the
same time of the CMA announcement in December, Ofcom also announced
that it is reviewing the pricing differential. Ofcom has expressed concerns
about vulnerable customers who are out of contract and being charged high
prices, with a particular focus on over 65s. We met with Ofcom in February
as part of our on-going relationship and expressed concerns. Ofcom agreed
that it shouldn’t use such a broad brush to define vulnerability.
The Telecoms team has reviewed its pricing strategy and analysed
competitors’ responses. The current decision is to maintain the current
approach until the direction of travel from Ofcom becomes clearer.
On 15 May Ofcom “invited” all telecoms companies to sign up to a voluntary
commitment to a charter of 6 principles of “fairness” to customers, ahead of
a launch event on 3 June. The Telecoms and Compliance teams are
reviewing our current position and what small changes may be needed to be
fully compliant. We have also been made aware through an industry
association we are members of (UCKTA) that the Vulnerable Customer
commitments, which Ofcom has not yet published, may be
challenging/inappropriate. As a result, we attended an Ofcom workshop on
17% May to understand what these are so that we can fully assess before we
commit.
Mortgages, Cash Savings & General Insurance
52.
There has been one development in this area since the last report: The FCA
has issued new proposed rules to be in force by the end of 2019 on the
“mortgage prisoners” challenge (customers that are up to date with their
mortgage payments but cannot re-mortgage because they would fail FCA
rules on eligibility). We will work with Bol to assess approach/impact of new
eligibility rules and any new opportunities these may present.
What is the forward-looking regulatory agenda?
53.
See appendix 4.
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Internal Audit
What progress has been made with the internal audit plan and what key messages
have been reported?
Progress against plan (2018/19):
54.
55.
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We have made good progress clearing the backlog of audits, following the
delays experienced in 2018. We will deliver 24 of the 26 reviews on plan. The
remaining two reviews are change assurance reviews, which were delayed
due to the change portfolio being reprioritised. These two programmes have
been included in the 2019/20 change assuran
ce plan.
Seven reviews have been finalised since the March ARC, with summaries
included after paragraph 64. Current delivery progress is as follows:
2018/19 Combined Plan Status -Total Audits = 26 (?
= Compieted
Reporting
» Postponed
(DARC approved baseline plan for 2018/19 (16 core internal audit reviews & 10 change assurance reviews). A
full summary of the 2018/19 audit plan status is included in the reading room.
56. The following seven reviews from the 2018/19 plan are still being finalised:
Review Status
1__I Contract Management (IT) Final draft with GE for comment
2__I IT Control Framework Final draft with GE for comment
3__I Payroll Final report being cleared by RCC
4_I Payzone Integration (Panther) Final report being cleared by RCC
5__I Change Excellence (Follow-up) Final report being cleared by RCC
6_I P2C Belfast Exit Final report being cleared by RCC
7_I FS Training & Competence Draft report
Progress against plan (2019/20):
57. The following reviews are being planned for Q1. A full summary of the
2019/20 audit plan status is included in the reading room):
Review Status Timing
1__I Pensions Process (Follow-up) Fieldwork 07/05 - 24/05
2 Procure to Pay Planning 03/06 - 28/06
3 I Telco Billing Process Planning 10/06 - 28/06
4 Payment Technology Upgrade (PCI Compliance) Planning Tbe (scope being
(Change Assurance) re-defined)
5 _I Digitising Mails (Change Assurance) Planning 17/06 - 05/07
6 I POI - Change Capacity Planning 17/06 - 05/07
7__I POI - AR Oversight (Operating Effectiveness) Planning 17/06 - 05/07
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Changes to plan since March ARC meeting:
58. 2018/19 Plan: As advised at the March ARC meeting, two change assurance
reviews have been delayed to 2019/20 due to the reprioritisation of the
change portfolio (Digitising Mails & Payment Technology Upgrade (PCI)).
Both are being planned for delivery in Q1.
59. 2019/20 Plan: There were no changes made to the 2019/20 audit plan,
which was approved at the March ARC meeting (see reading room).
POI Audit Plan
60. POL Internal Audit is also responsible for delivery of the audit plan for Post
Office Insurance (POI) with all audits being reported at the POI ARC.
Progress with the 2018/19 audit plan is as follows:
Audit title Status and Rating
Insurance Distribution Directive (IDD) Complete - Needs Improvement
Oversight of Appointed Representatives Phase 1: Complete - Needs Improvement
Phase 2: Moved to Q1 2019/20
Product Lifecycle Draft report
Nemesis (Programme assurance review) Complete — Not rated
MI Key Interfaces In progress
Status of Audit Actions:
61. Audit actions are generally being completed on time. As at 22 May 2019
there were 21 open actions, none of which were overdue.
Audit Action Status:
Open (not yet due) 21
Overdue (<60 days) 0
Overdue (>60 days) ie}
Total 21
Reporting on Control Themes:
62. Given the high number of reports that are still being finalised, it is not yet
possible to produce a meaningful mapping of audit findings against internal
control themes. We will endeavour to report this information at the ARC
meeting in July to provide coverage of the full annual cycle, with comparative
results for the previous year.
Internal audit reviews completed
63. Since the March ARC meeting we have finalised the following seven
reviews:
Network Reporting
Financial Controls Framework
Cyber Security Maturity Assessment
Agent Remuneration
Client Settlements Process
Branch Hub / Agents Portal (Change Programme)
Digital Identity (Change Programme)
Our findings and observations from these reviews are summarised below,
with the full reports included in the reading room:
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Network Reporting (Ref. 2018/19-23)
Needs
\ Improvement
Sponsor:
Debbie Smith
Audit actions:
0
3
1
Total 4
with £50m expected for 2018/19. Under the Funding Agreement, Post
Office reports annually to the Secretary of State that it fulfilled its
obligations around network numbers and delivery of services of
general economic interest (SGEI).
Internal Audit was asked by the Board to provide assurance over the
process by which it produces its annual report to the Secretary of
State. We reviewed the controls in place to ensure accuracy of the
2019 report as well as the proposed methodology change (to take
effect from April 2019).
The audit concluded that the process to calculate the reported
numbers and the report itself are established and the audit did not
identify any errors. The new methodology has been run in parallel
with the current and management are satisfied that the intended
improvements will be realised from April 2019.
We have rated this report Needs Improvement as there are some
process and control weaknesses that, if not addressed, may result in
inaccurate reporting in future. These include deficiencies in the
completeness of process documentation and audit trail retention,
which management have agreed to remediate.
Management Comment provided by Tom Moran
“Management are both in agreement with, and supportive of, the findings of the audit. During a
time of change your recommendations to develop more robust documentation of the process is an
important step and will be completed as a matter of urgency over the coming weeks. Overall, the
process has been very helpful in identifying areas of improvement.”
Financial Controls Framework (Ref. 2018/19-21)
Needs
Improvement
Sponsor:
Al Cameron
Audit actions:
0
6
1
7
Total
This audit covered 12 of the 17 financial processes in the Financial
Controls Framework, with the remaining 5 processes being covered
through separate deep dive reviews. The audit also assessed the
effectiveness of the control self-assessment process through the
TrAction system.
We concluded that the controls within the framework continued to
operate effectively for the most part. However, limitations with the
TrAction system had impacted the effectiveness of some controls. In
addition, preparation for the Back Office Transformation (BOT)
programme impacted resource availability, which in turn, temporarily
reduced the effectiveness of the 2nd line oversight and resulted in a
lower controls maturity compared to previous years (71.8% controls
were effective, vs. 78.8% the previous year).
Strictly Confidential
Management Comment provided by Michael Passmore
“The report is fair and representative of the system limitation issues experienced, which was
highlighted at the time the system was chosen. The system limitations have caused significant
manual workarounds to ensure accurate monitoring and reporting, and we are now investigating
alternative solutions. Until such time we will focus on the issues we can address, increase manual
workarounds and continue the education process to the business.”
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Cyber Security Maturity Assessment (Ref. 2018/19-22)
nnn In December 2018, the POL Board commissioned Deloitte to assess the
maturity of Post Office's Cyber Security capabilities.
Not Rated The review was carried out in two phases. Phase one enabled rapid
reporting of provisional maturity scores to the ARC in January 2019.
Phase two involved an in-depth validation of maturity, the development
of detailed recommendations for each area and allowed POL to select
maturity targets through discussions with Deloitte. The review covered
34 cyber capabilities across 4 top level domains:
« Governance - how the organisation is set up to address cyber
security.
aie nen taal «Secure - what proactive protection is in place to defend against
cyber threats.
« Vigilant - how the organisation detects malicious, unknown or
. unauthorised activity.
26 : « Resilient - whether the organisation can respond quickly and
. appropriately when a risk materialises.
Deloitte leveraged their Cyber Security Framework (CSF) and
supporting tool to provide an objective and repeatable assessment of
cyber maturity.
Deloitte concluded that Post Office has made significant progress over
the last 12 months in developing its IT and information security
capabilities. Increases in maturity scores between phases one and two
of this review confirmed progress made in the first 3 months of 2019.
Nevertheless, a total of 224 recommendations were identified across 34
cyber domains - these are currently being analysed to identify any
1 # FS sector maturity gaps that are not yet addressed by the IT Security
Transformation Programme (ITSTP). It is encouraging that actions to
address 76% of the capabilities, where a maturity shortfall was
Audit actions: identified, are already in progress or included within the ITSTP.
10 We note that the top three areas of concern are actively being
addressed by the ITSTP. These are:
«Phishing (clicking on malicious links and installing unauthorised
software)
Total 10 * Password management (use of weak passwords)
« Third party suppliers (implementing security and responding to
incidents effectively)
Implementation of the 10 overarching actions, combined with a focus
on addressing high priority actions as part of the ITSTP, will allow POL
to make significant progress in reaching its target maturity levels.
Follow-up maturity assessments will enable the business to track
progress against targets and to address changes in the cyber security
landscape.
Management Comment provided by Mick Mitchell
“We accept the findings of this assessment. We also welcome the benchmarking and targets that
have been set to judge IT Security maturity going forwards. This assessment gives a repeatable
process and a clear and measurable focus for the future. It is also reassuring that the ITSTP already
has a large section of the actions needed included. However, we will review this report and ensure
we take further actions to progress towards the targets set.”
Sponsor:
Rob Houghton
AVERAGE Si
w Retail
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Agent Remuneration (Ref. 2018/19-19)
Needs
Improvement
Sponsor:
Debbie Smith
Audit actions:
Total
The objective of this internal audit was to assess the design and
operating effectiveness of controls in place over payments made to Post
Office agents. Post Office has spent £365m on agent remuneration
2018/19. Agent remuneration data was migrated from the SAP syste:
to the Core Finance System (CFS) in February 2018 as part of the Back
Office Transformation Programme. Agent details are maintained in and
agent remuneration payments made through CFS. Agent remuneration
is calculated monthly, based on rates stated in agent contracts.
Controls over the payment of agent remuneration were found to be well
established and generally effective, although some control weaknesses
were identified and areas for improvement have been highlighte
Specifically the audit identified that:
« Balance sheet reconciliations had not been completed for October
2018 during a time of significant changes to the relevant teams
and limitations in TrAction to transfer this control to the new
owner (TrAction issues reported below in FCF audit). The control
has since been reinstated.
« Requests to change agents’ bank account details were not always
independently validated as the control was not designed
effectively.
« Inputs to the agent remuneration process come from several
teams in different locations and there are opportunities to
improve the collaboration between them.
« There is an opportunity to systemise the majority of the
underlying agent records (joiners, movers and leavers
documentation) as considerable reliance is currently placed upon
paper based records to provide a full audit trail.
in
m
cd.
Management Comment provided by Tom Moran
actions.”
“I am grateful to the IA team for conducting this audit and delighted to see such a positive
assessment of Agent Remuneration, which is a direct reflection of the hard work of those
responsible. I agree with and support the prompt implementation of the activities identified in the
Client Settlements (Ref. 2018/19-20)
Sponsor: Al Cameron
Audit actions:
3
1
4
Total
The Client Settlements process has changed significantly as a result
of the Back Office Transformation Programme. The Client
Settlements team currently services 220 clients, with payments to
them totaling an average of £460m per week.
We conclude that the implementation of BOT Systems went well and
the controls over Client Settlements, both before and after BOT, were
found to be well established and generally effective with particular
emphasis on strong user access controls and segregation of duties.
Although some areas for improvement have been highlighted, we
have found the control environment to be acceptable and therefore
we have rated this report ‘Satisfactory’.
Management Comment provided by Michael Passmore
“I am pleased to see that we continue to maintain a strong controls environment and we will, of
course, look to act on the recommended changes identified.”
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Branch Hub (Change Assurance) (Ref. 2018/19-15)
Branch Hub aims to deliver a new digital channel enabling Agents 24/7
Needs I I access to fundamental services. The programme aimed to deliver a
I I Minimum Viable Product (MVP) to a subset of agents in October 2018,
Improvement however, it experienced delays, re-prioritised deliverables and released
Sponsor: a limited ‘Alpha’ pilot in Nov. 2018. The key contributor of the delay was
Rob Houghton & the late agreement of the underlying solution architecture, impacted by
. . the delayed agreement of Post Office’s wider cloud strategy with Fujitsu.
Debbie Smith This change assurance review, adapted its focus and timeline to
. . accommodate the re-plan, focused on programme _ initiation,
Audit actions: requirements assessment, plan delivery of MVP and Alpha pilot.
While we observed significant progress improving on the learning of
previous digital deliveries, with an overall adequate governance and
programme management, our review still highlighted weaknesses in
programme benefit assessment, risk management, requirement
capture and documentation, clarity over roles and responsibilities and
lack of resources in the PM/PMO space. The scoped also needed to be
reassessed and committed to.
We have rated this report ‘Needs Improvement’ emphasising the
ambition to drive immediate improvements as observed following the
review. At January 2019 IC additional funding approval, a clearer
roadmap of planned features and Agent adoption targets was submitted
and the plan to address key noted deficiencies is well underway.
We have also been working closely with SPO as the mitigation of issues
would benefit from central guidance and procedures. Therefore some
actions were elevated to portfolio level and are now part of the
deliverables under Change Excellence.
Management Comment provided by Andy Garner (Product Manager for Branch Hub)
“Branch Hub Digital Delivery team agree good progress is being made in embedding agile delivery
methodology. It is recognised that the low level of Fujitsu agile maturity has held up our
mobilisation of features however this and delivery performance is improving. It is accepted that
the controls and processes need to be tighter around e.g. benefits management and risk
management.”
Management Comment provided by Kevin McKay (Delivery Performance Manager, SPO)
“SPO recognise the need to drive improvements in agile adoption and use, and to provide tools
and standard approaches to facilitate this. Whilst one action was already in progress and will be
completed shortly, the other has been added to the backlog for PI4 which runs from April to June
2019.”
Total 10
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Digital Identity - Change Assurance Review (Ref. 2018/19-25)
Digital Identity is set to deliver a core digital identity platform allowing
'} I customers to set-up and maintain re-useable digital identities and query
Needs I identity-related information via APIs, enabling a GOV.UK Verify market
Improvement share increase; solutions for passport and employment vetting; and
Borsa further developments of the digital business beyond 2019/20.
. The review assessed at an early stage of the programme, the
Martin Edwards effectiveness of the controls, focusing on initiation, requirements
assessment and planned delivery of the core identity platform.
. We noted the programme was broadly being set up for success and we
Audit actions: have observed multiple instances of good practice, however, we
0 highlight that the programme was operating at risk as at the time of
fieldwork it had not executed agreements with its key delivery partner
Digidentity (Digi) (contract signed on the 29 April 2019). Furthermore,
there is a risk the cost estimates of integrating the new HR Vetting and
Passport Renewals service offerings with the wider Post Office’s systems
being underestimated as they were based on a high level solution
designs.
Also, although piloting elements of Post Office’s revised Change
methodology and following Agile delivery methods, it must factor into
its ambitious delivery timescales, the limitations of solution providers
and the wider Post Office in not completely adhering to Agile and not
been able to operate at the same pace. Furthermore, it is currently
relying heavily on contractors and needs to better plan for knowledge
transfer and retention.
Management Comment provided by Martin Edwards
“I welcome the conclusions of this Change Assurance Report, which as expected from an early stage
review have highlighted both instances of good practice and some specific issues which need to be
addressed. On the latter I can confirm that actions have either already been completed (such as
signing the development contract with Digidentity) or are now underway (such as regularly reviewing
resources, benefits projections and key indicators). The early stages of the programme were
hampered by some specific resourcing challenges for key roles (both the programme manager and
solution architect had to be replaced for differing reasons), but the core team is now in place enabling
us to address the remaining issues highlighted by the report.
More generally, the report highlights the tensions of attempting to run an Agile product
development process when some of our external suppliers and internal approaches are still more
aligned to traditional Waterfall approaches. We will continue to work with SPO to ensure the
broader learnings from this experience are captured.”
wo] HB] 00
Total
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Appendix 1, Risk Heatmap
= ee oe =
vincipal Green status etal wdenuty Finance “Pg ReKand oy Gn, COMM ALL May.°18 Comments
Ainolepees I ea teore
(coo) Sever Has)
eT er Fed ~ Wo high concerns reported in ths area, There is one new ey rk fr Banking
Meio fF Services related to LINK Disaggregation, where LINK will stop supporting settlement by
a : : 1st July 2019. Options are currently being discussed to mitigate this risk
loperational oo oe — Key Amber points ~ The Safety Compliance Top isk mains “Amber as improvements
: © to H&s traning and compliance are ongoing. For Network Operations, work continues
May-"19 Po © n/a on creating a Branch Support Centre in Chesterield to replace the current NBSC
helpdesk model
: Red - Whhist ino Security isnot called out red, Cyber Thveat wil remain a focus area
Mtg oo and forms part of our top risk rosie
: oes Key Amber points The Deloitte Cyber Report has now been published and
remediation activites wil continue throughout the year. The rik profile wil remain
es ‘Amber’ until material changes in the remediation programme have been approved by
Aust.
Red - No business area is currently reporting high concerns inthis area. Retall
continues to old a key rik around the fellure of IT infrastructure in branch, reflecting
Mar'19 a the importance to ensuring branches can continue to trade
/ Key Amber points ~For F582, Identity and POI, the overall isk status has moved to
HTechnology : oe ‘Amber. This is predominately todo with our legacy IT systems e.g, erzon. Alongside
= this the development of the Digital & Identity strategic plans are currently underway.
For, CC have advised thatthe current version of soRware which connect sevice for
branch and admin uses is currently out of dete. Priority to upgrade the critical services
will be discussed a the archtect review whichis scheduled to take place this week
Key Amber points For Fx there one Fey risk over Telco Thd party exposure. We
Mar-'19 are reliant on Fujitsu's guarantee that they are compliant with Regulations and Law. We
are now in contractual negotiations and pan to start a tendering proces. nT,
freind Party currently 3 contracts re out of suppor that could potentisly impact the speed of
resolution fr incidents impacting Finanee Operations (Credence/MOM application BM
suppor, Credence/MOM application Oracle support and SAP Business Object)
Remediation pian are under review
hinformation
May-'19
May-'19
Red The risk score ‘or PC as remained the same. 80% of the dota discovery
complete and is due to end by June 18. POL's current poston is that there are two
linked areas forthe ROC: payments and banking. plan to achieve both PCI
Compliance has been commuricated as November 2020, but work is underway to
. identify amore aggressive timeline. For Banking Services, there is one new ke risk
May-"19 II _ Ma_reated o's non conformance in cash withdrawal card transactions without advising or
I requesting the customer for approval. It help the PM avoid a POS Merchant charge
‘and instead creates a remuneration increase. A technical solution has been requested to
Fujtsu/ATOS to elminate the issue. FS&T Regulation reins a concern for Telco and
Fakorean this has moved the risk profile from Amber to Red. due to key person dependency
SEHK I Nov-20 Key Amber points ~For HR Employment Practices remains ‘Amber ER traning will
Expected Date be piloted atthe end of May and wil roll out in June which should mitigate ths risk
jwabe unk tua isk ene its ithe neat ET
isk over Ofcom pricing diferent review
that remains a concern for Telco. Telco compliance anager met with Ofcom in March
to lobby fom Post OFFce point of view. Now awaiting consukation before commencing
‘urter lobbying. One key risk has been closed in respect of inadequate financial
control for FS. Fr, FY18/19 resus closed at £91.8m, (2.4m off budget). The cost
ee challenges were due to delysin Project Everest Belfst Ex, savings expected through
sp contract negotiations fell short of target and savings from networks migration lower
ue eg than anticipate.
HR EER rlcatons work continues on developing the Retail Proposition to provide greater
31
access to Post Office products and services. The Corporate & Market Developments
31-0ct- 31-0¢t risk remains Red, Projects and negotiations underway with BOL RMG and development
continues with digitisation for PO. Brext - Confidence increasing into how we would
‘manage contingency inthe event of a ‘No Deal’, but political uncertainty remains
‘Key Amber points -For the Digital Competency Risk, work is underway to support the
Digital Workplace Programme (delivered by IT), whereby HR focus on development of
“Talent Acquistion and Development Programmes. Further review is required on the
scope ofthis activity and feedback from a recent review by McKinsey being considered.
In FSC and Identity the impact cassiication has moved to worsening’, due to the
Facent loss of colleagues across various businesses:
Legal a
Regulatory
Financial
Strategic Risk Green
Status
key Amber points - int change portolio prottisation and execution continue the
I __ process of assessing the change agenda and determine T priorities. Change port‘olio
I acking remains ‘Amber primariy because 18/19 secured benefits were 6.7% below
plan and 18/19 investment was above original budget. 7 out of 37 Platinum’ and ‘Gold’
change : ee I _programme/projects reporting Red RAGS These ae Fit Proper, Back Office
I __ Transformation, Data Analytics, Future of POCa, Digital identity, Legal Entity
I Optimisation and PCI Compliance. Top 3 remain Pertfolio performance, change
I__nerores and bushes nership Sgneant ndepender ongoing reve
I programme risks logs ~ demonstrates broad compliance with standards but
be improvement required in specifi areas.
+ Improving 4 Worsening qammp Stable
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Appendix 2: Compliance Heatmap
Current Previous
Sector ‘Agnaseniant I Aseouament Comment/ Action
Ofcom has confirmed it is to investigate the Text Relay issue and we
Telecoms are supporting it with its information requests. We have signalled
that we are open to exploring an early settlement, which was
proposed by the regulator may be offered
The data incidents previously reported have closed with little impact
to Post Office. The DPO has returned to full time work following a
long-term illness
Compliance
Information
Protection &
Assurance
We have received confirmation from HMRC that branch registration
fees are increasing from £130 to £300 per annum with effect from
1st May 19. This will have a significant impact on our annual renewal
fees which are due on ist June. HMRC has agreed our position on
Officers in Charge and is comfortable with an extension up to
beginning September for registering agents for fit and proper
No material issues to report. Analysis of February’s Whistleblowing
survey has been undertaken and we are now working with HR and a
newly formed Ethic’s Code of Business Task Force on how to promote
the key messages and improve the service.
Starting in Qi, the Financial Crime team will monitor the Selenity
expenses report quarterly and compare these against the quarterly
: Gifts & Hospitality report to identify any potential discrepancies
Supply Chain Oe 14 improvement needs from 4 audits in the 3 months to April. No
Compliance r : : — material issues - satisfactory overall
Financial I . _ Within appetite overall, however, we are working with FS on strategic
Services - — ___ product change initiatives for credit card new providers and current
Compliance — account closure. This includes new Appointed Representative
and Conduct I agreement and management of new regulatory Principal.
Risk : —
Vulnerable Alternative format literature provision-we are currently at the final
Customers stage of contract negotiation with an external provider. When
complete this metric should move to green (expected end May)
Whistleblowing I
Anti-Bribery
and Corruption
KEY
WT Material items of concern that require focussed remediation to ensure we stay within our risk appetite ]
‘Some items of concern that could breach appetite if they crystallise or are not managed ]
Es Within overall appetite ]
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Appendix 3: Change Portfolio: Gold & Platinum
programme/projects dashboard?
Process & Contact Centre Cost Reduction
Project Arrow -Data & Analytics Strategic Enabler
Source to Settle Cost Reduction
Safe Haven Exit Cost Reduction
Future of Stock Cost Reduction
Back Office Transformation Cost Reduction
Branch Hub Cost Reduction
‘Agent On boarding End-User experience
‘Common Services
Strategic Enabler
Home Phone & Nuance Cost Avoidance
Success Factors - Phase 2 Strategic Enabler
Blueprint Cost Reduction
Digital Identity Strategic Enabler
PCI Compliance Cost Avoidance
Project Everest Legal & Regulatory
Belfast Exit Cost Reduction
Security Operations Centre Strategic Enabler
Legal Entity Optimisation Strategic Enabler
Fit & Proper Legal & Regulatory
LRG ‘General Data Protection Regulation Legal & Regulatory
Peete Nemesis (Home) Strategic Enabler
Peet Morpheus (Priang / Cvs) Strategic Enabler
POCA Implementation Service Sustaining
Horizon Integration Hub Strategic Enabler
Enhanced User Management Legal & Regulatory
59K Tral Strategic Enabler
Network Development Service Sustaining
Network Transformation Service Sustaining
Future of POCa Revenue Generating
Cheque Imaging Legal & Regulatory
Crown Network Shape Cost Reduction
DMB Strategy Cost Reduction
Malls Mult-Channel Revenue Protection
SSK Simplification End-User Experience
Parcel Shop Revenue-Generating
‘Automated Locals Revenue-Generating
SSK Procurement Cost Avoidance
Summary (P12)
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Appendix 4: Forward Looking Compliance Agenda
Post Office Telecoms Regulatory Calendar
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AUDIT, RISK AND COMPLIANCE COMMITTEE INFORMATION PAPER
Annual Report and Accounts 2018/19
Top Risks, Executive Declaration, and Risk Management Section for ARA
Author: Deana Herley Sponsor: Jenny Ellwood Meeting date: 29 May 2019
Executive Summary
Context
The purpose of this paper to review and agree the draft principal risks in the Annual
Report and Accounts (ARA) 2018/19. Updates have been made following a review of
the Top Risks and Executive Declaration results. The Top Risks is a summary based on
feedback from all GE members and is a consolidated view across the Post Office
business. The Executive Declaration process enables members to consider (and attest
annually) as a part of year-end procedures, if any additional disclosures are required to
the principal risks to be included in our ARA.
Questions addressed in this report
e What is the current profile of our Top Risks in appendix 1?
e What are the outcomes of the Executive Declaration in appendix 2?
e Are the proposed Principal Risks as set out in appendix 4 the correct risks for
inclusion in the ARA?
Conclusion
1. We have performed a robust and systematic review of our risks that we believe
could have a material impact on the results, condition and prospects of Post Office.
The proposed principal risks set out in appendix 4 are those which will appear in
the ARA and have been drafted based on the position of Top Risks (appendix 1)
and are supported by the Executives’ Declaration results (appendix 2). We show
the alignment of items to our priorities.
Input Sought
The Committee is asked to review the information provided in appendices 1-4:
* Agree proposed changes to our Top Risks;
« Note the Executive Declaration outcomes;
¢ Confirm the approach to ARA disclosure as set out in this paper; and
e Consider whether there are any other matters that should be included and
reported against.
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The Report
What is the current profile of our Top Risks in appendix 1?
1.
Since March ARC meeting, marginal changes have been made to the top risk profile
(see appendix 1) which include the following:
e We have 12 top risks. 1 risk has slightly increased relating to Technology and
Business Interruption (Computer Centre automatic failover) has increased in
impact (5-2 from 3-3) as a result of being unable to automatically failover to
the 2° datacentre. Manual failover is possible however, and as there have
been few historic events which have led to a failure so probability reduced but
impact increased. The likelihood of the Group Litigation risk has increased to
a 3 (possible) from a 2 (unlikely), impact remains as a 5 (5-3). All other risks
(10) have no changes to impact and probability scores.
« Top Risks considered as key are disclosed generically in the Risk Note section of
the ARA, as summarised in appendix 4.
What are the outcomes of the Executive Declaration?
2.
The Executive Declaration returns have been reviewed for materiality and
consistency against Internal Audit and wider Business Assurance reviews, resulting
in 17 items being disclosed with 8 items of materiality (29 items disclosed and 14
of materiality last year) being summarised in appendix 2 including:
e 1 item of material significance that will be disclosed as a contingent liability re -
Post Office Group Litigation.
« 7 items are to be disclosed generically in the Risk Note section of the ARA.
e Outputs (7 items) requiring an accounting judgement to determine the need for
any adjustment have been reviewed by the Finance Director.
« 2 items were also considered by the GE owner, but were determined as being not
material or sufficiently addressed by other generic disclosures.
There has been a direct correlation in the number of items reported with the
maturity of our risk reporting processes (Incident Reporting, Exceptions,
Complaints, and Risk Registers, including identification and reporting).
Are the proposed Principal Risks as mapped in appendix 4 the correct risks for inclusion
in the ARA?
The proposed wording around the ‘Management of Risk’ which will be included in
the ARA is set out in appendix 3 and principal risks (appendix 4) proposed for ARA
inclusion and have been drafted based on the position of Top Risks (appendix 1)
and are supported by the Executive Declaration outcomes (appendix 2). The arrows
indicate risk movement.
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Appendix 3: Management of Risk
Our Approach to Risk
The commercially competitive and highly regulated environment, together with operational
complexity, exposes the Post Office to a number of risks. 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. We seek to understand and harness risk in the pursuit of our
objectives and aim to operate within an acceptable level of risk taking. The Post Office has
articulated its risk appetite in relation to the most material risks with a view to better managing
the key strategic risks and assessing the risks in relation to new opportunities.
Risk Management Governance
The Board is accountable for risk management and internal controls in the Post Office, reviewing
their effectiveness and determining the nature and extent of principal risks. The Board has
delegated responsibilities to the ARC, which provides assurance to the Board through review of
reports from management, risk, internal audit external advisers and external audit.
Responsibility for day to day operations rests with the GE. The RCC reviews the effectiveness of
the risk management framework and management of principal risks. The outputs reported as
necessary to the ARC.
Our Risk Management Framework
In order to deliver its objectives, the Post Office is required to identify, assess and manage a
wide range of risks. These are managed through an overarching framework in order to apply
consistency and transparency of risk management across the organisation. The framework
identifies roles and responsibilities of key parties in the risk management process, the policies
for how risks are managed, the tools and processes used and the reporting outputs that are
generated.
The approach to risk management is based on the underlying principle of line management
accountability for effective implementation of internal controls to manage risk. The GE has
identified and manages the principal risks in the organisation, focusing on the aims of the
strategic plan. These risks, with their response plans, are reviewed by the Central Risk team and
at the RCC and the ARC to assure the robustness of risk assessment and management. There is
an ongoing process of identifying, evaluating and managing the principal risks faced by Post
Office.
During the year we have further improved our oversight over the level of risk being taken across
Post Office and effectiveness of our mitigating actions, including close monitoring of emerging
risk themes and incidents. Plans are also in place to fully refresh risk appetite to better inform
decision making. This is a component within our wider enhancement plan to continue maturing
our Risk Management Framework.
Our Control Framework
We have an internal contro! framework in place for both our financial reporting and IT processes,
which fall under our self-assessment regime. In addition, we have implemented a suite of Post
Office policies which define the minimum control standards we expect to be performed within
the applicable business areas. Our risk management efforts are also underpinned by our
Executives’ Declaration.
What has changed since last year?
Our principal risks evolve overtime, as we progress with the North Star strategy and business
plan, new risks emerge and our mitigation activities adapt. Health and Safety has become a new
principal risk this year, reflecting the high importance we place on the safety. Litigation is also
new, due to the change in posture. The level of risk has increased for the Economic and Political
Strictly Cor
tial
Post Office
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POST OFFICE PAGE 4 OF 8
environment, in response to the ongoing political and economic uncertainty. Dependency on
strategic relationships remains a principal risk and is in an improving position. We have invested
considerably in Technology, Business Interruption and Cyber and this principle risk is improving.
Both our Retail Proposition and Regulatory Environment risks are stable. Our Retail Proposition
remains fundamental to enabling us to continue to successfully deliver our social purpose and
the regulatory environment continues to evolve and introducing new ways of doing business.
tial
POST OFFICE
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Appendix 4: 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. Our principal
risks are regularly re-evaluated and discussed at both a Board and GE level.
Principal Risk / Movement
Potential
Consequences
Key Mitigations
STRATEGIC RISKS
Dependency on Strategic
Relationships
Post Office has a number of
strategic relationships which
are key to delivering its growthI
and strategic ambitions. The
number of such relationships isI
increasing.
We work with our partners to
align our direction and
interests to enable us to meet
evolving customer and market
requirements and any
misalignment.
Not achieving our
strategic ambitions,
losing revenue and
market share.
We have established close working
relationships with our strategic
partners underpinned by formal
governance and reporting mechanisms.
These ensure commercial objectives
are aligned and relationship deliver to
expectation.
Regular interaction with strategic
partners to improve joint operating
efficiency, product offering and service
to drive growth and profitability for all
parties. This includes regular
engagement at Chief Executive Officer
/ Managing Director level.
We review the relationships with our
strategic partners on a regular basis, toI
ensure long term alignment, with our
customer and business outcomes.
Retail Proposition
Post Office are committed to
maintaining a Retail network
of at least 11,500 branches.
Critical to this objective is
offering an attractive
proposition for our retail
partners and to continue to
operate Post Offices in
communities who need us.
We continue to review and
develop our proposition to
enable us to continue to
successfully deliver our social
purpose, which addresses the
impact of:
« increased high street costs;
* ongoing move to online;
and
« a decline in traditional
income streams.
Strictly Confidential
Post Office
Inability to meet
our network
commitment, and
consequent
adverse impact on
delivery of our
social purpose and
consequential
financial impacts.
.
We are continuing to open branch
locations where there is a customer
need, adding 328 ‘new network
locations’ in 2018/19. We are also
continuing to improve our support to
existing postmasters and have
strengthened our field support team this
year.
New technology will help our
postmasters manage costs and our
business remain relevant to customers
and we are investing in the next
generation of automation for our
branches as well as further developing
the software that will allow retailers to
sell Post Office products on their own
tills.
We are developing 15 pilot locations for
Post Office Parcel Shop and are
continuing to develop automated locals,
with the first proof of concept branch.
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Economic and Political Spending patterns Ie We regularly perform horizon scanning
Environment of our customers to identify external events and assess
Current uncertainties in the during economic their potential impact on our business.
uncertainty and * Our strategy considers customer
external political, economic ;
and social environment could potential downturn cee sien bekooteur trends and
have a detrimental impact our of the economy * We continue to invest in the
strategy and operating model e.g. decline in the development of our digital capability.
significantly: sale of banking « In terms of Brexit arrangements, PO
Brexit itself represents a products, have communications, training and
potential series of risks which particularly contingency processes in place to
would be most pronounced in mortgages. deploy in the event of a ‘no deal’.
the event of a no-deal Disruption to
departure from the EU, but operations
has also taken a very serious (customs labels in
toll on all aspect of branch,
Government and politics more accessibility Issues
broadly. There remains a for supply chain)
possibility that the current Financial resilience
impasse will increase the of our postmasters
pressure for a General and suppliers.
Election, with the attendant Retention of skilled
risk that Government and our labour and
Shareholder’s priorities will recruitment.
change in favour of a Labour
ith elani New income
agenda, with significant a
ee : streams failing to
implications for the business.
grow.
Examples include the
implementation of Labour's
proposals for the
renationalisation of Royal Mail
Group, and the creations of a
Post Bank.
OPERATIONAL AND FINANCIAL RISKS
Health and Safety Exposure to « We have regular Health & Safety
Due to Post Office’s wide reach significant costs forI training provided to all colleagues and
through the size and operation reimbursement for I Managers including Directly Managed
of its Network including fleet, damages and Branches and Supply Chain Managers.
it is essential we invest in our remediation, *We regularly review, update and
" monitoring of Local Risk Assessments
safety procedures and operational
f di A and safe systems of work.
controls. _ isruption, * We have developed a Road Risk Policy.
A health and safety incident or prosecution and «We regularly review our Health & Safety
failure could result in serious New reputational policy and Property Statutory
injury, ill health or loss of life. damage. Compliance policies.
« Our Health & Safety Management
System has been independently audited
and assessed as strong and
mature. Initiatives recommended to
further strengthen our safety culture
have been implemented.
«An independent Risk Assessment of high
risk building fabric has been undertaken
and remediation actions completed.
tial
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e We undertake a dynamic risk
assessment, work closely with
industry experts and bodies and have
invested heavily in security related
interventions to reduce the risk of attack)
and assault across the Network and
Supply Chain.
TECHNOLOGY AND INFORMATION SECURITY RISKS
Technology, Business Direct impact on I * Weare continuing to mitigate this risk
Interruption and Cyber our network by migrating some of our aging legacy
Post Office is dependent on the! availability and systems to new infrastructure and this
continued effectiveness, reliability resulting will continue through 2019/20.
availability, integrity and in adverse * We regularly evaluate the adequacy of
security of its information customer service our IT infrastructure and related
systems and associated and financial controls.
infrastructure. performance « We regularly meet with our key third
and/or reputation. parties to ensure they fulfil their
Post Office, in common with obligations covering the security,
other businesses, is continuing A cyber-attack resilience and availability of our IT
to track the threat universe could threaten the systems and infrastructure.
and is aware of increasing risk confidentiality, « We have introduced a Security
from cyber-attackers integrity and Improvement Plan enabling our third
(particularly nation states) availability of our party suppliers to use their security
seeking to undermine systems. experience to identify a gap or
businesses, government and improvement to a security process or
utilities. tool that Post Office has not identified,
improving our partnership and utilise
their experiences to improve our
overall security posture.
« We have policies in place for cyber,
disaster recovery, information security
and acceptable use.
« We monitor and provide assurance
against the minimum controls defined
in these policies.
« A Security Operations Centre has been
built enabling our IT Security Team to
assess and manage vulnerabilities,
identify and mitigate the risk of cyber-
attacks.
« We continue to further invest and
further mature our cyber defences
including:
» increasing capability within our
security operations; and
> cultural awareness around data
protection.
LEGAL & REGULATORY RISKS
Group Litigation Legal findings and I ¢ Post Office has instructed specialist
Post Office Limited is the court orders which legal advisors to advise on and conduct
defendant in Bates & Others v. have an adverse its defence of the litigation, subject to
Post Office Li 7 lai, (NEW impact on financial senior management oversight.
Nos.HQ16x01238, perrormance ;
HQ17X02637 & HQ17X04248 and/or reputation.
Strictly Cor
tial
Post Office
POST OFFICE
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in the High Court of Justice,
Queen’s Bench Division (“The
Post Office Group Litigation”).
Regulatory Environment
Post Office operates under an
extensive and evolving
regulatory environment,
including areas such as
financial services, transactional
services, postal services,
telecoms, procurement,
competition law, and data
security. This environment
continues to evolve,
particularly in the financial
services (e.g. HMRC’s
requirements around Anti
Money Laundering controls,
location fees as well as Fit and
Proper) and telecoms space,
which increases the risk of
non-compliance, costs and
could impact our financial
performance.
tial
Post Office
Fines, penalties,
litigation and a
resulting adverse
impact on financial
performance
and/or reputation.
.
We have open dialogue with key
regulators to understand and clarify
expectations.
We regulatory perform horizon
scanning to anticipate future
requirements and planning with each
business area to undertake
appropriate solutions.
On-going training is provided to staff
and retail partners on legal and
regulatory matters.
Regulatory obligations are supported
by policies which define minimum
controls that must be operated to
mitigate risks.
Internal and external programmes are
in place to provide assurance on
regulatory compliance.
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Appendix 1
POST OFFICE
GROUP RISK PROFILE - May 2019
1 Ge Rik
Principal Rsk CE RK
Movement I Rationele for Movement / Mitigation Plan
Rsk Description
Business
wae ey Controls in place
Ratlonale fr Movement
‘Tha ret poston has not changed since our iat report and treme a ‘High 26. From a
perspective, we can repo" that 80% of te dita discovery is combiete and is due to compete
ine 19, Poitvey, there have bean minimal natancs of card data nd aero the nett
conclsion of the dicovery wil define PO's PC! scope, Te current poston eat there are Wo I
inked areas for the ROG; payments and banking. Both require remediation become PC! I
Compliant. plant aeniave both has been communicated as November 2020, Sutwerk's I
senderway te identya more aggressive timeline I
Pcioss IT Project nlace to addres the requirements for
‘The 2017 PC Aud ident eda numberof Aust Actlone across cenifeaton,
2rd party IT suppliers wien are “not yet compliant. Faure
by Post Office to address there findings and provide a robust Formation of PCI steerco
Piantoresohe the actions (within an estimated tmesealeof
I 12-24 months) mayresttn chalanges during externa Stop, Start, Continue assessment hasbeen comslated to
suds, operating restrctons or financial penates from dent forward pian
partners, requre remediation activites and atract
unbudgeted emediation cote, Potential plans to certification have been reviewed,
Mlgation tan
1 Princo des gn
2) Customer trancactons being remediate - Reta vansactions for payment trancations va
cedterd
2} Customer trancactons being remadlated - Banking
Gap Analysis hasbeen completed to ident a potenti
reduction in seo
tions for cath withdrawals,
‘Custom vancactons beng remediate Bi payments and noehis and in waaactons~ I a
{ortansactors whore a custome Sesto pay aut bilfor exami, ha barcode one il
Informaton scanned and thiscften incest PAN number fr wen eansactonexection I
rr Protection gy 5) Deployants conrancedandpn-aads wil be nipped back tothe super, Ingenio.
eguatory Pcicomptant softwar willbe talled andthe deveas redeployed tack to allow tranches I
compiance cover aperodof7 months
6) iminate PAN data rom Post Of aac ond yt
7) PCI card Osta Sean
8) Prepay and Post Ofiee Branded Care
9} stern Cent and Branen Commun cations
ta Satoy oresanted tothe Board lane contane Rationai for Movement
sion bacon iutcnty pir of city, sreevaty beter franchise Nochange inte iu care thi quate.
retro and ereach government commitments. Ths sczount management of goverment eatorsip BV OUEY igen tn
comouttiven ater ay compounded oy incase cons sxc with sar pdates on network number andend 1+ now soqented proponitonaored to Agents ad provide
i I oy cts and serves though a range of devices ours and
Reta eeMariet gs customer andthe Pox Offe, Aten! propeston tated 90st
nd cstom multe partners sd to Se roladout hs qua
COtnerdevelooments in ths quartar ince 15 plot location for Post Offce Pace Shop due to
five in fune 2018 Work alo continues on automated leas, tn the frst pret of eoncest I
eh excectad to go vein dune 2019 I
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Post Office Top Risks
sua Rik Sco (WL)
usiness Ge Rik
inca escription 1 Controsin place Jonale for Movernent/ Mitigstion Plan
“are rincpal ak Og isk Descriptio Key Controls nl Rationale fr Movernent/ Mitigation Pl
P.O Group Litigation PO has in place a Steering Group wits attendees from Rationale for Movement / Mitigation Plan i
tier Lugs Tou cig Seo Cou gps PO ign Pan I
2 ‘verse the itgation and respond to iter I
jbo vei iii Aine Movant Fa
‘We have critical T Security exposures highighted by a third ‘elearning Module. 'No change in the risk score this quarter. In Decer be
party (Deioitte) revi ity infrastructure, Information Security Governance. ‘Audit, This has delivered a maturity y
‘These relate to firewalls, pen testing and out of date: = Information Security Culture Campaign. ‘domains. it's important to note that approximately 76% of the recommendations were already >
' : and effectvely manage data protection poles, standards and Extemal ‘180 wil start in May,
ITACG raion AM ‘Soc ogame undrway {Vines th capably ander uaranas around ate protcon
comatance . *Supplie Securty meets 2)improve the management and assurance of our third party supplies
: Digital Shadows deployment providing eyes intligence 13) Extend the coverage and capably witin our securty operations
5} Password strength te! imsiemented
6) Address and remediate al Delotesecury findings
to any Cyber secutty exposures
‘7 CP pans igh eval pias in lace for Crested and doten ational for Movement
Limited DR/8CP plas, a Work area recovery tat for Both Cnestrfld and Boton
systems and ste oss in Asti 2018 partly succast!
tote rk ating, work romaine ongoing, auaiting confirms
Mtgation Plan
The Fak of busines
COperatio’ CP exe
(COO) TDR)
ruption due toinedequate BCP arangerents is unchanged from Qs
(12) ref ecting incomplete ORtestng at Chesterfield and Bolton and he need to neta IT
in Swansea before Swindon canbe tested
res
Genk isk
Principat isk Ag sk Description “
Lo
twaddresschalenges posed by dgtal dsrupton shal lead to
lors of urtomar bate, fundamental diruption tothe bus nse
rode! snd eventual rapid decine ofthe business
Devel
HR Inepieand a
FST Market Oovelopments/ Competition
Post Offce faces noth tareats and opportniies to income
‘rom our compettive market pace. Pest Office operates und
nd extreve repuatoryewironmant, covering areas such
financial and post sanice, telecoms, crocurementand
competion lw and data securty, Ths emironment
Certinues to evolve, we need to ensure tat caging
raqurements continue tobe dentfied and met. Faure to
Implement an effective strategy n responce to these emerging I
markets, new entant, maret apy, business model
Changes, could reuttin ourcurtomer experience,
prope tons and enanne strategy fang to deliver what
Compettiven
FSAT spd customer, OW
We have difict and uncertain negtations wits BOL, RM and
Fults thin the 2018/18. Negotiations w/th kay partners has
IRRELEVANT
‘Brenthas made the economic took even more uncertain,
ow groutn and confidence over spending nave negative
savings and international paces
I Residual sk Score (/t)
Contras F
Key Control in place Movement
Maya
"providing digta tools n the workolace (Ben Coove) Digital
Workplace Programme
Balding capabity and competency to use dita tools
2) Digit learning strategy nace
0) Providing kil through blended
seasons across the busine
€) SuccessFactors e-learning in pace
1) Data tars network proudes peer suppor
(Yamme7Teame/tralning sesions
farningand
stvacting appropriately slied talent (Sean)
1) Working with CO to dently adatone!channe's to
1) Techno.ogy Graduate Programme aunched
FST -Boaed and GE sign off on sratogy araed and being
PO Money Negatiatone with BOlare ongoing-Head of
terms ayeed and workng on contractual amendments
Digteation -ffer digit services neuding POGO & Digital
Remittances
Telecoms - Agency intatives to imorove remuneration and
Incentvising them to sal aru. rand and mariet
PO1- Project NIKE curenty und,
Strategic relationships and project delivery ae keyto
product offering and growtn for instance, Roy! Mail Group
snd Bonk of rand (UN ole. Msignment of s-tegie
irecbon ad focus wth a partner could resuttn products
that donot supsor our growth strategy 0” meet ou
customer or maraet requirement
Innovation -Digtaton i ranging the way consumers
manage the’ finances and purchases. CHUB nove moved
Into BAU and further development maybe co
2038/39{ Maison hol at prezont). Now Poet Office
frzenta spp went ve n Ape 2038,
rd
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Post Office Top Risks
Rationale fr Movernent/ Mtgation Plan
Rationale for Movervent
Io change inthe ee seore this quater.
Mitigation Plan
1) reviw nas bean undartacen by MeKiney who ovate the current programme of work
and nous capa todelver the dgtal competency and the output ofthe review is being
Secured,
2) Reesitment is underway forthe new Dig
and innovation board 5 new res)
Rationale for Movement
Mtgation Plan
Actone being talon areas flow:
1) PO Money: Negotiations with BO! are ongoing. Head of terms agreed and working on
contractus amendments, Ogtaston offer dit’ services including POGO & Dig
Remittances. Diversity of PO Money sreducts through different aroduct provers I
2) Telecoms Agency ntiatves to morove remuneration and neentving them to sl product.
Brandand market avareness I
2) PO1- Project NIKE currenty underway
4) stratagerlationshins and project delivery are key to oroduct offering ad growth fo
instance, Roya Mali Gus and Bank of ela (UH 'e. Mial gnment of srategie direction and I
feeds wth a partner could resin arodute that do not support our grouth svategyor mest
‘ur euttomer or marat requirements
5} Innovation Ditaton is changng the way consumers manage thet nunces and purchases. I
(CHUB now moved into BAU and further devlooment may 3@ considered 2018/19 (Mai
at prezet). New Post Office eazantas app went ven Apr 2018
I
10day #
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Post Office Top Risks
I I I “Resa ik Sore)
usnass ema I aia
i Pinca Rik ‘ Alok Dnserption ay Controle in place I eeciven I Rationlefor Movement Mtigrtin Plan
free I owner I I
/ eosScore I aria May9
ae oe eee nnn
I Po, and ancrosrate actions and remediation actvites rin ofthe tet dovelopmants (etobe 2039, eae conf dentin now we woul manage 8 No Osa scenaro, Thats the I
I __ development. rik remaie tat Breit cout have a “extension and the probiems faced in agreeing a deal does increase the possivlty of a general I
I devimental most to #0 strategy, erations and POMS aff nz with PO ato ance tat Bent sectonoranctrer pub vot, I
I I rrastracture whien are more prevelentina'o dea! decison Impacts and opportunities are considered. I
a Migaton Pan I
a PO sariortakanoiders working group has commenced in 1) Worth trae parts, the FA and our ey partners to understand the ey rss of Brest I
i Sept 18 to establh te rks & opportunities post March ‘ur business Tis work is ongoing. I
. 2019. 2) Understand soecifaly how products wil perform under Brext scenarios &g. long delays at
a ots
ALL Statege gE
a Sine th at evi atessmant rd any capacy sss or ongoing psepotng tues winin our neurance provide
I sere PO, roving a cons 4) 20k for opportunities a wal astra povided by
I ueo 5) Conider th pvt for taf
thie hasbeen sted ou ay sper. - 6} Consider how POMS wl rexpond under stan sconce Boxteadstosrecessonvia I
I
‘I _ I
. £9) Confit insurer no they exec te surance to orate under Nodes! scnarie, I
: a I
I sestanbtty of business mode Sing in lca i tnd aah iin or vr I Ri
I Treandermning ot ene stati, a3 resatof ether: CU rat lve of enor to ence tat No cange nthe tsar ths quarter The business montoring the develooments covey x
1 I ge cams, Tayor revo from rogultoryntrventons sa sion, mateals and documentation The Sd als underway, sone enange are expected ut OcUNOv 2018, I
Reta they are catogosad as wmployeeso workers and Por Offceoecoma abe" add ona cost 3S
_ Twain cy HR th cone nvivemant of or agents ay tern (Wek Bas I
a Zio conrdhated wt outHorton wer (Same Leds) I
Oo I I Techie aad snes intrrption iPoit Otc ass Change Nianagernerd policy that early istonai for Movement I
1 I __ Parte’ eters and tne reds ond seve dates wat costhites change, how changes are red Theratnasteen newntedt Si. Inpacthasincesed sient earenitttneinbityts I
I _ roan espe ana nn como Classe, ported, and how tov change: sould be {alone automatealy to the CCantondary datacrte, CE have conned that te I
I tecnica arenitactur, Thre ie ars f flare of key atoms proceed by upp 199 perorm armani fainscn the unikey avert ofa major I
F ccrinratractore reduces the flectvonest, evabity, Seater
/ Tecmoogy .. I, ieertyorsecurty of eur Network 2.17 nave a documented Seve Conny poiey in
a plac wnien eaters for tena and outoureed ousnee Mitigation Pan
(I Seoeeotee frocenss end servic acites hat ar cra toe 1) Upgrade tna Vephae softs
resting n advereecurtomer service and nance tnterarte operations or necessary to mest og! and/or 2) Manus! procetes/procedure nsacet perform manus falbees 26 hours te implement
performance and/or reputaton. ontractul obigatore 43) DR fnover text to 58 rarchedsled to Octave” 2019.
i]
I
. I
: I I
P 58: Regulation Regulatory Horiaon Scanning, Comaliance team resource to Rationale for Movement i
Tapia III buonesandmpuct ont charg ve Falevew ofthe Genera Condtion was completed for 9 onrequltion
October 2018 to ensure nat te changoe made to the GCs
were implemented. Acheck was done on exstng GCs
howe ‘ance on Fut, Further works
neededto get Fuss to provide ev dence of the!
nto discus orogres, expectation of hierishto materialize on the
Denof Maren
5) Change requests beng alse toimpiament GC changes,
I
I
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usiness Ge Rik a
I Principat isk SRSA
Key Control in place Rationale fr Movernent/ Mtgation Plan
ees
I Mara Mayas
LE Sie Compitance “Training H&S BPs continue to provide training to OM, 4 Rational for Movernert I
i I _ safety oocomes are not word lars and where they ae notin Supply Chain Managers and ANCMe and Training and Audit I 4 Io change inthe ik zeore since lat review. I
I Inmwrthreqed ge and regutory tnd, ay lendto ‘Managers and workshops for Safety Champions. H&S I
I etossinos traning ne been converted towlernng th support from Mitigation Pan I
the learaing Academy ad sae nine ith clon Training Gener H&S mode content has oven developedforisuein QOH tol business I
I . ec to CWU Rs sce DMB and Supy Chavis Succes Fats Fre Awareness Waning waslasuedin I
_ sere th Safety November and driver trang esd in Thee as been a uth bate asta of
_ Management System and ported tat tw PO SMS evel training n 201/39 an gars are bing closed, HRS BPs are atanng end team resting to I
. 4 {very good). A Safety plan identifi 30 actions and safety awareness across Network Ops and Support Teams. External IOSH Managing Safe traning)
Bard monitoring a coneion by yearend. Tein nas ben rou dad to 21 Safety Champions, Ha lead for SC booked on NEBOSH Carat In
. cust andconsstentnapectons.AICHU, Unte and HBS Bs stendedjoitworkshopin I
. rary. Review of Supply Can traning wil incude plan to deliver mare ac of
traning in (29/20)
I)
I)
I
I)
_
i testng, ub atacand seh Vague ng veda et esate cw 8
) team medtngsANCK to upl manages nese of teas oftal its sn of machinery, acer cating and oledg Toe 4s Bs ae ating
thai HBS responses. ving to aens risk and are also providing face tofece traning and coaching taine
CC ncadng ena scompte, wth vend Conpanc aS ft unterdnns tan droped tnd compan ad prt nan I
a ined emedal wots conpiated a I af raning, rk assessments, ac ders, arn al busines ares and sare at Safety
a Road Risk -An overarching Road Rsk Policy has been “ 4 Board and Ovs Boo'd. Certicates of Compliance are being completed and returned and
a developed undef daft shared with stekenoldes, An ‘eines montored by HAS Tum. Gaprore bring shared wth ath Ws led arson for
tcton plan hasbeen agreed anda numberof hitaties ee fl
,
tain ected ores ding comnts Rocdis: Eeerngtreningre ised in Qf, ceforng mo
. tedowr stb Sar sndettany fbn: Wenre contingent Nose COP
) mec divers Worsng win BRAG, RG and sob Sr Pil of Wel te esses dng I
{ucgur and Strection ad provde eve and pidnce tors ond te ine manages
Property Low ra ulin tab aconshave teen competed Leng ee bing chcied
sero c00 oc branees,Aatona taining cogon, a eview of procs
. connor safety and ak sessment be odes, Atindepedet nats bong
srociredin Qi 19/20. fe Rac ssessmest remade action ee GER ower than prevousyear_I
oo fedare beng cored wth ip fom the HS team and CBRE. I
Secu nvestmert Committe approved adios funding for range of inate to reduce I
oo aiiben haucnghegacaneneceumenwoneaewntey I
i] carers ec scr anda weedes I
I
oS I
I
I
Su
Appendix 2
‘EXECUTIVE DECLARATION as at ‘May 19°
ieee
I uses interruption Maeva risk to Pos Office that are not
I Ero captred inthe Group Rik role
le ‘Material new contracts or extensions
UBE comactmanogamant entered ints dec onardsand where I
[FE have ntfolowed the contact process
: I .
le i
(8 Material frauds, regularities orlosses I
IB Managing losses and that have come to ight, whether carried
Stead coutby our staf agents, contactor,
3 suppers or partners ’
Ey :
a
2 Reporting result,
Fd Comples or subjective acounting
providing data accurately iments, estimates and revenue
2% tndetective internal
B competveres Market Mate to Pot fe that ar not
B snd Customer Relevance captured inthe Group Risk rofle
system. Cash movement transactions ae recorded correcty in depots leading toa correct depot cash balance (confirmed through physical
counts) However due to technical isues these donot al flow through to CFS ou financial eyster, This has led to CFS being significantly
“understated. The Back Office Transformation project team have worked wit finance (end our auditors) to maintain alg of al transactions
mizing from CFS and are able to evidence an accurate pituce. This sve has expoted a rick thatthe Tanstrack WC aplication technical
“architecture i nt up to the standard expected. An architectural review ison going, once compete actions wil be agreed with Transtrack’s
management to reduce the risk of future technica sues.
ae ‘Application Architecture, Oata Integrity and coding practice. Thece sa eure issue with Teansrack CWC, ur eash inventory
:
‘Data centres in Belfast. We have an evicting operational rik that lots ofboth datacentres in Belfast catastrophic to the business as we could
“not ecover Horizon service This materia ik has ented since Horizon was implemented andl considered extremely remote lielihood due to
[ese bewmn tacoma nat tw anette of) end ton eam at
I
(
ae ee
lines (Le earthquakes, tsunami events) The area has some poltical unrest but ths not fl to increase the risk unduly.
{Group Rsk - GLO - Customer confidence in Horizon online system. The case ofthe Herizon system is curentiy underway. The outcome cf this
‘case may impact the agents and clents confidence in using the system and risk reputational damage, Mitigation plans are being bulk in cesponse
{automated falover from the primary datacentre to the secondary datacenter, the switch from primary to secondary would require a manual
“failover. This would rutin the service being unavailable within branch and for admin users for period of time until manval aver complete.
"Manual fall back processes and procedures are in place to restore service as quickly a posible and best efforts wl be made but the service
“outage rks exceeding RTO, The upgrade of the software has been requested and this expected to complete in 10 weeks
tion-compiiance with PCR. There are a iow number of contracts signed or extended which were not procured or extended in ine with Public
Procurement Regulations 2015, They are generally low rsk and with a commercial imperative. New controls have been introduced to record
deta enrons eo fv This has brought greater clarity over level of non-compliance with PCR. All non compliant extensions and
{awards are logged and reported tothe RCC on a quarterly bass
“Banking cash deposits, Most ssves relate to high value Santander Business Banking deposits but as the BFS expands, this is migrating. The
"annual training was signficanty re-written this year to help branches to identify and report issues. A new procedure has alo been implemented
“to identify and report large volumes of Scottish and irish note deposits from locations remote from the Scotish and irish borders as these are
“frequently indicators of criminal street cash laundering. There have been a number of investigations involving high value business cash deposts
“and, atthe request ofthe MLRO, the Post Office Legal team are currently reviewing the MLR requirements for Post Office in relation to these
“transactions to ensure that there are no additional regulatory obligations on Post Ofice, and that customer due diligence and transaction
‘monitoring remain the responsibility ofthe banks within the Banking Framework Services contract, Financial Crime and Legal are liaising wth
Pinsent Masons to establish the exact regulatory postion/risks and also working with the Santander FIU (Financial Intelligence Unit} to raise our
{concern about some of their customers actives
ee
"iG Gi pa i iC i was seo aka abr a iy amar pokes in Pot Oc elon to
_ various legal, technical and operational matters "the Post Office Group Litigation”). Par POL: accounting policy for exceptional tems and a:
I areed with E, the expenditure associated wth the Post Office Group Ligation shoud be accounted fr as an exceptional iter, Subject to
‘na ua, te incurred cost for FY 2018/19 1 £13.7m
{Coop Group and / regional Coop Solis. We believe tis rik has been patialy mitigated through improved stakeholder management with
some ofthe individual Co-Operative societies couple witha jant working approach with FRTS (the jolt buying group for the Co-Operative
I Group} to complete detailed analysis ofthe deployment ofthe PO operating model inthe Co-Op,
ee
E
Identified by
GE Member
Rob Houghton
fob ougiton
Rob Houghton
eb oUghiSR
lane Macleod
lane Wackeod
Tine iackeod
‘ebbie Sih
ARA Action
Deseripton of skaround Tranzack linked
generically through to Rsk Note asa part of isk to
Technology and Business Interruption
‘eserpton of ak around Beast linked generically
through to Rsk Noteas apart of rskto Technology
and Busines Interuption
Description of sk around system confidence i linked
‘through generically to Risk Note a apart of rik to
Inigation
"Basciipiion of rk araund Computer Conte faliover is
linked generically through to Risk Note asa pat of
rik to Technology and Business Interruption
Description f risk around non-compliance with PCRs
linked generically through to Risk Note asa part of
rik to Legal and Regulatory Breach
Descipton ois round
generically to Risk Note a
Regulatory Breach
id ae linked through
part of rskto Leeland
‘tobe disclosed
‘eterption of ek around disengagement fom Post
Office by Co-Op Group (TCG) i tinked through
generically to Risk Note a
Propostion and Network Sustainability
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POST OFFICE LIMITED PAGE 1 OF 1
AUDIT, RISK & COMPLIANCE COMMITTEE NOTING PAPER
Audit, Risk & Compliance Committee Terms of Reference
Evaluation 2018/19
Author: Elizabeth Hallissey, Senior Assistant Company Secretary — Sponsor: Veronica Branton, Head of Secretariat
Meeting date: May 2019
Executive Summary
The Financial Reporting Council’s Guidance on Board Effectiveness 2018 refers to the
need for “properly structured and appropriate terms of reference.”
The Board Committees review their terms of reference (ToR) annually to identify any
changes required and to evaluate whether the Committee’s responsibilities have been
met.
The evaluation of how and when the responsibilities set out in the ToR have been
considered during 2018/19 are set out at Appendix 1 and the ToR are at Appendix 2.
The Committee met its responsibilities, excepted for this review taking place within the
2018/19 financial year.
Input Sought
1. The Committee is asked to note the
terms of reference review and note
the responsibilities met by the
Committee in 2018/19.
Post Office Limited - Audit, Risk & Compliance Terms of Reference Evaluation 2018/19
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Appendix 1
Was it complied
with?
28 June 2018
31 July 2018
30 October 2018
29 January 2019
25 March 2019
The relevant section(s) of the Terms of Reference are shown in brackets after each item. The Terms of Reference are included at Appendix 2.
Goi
All met
inclusion in the Annual Report and shall review
and approve on behalf of the Board statements to
be included in the Annual Report concerning
financial controls, internal control and risk
management. (17.c)
Summary included in
Annual Report &
recommended to
Board for approval.
Review and update its terms of reference annually x
(17.0) This review was missed
from the agenda in
March 2019
Conduct an annual evaluation of the performance v Results of
of its duties and responsibilities and of its evaluation.
effectiveness, and discuss the results with the
Board of Directors (17.b)
Prepare an annual report on its activities for v
In the absence of express authority from the
Board, the Committee will not, without the
concurrence of both management and the
auditors, have either the responsibility or
authority for altering the financial statements or
the accounting procedures of the Company. (17.d)
v
Strictly confidential
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Appendix 1
Was it complied 28 June 2018 31 July 2018 30 October 2018 I 29 January 2019 I 25 March 2019
with?
Review and recommend to the Board the v Recommended
nomination or discharge of the independent new auditor.
external auditors, the proposed fees (in
consultation with management) and the
acceptance of the scope and general extent of the
engagement. (18.a)
Formally review, challenge and approve the v Audit Strategy
agreed annual external audit plans and approach. reviewed and
(18.b) challenged.
Periodically review the scope, resourcing and Vv Internal audit
capabilities of the Internal Audit function. (18.c) co-source
appointment -
Deloitte.
Review and re-approve the Internal Audit Charter on an v
annual basis. (18.4) The Internal Audit
Charter for 2018-20
was approved in
I___ March 2018.
Approve each year in advance the Internal Audit Vv Internal audit
plans and review both resources and any co-source
proposed amendments that may occur through appointment —
the following year. The review should include Deloitte.
methods employed by the internal auditors to
assess risk and to prioritise the various audit
proposals identified in the annual plan. (18.e)
Assume a primary role in the appointment, N/A
assessment and if necessary the discharge of the
Head of Internal Audit. (18.f)
Strictly confidential
Appendix 1
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Was it complied
with?
28 June 2018
31 July 2018
30 October 2018
29 January 2019
25 March 2019
Ensure the independence of the external and
internal auditors including an annual review of any
non-audit services provided by either. (18.g)
‘This has not been a separate
agenda item but
independence was
considered as part of the
appointment of PwC and
‘our new external auditor
and Deloitte as our co-
source internal audit
partner.
Ensure free and effective communication
between the Committee, external auditors and
internal auditors and hold separate sessions, or
informal meetings and contact as required. These
meetings may discuss matters that any of these
groups believes should be discussed privately with
or without management. (18.h)
v
Ensure lines of communication are maintained
with the Board. (18.i)
v
Summary of ARC
meetings at Board
meetings where Board
Members have not
ded ARC
Review, discuss and consider with the external
auditors their approach to risk assessment and the
scope and plan of their audits. (19.a)
‘Audit Strategy
reviewed and
challenged.
Review the annual financial statements which are
to be submitted to the Board, including
Management's explanatory notes. (19.b)
The Committee shall review with management
any half yearly trading statements or financial
reports and the contents of any press release
Strictly confidential
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Appendix 1
Was it complied
with?
28 June 2018
31 July 2018
30 October 2018
29 January 2019
25 March 2019
concerning the Company's financial performance
or situation, before release to the public or to
shareholders. (19.c)
Review the overall risk management framework in
place for the Company including its appetite for
risk. (20.a)
v
Information
security risk
appetite.
Oversee the Risk and Compliance Committee
activities and receive summary reports as
appropriate. (20.b)
v
Verbal updates and
minutes from January
2019 onwards
Review the Company's overall risk position;
regularly review the risk register for the Post
Office and its subsidiaries, and periodically invite
management to outline risk management strategy
and status within their specific business units.
(20.c)
v
Risk Report.
Risk Report.
Risk Report.
Risk Report.
Review management’s assessment of the degree
of risk the Company prudently incurs in achieving
a reasonable balance between the cost of
managing risk and control systems and the
benefits derived. (20.d)
Consider and review areas of specific risk as
highlighted by the Risk and Compliance
committee. (20.e)
Risk Report. IT
governance
and Risk
Management
Ofcom non-
compliance
with Text Relay
Review legal, regulatory and any other matters
that may have a material impact on the financial
statements, related Company compliance
Payment card
industry data
security
standards.
Payment card
industry data
security
standards
Money
Laundering
Update.
Strictly confidential
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and its subsidiaries. (20.h)
Appendix 1
Was it complied 28 June 2018 31 July 2018 30 October 2018 I 29 January 2019 I 25 March 2019
with?
policies, and programmes and reports prepared to
manage and monitor Company compliance
policies. (20.f)
Consider whether any remuneration policy N/A
adopted by either Post Office or its subsidiaries, or
the implementation of any such policy is
consistent with Post Office risk appetite
particularly in relation to conduct risk. (20.g)
Consider the impact of any new legislative, v Payment card Update on
regulatory, market or other developments which industry data payment
could materially or adversely affect Post Office security systems
standards. regulators.
scope or access to required information by either
external or internal audit. (21.d)
The adequacy of the Company's internal controls. v Internal Audit I Internal Audit I Internal Audit _I Internal Audit
(21.a) Reports. Reports. Reports, Reports.
Business
continuity
update.
Recommendations for the improvement of the vo Internal Audit Internal Audit Internal Audit Internal Audit
Company's internal controls, processes and Reports. Reports. Reports. Reports.
systems. (21.b)
Significant findings (the “management letter” v With financial
from external auditors) and recommendations statements.
together with management's responses. (21.c)
Any reportable restrictions experienced regarding N/A
Strictly confidential
Appendix 1
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Was it complied
with?
28 June 2018
31 July 2018
30 October 2018
29 January 2019
25 March 2019
conduct and similar policies —_ including
whistleblowing. (22.c)
and hospitality
annual review.
Anti-bribery
and corruption.
security policy.
Acceptable use
policy.
Protecting
personal data
policy.
Review with management their fraud assessment, vo
detection measures and their investigation of
illegal acts, as appropriate. (22.a)
Review any summary of frauds, thefts and other v Fraud on
irregularities of any size. (22.b) misappropriati
on of postal
orders.
Review with the internal auditors and the external Vv Whistleblowing I Financial crime, I Approved Treasury
auditors the results of any review of the annual report I fitand proper I cyber and Policy.
compliance with the Company’s codes of ethical &policy. Gifts I policies. information
The Committee shall specify from time to time the
or authorise investigations into any company
matters within the Committee’s scope of
responsibilities. The Committee shall be
empowered to obtain independent legal advice,
and engage counsel, accountants, or others to
assist it in the conduct of any investigation. (24)
vo Group POMS ARC. POMS ARC. Security POMS ARC.
reports and management information which it Litigation strategy.
requires in order to discharge its responsibilities. update. POMS ARC.
The minutes of the POMS ARC will be provided to Report from
the Committee for noting. (23) POMS ARC.
The Committee shall have the power to conduct N/A
Strictly confidential
Appendix 1
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Was it complied
with?
28 June 2018
31 July 2018
30 October 2018
29 January 2019
25 March 2019
The Committee shall perform such other functions
as may be assigned or delegated to it by the Board,
and may review other items of an internal control
or risk management nature which may from time
to time be brought before the Committee. (25)
N/A
Strictly confidential
TERMS OF REFERENCE OF THE POST OFFICE AUDIT, RISK AND
COMPLIANCE COMMITTEE
Purpose
1.
The purpose of the Audit, Risk and Compliance Committee (“ARC” or the
“Committee”) is to assist the Board of Directors in fulfilling its fiduciary
responsibilities by:
(a) Contributing an independent view on the accounting, financial control
and financial reporting practices of the Company;
(b) Taking all reasonable steps to ensure accurate and informative
corporate financial reporting and disclosures which meet appropriate
accounting and corporate governance standards; and
(c) Providing oversight of the company’s risk management systems,
operational controls and key systems.
The responsibilities undertaken by the ARC under delegated authority from
the Board will be subject always to the powers and duties of the Board, as
set out in the Articles of Association
Composition and Terms of Office
3.
The Committee shall serve as a standing committee of the Board. The
Chairman and members will be appointed by the Board. It shall consist of at
least two independent non-executive directors.
Only non-executive directors shall be eligible for membership of the
Committee. Members of the Committee will normally serve for a period of
three years. Their appointment may be renewed on an annual basis
thereafter with the consent of the Chairman of the Committee but no director
shall serve for more than six years.
The quorum shall be two directors, of whom one will have recent and relevant
financial experience.
The Committee shall meet as often as required but at least three times per
year.
The Company Chairman and executive directors may be invited to attend any
meeting, or any part of any meeting, by the Committee Chairman.
The CFO, the General Counsel, the Head of Risk Governance and the Head
of Internal Audit (or those holding positions with responsibility for such roles,
howsoever named) and the Director, Financial Services will be permanent
invitees.
The Company Secretary shall act as Secretary to the Committee and shall
attend all meetings to keep minutes and record actions.
+ The Financial Reporting Council recommends a minimum of 3 meetings but suggests that more will
be usually required.
ARC TOR approved by the Board on 22 September 2015.
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10.
11.
12.
The Committee Chairman will report regularly to the Board. Minutes of each
Committee meeting will be circulated to all members of the Committee and,
once agreed, to all members of the Board.
The External Auditors may attend all or part of any Committee meeting at
the invitation of the Committee Chairman. As a minimum the External
Auditors will attend to present their external audit plan for approval and to
present their reports.
The Company will provide current and new Committee members with any
training, briefings or induction required. The Company Secretary, Head of
Internal Audit and the External Audit Partner will keep members informed of
relevant published guidance as necessary.
Meetings
13.
14.
15.
16.
Any member of the committee or the Company Secretary may convene a
meeting. The External and Internal auditors may request a meeting with or
without management present.
Meetings may be held in person or by telephone or other electronic means,
so long as all participants can contribute to the meeting simultaneously.
Notice of each meeting shall be given to all those entitled to participate at
least 2 working days before the meeting.
Meetings shall be planned in accordance with key reporting and financial
planning dates.
Other Governance Responsibilities
17.
The Committee will:
(a) Review and update its terms of reference annually.
(b) Conduct an annual evaluation of the performance of its duties and
responsibilities and of its effectiveness, and discuss the results with
the Board of directors.
(c) Prepare an annual report on its activities for inclusion in the Annual
Report and shall review and approve on behalf of the Board
statements to be included in the Annual Report concerning financial
controls, internal control and risk management.
(d) In the absence of express authority from the Board, the Committee
will not, without the concurrence of both management and the
auditors, have either the responsibility or authority for altering the
financial statements or the accounting procedures of the Company.
Auditing Services
18.
The Committee will:
(a) I Review and recommend to the Board the nomination or discharge of
the independent external auditors, the proposed fees (in consultation
+ The Financial Reporting Council recommends a minimum of 3 meetings but suggests that more will
be usually required.
ARC TOR approved by the Board on 22 September 2015.
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(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
with management) and the acceptance of the scope and general
extent of the engagement.
Formally review, challenge and approve the agreed annual external
audit plans and approach.
Periodically review the scope, resourcing and capabilities of the
Internal Audit function.
Review and re-approve the Internal Audit Charter on an annual basis.
Approve each year in advance the Internal Audit plans and review
both resources and any proposed amendments that may occur
through the following year. The review should include methods
employed by the internal auditors to assess risk and to prioritise the
various audit proposals identified in the annual plan.
Assume a primary role in the appointment, assessment and if
necessary the discharge of the Head of Internal Audit.
Ensure the independence of the external and internal auditors
including an annual review of any non-audit services provided by
either.
Ensure free and effective communication between the Committee,
external auditors and internal auditors and hold separate sessions, or
informal meetings and contact as required. These meetings may
discuss matters that any of these groups believes should be discussed
privately with or without management.
Ensure lines of communication are maintained with the Board.
Accounting, Financial Control and Financial Reporting and Disclosure
19. The Committee will:
(a)
(b)
Review, discuss and consider with the external auditors their
approach to risk assessment and the scope and plan of their audits.
Review the annual financial statements which are to be submitted to
the Board, including Management's explanatory notes. The review
may include:
e Reports from the external auditors as to the results of their
examination to date.
e Discussion of any problems regarding financial reporting which
may need to be reported in the annual report to the shareholders
including any disagreements that may have arisen between the
auditors and management in any area.
e Meeting(s) with the senior financial executives who shall outline
any problems as to financial policies, financial reporting or matters
relating to internal control and any matters in contention with or
under consideration by the external or internal auditors.
e The appropriateness of existing accounting principles being
employed and any change in accounting policies or practices
which the corporate auditors may refer to in their report to the
+ The Financial Reporting Council recommends a minimum of 3 meetings but suggests that more will
be usually required.
ARC TOR approved by the Board on 22 September 2015.
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(c)
shareholders, and the impact on the Company’s financial
statements.
e Any proposed changes in the presentation of the financial
statements or accompanying notes which the auditors may
recommend.
e Reviewing the annual report and accounts and advising the board
on whether, taken as a whole, it is fair, balanced and
understandable and provides the information necessary for the
Company’s shareholders to assess the company’s performance,
business model and strategy.
¢ Other matters related to the conduct of the audit communicated
to the Committee under generally accepted accounting standards.
* The Management Letter.
The Committee shall review with management any half yearly trading
statements or financial reports and the contents of any press release
concerning the Company's financial performance or situation, before
release to the public or to shareholders.
Risk Management, Operational Controls and Policies
Risk Management Framework
20. The Committee will:
(a)
(b)
(c)
(4)
(e)
(f)
Review the overall risk management framework in place for the
Company including its appetite for risk.
Oversee the Risk and Compliance Committee activities and receive
summary reports as appropriate.
Review the Company’s overall risk position; regularly review the risk
register for the Post Office and its subsidiaries, and periodically invite
management to outline risk management strategy and status within
their specific business units.
Review management’s assessment of the degree of risk the Company
prudently incurs in achieving a reasonable balance between the cost
of managing risk and control systems and the benefits derived.
Consider and review areas of specific risk as highlighted by the Risk
and Compliance committee. This should include, but is not limited to,
sufficient coverage of strategic risk, financial risk, operational risk,
technology risk and cyber security, risk relating to the investment
strategy and funding requirements of existing and new pensions
schemes established for the benefit of previous, current and future
employees, conduct risks relating to the financial services businesses
operated by both Post Office Limited and its subsidiaries and joint
ventures, reputation, legal and regulatory risks, major change
initiatives and people risks.
Review legal, regulatory and any other matters that may have a
material impact on the financial statements, related Company
compliance policies, and programmes and reports prepared to
manage and monitor Company compliance policies.
+ The Financial Reporting Council recommends a minimum of 3 meetings but suggests that more will
be usually required.
ARC TOR approved by the Board on 22 September 2015.
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(g) Consider whether any remuneration policy adopted by either Post
Office or its subsidiaries, or the implementation of any such policy is
consistent with Post Office risk appetite particularly in relation to
conduct risk.
(h) Consider the impact of any new legislative, regulatory, market or
other developments which could materially or adversely affect Post
Office and its subsidiaries.
Controls and Policies
21. The Committee will consider and review with the external auditors and the
internal auditors:
(a) The adequacy of the Company’s internal controls.
(b) Recommendations for the improvement of the Company’s internal
controls, processes and systems.
(c) Significant findings (the “management letter” from external auditors)
and recommendations together with management's responses.
(d) Any reportable restrictions experienced regarding scope or access to
required information by either external or internal audit.
Fraud, Theft and Ethics
22. The Committee will:
(a) Review with management their fraud assessment, detection
measures and their investigation of illegal acts, as appropriate.
(b) Review any summary of frauds, thefts and other irregularities of any
size.
(c) Review with the internal auditors and the external auditors the results
of any review of the compliance with the Company’s codes of ethical
conduct and similar policies including whistleblowing.
Risk Management — Other
23. The Committee shall specify from time to time the reports and management
information which it requires in order to discharge its responsibilities. The
minutes of the POMS ARC will be provided to the Committee for noting.
24. The Committee shall have the power to conduct or authorise investigations
into any company matters within the Committee’s scope of responsibilities.
The Committee shall be empowered to obtain independent legal advice, and
engage counsel, accountants, or others to assist it in the conduct of any
investigation.
25. The Committee shall perform such other functions as may be assigned or
delegated to it by the Board, and may review other items of an internal
control or risk management nature which may from time to time be brought
before the Committee.
+ The Financial Reporting Council recommends a minimum of 3 meetings but suggests that more will
be usually required.
ARC TOR approved by the Board on 22 September 2015.