Post Office Audit, Risk and Compliance Committee Agenda
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18! May 2017
Start Time Finish Time
10.30hrs 13.30hrs
Room 1.19 Wakefield
Present
+ Carla Stent (Chair)
+ Richard Callard
+ Tim Franklin
+ Ken McCall
In Attendance
+ AlCameron
+ Jane MacLeod
+ Nick Kennett
+ Alwen Lyons
+ Johann Appel
+ Richard Williams
+ Amanda Radford
+ Peter Mclver, EY
+ Claire Johnson, EY
Amanda Bowe (item 3)
Rob Houghton (Item 5.1)
Sharon Gilkes (Item 5.1)
Sally Smith (item 5.3)
Jonathan Hill (item 5.4)
Angela Van Den Bogerd (item 5.5 & 5.6)
Martin Hopcroft (item 5.5)
Jenny Ellwood (item 5.6)
Deana Herley (item 8.2 & 8.4)
Tim Armitt (item 8.5)
Martin Kirke (item 9.1)
Apologies
Paula Vennells
Agenda Item Purpose Lead
1. Welcome and Conflicts of Chairman 10.30
Interest
2. Minutes of the Meeting held on = Approval To approve the minutes of the meeting held on 28'" Chairman 10.32
28" March 2017, Matters March 2017, note the Matters Arising and update on the
Arising and Actions List Actions.
3. POMS ARC Report (verbal) Noting To update the ARC on the POMS ARC held on 16" May = Amanda Bowe 10.35
2017.
4. Annual Report & Accounts Approval To present to the ARC the financial statements for the 10.45
External Audit year ended March 2017:-
+ ARA Covering Note Amanda Radford
+ Financial Statements Amanda Radford
POL Briefing Book including Accounting Judgements = Amanda Radford
EY External Audit.
Peter Mclver
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Post Office Audit, Risk and Compliance Committee Agenda (cont.)
Agenda Item
Action Needed
I Purpose
Lead
5. Key Operational Risks Questions & ARC to updated on area areas of concern. 12.25
5.1. IT Controls Noting Rob Houghton / Sharon Gilkes
5.2 Financial Controls Amanda Radford
5.3 Financial Crime Sally Smith
5.4 Financial Services Conduct Jonathan Hill
5.5 Health & Safety Angela Van Den Bogerd /
Martin Hopcroft
5.6 Transformation Angela Van Den Bogerd /
Jenny Ellwood
6. Tax Update Al Cameron 12.40
7. Internal Audit Update Questions & ARC to note the Internal Audit Report. Johann Appel 12.55
noting
8. Risk Update Questions & ARC to be updated on any urgent Risk areas. 13.05
8.1 Top Risks noting Richard Williams
8.2 Executive Declaration Deana Herley
8.3 Principal Risks for the Annual Jane MacLeod
Report and Accounts
8.4 Report on Supply Chain Pilot Deana Herley
8.5 Business Continuity Planning Tim Armitt
9. Decision Papers 13.15
9.1 Modern Slavery Statement Martin Kirke
10. Noting Papers 13.20
10.1 Whistleblowing Report danie Mackeot
11. Any Other Business Topics raised under Any Other Business Chairman 13.25
CLOSE 13.30
POLARC 17(2")
Strictly Confidential
POL ARC 17/17 - 17/39
POST OFFICE LIMITED
(Company no. 2154540)
(the ‘Company’)
Minutes of a meeting of the AUDIT, RISK AND COMPLIANCE COMMITTEE
held at 9.30 am on
Present:
Carla Stent
Richard Callard
Tim Franklin
Apologies for absence:
Ken McCall
Alwen Lyons
In Attendance:
Tim Parker
Paula Vennells
Alisdair Cameron
Jane MacLeod
Nick Kennett
Amanda Radford
Johann Appel
Richard Williams
Jonathan Hill
Rob Houghton
Martin Hopcroft
Peter McIver
Claire Johnson
28" March 2017 at 20 Finsbury Street, London EC2Y 9AQ
Chair
Non-Executive Director (RC)
Non-Executive Director (TF)
Non-Executive Director
Company Secretary
Chairman of the Board
Group Chief Executive Officer (CEO)
Chief Financial & Operations Officer (CFOO)
General Counsel (GC)
Chief Executive Financial Services & Telecommunications
and CEO of POMS (NK)
Group Financial Controller (AR)
Senior Manager Internal Audit (JA)
Senior Risk Manager (RW)
Head of FS Risk & Regulation (JH)
Chief Information Officer (RH)
Safety, Environment and Wellbeing Manager.(MH)
Audit Partner, Ernst & Young (PMI)
Senior Quality Leader, Ernst & Young (CJ)
POLARC 17/17 WELCOME AND CONFLICTS OF INTEREST
(a)
POLARC 17/18 MINUTES OF THE MEETING HELD ON 3074 JANUARY 2017,
A quorum being present, the Chair opened the meeting. The
directors declared that they had no conflicts of interest in the
matters to be considered at the meeting in accordance with
the requirements of section 177 of the Companies Act 2006
and the Company's articles of association.
MATTERS ARISING AND ACTIONS LIST
(a) The minutes of the meeting held on 20‘ January 2017 were
approved as presented and the Chair of the committee was
POL ARC, 28 March 2017
authorised to sign them as a true record.
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(b) Actions:
17/08(g)
e The GC noted that a report consolidating the AML actions
to address the various risks would be brought to the ARC
in May following feedback from HMRC.
(c) The Committee acknowledge the work to date and the actions
status report was noted as accurate.
POMS ARC REPORT (ITEM 3(a) )
(a) Mr Kennett provided a report on behalf of Amanda Bowe,
Chair of the POMS ARC as follows:
« The Committee had established a new practice of receiving
training ahead of each meeting. In accordance with this
practice, a business continuity workshop had been hosted
by Tim Armitt (POL’s BCP manager) with the ARC - follow
up training sessions will focus on data and information
security
« The POMS independent NEDs had held a closed meeting
with the POL Internal Audit manager. A subsequent
meeting would be held with EY.
« The focus of the recent ARC meeting had been on the
operational risk framework, a deep dive on top risks and
regulatory changes, considering and approving the
internal audit plan for 2017-18; receiving the external
audit plan from EY; reviewing the POMS Treasury Risk
Management Policy; and approving the annual
compliance monitoring plan.
«The top risks had been considered and the following four
risks were identified as being outside appetite:
« Role of POL as AR
«Lack of skilled resources following loss of a senior
manager and will move back into appetite shortly.
* Strategy/business plans - moved from “in appetite”
to “out of appetite” following the development of the
2017/18 budget and operating plan; reflecting
requirements of the shareholder to reduce in-year
costs to invest in the business, as well as the
projected impact of Project Finch. As a result the
POMS 5 year plan is to be reviewed.
« Information protection resources - this is newly
identified and reflects the increased risk as the
impact of GDPR is understood.
Plans to bring each of these risks back within appetite
were discussed and the Committee requested a further
update on GDPR for its next meeting in May.
(b) The Committee noted the report from the POMS ARC dated
14 March 2017 as set out in Item 3(a).
(c) The Committee noted the minutes of the meeting of the
POMS ARC held on 8 November 2016.
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POLARC 17/20 MANAGEMENT OF KEY OPERATIONAL RISKS
Financial Reporting Controls Update (Item 4.1)
(a) The Committee received a report from Alisdair Cameron,
Chief Finance and Operations Officer and Amanda Radford,
Financial Controller.
(b) I The FC reported the continued progress to implement the
Financial Controls Framework the majority of which would be
in place by the end of the Financial Year.
(c) I The Committee discussed the self-assessment controls. The
Committee noted that nearly 100% (98%) of the controls are
now self-assessed and were considered to be operating
effectively, and that no high risk gaps were expected to
remain by year end. The FC noted ownership (and therefore
accountability) had now been identified for each control.
(d) Controls around fixed assets were being enhanced in respect
of the likely change in value and Masterdata controls had
been added to the project scope and it was expected that
work on these would be completed by end July. Work would
also commence shortly in relation to controls around agents’
debt; branch correction processes; agent remuneration and
POMS, although it was noted that a separate internal audit
review had been conducted in relation to POMS’ controls
during 2016-17 with no separate issues identified.
The Committee noted the report and thanked the FC for the
good progress.
POLARC 17/21 FINANCIAL CRIME RISK UPDATE (Item 4.6)
(a) The GC updated the ARC on discussions with HMRC on 22
March 2017 which had occurred since the Committee papers
were distributed and reported that:
« HMRC had identified a number of historic breaches of
regulatory principles. Most (but not all) related to in-
branch bureau de change services.
« HMRC had also noted that in some branches there
appeared to be a sales driven culture which could
override need to adhere to regulatory requirements.
« Other concerns identified by HMRC included system
limitations affecting transaction monitoring; frequent
changes in the MLRO; no training of non-branch staff
prior to 2016; concerns around the sanctions applied to
branches that are in breach; low SARs reporting
compared to size of network and number of
transactions; Reliance on FRES for data.
(b) The GC reported that HMRC had indicated that further
sanctions in respect of these findings was possible.
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(c)
(d)
(e)
(f)
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The GC advised however that HMRC had formally confirmed
that no action will be taken in relation to historic supply
chain issues re MSBs.
The GC further reported that HMRC would require
implementation of an action plan to remediate the issues
identified through the audit, and that a further meeting with
HMRC had been scheduled for early April to review the
remediation plan - work on which had commenced during
2016. The action plan would require accountabilities and
fixed dates for rectification. Failure to deliver against this
plan would also likely attract sanctions.
The GC noted that a number of these issues had been flagged
over the previous 12 months and that remediation actions
had been commenced in response. The ARC noted that full
remediation would require cooperation from across the
business and the costs of rectification will not be immaterial.
The GC also noted that the draft regulations to implement
the 4th Money Laundering Directive had recently been
published and that the consequential implications for Post
Office appeared material. In particular:
e there are increased requirements for ‘fit and proper’
testing (including skills, knowledge and expertise of
the individual to carry out their function effectively,
as well as conduct and integrity requirements) which
are likely to have to be rolled out across the
postmaster population and updated frequently. It is
unclear the extent to which these will apply to
assistants and multiples;
e Enhanced requirements for identity checks to be
carried out for in-branch transactions, and more
onerous requirements for records/copies of those
checks to be retained.
The GC noted that further work would be done to monitor the
draft regulations and to assess the actual impact on the
business.
In response to a question from the Committee about
resources and monitoring capabilities, the CFOO confirmed
that there is available funding within the change budget and
that where possible management would seek to embed
change through technology.
The Committee noted the report.
POLARC 17/22 IT CONTROLS UPDATE (Item 4.2)
(a)
POL ARC, 28 March 2017
Rob Houghton, CIO, introduced the report and informed the
committee that work to improve the IT control framework
was still in its early stages and that a more substantive report
would be brought to the May ARC. The ARC queried whether
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(c)
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controls were being mapped to identified risks and whether a
RACI model had been developed and embedded. It was
noted that the proposed COBIT 5 model would address these
issues.
In response to a question, RH also noted that work to review
critical services and a proposed operating model was ongoing
and would require re-negotiation with suppliers. This would
be presented to the Committee in May. It was noted that
POL’s outsourced model would require suppliers to be part of
the self-assessment framework and that work was ongoing
to define this and seek to embed it contractually. In
response to a further question RH noted that Internal Audit
was supporting the project to ensure the proper embedding
of controls.
The Committee requested that the IT controls follow a similar
process to those use by the Finance Department, ensuring
clear ownership and accountability. RH confirmed that this
matrix would be available and included in the May
update.
(d) Committee noted the report.
POLARC 17/23 TRANSFORMATION - CHANGE RISK UPDATE (item 4.5)
(a)
(b)
POL ARC, 28 March 2017
The Chair welcomed Angela Van Den Bogerd, Director of
Support Services to the meeting, to present the report
together with Jenny Ellwood, Head of Transformation Risk and
Assurance.
JE updated the Committee on the 3 main risks that impacted
transformation activity:
e Following the release of the HMRC online ‘calculator’, it
had been concluded that IR35 did not result in a number
of contractors being caught by the new rules. As a result,
while the uncertainty had caused a lot of unrest among the
contractor population, and a number of contractors had
chosen to leave, no programs were now assessed as being
at risk. The resourcing model was being reviewed to
ensure that it appropriately supported the level of change
activity.
¢ Activity around IT supplier management - RH noted that
discussions were ongoing across the supplier base but that
suppliers were responding well.
« Complex change portfolio delivery - the committee
discussed the risk of multiple major programs being
undertaken in parallel. The CFOO noted that while this was
true, in practice there were delays and items slipped.
Management therefore needed to re-assess the change
activity and make sure that project plans and costings were
realistic and that we were not being too optimistic. The
Chair noted that this was an area where the Company’s
risk appetite should be considered and that it is how we
defined our tolerances around change delivery.
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The Committee noted the report.
POLARC 17/24 FINANCIAL SERVICES CONDUCT RISK UPDATE (item 4.3)
(a)
(b)
(c)
Action: JH
(d)
(e)
(f)
POL ARC, 28 March 2017
The Chair welcomed Jonathan Hill, Head of FS Risk &
Regulation to the meeting.
JH reported that:
e Further work was underway with Bol and POMS to
understand the impact of the Senior Managers Regime -
this already applied to BoI and would apply to POMS during
2018, however there remained uncertainty as to if, and
the extent to which, it would apply to Appointed
Representatives.
e Sales compliance by FSs and MSs had been improving as
a result of the action plan. JH stated he was confident in
the work being done, but not complacent.
e The Committee discussed the metrics around mortgage
sales and JH noted that as the number of sales were low,
the absolute numbers of mystery shops distorted the
results. Completions were increasing and therefore more
statistically relevant data should start to emerge. JH noted
that the QA team reviews every mortgage before it is
finalised so management has confidence that sales
compliance processes are working.
JH reported the CRM roll out was getting good reviews from
a financial conduct perspective. The Committee discussed the
sale process and the risk that CRM customer engagement
would be seen as advised, and what mystery shopping was
being done to review these processes. The Committee noted
that mystery shopping was designed to test for failures, and
that complaints data needed to be considered in parallel in
order to get a more complete view of the sales process. JH
was asked to prepare an update for the next meeting
on the sales process undertaken by tablet and the way
quality assurance processes worked.
JH updated the meeting on progress on vetting, training and
access management controls. It was noted that at present
there was no plan to re-vet or re-test existing staff (including
agents and assistants) prior to giving them access to Horizon
following introduction of the new EUM controls, however this
would be kept under review in light of emerging data
regarding the effectiveness of historic and current vetting
processes
JH updated the meeting on the FCA’s requirements on “Cash
Savings Remedies” to provide customers with a savings
summary box at point of sale. He reported that compliance
levels for provision of the summary material to customers
were improving, and that BoI was happy with the results to
date, with further improvement required.
JH also noted the FCA thematic review on customer
understanding of transactions. He was expecting to see the
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material submitted by Bol to the FCA and noted that it was
likely to be some time before the output from this review was
available.
The Committee noted the report.
POLARC 17/25 SAFETY (item 4.4)
(a)
(b)
(c)
(d)
(e)
(f)
Action MH (g)
The Committee received a report from Martin Hopcroft,
Safety, Environment and Wellbeing Manager.
MH informed the committee that progress is being made as a
result of the increased focus on specific areas such as
reducing: absences, assaults at point of transfer and
cashpoint risk.
Work continued with branch managers and ‘Persons in
Charge’ to manage property compliance risks and as a result
fire risks were assessed as low, and work was ongoing
assessing asbestos and water risks.
The refreshed mobile phone policy had been rolled out and
communicated and this clearly discouraged making any calls
while driving — including hands free.
Further work was being undertaken in Supply Chain to ensure
that all shift managers were trained and that they understand
the importance of maintaining records.
MH commented that work done on ‘case across the counter’
and tracking other industry developments was showing clear
benefits, however criminal activity was now moving to ATM
attacks. The CFOO noted that the next area to focus on was
staged incidents where apparent victims may also be the
perpetrators.
The Committee requested more industry information to
understand the benchmarking. MH commented that POL
does have access to industry data and that work is ongoing
to ensure that we have appropriate comparators.
The Committee noted that the report was positive and
thanked MH for his good progress.
POLARC 17/26 RESIDUAL PENSION RISKS (item 5)
(a)
(b)
POL ARC, 28 March 2017
The Committee received a report from Natasha Wilson,
Director of Reward, Pensions and Performance.
NW informed the committee that agreement had finally been
reached with the Pension Trustees to close the pension
scheme and that the final arrangements were designed to
protect POL from being required to make further payments.
In particular it had been agreed that any future surplus would
not be returned to POL. Following a question from the
Committee, the CFOO noted that he did not believe that any
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further provisions would be required, although this remained
subject to year end accounting and audit work.
The Committee thanked NH for the work put into the project.
POLARC 17/27 CASH EFFICIENCY MEASURES
(a)
(b)
(c)
(d)
The Committee received a report from Amanda Radford, the
Financial Controller.
AR informed the committee that Remco had accepted the
recommendation that cash management should be a
bonusable measure (80% of the bonus was based on
EBITDAS and 20% on cash) however Remco had asked the
ARC to review the operation of the measure which required
maintenance Of a} ievevanr; DUffer. It was noted that the cash
measures had to bre-rned every month in order for the target
to be met.
In response to a question as to whether the measure would
incentivise the right behaviours, the CFOO stated that the
measure was consistent with management’s objectives to
better use available cash resources. The CEO noted that a
paper was to be discussed with the Board at the June strategy
day on options to manage cash more efficiently across the
network.
The Committee concluded that they supported the measure
and recommended the adoption of the measure as part of the
annual bonus plan.
INTERNAL AUDIT
POLARC 17/28 AUDIT REPORT (item 7.1)
(a)
(b)
Action: JA
(c)
POL ARC, 28 March 2017
The Committee received a report from Johann Appel, Senior
Manager Internal Audit.
JA reported on the current audit plan and noted that due to
delays in fieldwork and finalising fieldwork, no audits had
been finalised in time for the meeting, which was a
disappointing outcome. This was due in part to changes in
accountabilities due to the recent reorganisation, which also
meant it was taking longer to clear reports. This was
particularly the case with the Identity and Access
Management review. JA noted that as a result there were
potentially 11 audit reports which would come to the May
ARC. The Committee requested that batches of reports
be circulated (as they became available) ahead of the
next meeting.
JA noted that there were no overdue actions, although a
number were due at the end of the month. The CEO
commented that this was the first time this financial year that
there have been no overdue reports. JA explained that the
IA team had implemented a new reporting tool to track
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actions which enabled advance warning to be provided of
upcoming completion dates for actions of their actions.
The Committee noted the Internal Audit Report.
POLARC 17/29 INTERNAL AUDIT PLAN 2017/18 (item 7.2)
(a)
(b)
Action: JA
(c)
(d)
(e)
(f)
(g)
JA then presented the draft audit plan for 2017/18 and noted
that it was proposed to cover 16 ‘BAU’ focussed audits during
the year, and 13 change audits. The paper also outlined other
potential audits which would be considered should risks
change, and /or time and resources permit.
In response to a question as to whether cyber security would
be audited, JA noted that this was proposed for Q4 and
explained that this was a follow up audit to the audit work in
2016 and was intended to measure progress against the
recommendations identified in that report. The Committee
requested that the Cyber Security audit be performed
in two phases - Phase 1 to cover current market
learnings, and phase 2 to cover operational
effectiveness once the controls have been embedded.
The Committee questioned whether fraud should be included
as there is an emerging risk of issues such as money
laundering. JA confirmed that an audit of Moneygram was
already provided for in the plan.
In response to a question from the CFOO, JA noted that there
was flexibility in the plan, and that not all audits would require
the same amount of work. Therefore it would be possible to
respond to changing threats.
JA also noted that the audit team were undertaking assurance
activity in relation to the controls remediation projects being
implemented in each of Finance and IT. Reports as to the
effectiveness of the program would be provided to the
sponsor of each programme, and reports on progress would
be provided to the ARC.
The audit plan around change activity was also reviewed, and
the Committee noted that the proposed review of the pension
scheme would focus on auto enrolment requirements.
The Committee agreed that the Internal Audit Plan for
2017/18 represented an appropriate programme to support
senior management in their activities and provide assurance
to the Committee over key risks to the Post Office.
POLARC 17/30 REVIEW OF INTERNAL AUDIT CHARTER (item 7.3)
(a)
(b)
POL ARC, 28 March 2017
The Committee received a report from Johann Appel, Senior
Manager Internal Audit noting that
The Committee noted the report from JA confirming that the
self-assessment against the requirements of the Internal
Audit Charter showed compliance with those requirements.
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The Committee approved the Internal Audit Charter for
continued use through 2017/18.
EXTERNAL AUDIT
POLARC 17/31 UPDATE FROM THE EXTERNAL AUDITORS ON THE EXTERNAL
AUDIT PLAN (item 8.1)
(a)
(b)
(c)
The Committee received a verbal update from Peter McIver &
Claire Johnson of EY
CJ reported that the pre year end substantive testing was
nearing completion. She reported that there was no change
to the overall risk assessment, and EY had noted an
improvement in the control framework which would enable
them to place greater reliance on that framework going
forward. Nevertheless there were some areas where a
substantive approach was still required.
CJ reported that the IT audit was proving more challenging
and was therefore slightly delayed; this was due largely to the
outsourced nature of POL’s IT infrastructure and the need to
obtain documents and assurance from those outsourcers. CJ
reported that the IT transformation activity would, once
completed, address a number of the current concerns.
Peter McIver noted that there was further work to be done -
particularly as regards the postmaster litigation and that
subject to the outcome of the funding discussions, it was still
expected that the audit would be completed by July.
The Committee noted the update.
POLARC 17/32 ACCOUNTING JUDGEMENTS (item 8.2)
(a)
(b)
(c)
POL ARC, 28 March 2017
The Committee received a report from Alisdair Cameron, the
CFOO on the accounting judgements that would be relevant
for year end. The Committee noted the various
recommendations contained in the paper including the
proposed accounting treatment of the carrying value of FRES,
the approach to impairment of fixed assets, closure of the DB
pension scheme, closure of the third party supply chain
business as part of Iris, and the proposed move to a columnar
presentation of exceptional items in the accounts.
The Committee discussed the changes to reporting, and the
layout that the CFOO proposed, and noted that EY was in
principle supportive of the changes, subject to validating the
underlying data.
The Committee noted, and approved in principle:
« the proposed changes to the accounting judgments,
* the proposed move to a columnar format to demonstrate
performance of the business; and
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e confirmed that the retail operation within Supply Chain had
constituted a separate and major operation of Post Office
and should therefore be treated as a discontinued item.
RISK UPDATE
POLARC 17/33 SUPPLY CHAIN PLACEMAT PILOT (item 9.1)
(a)
(b)
Action: RW
(c)
The Chair invited Richard Williams, Senior Manager Risk to
introduce the report.
RW informed the committee that the pilot in Supply Chain
was ongoing to develop the ‘placemat’ to provide a granular
view of the risks and controls within Supply Chain and the
target was to report back to the ARC at the May meeting.
The CFOO noted that a decision would need to be made
following the pilot as to whether resources were best
deployed rectifying/remediating those issues identified in
Supply Chain as part of the Placemat process, or whether
emphasis should be on other areas.
The Chair encouraged management to bring through
risk data in May wherever possible.
The Committee noted the report showed good progress in risk
management for the business.
POLARC 17/34 INCIDENTS AND EXCEPTIONS (item 9.2)
(a)
(b)
Richard Williams, Senior Manager Risk introduced the report,
and noted that incident reporting levels had dropped by c
25%. It was unclear as to whether this was due to actual
numbers of incidents reducing or whether there was some
other factor at work, and that work was ongoing to
understand this.
The Committee noted the incidents and exceptions.
POLARC 17/35 RISK APPETITE WORKSHOP (item 9.3)
(a)
(b)
POL ARC, 28 March 2017
The Committee received a report from Richard Williams,
Senior Manager Risk.
RW informed the committee that the Risk Appetite Workshop
had identified 5 areas of importance around:
e Customer relevance,
« Trust/brand/ social purpose
e Conduct & compliance issues
« Commercial sustainability,
e Mails and parcels business,
However further work needed to be done around these to
validate the findings. RW noted that the central risk team
would explore each of these further with a view to developing
a more granular approach.
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Action: TA
POLARC 17/37
Action: GC
POLARC 17/38
Action: Martin
Kirke
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(c) The Committee asked for more data at the next
meeting and noted the report.
BUSINESS CONTINUITY PLANNING (item 9.2)
(a) The committee received a report from Tim Armit, Business
Continuity Manager.
(b) The Committee asked management to develop a
tracker showing resolution of the items identified
through these reports.
(c) The Committee noted the business continuity and crisis
management update.
NOTING PAPERS
ARC EFFECTIVENESS REVIEW AGAINST TERMS OF
REFERENCE (item 10.1)
(a) I Jane MacLeod, General Counsel, introduced the report.
(b) I The Committee agreed the findings of the review against its
terms of reference (Appendix 1 to the report) and specifically
that the requirements of the terms of reference had been
met. The GC advised that the Terms of Reference would be
reviewed and recommendations for changes would be
brought to the next ARC meeting
(c) The Committee agreed the proposed committee forward plan
(Appendix 2 to the report).
HORIZON SCANNING (item 10.2)
(a) The Committee received a report from Jane MacLeod, General
Counsel and noted that POL would need to comply with the
new requirements on reporting practices, and noted that
work had begun on this to ensure compliance was possible.
The Committee further noted that an update on Modern
Slavery was due at the May ARC.
(b) The Committee noted the report.
ANY OTHER BUSINESS
(a) There being no further business the Chair closed the meeting
at 12.10pm.
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Post Office Limited ARC Committee
Status Report as at: 12 May 2017 Action included on the ARC agenda
Action closed
REFERENCE ACTION ‘Action Owner IDue Date [STATUS ‘Openiciosed
(GE Member)
[22 January 2016 I Risk Update Vane MacLeod I September 2017 ARC [Corporate Governance Capability - The Chairman of the ARC & GC have ‘Open
POLARC 16/03 (q) _IFor the Executive to work with the external auditors to set out (General lagreed to revisit the benchmarking with the UK Corporate Governance Code in
Iwhat a three year roadmap to benchmark against the UK Counsel) la years time September 2017 ARC
ICorporate Governance Code would like.
128 September 2016 IBOIUK Report Jane MacLeod I September 2017 ARC ‘OpenI
IPOLARC 16/43 (g) A review of the 2nd and 3rd lines of defence in the Post Office (General
Money branch distribution model to be undertaken in autumn Counsel)
2017/18.
30 January 2017 INetwork Conduct Risk Action Pian Jonathan Hill_I March, September and [Provided in agenda papers ‘OpenI
IPOLARC 17/04 (i) _ IThe Committee asked to see, quarterly, a network conduct risk November 2017 ARC
Iscorecard, and action plans against the areas highlighted as
lconcems, with a highlight on any regulatory changes which will
latfect the network risk.
[30 January 2017 __ [Annual Risk Review Jane MacLeod May 2017 ARC__I The updated Financial Crime paper sets out the actions and status deriving from Closed}
IPOLARC 17/08 (g) IThe Committee asked for a detailed review at the next Meeting, (General this review, and actions will be formally tracked against it by the AML Steering
lwith a report to include a consolidated list of observations and an} Counsel) IGroup going forward, with status updates to the RCC and ARC at each meeting.
laction plan to mitigate / resolve the issues across all the reports
that have or are to be issued on this subject.
[28 March 2017 [iT Controls Update Rob Houghton May 2017 ARC___IOn the agenda. Closed]
IPOLARC 17/22 (c) _IARC requested that the IT controls follow a similar process to (clo)
Ithose used by the Finance Department. ensuring clear
laccountability. RH confirmed that this matrix would be available
land included in the May update.
[28 March 2017 Financial Services Conduct Risk Update Jonathan Hill May 2017 ARC___IOn the agenda. Closed}
IPOLARC 17/24 (c) _IJH was asked to prepare an update for the next meeting on the
lsales process undertaken by tablet and the way quality
lassurance processes worked.
[28 March 2017 [Safety Martin Hopcroft I May 2047 Sept 2017 ARC Ie have not yet received the more detailed industry benchmark data from our Closed}
IPOLARC 17/25 (g) __IMH was asked to provide more industry information to sources ie. BSIA (Accidents in Supply Chain), QBE Insurance and Lockton's
lunderstand the benchmarking. broker (Client comparisons), CBRE and Servest (Property compliance), OH
JAssist ™ (Occ Health and Mental Health). We are still bringing this data
ltogether in order to compare year end performance and will provide this to the
ISeptember ARC meeting
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REFERENCE ACTION ‘Action Owner Due Date [STATUS ‘OpeniGiosed
(GE Member)
[28 March 2017 [Audit Report Johann Appel I Prior to May 2017 ARC. IWill circulate the first batch w/e 1 May and the second batch wic 6 May, with Closed}
IPOLARC 17/28 (b) _IJA was asked to circulate batches of audit reports (as they high level summaries of the reports included in the ARC paper.
become available) ahead of the next meeting.
[28 March 2017 Internal Audit Pian Johann Appel May 2017 ARC _IAudit Plan updated to reflect this change. Closed}
IPOLARC 17/29 (b) _IARC requested that the Cyber Security audit be performed in two
phases - Phase 1 to cover current market learnings and Phase 2
io cover operational effectiveness once the controls have been
lembedded,
[28 March 2017 [Supply Chain Placemat Pilot Richard Williams May 2017 ARC __IOn the agenda. Closed}
POLARC 17/33 (d) IThe Chair encouraged management to bring through risk data in
May wherever possible.
[28 March 2017 Risk Appetite Workshop Richard Wi May 2017 ARC __IOn the agenda / verbal update. Closed}
POLARC 17/35 (c) _IARC asked for more data at the next meeting.
[28 March 2017 [Business Continuity Planning Tim Armit May 2017 ARC _IOn the agenda. Closed}
IPOLARC 17/36 (b) IARC asked management to develop a tracker showing resolution
Jf the items identified through business continuity planning
reports,
[28 March 2017 IARC Effectiveness Review Against Terms of Reference Jane MacLeod IMay-2017 Sept 2017 ARC Resourcing constraints and the focus on the Placemat have meant this work ‘OpenI
IPOLARC 17/37 (b) _IGC advised that the ToR would be reviewed with (General has not started. We will bring this back to the next ARC.
recommendations for changes being brought to the next ARC Counsel)
meeting
[28 March 2017 Horizon Scanning Martin Kirke May 2017 ARC __IOn the agenda. Closed}
POLARC 17/38 (a) _IARC noted that an update on Modern Slavery was due at the
May ARC.
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AUDIT, RISK AND COMPLIANCE COMMITTEE ADVISORY PAPER
Annual Report and Accounts 2016/17
Author: Amanda Radford Sponsor: Al Cameron Date: 18" May 2017
Executive Summary
Context
1. The draft 2016/17 financial statement section of the Annual Report and
Accounts (ARA) is presented to the ARC for review.
2. POL usually signs and publishes its ARA around the end of June. Provided that
(1) confirmation of investment funding is received from BEIS by the end of June
(2) EY audit procedures are complete and (3) the legal review of control
accounts in POLSAP by Deloitte is finalised, we believe that we should be in a
position to sign the ARA by the end of July.
3. The financial statements are presented on the basis that the impairment of fixed
assets can be reversed. The effect on the financial statements of a potential
delay in receipt of this funding is considered further in this paper.
4. We have not presented the front half of the ARA to the ARC for review. Until we
have clarity on the timing of the investment funding decision, the messaging
within the Chairman, CEO and Finance Review cannot be completed. Once we
have a clear view on the investment funding timeline we will complete the front
half of the ARA, circulate a full draft ARA and arrange a further ARC meeting to
review and approve.
5. The papers comprise the financial statements section of the ARA, a briefing
book setting out the details of the financial results and accounting judgements, a
report from Ernst & Young on their findings to date and an update on the
Financial Control Framework.
Questions addressed in this report
6. The following questions are addressed in this report:
a. In summary, what were POL’s financial results for the year ended March
2017?
b. What is the status of the audit work on the ARA?
c. What is the effect on the ARA of a delay in the confirmation of investment
funding?
d. What matters are we drawing to the ARC’s attention in their review?
Input Sought
7. The ARC is requested to review and comment on the draft financial statements
for the year ended March 2017, enabling the Chair to provide a verbal update to
the Board on 25" May.
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The Report
In summary, what were POL’s financial results for the year ended
March 2017?
‘eit Underlying revenue
rin ipally asa result of the planned
ing the
the required valuation methodology) was written off. This should be offset by the
reversal of the impairment accounting estimate which would lead to ‘the
What is the status of the audit work on the ARA?
10.EY continue their audit work in relation to the following areas and will provide a
verbal update on progress at the ARC meeting on 18" May
Postmasters compensation
Provision for legal claims
Finalisation of substantive leavers testing
Corporation tax
Position paper on bill payments deferred revenue
oaoo7p
In addition, until we have clarity on the timing and value of investment funding
the following areas of audit testing and accounting judgement remain
outstanding:-
f. Fixed asset impairment reversal
g. Going concern
h. Subsequent events review to the date of signing of the accounts.
In addition, to the above, completion of the financial statements is also subject to
finalisation of:-
i. Directors emoluments
j. Capital commitments
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k. Tax disclosures (which will not impact the tax position for the year)
11.Subject to the completion of their audit work, EY have not identified any
significant issues. EY identified an adjustment of iineetevanrin relation to the
overstatement of a provision in relation to the Royal Mail separation. We have
adjusted the accounts accordingly in Capital and Investments. The credit does
not affect EBITDAS for the year.
12.As part of the year end process, internal POL reviews have been undertaken to
review post year end invoices, purchase orders and bank reconciliations and no
adjustments are proposed as a result. EY also undertake a post year end review
and will update nearer to signature.
What is the effect of a delay in the confirmation of investment
funding?
13. If confirmation of investment funding is delayed beyond the end of June, we will
need to consider our options with regard to the date of signing and publishing
the ARA and the assumptions surrounding fixed asset impairment
a. Confirmation of investment funding received late summer (July/August)
Delay signing and publication of accounts until confirmation is received. This
will require the review of disclosures on going concern, a decision on
impairment and additional post balance sheet review procedures ahead of
signing. The Group net assets position would be unchanged, subject to the
post balance sheet review.
b. Confirmation of investment funding received in the Autumn Statement
(November)
Option 1 - Delay signing and publication of accounts until confirmation is
received. This will require the review of disclosures on going concern, a
decision on impairment and additional post balance sheet review procedures
ahead of signing. The Group net assets position would be unchanged,
subject to the post balance sheet review. However, Post Office may receive
pressure and challenge from external stakeholders as a result of the delay.
Option 2 — Sign and publish the accounts ahead of confirmation of
investment funding. We will need to be able to demonstrate that preparation
of the accounts on a going concern basis remains appropriate and to
consider whether the change in financial conditions under which we are
reversing the impairment of fixed assets is still valid. If we were to determine
that the impairment estimate.sbauld not be reversed, the Group would have
a net liabilities position off RRELEVANTI
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What matters are we drawing to the ARCs attention in their review?
Basis of preparation
14. The financial statements have been prepared on a basis consistent with prior
years with a number of key exceptions:-
a. Accounting for FRES — in the company only accounts, there has been a
change in accounting policy. Equity accounting for investment in joint
ventures has been adopted in line with the Group accounts. This has had the I
effect of increasing the carrying value of the investment in FRES from ierevevant!
ta ecuevantiat March 2017 and a restatement of the prior period under the Same
accounting policy (FY16!:
b. Closure of the defined benefit scheme — as a result of the signing of the
memorandum of understanding, POL no longer has a right to the assets of
the scheme, should they exist, at any point in the future. Consequently, the
accounting asset has been derecognised. This has the effect of removing the
net pension asset of
c. Impairment of fixed assets — the historical accounting estimate has been to
immediately impair fixed assets on acquisition. As a result of a sustainable
return to profitability and the agreement of an extension to the working
capital facility and government subsidy through to March 2020 and expected
confirmation of investment funding, we have reviewed the accounting
estimate and concluded that we can return to a more conventional
capitalisation and depreciation and amortisation policy. The net effect of the
recapitalisation of fixed and intangible assets is to increase the net book
value of fixed and intangible assets on the balance sheet b
review the appropriateness of this change subject to the confirmation of
investment funding.
d. Presentation of the Consolidated Income Statement - we have reviewed
the way in which we show exceptional items on the face of the Consolidated
Income Statement. Exceptional items have traditionally comprised impaired
capital expenditure and major strategic project spend net of investment
funding.
In 2016-17, we have transitioned to an alternative presentation. We are
showing four columns in the consolidated income statement in the current
year and preceding financial year. These are: revenue trading; closure of
operations; capital and investments; and (adding them together) the reported
results. The EBITDAS figure can be directly extracted from the underlying
trading column.
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As the ARC has confirmed that IRIS is a separate and major segment we are
showing Mobile and IRIS under Closure of Operations but within
discontinued operations (as required by IFRS 5
revenue ahead of costs has led to a loss of! i
addition we have incurred one-off non-recurring costs o; relation to
;tedundancies and site closure giving a loss from discontinued operations of
IRRELEVANT Netted against IRIS and within discontinued operations is a credit of
in relation to the release.of.a prior year Mobile provision, giving total
discontinued operations of IRRELEVANT I
The one off pension credit relating to prior periods: is shown within
the Closure of Operations together with the tax charge which arises from the
reversal of the deferred tax asset associated with the closure of the scheme
As a result of the treatment of IRIS as a discontinued operation, we have
restated the prior year to take account of this reclassification which affects
reported EBITDAS but has no effect on the overall loss for the year. A
reconciliation of the changes is presented below.
As per signed I Restatement Restated
financial for IRIS
statements discontinued
operation
_ am £m
Turnover
Costs
Operating profit from
continuing operations
before capital and
investment
Loss for the financial year
from continuing
operations after financing
and tax
EBITDAS
Loss for the financial year
after tax from
discontinued operations
Loss for the financial year
IRRELEVANT
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*Excludes depreciation o™*=""";
e. Discount rate applied to determining defined benefit pension
obligations - In preparing the accounts, we are required to revalue the
pension scheme asset before the asset is written-off. We draw to the
attention of the ARC, the discount rate applied in the calculation of the
defined benefit scheme obligation.
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. AA rated
corporate bond yields have fallen significantly since 27 March 2016,
_ Suggesting a discount rate of at lea a lower than last year (FY16:
The current year assumption has been considered with reference to the
Willis Towers Watson 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. Given the uncertainty of such extrapolation, we have chosen to take a
more prudent view and not taken full credit for the upward slope in the
model. This results in a reduction in discount rate t "«! It should be noted
that the discount rate used in the funding valuation i
EY have challenged whether the discount rate of; appropriate and
believe that it is on the prudent end of the range. ver, they have
reviewed other assumptions and concluded that, in the round, the
assumptions applied in deriving the pre write-off scheme asset give a
valuation which is materially correct.
Going Concern
15. The draft financial statements have been prepared on the basis that POL is a
going concern. Given the uncertainty over the timing of the investment funding
decision we are currently undertaking a detailed review of future cash flows with
and without investment funding.
16.Whilst we haven't received investment funding confirmation, we have received
confirmation of the working capital facility through to March 2021 and subsidy for
March 2018-19 and March 2019-20. As a result, we anticipate being able to
provide assurance for 18 months beyond the balance sheet date in absence of
the investment funding decision and we will provide this support to the ARC
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should we make the decision to sign and publish the accounts before
confirmation of investment funding (11b — Option 2).
Quality of Earnings
17.Adjusted for the net one-off items included _within.EBITDAS, the reported
earnings improvement increases from, IRRELEVANT reducing the relative
impact of one-offs.
Post Office Limited (consolidated) £m. £m. £m %.
Reported profit from continuing operations
Network Subsidy Payment
Add back depreciation
Reported EBITDAS i
Bill payments (a)
Pensions one-off item — closure impact on current year costs (b)
HMRC Anti-Money Laundering penalty (c )
Telecoms line rental income recognition (4) I RR E L EVAN T
Gamma one-off income release i
Billing corrections re 2014-15
Back-billing to RM for Certificates of Posting work
Fujitsu compensation for poor service in 2013-14
Change in Telecoms bad debt policy
Total adjustments
Adjusted to exclude one-offs
a. Bill payments
A review of deferred income in relation to bill payments was completed in the
year which resulted in a one-off credit to the income statement.
b. Pensions past service credit
As a consequence of the closure of RMPP to future accruals, al mneievanricredit i in
relation to current year service cost ha:
statement. The prior year impact Of mresvans has been taken below the line in
“Closure of Operations”. —
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c. HMRC AML penalty
Following a review by HMRC dr rovision for historical AML premises
registration non-compliance penalties has been made.
d. Telecoms line rental
During the year a correction was made to telecoms line rental income
recognition to recognise revenue over the life of the contract with the customer.
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Post Office Limited
Registered Number 2154540
Post Office Limited
Financial Statements
2016-2017
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DIRECTORS’ RESPONSIBILITIES STATEMENT
The directors are responsible for preparing the Annual Report, which includes the Directors’ Report,
Remuneration Report and Corporate Governance Statement, and the Group and Parent Company
Financial Statements, in accordance with applicable law and regulations.
Company law requires the directors to prepare Financial Statements for each financial year. Under that
law the directors have elected to prepare the Group consolidated Financial Statements in accordance
with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union (“EU”),
The financial reporting framework that has been applied in the preparation of the Parent Company
Financial Statements is applicable law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice). Under company law the directors must not approve the
Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs
of the Group and Parent Company, and of the profit or loss of the Group and Parent Company for that
period.
In preparing these Financial Statements, the directors are required to:
« select suitable accounting policies and then apply them consistently;
* make judgments and accounting estimates that are reasonable and prudent;
« state whether IFRS as adopted by the EU, and applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in the Group and Parent
Company Financial Statements respectively;
* prepare the Financial Statements on the going concern basis unless it is inappropriate to
presume that the Group and Parent Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and
explain the Company’s transactions and disclose with reasonable accuracy at any time the financial
position of the Company and the Group and to enable them to ensure that the Financial Statements
and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the
Group’s Financial Statements, Article 4 of the International Accounting Standards Regulation. They are
also responsible for safeguarding the assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial
information included on the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of Financial Statements may differ from legislation in other
jurisdictions.
The Directors are responsible for preparing the Directors’ report and the Corporate Governance report
in accordance with the Companies Act 2006 and applicable regulations.
The Directors confirm that to the best of their knowledge:
* The Group consolidated Financial Statements, prepared in accordance with IFRS as adopted by
the EU and in accordance with the provisions of the Companies Act 2006 give a true and fair
view of the assets, liabilities, financial position and profit of the Group;
« The Parent Company Financial Statements prepared in accordance with United Kingdom
Generally Accepted Accounting Practice including FRS 101 “Reduced Disclosure Framework”,
give a true and fair view of the assets, liabilities, financial position and profit of the Company;
and
« The management report contained in this report includes a fair view of the development and
performance of the business and the position of the Group as a whole and of the Company,
together with a description of the principal risks and uncertainties they face.
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF POST OFFICE LIMITED
We have audited the consolidated Financial Statements of Post Office Limited for the 52 week period
ended 26 March 2017 which comprise the Group Consolidated Income Statement, the Group
Consolidated Statement of Comprehensive Income, the Group Consolidated Balance Sheet, the Group
Consolidated Statement of Cash Flows, the Group Consolidated Statements of Changes in Equity, the
related notes 1 to 23, the Parent Company Statement of Comprehensive Income, the Parent Company
Balance Sheet, the Parent Company Statement of Changes in Equity and the related notes 1 to 19.
The financial reporting framework that has been applied in the preparation of the group Financial
Statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by
the European Union. The financial reporting framework that has been applied in the preparation of the
Parent company Financial Statements is applicable law and United Kingdom Accounting Standards
(United Kingdom Generally Accepted Accounting Practice), including FRS 101 “Reduced Disclosure
Framework”.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part
16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsi ies of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page tx, the directors
are responsible for the preparation of the Financial Statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
Scope of the audit of the Financial Statements
An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements
sufficient to give reasonable assurance that the Financial Statements are free from material
misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the Financial Statements. In addition,
we read all the financial and non-financial information in the Annual Report and Financial Statements
to identify material inconsistencies with the audited Financial Statements and to identify any
information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications for our report.
Opinion on Financial Statements
In our opinion:
e@ 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 26 March 2017 and of the Group’s profit for the 52-week period then
ended;
e@ the group Financial Statements have been properly prepared in accordance with IFRSs as adopted
by the European Union;
e@ the Parent Company Financial Statements have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice, including FRS 101 “Reduced Disclosure
Framework”; and
@ the Group and Parent Company Financial Statements have been prepared in accordance with the
requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
based on the work undertaken in the course of the audit
4
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>» the information given in the Strategic Report and the Directors’ Report for the financial year
for which the Financial Statements are prepared is consistent with the Financial Statements.
» the Strategic Report and the Directors’ Report have been prepared in accordance with
applicable legal requirements;
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Company and its environment obtained in the
course of the audit, we have identified no material misstatements in the Strategic Report or Directors’
Report
We have nothing to report in respect of the following matters where the Companies Act 2006 requires
us to report to you if, in our opinion:
@ adequate accounting records have not been kept by the parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
e@ the Parent Company Financial Statements are not in agreement with the accounting records
and returns; or
e certain disclosures of directors’ remuneration specified by law are not made; or
e we have not received all the information and explanations we require for our audit.
Peter McIver (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
x 2017
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Consolidated income statement
for the 52 weeks ended 26 March 2017 and 27 March 2016
2017 £m 2016 (restated) £m
Revenue Closure of Capital and Revenue Closure of Capital and
Notes trading operations investment Total trading operations investment Total
Continuing operations:
Turnover 957 - 7 957 964 = - 964
Network Subsidy Payment 80 - : 80 130 - - 130
Revenue 1,037 - - 1,037 1,094 - -_ 1,094
Costs 2,4 (978) 19 (119) (1,078) (1,016) - (283)(1,299)
Investment funding 4 - - 140 140 - - 150 150
Impairment 4 - - 151 151 - - (136) (136)
Depreciation - - - - (1) - - (1)
Joint venture share 10 34 - = 34 35 = 5 35
Operating profit / (loss) from
continuing operations 93 19 172 284 112 - (269) (157)
Finance costs 6 (7) - - (7) (5) = - (5)
Net pensions financing income 17 8 = : 8 8 - = 8
Profit / (loss) before taxation
from continuing operations 94 19 172 285 115 - (269) (154)
Taxation credit / (charge) 7 9 (25) - (16) 4 : - 4
Profit / (loss) for the financial
year from continuing operations 103 (6) 172 269 119 - (269) (150)
Discontinued operations:
Loss for the financial year
after tax from discontinued
operations 20 : (47) : (47) : (17) - (17)
Profit / (Loss) for the
financial year 103 (53) 172-222 119 (17) (269) (167)
EBITDAS 13 - - - (47) - - 7
Revenue trading represents the underlying trading of the business excluding the Closure of operations
and Capital and investment.
Closure of operations is the £48 million net loss of the Retail Cash in Transit operation which has been
discontinued during the year (note 20) less the £1 million provision release from the Mobile operation
that was discontinued in prior year, plus £19 million one-off pension gain resulting from the closure of
the defined benefit plan. The reversal of £25 million tax losses asset has also been allocated to closure
of operations as this is related to the closure of the defined benefit plan (note 7). Prior year results
have been restated to show the Retail Cash in Transit net loss as discontinued, the impact of this on
prior year revenue and costs has been summarised within note 1. Capital and investment (note 4)
includes government funding, impairment of capital expenditure and transformational spend. In the
current year there has been a reversal of impairment to the value of £255 million, further detail is
given within note 1.
EBITDAS is one of the Group’s key financial measures and is calculated by taking Revenue excluding
the Network Subsidy Payment, less costs from revenue trading excluding depreciation, plus joint
venture share. For the year ended 26 March 2017 EBITDAS was £13 million (2016 restated: EBITDAS
loss of £17 million).
6
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Consolidated statement of comprehensive income
for the 52 weeks ended 26 March 2017 and 27 March 2016
2016
2017 (restated)
Notes =m £m
Profit / (loss) for the financial year from continuing operations 269 (150)
Loss for the financial year from discontinued operations 20 (47) (17)
Profit / (loss) for the financial year 222 (167)
Other comprehensive income not to be reclassified to profit or loss in
Future periods
Remeasurements on defined benefit surpluses 17 (249) (9)
Withholding tax effect 30 7
Income tax effect 7 25 5
Total comprehensive income for the year 28 (171)
There are no other comprehensive income items that will be reclassified to the profit and loss in future
periods.
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Consolidated statement of cash flows
for the 52 weeks ended 26 March 2017 and 27 March 2016
2016
2017 = (restated)
Notes £m £m
Cash flows from operating activities
Operating profit from revenue trading from continuing operations 93 112
Operating loss from discontinued operations 20 (47) (17)
Total profit before capital and investment 46 95
Adjustment for:
Share of profit from joint ventures 10 (34) (35)
Pension operating costs 2 24 30
Working capital movements: (1) (81)
[Decrease/(Increase) in trade and other receivables 86 (16)
(Decrease) in trade and other payables (95) (59)
[Increase in inventories (1) -
Increase in provisions for discontinued operations 20 5 3
Increase/(Decrease) in revenue trading provisions 15 4 (9)
Pension operating costs paid (22) (23)
Cash payments in respect of capital and investment items: (55) (109)
Government grant 140 150
Restructuring costs (195) (253)
(Other = (6)
Net cash outflow from operating activities (42) (123)
Income tax recovered 7 9 9
Cash flows from investing activities
Dividends received from joint ventures 10 35 35
Acquisition of insurance business - (44)
Purchase of tangible and intangible non- (115) (136)
Net cash outflow from investing acti (80) (145)
Net cash outflow before financing ac! (113) (259)
Cash flows from financing activities
Finance costs paid (7) (5)
Payments to finance lease creditors (8) -
Proceeds of borrowings from BEIS 14 96 155
Net cash inflow from financing activities 81 150
Net (decrease) in cash and cash equivalents (32) (109)
Cash and cash equivalents at the beginning of the year 12 712 821
Cash and cash equivalents at the end of the year 12 680 712
Post Office Limited
Consolidated balance sheet
at 26 March 2017 and 27 March 2016
2017 2016
Notes £m £m
Non-current assets
Intangible assets 167 44
Property, plant and equipment 9 141 9
Investments in joint ventures 10 66 67
Retirement benefit surplus 17 1 196
Trade and other receivables 11 11 12
Total non-current assets 386 328
Current assets
Inventories 7 6
Trade and other receivables 11 326 411
Cash and cash equivalents 12 680 712
Total current assets 1,013 1,129
Total assets 1,399 1,457
Current liabilities
Trade and other payables 13 (563) (655)
Financial liabilities - interest bearing loans and borrowings 14 (561) (465)
- obligations under finance leases - (8)
Provisions 15 (58) (151)
Total current liabilities (1,182) (1,279)
Non-current liabilities
Other payables 13 (22) (25)
Provisions 15 (30) (16)
Total non- current lia (52) (41)
Net assets 165 137
Equity
Share capital 18 - -
Share premium 18 465 465
Retained earnings (302) (330)
Other Reserves 18 2 2
Total equity 165 137
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The financial statements on pages [x] to [x] were approved by the Board of Directors on [x] 2017 and signed
on its behalf by:
P A Vennells
Chief Executive
A Cameron
Chief Financial Officer
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Consolidated statement of changes in equity
for the 52 weeks ended 26 March 2017 and 27 March 2016
Share Retained Other Total
premium — earnings reserves equity
Notes £m £m £m —m
At 27 March 2016 465 (330) 2 137
Profit for the year - 222 - 222
Remeasurements on defined benefit surplus 17 - (249) - (249)
Withholding tax effect - 30 - 30
Income tax effect 7 - 25 : 25
At 26 March 2017 465 (302) 2 165
Share Retained Other Total
premium earnings __ reserves equity
Notes £m £m ém £m
At 30 March 2015 (restated) 465 (159) 2 308
Loss for the year - (167) - (167)
Remeasurements on defined benefit surplus 17 - (9) - (9)
Income tax effect 7 : 5 : 5
At 27 March 2016 465 (330) 2 137
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Notes to the financial statements
1. Accounting Policies
Financial year
The financial year ends on the last Sunday in March and for this reason these financial statements are made up
for the 52 weeks ended 26 March 2017 (2016: 52 weeks ended 27 March 2016).
Basis of preparation
The Group financial statements on pages bd to bd have been prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS. Unless otherwise stated in the accounting policies below, the
financial statements have been prepared under the historic cost accounting convention.
The Company is incorporated and domiciled in the United Kingdom. The Group consolidated financial statements
are presented in Sterling and all values are rounded to the nearest Emillion except where otherwise indicated.
The presentational format of the income statement has been changed in the current year to a columnar format
presenting the results of the Group in total and split between Revenue trading, Closure of operations, and Capital
and investment. The definition of these headings is defined within a memorandum to the income statement.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiary
undertaking as at 26 March 2017. 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) for the 52 weeks
ended 26 March 2017. The year end date is in line with the Company. The subsidiary uses consistent accounting
policies where appropriate and its results have been consolidated into the group financial statements. All intra-
group balances, transactions, unrealised gains and losses resulting from intra-group transactions are eliminated
in full.
New standards, amendments and interpretations issued not yet effective for the current year
The following standards and interpretations, which have been issued by the IASB and are relevant for the Group,
subject to EU ratification, become effective after the current year-end and have not been early adopted by the
Group:
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments was first issued in November 2009 and has since been amended several times. A
complete version of the standard was issued in July 2014 and is a replacement of IAS 39 Financial Instruments:
Recognition and Measurement. IFRS 9 covers the classification, measurement and derecognition of financial assets
and financial liabilities, together with a new hedge accounting model and a new expected credit loss model for
calculating impairment. The new standard becomes effective for annual periods beginning on or after 1 January
2018. It is anticipated that the application of this amendment will have no significant impact on the Group’s income
statement or balance sheet.
IFRS 15 Revenue from Contracts with Customers
The IASB issued IFRS 15 Revenue from contracts with customers in May 2014. The new standard provides a
single, five-step revenue recognition model, applicable to all sales contracts, which is based upon the principle
that revenue is recognised when control of goods or services is transferred to the customer. It replaces all existing
revenue recognition guidance under current IFRS and becomes effective for annual periods beginning on or after
1 January 2018. The Group is currently considering the impact on its consolidated results and financial position.
Amendments to IFRS 16 Leases
The scope of IFRS 16 includes leases of all assets, with certain exceptions. IFRS 16 requires lessees to account
for all leases under a single on-balance sheet model in a similar way to finance leases under IAS 17, except for
two exemptions which are leases of low value assets and short-term leases (leases with a lease term of 12 months
or less). At the commencement date of the lease, a lessee will recognise a liability to make lease payments and
an asset representing the right to use the underlying asset during the lease term. Lessees will be required to
separately recognise the interest expense on the lease liability and the depreciation expense on the asset. Lessees
will be required to re-measure the lease liability upon the occurrence of certain events as an adjustment to the
asset value. The amendments are effective for annual periods beginning on or after 1 January 2019. The Group is
currently considering the impact on its consolidated results and financial position.
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IAS 7 Disclosure Initiative - Amendments to IAS 7
The amendments to IAS 7 Statement of Cash Flows are part of the IASB’s Disclosure Initiative and help users of
financial statements better understand changes in an entity’s debt. The amendments require entities to provide
disclosures about changes in their liabilities arising from financing activities, including both changes arising from
cash flows and non-cash changes (such as foreign exchange gains or losses). The amendment is effective for
annual periods beginning on or after 1 January 2017 but early application is permitted. The Group is currently
considering the impact of this change.
IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12
The IASB issued the amendments to IAS 12 Income Taxes to clarify the accounting for deferred tax assets for
unrealised losses on debt instruments measured at fair value. The amendments clarify that an entity needs to
consider whether tax law restricts the sources of taxable profits against which it may make deductions on the
reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity
should determine future taxable profits and explain the circumstances in which taxable profit may include the
recovery of some assets for more than their carrying amount. Entities are required to apply the amendments
retrospectively. The change is effective for annual periods beginning on or after 1 January 2017 but early adoption
is permitted. It is anticipated that the application of these amendments will have no significant impact on the
Group’s income statement or balance sheet.
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.
Goodwill
Prior year restatements
In preparing the financial statements for the current year, the comparative figures for the year ended 27 March
2016 have been restated. The Retail Cash in Transit operation has been discontinued during the current year
and has been presented as part of discontinued operations. The comparatives in the income statement have
been restated and allocated to discontinued operations. The restatement affects revenue, people costs, and
other operating costs. Within this report, the comparative income statement and statement of comprehensive
income for the year ended 27 March 2016 have been restated. The operating profit from revenue trading on the
cash flow statement has also been restated. There has been no effect on the balance sheet or statement of
changes in equity.
The table below shows the impact of the restatement on revenue trading and closure of operations for the year
ended 27 March 2016:
As previously 27 March 2016
reported Restatement Restated
Turnover 981 (17) 964
Costs* (1,040) 24 (1,016)
Loss for the year from continuing operations (157) z (150)
Loss for the year from discontinued operations (10) (7) (17)
Loss for the year after discontinued operations (167) 0 (167)
*Costs exclude £1 million of depreciation which is separated on the face of the income statement in the current
year.
The presentational format of the income statement has been changed in the current year to a columnar format
presenting the results of the Group in total and split between Revenue trading, Closure of operations, and Capital
and investment. The definition of these headings is defined within a memorandum to the income statement. The
prior year results have also been presented in the columnar format which is different to the format they were
presented in the last set of financial statements.
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Critical accounting estimates and judgements in applying accounting policies
The Group makes certain estimates and assumptions regarding the future. Estimates and assumptions are
continually evaluated based on historical experience and other factors. In the future, actual experience may
differ from these estimates and assumptions. In addition the Group has to make judgements in applying its
accounting policies which affect the amounts recognised in the accounts. The most significant areas where
judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Group are determined using methods relying on
actuarial estimates and assumptions. In the current year the RMPP Plan was closed to future accrual and as a
result there has been a one-off credit to the income statement, and the surplus has been written off through
other comprehensive income. This is described in further detail within note 17. The values of these adjustments
are particularly sensitive to changes in assumptions for discount rates, mortality and inflation rates. The Group
exercises its judgement in determining the assumptions to be adopted, after discussion with its Actuary. Details
of the key assumptions are set out in note 17.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a
rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term.
Judgement has been applied in determining that for these purposes a high quality corporate bond constitutes AA
rated or equivalent status bonds.
Provisions
The Group has recognised provisions where a present legal or constructive obligation exists as a result of a past
event, where it is probable that an outflow of resources will be required to settle the obligation and a reliable
estimate of the amount can be made. Severance provisions are recognised for business reorganisation where
the plans are sufficiently detailed and well advanced and where appropriate communication to those affected has
been undertaken at the balance sheet date. Postmasters’ compensation provisions are recognised when either
Postmasters agree to terminate their existing contracts or sign the new format contracts under Network
Transformation. The total provision for Postmasters’ compensation at the year end date represents
management's best estimate of the future obligation. Provisions are detailed in note 15. Due to the nature of
provisions the future amount settled may be different from the amount that has been provided.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate the risks specific to that liability.
Impairment of non-current assets
The Group assesses whether there are any indicators of impairment for all non-currents assets at each reporting
date as well as if events or changes in circumstances indicate that the carrying value may be impaired. Where
appropriate, an impairment loss is recognised in the income statement for the amount by which the carrying
value of the asset (or cash generating unit) exceeds its recoverable amount, which is the higher of an asset’s
net realisable value and its value in use.
In previous years, due to on-going operational losses (excluding the Network Subsidy Payment), impairment
losses have been recognised and the carrying value of some assets have been impaired to zero on acquisition.
In the current year the Group has made a profit from continuing operations and this is expected to be
sustainable. [It adaltiohs thie Group hasisecired governinent furdlag to MarcH 2024]. tn this circumstance the
Group no longer considers there to be indicators of impairment, and there has been a change in accounting
estimate to reflect this. The change in accounting estimate has resulted in a reversal of impairment losses in the
current year, and the carrying value of assets has been increased. The reversal is no more than the depreciated
historical cost if the impairment had not been recognised. The reversal of the impairment loss has been
recognised in the income statement for the current year and the change will be applied in future years subject to
a continuous review of trading and funding.
Each asset category is described below:
Property, plant and equipment excluding freehold property, long leasehold property and land:
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into
working condition for its intended use. These assets have a relatively short useful life and in previous periods
due to on-going operational losses (excluding Network Subsidy payment) they have been impaired to zero on
acquisition. In the current year the impairment loss has been reversed and depreciation has been recognised 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
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Freehold property, long leasehold property and land:
As with other property, plant and equipment this is recognised at cost, including attributable costs in bringing
the asset into working condition for its intended use. These assets have a long useful life and a fair market
value, therefore these assets have not been impaired on acquisition but would be considered for impairment if
indicators existed. They are depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining
useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted where applicable on a
prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. In previous periods
these assets are impaired to zero for the reasons noted above. In the current year the impairment loss has been
reversed and the assets have been amortised on a straight line basis via a charge to income statement over the
following useful life:
Software 3 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with Group policy noted above but are not
automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets
acquired and liabilities assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested
for impairment annually as well as when there are any indicators of impairment.
Non-current assets within subsidiaries
Subsidiaries are considered separate cash generating units and the need for impairment of assets is considered
within the subsidiary and is dependent on whether indicators of impairment exist within that subsidiary. At a
Group level the impairment is adjusted on consolidation to be in line with Group policy.
Revenue
Turnover from Retail, Financial Services and Telecoms comprises the value of services provided from the Group’s
principle activities in providing a whole range of services through its physical and digital channels. Turnover from
Financial Services and some Retail services comprises the commission received. Turnover relating to line rental
for telecoms services is recognised evenly over the period to which the charges relate and revenue from calls is
recognised at the time the call is made. Turnover from all other transactions is recognised when the transaction
is completed. All turnover is derived wholly from within the United Kingdom.
Turnover within the subsidiary Post Office Management Services Limited comprises the value of commissions
received from providing insurance intermediary services.
The Network Subsidy Payment is Government grant revenue recognised to match the related costs of making
available the network of public Post Offices that the Secretary of State for Business, Innovation and Skills considers
appropriate.
Capital and investment expenditure
Capital and investment items are items of income and expenditure arising from the operations of the business
which, due to the nature of the events giving rise to them, require separate presentation on the face of the income
statement to allow a better understanding of financial performance in the year and in comparison to prior years.
Items classified within here will be material either because of size or nature and relate to the transformation of
the business rather than ordinary trading. This separate reporting of capital and investment expenditure helps to
provide a better picture of the Company’s underlying performance.
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Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have
passed to the Group are capitalised at the inception of the lease with a corresponding liability recognised for the
fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease
term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor, are
classified as operating leases and rentals are charged to the income statement over the lease term. The aggregate
benefit of incentives are recognised as a reduction of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures
Investments in joint ventures within the Group’s financial statements are accounted for under the equity method
of accounting. Under this method the investment is carried in the balance sheet at cost plus post-acquisition
changes in the Group’s share of the net assets of the joint venture less any impairment in value. The income
statement reflects the Group’s share of post-tax profits from the joint venture.
Inventories
Inventories include stationery, retail and lottery products and are carried at the lower of cost and net realisable
value after adjusting for obsolete or slow-moving stock.
Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed
or are disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by
the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and
unused tax assets and losses except:
- initial recognition of goodwill;
- the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit and loss;
- taxable temporary differences associated with investments in subsidiaries and interest in joint ventures, where
the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future; and
- deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available
against which they can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the
tax asset is realised or the liability is settled, based on tax rates that have been substantively enacted at the
balance sheet date. Deferred tax balances are not discounted.
Current and deferred tax is recognised in the income statement, except to the extent that it relates to items
recognised in other comprehensive income or directly to equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Company. All
members of defined benefit schemes are contracted out of the earnings-related part of the State pension scheme.
The RMPP defined benefit Plan was closed to future accrual on 31 March 2017.
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of
return on a high quality corporate bond of equivalent currency and term. The RMPP Plan was closed on 31 March
2017 and as a result the surplus relating to this Plan has been derecognised in the year.
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). The RMPP defined benefit plan has been closed and no future refunds
will be made to the Group. In accordance with IFRIC 14 the pension asset has been de-recognised.
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service
costs and any gains and losses arising from settlements, curtailments and past service costs. The net difference
between the interest costs and the expected return on plan assets is recognised as net pensions interest in the
income statement. Actuarial gains and losses are recognised immediately in the statement of comprehensive
15
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income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the
statement of comprehensive income. In the current year there are further impacts on the income statement and
statement of comprehensive income as a result of the closure of the RMPP Plan; these have been described in
further detail within Note 17.
For defined contribution schemes, the Group’s contributions are charged to operating profit, as part of staff costs,
in the period to which the contributions relate.
Foreign currencies
The functional and presentational currency of the Group is sterling (£).
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of
the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from
the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates
are recognised in profit or loss.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectible
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad
debts are written off when identified.
Borrowing costs
Borrowing costs in relation to the working capital loan facility are recognised as an expense when incurred unless
they are directly attributable to the construction or development of a qualifying asset, in which case they are
capitalised using the weighted average cost of borrowing for the period of construction/development.
Government grants
Government grants are shown separately in the income statement to match the expenditure to which they relate.
Provisions 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. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at an appropriate pre-tax rate.
Financial instruments
The classification of financial instruments included on the balance sheet is set out below:
Financial assets
Financial assets are measured at fair value at the balance sheet date. They are classified into the following
categories, loans and receivables or available for sale, as appropriate based on the purpose for which they were
required. Financial liabilities are measured at either fair value at the balance sheet date or as financial liabilities
measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at
amortised cost.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the
balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent
arm’‘s length market transactions; reference to the current market value of another instrument which is
substantially the same; and discounted cash flow analysis and pricing models.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or
expires.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised
within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair
value measurement as a whole:
« Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities
e Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable
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« Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines
whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the
lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand, including cash in the Post
Office network and short-term deposits (cash equivalents) with an original maturity date of three months or less.
In addition the Group uses Money Market funds as a readily available source of cash and these funds are also
categorised as cash equivalents. Cash equivalents are classified as loans and receivable financial instruments.
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents
as defined above, net of bank overdrafts.
The subsidiary Post Office Management Services Limited holds some fiduciary cash balances, these are held on
trust on behalf of insurance third parties, see note 12 for details.
2. Staff costs and numbers
Employment and related costs were as follows:
2017 2016
People costs within revenue trading: £m —£m
Wages and salaries 157 164
Social security costs 21 19
Pension costs (note 17) 24 30
Total people costs within revenue trading 202 213
Other operating costs within revenue trading 776 803
Total revenue trading costs 978 1,016
People costs within closure of operations of £19 million (2016: Enil) relate to a one-off past service adjustment in
respect of the closure of the RMPP defined benefit pension plan.
People costs within capital and investment relate to severance costs as part of restructuring and are disclosed
within note 4.
Period end and average employee numbers were as follows:
Period end employees
Average employees
2017 2016 2017 2016
Total employees 5,302 6,605 6,054 6,667
Total employee numbers can be categorised as follows:
2017 2016
Administration 1,275 1,261
Directly managed branches 2,807 3,344
Supply Chain 833 1,360
Network and DMB transformation programmes 387 640
Total 5,302 6,605
Post Office Limited
3. Operating profit from continuing operations before capital and investment
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Operating profit from continuing operations before capital and investment expenditure is stated after charging:
2017 2016
£m £m
Postmasters’ fees 388 413
Depreciation - 1
Cost of inventories recognised as an expense 4 3
Operating lease charges - Land and buildings 14 17
Fees payable to the group’s auditors for audit and other services: £000 £000
- parent company and group audit 524 346
-audit of subsidiary 60 70
-audit related assurance services 38 40
-other non-audit services 106 106
4. Capital and investment
2016 2016
£m £m
Government Grant 140 150
Restructuring:
Business transformation (6) (13)
Network transformation including Postmasters’ compensation (36) (177)
Directly managed branch transformation (18) (23)
IT transformation (9) (30)
Restructuring - severance (46) (29)
- other (4) (11)
Total restructuring costs (119) (283)
Impairment:
Impairment of intangible assets (note 8) (56) (93)
Impairment of property, plant and equipment (note 9) (48) (43)
Reversal of impairment in the year 255 :
Total impairment 151 (136)
Total capital and investment 172 (269)
Restructuring:
Restructuring costs are those incurred in order to implement the major transformation programmes primarily the
Directly Managed Branch and Network programmes which are discussed further in the Financial Review on page
bd. Network transformation includes the costs of Postmasters’ compensation of £10 million (2016: £102 million)
which are payments made to Postmasters’ as a result of the ongoing programme. Postmasters’ compensation
costs in 2017 were £10 million but these were offset by a release in the provision of £34 million (credit to the
income statement); this is due to a change in the accounting estimate as the programme nears completion and
the expected number of branches to convert decreases.
Impairment and reversal of impairment:
See the accounting policies on page [x] for details.
Post Office Limited
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Hl
6. Net finance costs
2017 2016
£m £m
Interest payable on loans (5) (2)
Finance charges (2) (3)
Total (7) (5)
7. Taxation
(a) Taxation gains recognised in the year
2017 2016
£m £m
Corporation tax credit for year (9) (9)
Deferred tax credit relating to the origin and reversal of temporary differences 24 2
Effect of change in tax rate a 3
Income tax charge / (credit) reported in the consolidated
income statement 16 (4)
Deferred income tax of £25 million (2016: £5 million) has been credited to other comprehensive income relating
to actuarial movements in the retirement benefit surplus. This offsets the deferred tax debit of £25 million (2016:
£5 million) that has been reported in the consolidated income statement.
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The net charge recognised in the income statement is £16 million (2016: net credit of £4 million). Of this net
charge, a credit of £9 million relates to normal revenue trading. The remaining £25 million charge is linked to the
closure of the defined benefit plan and therefore has been recognised within Closure of operations in the income
statement.
(b) Factors affecting current tax charge on profit on ordinary activities
The tax assessed for the year differs from the standard rate of corporation tax in the UK of 20% (2016: 20%).
The differences are explained below:
[This is being updated by WK based on adjustments to P&L since tax pack]
Loss on ordinary activities before tax from continuing operations 286 (161)
Loss on ordinary activities before tax from discontinued operations (47) (10)
the Ux of te (2016! 20%) (34)
Net decrease in tax charge as a result of recognition of deferred tax assets 8
Expenditure disallowable for tax 1
Adjustment in respect of prior period ]
Effect of unutilised losses carried forward 28
(c) Deferred tax
Deferred tax assets relate to the following:
Balance sheet Income statement
2017 2016 2017 2016
£m £m £m £m
Pensions temporary differences - (25) (25) (5)
Losses available for offset against future
taxable income S 25 = =
Total deferred tax asset - : (25) (5)
Income statement - : (25) (5)
(d) Factors that may affect future tax charges
The Group has unrecognised deferred tax assets of £191 million (2016: £166 million), comprising £59 million
(2016: £78 million) relating mainly to fixed asset timing differences, £6 million (2016: £1 million) relating to
timing differences on provisions and £125 million (2016: £87 million) relating to tax losses that are available to
offset against future taxable profits. The Group has rolled over capital gains of £2 million (2016: £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 Finance Act 2013 reduced the main rate of corporation tax to 19% with effect from 1 April 2017 and 18%
with effect from 1 April 2018. Following these changes, deferred tax balances were reduced from 20% to 18%.
The impact of this change on deferred tax balances is included in these financial statements.
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8. Intangible assets
Software Goodwill Total
2017 2016 2017 2016 2017 2016
£m £m —m £m £m £m
Cost
At 27 March 2016, 29 March 2015 389 297 44 = 433 297
Reclassifications (20) - - a (20) a
Additions 79 93 7 44 79 137
Disposals (78) (1) - . (78) (1)
At 26 March 2017, 27 March 2016 370 389 44 44 414 433
Amortisation and impairment
At 27 March 2016, 29 March 2015 389 297 - a 389 297
Reclassifications (20) - - - (20) -
Amortisation and impairment (44) 93 - - (44) 93
(see note 4)
Disposals (78) (1) - = (78) (1)
At 26 March 2017, 27 March 2016 247 389 = al 247 389
Net book value
At 26 March 2017, 27 March 2016 123 Los 44 44 167 44
Goodwill relates to the acquisition from Bank of Ireland of the business and assets of the joint insurance business.
The goodwill sits within Post Office Management Services Limited.
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9. Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m £m £m £m ém £m £m
Cost
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 . > 4 e 38 43
Disposals (1) - (3) (4) = (3) (8)
At 27 March 2016 77 58 90 43 1 843 1,112
Reclassification* (12) 8 - - ~ 23 19
Additions sl - > 1 - 25 26
Disposals (16) (20) (64) (17) - (34) (151)
At 26 March 2017 49 46 26 27 1 857 1,006
Depreciation and
impairment
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification* (6) 3 (22) - - 25 -
Depreciation and
impairment 2 - - 4 - 38 44
Disposals (1) = (3) (1) = (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Reclassification (12) 8 - - - 23 19
Depreciation and
impairment
(see note 3 and 4) (14) (19) - - - (74) (107)
Disposals (16) (19) (64) (17) = (34) (150)
At 26 March 2017 27 27 26 26 1 758 865
Net book value
At 26 March 2017 22 19 = 1 - 99 141
At 27 March 2016 8 1 = = = = 9)
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land,
which represents £3 million (2016: £3 million) of the total cost of properties.
In previous years, due to on-going operational losses (excluding the Network Subsidy Payment), impairment
losses have been recognised and the carrying value of some assets have been impaired to zero on acquisition.
In the current year the Group has made a profit from continuing operations and this is expected to be
sustainable. [Id adltions Rie Group hasisecired goveliimenifundhigito Mac 20241, tn this circumstance the
Group no longer considers there to be indicators of impairment, and there has been a change in accounting
estimate to reflect this. The change in accounting estimate has resulted in a reversal of impairment losses in the
current year, and the carrying value of assets has been increased. The reversal is no more than the depreciated
historical cost if the impairment had not been recognised. The reversal of the impairment loss has been
recognised in the income statement for the current year and the change will be applied in future years subject to
a continuous review of trading and funding.
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10. Investments in joint ventures
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The following entity has been included in the consolidated financial statements using the equity method:
Joint ventures
During 2016/17 and 2015/16, 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.
2017 2016
Joint venture Joint venture
—£m £m
Share of net assets
Total net investment at 27 March 2016, 29 March 2015 67 67
Share of post tax pre dividend profit 34 35
Dividend (35) (35)
Total net investment at 26 March 2017, 27 March 2016 66 67
2017 2016
Joint Joint
venture venture
Share of assets and liabilities: —£m £m
Current assets 222 187
Non-current assets 7 6
Share of gross assets 229 193
Current liabilities (163) (126)
Share of net assets 66 67
Share of revenue and profit:
Revenue 82 79
Profit after tax 34 35
11. Trade and other receivables
2017 2016
Em —m
Current:
Trade receivables 70 95
Prepayments and accrued income 97 73
Client receivables 144 229
Other receivables 15 14
Total 326 411
Non-current:
Prepayments 41 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).
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As at 26 March 2017 trade receivables of £14 million (2016: £18 million) were impaired and fully provided for.
During the year £13 million (2016: £4 million) of the provision has been utilised and an additional £9 million
(2016: £8 million) has been provided for. Trade receivables of £13 million (2016: £23 million) were past due but
not impaired. The aging analysis of the trade receivables are as follows:
2017 2016
£m £m
Not yet overdue 57 72
Past due not more than one month 4 12
Past due more than one month and not more than two months 3 3
Past due more than two months 6 8
Total 70 95
The fair value of trade and other receivables is not materially different from the carrying value.
12. Cash and cash equivalents
2017 2016
£m ém
Cash in the Post Office Limited network 666 653
Short-term bank deposits 13 57
Fiduciary cash balances held on behalf of
insurance third parties 1 2
Total cash and cash equivalents 680 712
Where interest is earned it is at a floating or short term fixed rate. The fair value of cash and cash equivalents is
not materially different from the carrying value.
The fiduciary cash balances are held within Post Office Management Services Limited and are held on trust on
behalf of insurance third parties and cannot be called upon should the Company become insolvent.
13. Trade and other payables
2017 2016
£m £m
Current:
Trade payables 51 51
Accruals 161 163
Deferred income 33 39
Social security 10 8
Client payables 296 375
Capital payables 11 16
Other payables 1 3
Total 563 655
Non-current:
Other payables 22 25
The fair value of trade and other payables is not materially different from the carrying value.
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14. Financial liabilities - interest bearing loan and borrowings
2017 2016
£m ém
Department for Business, Energy & Industrial
Strategy 561 465
The loan under the facility is short dated on a programme of liquidity management and matures on average 1 day
after the year end (2016: 1 day). The fair value of borrowings approximate their carrying value due to the short
term maturities of the loan. On maturity it is expected that further loans will be drawn down under this facility,
which expires in 2018. The undrawn committed facility, in respect of which all conditions precedent had been met
at the balance sheet date, is £389 million (2016: £485 million). The average interest rate on the drawn down
loans is 0.8% (2016: 1.0%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited
network.
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and
a negative pledge over cash and near cash items. The negative pledge is an agreement not to grant security over
the assets or to set up a vehicle that has the same effect.
15. Provisions
Network
Transformation Other Total
£m £m £m
At 27 March 2016 134 33 167
Charged to capital and investment 10 73 83
Charged to revenue trading - 5 5
Charged for discontinued operation - 44 44
Utilisation (68) (89) (157)
prused amounts in the year - capital and (34) (19) (53)
Unused amounts in the year - revenue . (1) (1)
trading
At 26 March 2017 42 46 88
Disclosed as:
At 26 March 2017
Current 28 30 58
Non - current 14 16 30
42 46 88
At 27 March 2016
Current 132 19 151
Non-current 2 14 16
134 33 167
The Network Transformation provision relates to payments due to postmasters in relation to the major
transformation programme, see the accounting policies note on page bd for further details of this provision.
Other provisions of £46 million (2016: £33 million) include £38 million for continuing operations, this includes £21
million onerous lease obligations, £9 million severance and £6 million of smaller provisions including £1 million for
personal injury claims and £1 million which sits within the subsidiary Post Office Management Services Limited
and relates to the repayment of commission received in the event of the cancellation of insurance policies. It also
includes £8 million in relation to the discontinued operation as disclosed in note 20.
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16. Financial assets and liabilities
a. Financial assets and liabilities by category
The breakdown of the Group’s financial instruments at 26 March 2017 and 27 March 2016 is shown below:
2017 2016
Current Non Total = Current Non Total
current Current
—m —m —m £m £m
Financial assets
Trade and other receivables 312 - 312 396 3 396
Cash and cash equivalents 680 - 680 712 - 712
Financial liabilities
Trade and other payables (520) (4) (524) (608) (4) (612)
BIS loan (561) - (561) (465) - (465)
Finance leases obligations : = : (8) : (8)
(89) (4) (93) 27 (4) 23
Except for prepayments, social security and deferred income, which have been excluded from the table above, all
of the Group’s financial assets and liabilities by nature and classification for measurement purposes are considered
loans and receivables.
The fair value of the Group’s financial assets and liabilities approximate their carrying value due to the short term
maturities of these instruments. The fair value of financial assets and liabilities is defined as the amount at which
the Group would expect to receive upon selling an asset or pay to transfer a liability in a transaction between
market participants at the measurement date.
The nature of the inputs used in determining the values of the financial assets and liabilities is quoted prices
(unadjusted) in active markets for identical assets and liabilities. All of the Group’s financial assets and liabilities
are therefore considered as Level 1 in the fair value hierarchy.
The Group has no Level 2 and Level 3 financial instruments and there have been no transfers between the levels
of fair value hierarchy during the period.
b. Financial risk management objectives and policies
The Group is exposed to a variety of financial risks: market risk (including foreign currency risk, interest rate risk),
credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of
financial markets and aims to minimise potential adverse effects on the Group’s financial performance.
Interest rate risk
The Group is exposed to changes in interest rate on floating rate debt, cash deposits and money market fund
investments. Interest rate risk on borrowings is managed through determining the right balance of fixed and
floating debt within the financing structure. Market conditions are considered when determining the desired
balance of fixed and floating rate debt. Had there been a 50 basis point increase in interest rates, there would
have been a £8 million favourable impact on the Group’s equity and income statement. A 50 basis point decrease
would have resulted in a £8 million adverse impact on the Group’s equity and income statement.
Foreign currency risk
The Group is exposed to foreign currency risk resulting from balances held to operate Bureau de Change services.
The currencies which these transactions are primarily denominated are the US dollar and Euro. The Group’s foreign
currency risk management objective is to minimise the impact on the Income Statement of fluctuations in the
exchange rates. The Group hedges its foreign currency risk principally through external forward foreign currency
contracts to cover near-term future revenues with a number of providers including First Rate Exchange Services
Holdings Limited.
The following table demonstrates the sensitivity of financial instruments to a reasonably possible change in the
US dollar and Euro exchange rates, assuming they are unhedged and with all other variables held constant, on
profit/(loss) before tax and equity.
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Strengthening Effect on Effect Strengthening Effect on Effect
/ (weakening) profit on equity / (weakening) profit on equity
US dollar rate before tax ineuro rate —_ before tax
% ém ém % —m £m
Increase / Increase / Increase / Increase / Increase / Increase /
(decrease) (decrease) (decrease) (decrease) (decrease) (decrease)
2017 10 2 2 10 4 4
(10) (2) (2) (10) (4) (4)
2016 10 2 2 10 4 4
(10) (2) (2) (10) (4) (4)
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss
to the Group. Financial credit risk arises from cash balances (including bank deposits and cash and cash
equivalents) held by the Group and business credit risk arises from exposures to customers. Business risk includes
commission receivable and client related settlements for amounts paid out of the Post Office network on their
behalf.
The Group aims to minimise its financial credit risk through the application of risk management policies approved
by the Board. Counterparties are limited to major banks and financial institutions. The policy restricts the exposure
to any one counterparty by setting appropriate credit limits. The maximum exposure to credit risk is limited to the
carrying value of each class of asset summarised in note 11.
Business credit risk is monitored centrally. The level of bad debt provision is less than 2% (2016: less than 2%)
of turnover.
Capital management
The Group’s objectives when managing capital (defined as the net of borrowings and amounts due under finance
leases and cash and cash equivalents excluding cash in the Post Office Network) are to safeguard its ability to
continue as a going concern and to maintain an optimal capital structure in order to support the business and
maximise stakeholder value. In managing the Group’s capital levels the Board and the Group Executive regularly
monitor the level of debt in the Group, the working capital requirements and the forecast cash flows. The Board
and Group Executive plan accordingly following this review process in order to meet the Group’s capital
management objectives.
Liquidity risk
The Group’s primary objective is to ensure that the Group has sufficient funds available to meet its financial
obligations as they fall due. This is achieved by aligning short-term investments and borrowing facilities with
forecast cash flows. Typical short-term investments include short term bank deposits with approved
counterparties. Borrowing facilities are regularly reviewed to ensure continuity of funding.
The Group has adequate cash reserves to meet operating requirements in the next 12 months.
At 26 March 2017 the Group has unused facility of £389 million (2016: £485 million). The current facility expires
in 2018. An extension of the working capital facility to March 2021 was agreed on 30 March 2017.
The tables below analyses the Group’s financial assets and liabilities into relevant maturity groupings based on the
remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table
are the contractual undiscounted cash flows and include interest, where applicable.
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Post Office Limited
12 1-2 Total
Months Years
At 26 March 2017 —£m
Financial assets
Trade and other receivables 312 5 312
Cash and cash equivalents 680 - 680
Financial liabi
Trade and other
Pavables (520) ioe) (524)
Interest bearing loan (561) - (561)
Finance leases obligations ° . .
jancial assets/
ies) (89) (4) (93)
12 1-2 Total
Months Years
At 27 March 2016 £m
Financial Assets
Trade and other receivables 396 e 396
Cash and cash equivalents 712 - 712
Financial Liabilities
Trade and other
Payables (608) (4) (612)
Interest bearing loan (465) - (465)
Finance leases obligations (8) ° (8)
Total financial assets/ 7 (4) 23
(liabilities)
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There were no financial assets or liabilities in the current or prior year that were due to mature after 2 years.
17. Pensions
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 Executive Pension Plan (RMSEPP). Royal Mail Group Ltd is the principle employer of RMSEPP and
Post Office Ltd 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
Royal Mail Pension Plan (RMPP)* UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Post Office Pension Plan UK employees Defined contribution
*The RMPP closed to future accrual on 31 March 2017.
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Defined Contribution
The charge in the income statement for the defined contribution scheme and the Group contributions to this
scheme were £3m (2016: £3m) during the year. New employees joining the Group are able to pay
contributions to POPP after they have worked for the Group for a year.
Under the Pensions Act 2008, from 1 May 2017 the Group will auto-enrol all eligible employees into POPP
regardless of their length of service.
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 2015 using the projected unit method. For RMPP, this valuation was concluded at £62.7m surplus (2012:
£135m surplus) on a Technical Provisions basis. Valuations are carried out triennially and the next one for the
RMPP is due to be carried out as at 31 March 2018. 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 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 2015 using the projected
unit method. For 100% of RMSEPP, the valuation concluded at £17m surplus on a Technical Provisions basis.
The next full valuation for RMSEPP is expected to be carried out as at 31 March 2018.
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;
« Inrelation 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; and
«The Post Office section of the RMPP closed to future accrual on 31 March 2017 and so no further
defined benefits accrue 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).
Payment to the RMPP of £14m (2016: £17m) was made by the Group during the year in respect of regular
future service contributions. The regular future service contributions for RMPP expressed as a percentage of
pensionable pay, has remained at 17.1% (2016: 17.1%) effective from April 2010. Following formal
consultation with employees in 2016, the Trustee agreed to Post Office’s request for the closure of the Post
Office section of the RMPP to future accrual. Closure to future accrual means that no contributions in respect of
normal service accrual will be made after 31 March 2017. However it is expected that there will be redundancy
payments to be made to the RMPP during 2017/18.
Even though RMSEPP had a funding surplus on a Technical Provisions basis at 31 March 2015, under the
Schedule of Contributions agreed for the 2015 valuation, payments of £11m per annum will be made. Post
Office’s share of these payments will be 7% which is £1m per annum. A payment of £1m was made by the
Group during the year. The payments will continue to the later of 30 September 2018 and the date the 31
March 2018 valuation is completed.
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A current liability of £1m (2016: Enil) has been recognised for payments to the RMPP and RMSEPP schemes
relating to redundancy. During the year payments of £3m (2016: £3m) relating to redundancy were made.
The weighted average duration of the Post Office section of the RMPP is around 26 years, and for RMSEPP is
around 20 years.
The following disclosures relate to the gains/losses and surplus/deficit in respect of Post Office’s obligations to
RMPP and RMSEPP:
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 has concluded
that as a result of the Memorandum of Understanding, Post Office no longer has an unconditional right to refund
from the Plan. In light of this, the RMPP pension surplus can no longer be recognised on Post Office’s balance
sheet at 26 March 2017, and the resulting loss has been reconciled in Other Comprehensive Income.
a) Major long-term assumptions
The size of the defined benefit obligation shown in the accounts 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.
The major long-term assumptions in relation to both RMPP and RMSEPP were:
At 26 March 2017 At 27 March 2016
% pa % pa
Increases to benefits that retain a link to pensionable pay 3.4 2.8
Rate of pension increases — RMPP sections A/B 2.3 1.8
Rate of pension increases - RMPP section C 3.4 2.8
Rate of pensions increases - RMSEPP members transferred
from Section A or B of RMPP 2.3 1.8
Rate of pension increases - RMSEPP all other members. 3.4 2.8
Rate of increase for deferred pensions 2.3 1.8
Discount rate 2.3 3.5
Inflation assumption (RPI) - RMPP & RMSEPP 3.4 2.9
Inflation assumption (CPI) - RMPP & RMSEPP 2.3 1.8
The ultimate cost of the RMPP plan to the Group will depend upon future events rather than the assumptions
made. The assumptions made may not be borne out in practice and as such the cost of the plan may be higher
(or lower) than disclosed.
In common with other defined benefit schemes, the main risk in relation to the arrangements is the value of the
assets does not keep pace with the increase in the value of the liabilities. This can arise for many reasons, but
the most significant risks are as follows:
Investment risk: If the assets of the arrangements fall short of expectations, this will lead to a decrease in the
funded status.
Asset volatility: The arrangements hold return seeking assets (including equities and property) which are
expected to outperform corporate bonds in the long term but give exposure to volatility and risk in the short
term. RMPP does, however, invest in liability driven investment (LDI) assets, for example bonds and swaps, which
mitigate the impact of interest rate and inflation volatility on the funded status.
Inflation risk: Higher inflation rates than expected will act to increase the plan liabilities as benefits will increase
to a higher level than assumed. The arrangements have a maximum pension increase (generally 5% per annum)
written into the rules which limits the increase for many benefits, so limiting the impact of high inflation. This
includes benefits retaining a link to pensionable pay in RMPP. In addition, the arrangement holds assets that
increase in value as price inflation expectations rise, so mitigating the impact of rising inflation
expectations. These assets include LDI assets in respect of RMPP.
Changes in bond yields: A decrease in corporate bond yields will increase the plan liabilities, although this can
be expected to be partially offset by an increase in the value of any corporate bond holdings and, potentially, the
LDI assets.
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Pensioner longevity: If members live longer than expected, the liabilities would be greater than currently
anticipated because pensions would be paid for over a longer time than assumed.
Liabilities accrued in the Royal Mail Pension Plan to 31 March 2012 were largely transferred to the Royal Mail
Statutory Pension Scheme. These liabilities are substantially no longer an obligation of the Group and
consequently the transfer resulted in a significant removal of pension risk from the Group.
The following table shows the potential impact on the value of Post Office’s defined benefit obligation in respect of
RMPP and RMSEPP of changes in key assumptions:
2017 2016
£m £m
Changes in RPI and CPI inflation of +0.1% pa (9) (5)
Changes in discount rate of +0.1%pa 9 5
Changes in real salary growth of +0.1% pa - (2)
Changes in CPI assumptions of +0.1% pa (4) (1)
An additional 1 year life expectancy (10) (6)
The sensitivity analysis has been prepared using projected benefit cashflows as at the latest full actuarial valuation
of the plan. The same method was applied as at the previous reporting date. The accuracy of this method is limited
by the extent to which the profiles of the plan cashflows have changed since those valuations although any change
is not expected to be material in the context of the above sensitivity analysis.
Mortality: The mortality assumptions 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 2017 2016
Males 100% x S2PMA 106% x S1PMA
Female members 100% x S2PFA 101% x S1DFA
Female dependants 100% x S2DFA 101% x S1DFA
CMI 2015 Core Projections Medium Cohort Projections
Future improvements with a 1.5% pa long-term trend with a 1.25% pa floor
Average expected life expectancy from age 60: 2017 2016
For a current 60 year old male RMPP member 28 years 27 years
For a current 60 year old female RMPP member 30 years 30 years
For a current 40 year old male RMPP member 30 years 29 years
For a current 40 year old female RMPP member 32 years 32 years
b) Plans’ assets
The assets in the plans for the Group were:
Market value 2017
Market value 2016
Sectionalised RMPP ém
Corporate bonds* 394 233
Property 13 11
Private Equity 7 10
Cash and cash equivalents 68 41
Bond/fixed interest funds 25 41
Other loan/debt funds 17 28
Alternative asset funds 8 43
Fair value of RMPP assets 532 407
Present value of RMPP liabilities (322) (184)
Surplus in plan before asset ceiling adjustment 210 223
Less effect of asset ceiling (210) (29)
Surplus in plan after asset ceiling adjustment - 194
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*£4 million relates to UK Government Bonds, £365 million to an LDI investment containing UK
Government Bonds (it is a liability driven investment) and £25 million relates to infrastructure debt
holdings and collateralised liability obligations holding which are a combination of GBP, AUD, EUR and USD
denominated and are fixed interest.
Market value 2017
Market value 2016
Share of RMSEPP £m £m
UK equities 1 1
Overseas equities 12 10
Government bonds 2 15
Alternative asset funds 2 2
Property 2 2
Bulk annuity policy* 13
Fair value of share in plan assets for RMSEPP. 32 30
Present value of share in plan liabilities for RMSEPP (31) (27)
Surplus in plan for the share of RMSEPP before asset ceiling 1 3
adjustment
Less effect of asset ceiling : (1)
Surplus in plan for share of RMSEPP after asset ceiling 1 2
adjustment
*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 DBO.
A retirement benefit surplus of £1 million is disclosed on the balance sheet, representing the surplus in the
RMSEPP Plan only. As described above, no surplus is recognised for RMPP because Post Office has concluded
that as a result of the Memorandum of Understanding signed on 21 March 2017, Post Office no longer has an
unconditional right to refund from the Plan.
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 liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Sectionalised
Sectionalised
Assets
RMPP 2017 £m__RMPP 2016 £m
Assets in sectionalised RMPP at beginning of period 407 379
Contributions paid 17 19
Employee contributions paid 5 6
Finance income 15 14
Actuarial gains/(losses) 92 (8)
Benefits paid to members (4) (3)
Assets in sectionalised RMPP at end of period 532 407
Share of Share of
Assets RMSEPP 2017 RMSEPP 2016
=m £m
Share of assets in RMSEPP at beginning of period 30 31
Contributions paid 1 1
Finance income 1 1
Actuarial gains/(losses) a (2)
Benefits paid to members (1) (1)
Share of assets in RMSEPP at end of period 32 30
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Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabi Sectionalised Sectionalised
RMPP 2017 RMPP 2016
ém £m
Liabilities in sectionalised RMPP at beginning of period (184) (150)
Current service cost (23) (27)
Curtailment costs* 2 (1)
Finance cost (7) (6)
Employee contributions (5) (6)
Experience adjustments on liabilities 6 3
Financial assumption changes (129) -
Demographic assumption changes (5) -
Benefits paid 4 3
Effect of closure of RMPP* 19 -
s in sectionalised RMPP at end of period (322) (184)
Share of Share of
RMSEPP 2017 RMSEPP 2016
£m £m
Share of liabilities in RMSEPP plans at beginning of period (27) (26)
Finance cost (1) (1)
Experience adjustments on liabilities 7 (1)
Financial assumption changes (11) 2
Benefits paid 1 1
Share of liabilities in RMSEPP at end of period (31) (27)
*The gain on curtailment of £2 million is due to redundancies in the year. It is equal to a cost of £3 million in
respect of enhanced retirement benefits granted to certain members, offset by a saving of £5 million due to RPI-
linked in-service revaluation being replaced by CPI-linked deferred pension revaluation. The effect of the closure
of RMPP of £19 million is a past service adjustment as a result of the closure of the Plan and is a one-off adjustment.
Both of these adjustments have been allocated between revenue trading (net credit of £2 million relating to
adjustments linked to current year service) and closure of operations (net credit of £19m relating to adjustments
linked to prior years’ service).
d) Recognised charges
An analysis of the separate components of the amounts recognised in the performance statements of the Group
is as follows:
Sectionalised Sectionalised
RMPP 2017 RMPP 2016 £m
£m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit from revenue trading:
Current service cost 23 27
Loss due to curtailments 2 =
Effect of the closure of the RMPP (4) :
Total charge to revenue trading 21 27
Analysis of amounts charged to closure of operations:
(Gain) / Loss due to curtailments (4) 1
Effect of the closure of the RMPP (15) :
Total charge to operating profit 2 28
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 7 6
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Interest income on plan assets (15) (14)
Net pensions credit to financing (8) (8)
Net charge to the income statement before deduction for tax (6) 20
Analysis of amounts recognised in the statement of comprehensive
income:
Actual return on plan assets 107 6
Less: expected interest income on plan assets (15) (14)
Less: taxation on surplus recoverable through plan refunds - (2)
Actuarial gains/(losses) on assets (all experience adjustments) 92 (10)
Experience adjustments on liabilities 6 3
Effects of changes in actuarial assumptions on liabilities (134) -
Actuarial losses on liabilities (128) 3
Effect of the asset ceiling (210) =
Total actuarial (losses)/gains recognised in the statement of
comprehensive income (246) (7)
Share of Share of RMSEPP.
RMSEPP 2017 2016 £m
£m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to net pensions interest:
Interest on plan liabilities 1 1
Interest income on plan assets (1) (1)
Net pensions credit to financing - -
Net charge to the income statement before deduction for tax - =
Analysis of amounts recognised in the statement of comprehensive
income:
Actual return on plan assets 2 (1)
Less: expected interest income on plan assets (1) (1)
Less: taxation on surplus recoverable through plan refunds : 1
Actuarial gains/(losses) on assets (all experience adjustments) 1 (1)
Experience adjustments on liabilities 7
Effects of changes in actuarial assumptions on liabilities (11) (1)
Actuarial losses on liabilities (4) (1)
Total actuarial losses recognised in the statement of
comprehensive income (3) (2)
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18. Equity
Called up share capital:
2017 2016
£ £
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 (2016: £2 million) relate to First Rate Exchange Services Holdings Limited, the joint
venture entity.
Share premium:
On 7 August 2007 1,000 ordinary shares of £1 each were issue in return for £313 million cash paid by the Secretary
of State for Business, Enterprise and Regulatory Reform. A share premium of £312,999,999 resulted from this
subscription. In April 2008 two ordinary £1 shares were issued in return for £152 million cash paid by the Secretary
of State for Business, Innovations and Skills Reform. A share premium of £151,999,998 resulted from this
subscription.
19. Commitments
The Group is also committed to the following minimum lease payments under non-cancellable operating leases:
Land and buildings
2017 2016
£m —m
Within one year 12 14
Between one and five years 31 35
Beyond five years 30 29
Total 73 78
Contingent liabilities: As a large, nationwide retailer operating in dynamic and competitive markets, we may be
subject to regulatory investigations and may face damage to our reputation and legal claims.
From time to time, we may be named as a defendant in legal claims or be required to respond to regulatory actions
in connection with our activities. This may include claims for substantial or indeterminate amounts of damages
from customers, employees, consultants and contractors, or may result in penalties, fines, or other results adverse
to us. Like any large company, we may also be subject to the risk of potential employee or agent misconduct,
including non-compliance with policies and improper use or disclosure of our assets or confidential information.
The Directors do not consider the outcome of any current claim or action will have a material adverse impact on
the consolidated position of the Group.
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20. Discontinued Operations
In August 2016 the Group decided to discontinue its Retail Cash in Transit operation. The results of this operation
are disclosed below. 2016 includes the prior year results relating to the mobile discontinued operation, restated
to include the prior year results of the Retail Cash in Transit operation.
The mobile operation results included in the below table are a credit of £1 million for 2017 relating to unutilised
provision, and a cost of £10 million for 2016 relating to the closure (split between Other operating costs £4 million
and Capital and Investment £6 million).
2017 2016
£m (restated)
—m
Revenue 9 17
People costs excluding restructuring costs (19) (20)
Other operating costs (3) (8)
Operating loss before capital and investment (13) (11)
Operating capital and investment expenditure (34) (6)
Loss before taxation (47) (17)
Taxation 7 .
Loss for the year from discontinued operation (47) (17)
Balances on the balance sheet at year end in respect of discontinued operations are shown in the table below. The
current year balance relates entirely to the Retail Cash in Transit operation closure and is in respect of provisions
for severance costs (£3 million), other restructuring costs (£2 million) and vacant leasehold properties (£3 million).
The prior year balance relates to provisions for the Mobile operation closure costs and termination charges.
2017 2016
—m £m
Land and Buildings - 1
Trade Receivables - 2
Accrued Income - 1
Total Assets - 4
Provisions (note 15) (8) (3)
Total Liabilities (8) (3)
Total Net Assets (8) 1
The comparatives in the Income Statement for the year ended 27 March 2016 have been restated and allocated
to discontinued operations. The restatement affects revenue, people costs, and other operating costs. Within
this report, the comparative income statement and statement of comprehensive income for the year ended 27
March 2016 have been restated. The operating profit from revenue trading on the cash flow statement has also
been restated. There has been no effect on the balance sheet or statement of changes in equity.
The table below shows the impact of the restatement on revenue trading and closure of operations for the year
ended 27 March 2016:
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As previously 27 March 2016
Restatement
reported Restated
Turnover 981 (17) 964
People costs (233) 20 (213)
Other operating costs (808) 4 (804)
Loss for the year from continuing operations (157) 7 (150)
Loss for the year from discontinued operations (10) (7) (17)
Loss for the year after discontinued operations (167) 0 (167)
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.
Related party transactions
During the year the Group entered into transactions with the following related parties. The transactions were in
the ordinary course of business. The transactions entered into and the balances outstanding at the financial year
end were as follows:
Amounts owed from
Amounts owed to
Sales/recharges to Purchases/recharges related party related party
related from including outstanding including outstanding
party related party loans loans
2017 2016 2017 2016 2017 2016 2017 2016
=m £m —£m £m £m £m £m £m
First Rate Exchange
Services Holdings
Limited 32 26 121 122 38 10 25 7
The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the
yearend are unsecured, interest free and settlement is made by cash. First Rate Exchange Services Holdings
Limited is a joint venture of the Group.
The Group trades with numerous Government bodies on an arm’s length basis. Transactions with these entities
are not disclosed owing to the significant volume of transactions that are conducted.
Separately:
« the Group has certain loan facilities with Government (note 14);
« the Group has received a Government Grant of £140 million, all of which was recognised through the
income statement; and
« the Group has received the Network Subsidy Payment from Government (note 1).
Key management comprises Executive and Non-Executive Directors of the Post Office Limited Board and the
members of the Group Executive at 26 March 2017. The aggregate remuneration of the key management
personnel of the Post Office Group is set out below:
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22. Post balance sheet events
23. Immediate and ultimate parent company
At 26 March 2017, the Directors regarded Postal Services Holding Company Limited as the immediate and ultimate
Parent company. The largest group to consolidate the results of the company is Postal Services Holding Company
Limited, a company registered in the United Kingdom. Postal Services Holding Company Limited financial
statements can be obtained from Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
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Post Office Limited
Parent Company Financial Statements
2016-2017
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Company statement of comprehensive income
At 26 March 2017
2016
2017 = (Restated)
Notes £m £m
Profit / (Loss) for the financial year from continuing operations 261 (150)
Loss for the financial year from discontinued operations (47) (17)
Profit / (Loss) for the financial year 214 (167)
Other comprehensive income not to be reclassified to profit or loss in
future periods
Remeasurements on defined benefit surplus 11 (249) (9)
Withholding tax effect 30 -
Income tax effect 25 5
Total comprehensive income for the year 20 (171)
There are no other comprehensive income items that will be reclassified to the profit and loss in subsequent
periods.
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Company balance sheet
at 26 March 2017
2016
2017 (Restated)
Notes £m £m
Non-current asset
Intangible assets 2 114 -
Property, plant and equipment 3 141 9
Investment in subsidiaries 4 50 50
Investments in joint ventures 5 66 67
Retirement benefit surplus 11 1 196
Trade and other receivables 6 11 12
Total non-current assets 383 334
Current assets
Inventories 7 6
Trade and other receivables 6 325 413
Cash and cash equivalents 7 667 698
Total current assets 999 1,117
Total assets 1,382 1,451
Current liabilities
Trade and other payables 8 (555) (650)
Financial liabilities - interest bearing loans and borrowings 9 (561) (465)
- obligations under finance leases - (8)
Provisions 10 (57) (150)
Total current liabilities (1,173) (1,273)
Non-current liabilities
Other payables 8 (22) (25)
Provisions 10 (30) (16)
Total non-current liabilities (52) (41)
Net assets 157 137
Equity
Share capital 12 - -
Share premium 12 465 465
Retained earnings (308) (328)
Total equity 157 137
The financial statements on pages [x] to [x] were approved by the Board of Directors on [x] 2017 and signed
on its behalf by:
P A Vennells A Cameron
Chief Executive Chief Financial Officer
Post Office Limited
Company statement of changes in equity
at 26 March 2017
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Share — Retained Total
premium earnings equity
Notes: £m £m £m
At 27 March 2016 (restated) 465 (328) 137
Profit for the year - 214 214
Remeasurements on defined benefit
surplus 11 - (249) (249)
Withholding tax effect 30 30
Income tax effect - 25 25
At 26 March 2017 465 (308) 157
Retained
Share earnings Total
premium —£m equity
Notes £m £m
At 30 March 2015 (restated) 465 (157) 308
Loss for the year (restated) - (167) (167)
Remeasurements on defined benefit
surplus it 7 (9) (9)
Income tax effect = 5 E}
At 27 March 2016 465 (328) 137
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Notes to the financial statements
1. Accounting Policies
The accounting policies which follow set out those which apply in preparing the financial statements for the year
ended 26 March 2017.
Financial year
The financial year ends on the last Sunday in March and accordingly, these financial statements are made up to
the 52 weeks ended 26 March 2017 (2016: 52 weeks ended 27 March 2016).
Authorisation of financial statements
The parent company financial statements of Post Office Limited (the ‘Company’) for the year ended 26 March 2017
were authorised for issue by the Board of Directors on xxx 2017 and the balance sheet was signed on the Board’s
behalf by P A Vennells and A Cameron. Post Office Limited is a limited company incorporated and domiciled in
England and Wales.
Basis of preparation
These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (FRS 101). These financial statements are prepared under the historical cost convention.
As permitted by Section 408 of the Companies Act 2006 Post Office Limited has not presented its own income
statement. The result dealt with in the accounts of the company amounted to £214 million profit (2016: £167
million loss).
The results of Post Office Limited are included in the consolidated financial statements of Post Office Group which
are available from Companies House.
The Company has taken advantage of the following disclosure exemptions under FRS 101:
(a) the requirements of IFRS 7 Financial Instruments: Disclosures
(b) the requirements of paragraphs 91-99 of IFRS 13 Fair Value Measurement
(c) the requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative
information in respect of:
i. paragraph 73(e) of IAS 16 Property, Plant and Equipment
ii. paragraph 118(e) of IAS 38 Intangible Assets
(d) the requirements of paragraphs 10(d), 10(f), 39(c) and 134-136 of IAS 1 ‘Presentation of Financial
Statements’
(e) the requirements of IAS 7 Statement of Cash Flows
(f) the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and
Errors’
(g) the requirements of paragraph 17 of IAS 24 ‘Related Party Disclosures’
(h) the requirements of IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into
between two or more members of a group, provided that any subsidiary which is a party to the transaction is
wholly owned by such a member.
Fundamental accounting concept - going concern
Prior year restatements
In preparing the financial statements for the current year, the comparative figures for the year ended 27 March
2016 have been restated for the Retail Cash in Transit operation which has been discontinued during the current
year. The comparatives in the Income Statement for the year ended 27 March 2016 have been restated and
allocated to discontinued operations in both the Group and Parent Company financial statements. The
restatement affects revenue, people costs, and other operating costs. Within this report, the comparative
income statement and statement of comprehensive income for the year ended 27 March 2016 have been
restated. There has been no effect on the balance sheet or statement of changes in equity.
The comparative figures for the years ended 27 March 2016 and 29 March 2015 have also been restated for a
change in the accounting policy with respect to investment in joint ventures. The restatement is in the Parent
Company Financial Statements only. The change in accounting policy is described in more detail in the
accounting policies.
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The restatement affects the Investments in joint ventures shown on the Company balance sheet. The
investment value has been increased by £66m as at 27 March 2016, which reflects the Company’s share of the
joint venture in line with the equity accounting method which is also adopted by the Group. This has also
resulted in a restatement in Retained earnings as at 27 March 2016 and as at 29 March 2015.
The tables below shows the impact of both restatements on the income statement and balance sheet at 27
March 2016 and at 29 March 2015.
Restatement
As previously for 27 March
reported discontinued Restated
operation
Loss for the year from continuing
operations (157) id (150)
Loss for the year from discontinued
operations (10) (7) (17)
Loss for the year after discontinued
operations (167) 0 (157)
As previously Restatement 27 March 2016
reported for change in Restated
joint venture
accounting
Investments in joint ventures 1 66 67
Retained earnings (394) 66 (328)
As previously Restatement 29 March 2015
reported for change in Restated
joint venture
accounting
Retained earnings (223) 66 (157)
Critical accounting estimates and judgements in applying accounting policies
The Company makes certain estimates and assumptions regarding the future. Estimates and assumptions are
continually evaluated based on historical experience and other factors. In the future, actual experience may
differ from these estimates and assumptions. In addition the Company has to make judgements in applying its
accounting policies which affect the amounts recognised in the accounts. The most significant areas where
judgements and estimates are made are discussed below:
Pension assumptions
The costs, assets and liabilities of the pensions operated by the Company are determined using methods relying
on actuarial estimates and assumptions. In the current year the RMPP Plan was closed to future accrual and as a
result there has been a one-off credit to the income statement, and the surplus has been written off through
other comprehensive income. This is described in further detail within note 11. The values of these adjustments
are particularly sensitive to changes in assumptions for discount rates, mortality and inflation rates. The
Company exercises its judgement in determining the assumptions to be adopted, after discussion with its
Actuary. Details of the key assumptions are set out in note 11.
Pension liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a
rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term.
Judgement has been applied in determining that for these purposes a high quality corporate bond constitutes AA
rated or equivalent status bonds.
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Provisions
The Company has recognised provisions where a present legal or constructive obligation exists as a result of a
past event, where it is probable that an outflow of resources will be required to settle the obligation and a
reliable estimate of the amount can be made. Severance provisions are recognised for business reorganisation
where the plans are sufficiently detailed and well advanced and where appropriate communication to those
affected has been undertaken at the balance sheet date. Postmasters’ compensation provisions are recognised
when either Postmaster’s agree to terminate their existing contracts or sign the new format contracts under
Network Transformation. The total provision for Postmasters’ compensation at the year end date represents
management's best estimate of the future obligation. Due to the nature of provisions the future amount settled
may be different from the amount that has been provided.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate the risks specific to that liability.
Impairment of non-current assets
The company assesses whether there are any indicators of impairment for all non-currents assets at each
reporting date as well as if events or changes in circumstances indicate that the carrying value may be impaired.
Where appropriate, an impairment loss is recognised in the income statement for the amount by which the
carrying value of the asset (or cash generating unit) exceeds its recoverable amount, which is the higher of an
asset’s net realisable value and its value in use.
In previous years, due to on-going operational losses (excluding the Network Subsidy Payment), impairment
losses have been recognised and the carrying value of some assets have been impaired to zero on acquisition.
In the current year the company has made a profit from continuing operations and this is expected to be
the company no longer considers there to be indicators of impairment, and there has been a change in
accounting estimate to reflect this. The change in accounting estimate has resulted in a reversal of impairment
losses in the current year, and the carrying value of assets has been increased. The reversal is no more than the
depreciated historical cost if the impairment had not been recognised. The reversal of the impairment loss has
been recognised in the income statement for the current year and the change will be applied in future years
subject to a continuous review of trading and funding.
Each asset category is described below:
Property, plant and equipment excluding freehold property, long leasehold property and land:
Property, plant and equipment is recognised at cost, including attributable costs in bringing the asset into
working condition for its intended use. These assets have a relatively short useful life and in previous periods
due to on-going operational losses (excluding Network Subsidy payment) they have been impaired to zero on
acquisition. In the current year the impairment loss has been reversed and depreciation has been recognised 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, therefore these assets have not been impaired on acquisition but would be considered for impairment if
indicators existed. They are depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the estimated remaining
useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted where applicable on a
prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at cost. In previous periods
these assets are impaired to zero for the reasons noted above. In the current year the impairment loss has been
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reversed and the assets have been amortised on a straight line basis via a charge to income statement over the
following useful life:
Software 3 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with company policy noted above but are not
automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets
acquired and liabilities assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment losses. Goodwill is tested
for impairment annually as well as when there are any indicators of impairment.
Leases
Finance leases, where substantially all the risks and rewards incidental to ownership of the leased item have
passed to the Company are capitalised at the inception of the lease with a corresponding liability recognised for
the fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease
term.
Leases where substantially all the risks and rewards of ownership of the asset are retained by the lessor are
classified as operating leases and rentals are charged to the income statement over the lease term. The aggregate
benefits of incentives are recognised as a reduction of rental expenses over the lease term on a straight-line basis.
Investments in joint ventures
Investments in joint ventures within the Company's financial statements were in previous years stated at cost less
any accumulated impairment losses.
In the current year the Company has voluntarily changed its accounting policy with respect to investments in joint
ventures in order to apply the equity accounting method, consistent with that adopted by the Group.
This change in accounting policy is permitted by the amendment to IAS 27: Equity Method in Separate Financial
Statements. The amendment allows entities to use the equity method to account for investments in joint
ventures in their separate financial statements. Entities already applying IFRS and electing to change to the
equity method in their separate financial statements are required to apply that change retrospectively. The
amendments are effective for annual periods beginning on or after 1 January 2016.
The Company now applies equity accounting, under which the investment is carried in the Balance Sheet at cost
plus post-acquisition changes in the Company’s share of net assets of the joint venture less any impairment in
value. Prior to this change in accounting policy, the Company measured investments in joint ventures within the
Company’s balance sheet at cost less any accumulated impairment losses.
The Company considers the new policy is appropriate as it provides the user of the financial statements with
more relevant and reliable information and aligns the accounting between the Group and the Parent Company
financial statements.
The impact on each line item of the primary financial statements is shown within the Prior year restatements
section on page [x].
Investments in subsidiaries
Investments in subsidiaries within the Company’s financial statements are stated at cost less any accumulated
impairment losses. The carrying value relates solely to the Company’s investment in Post Office Management
Services Limited, a 100% subsidiary of the Company and is less than £1 million.
Inventories
Stocks, which include printing and stationery, retail and lottery products, are carried at the lower of cost and net
realisable value after adjusting for obsolete or slow-moving stock.
Taxation
The charge for current income tax is based on the results for the year as adjusted for items which are not taxed
or are disallowed. It is calculated using tax rates in legislation that has been enacted or substantively enacted by
the balance sheet date.
Deferred income tax assets and liabilities are recognised for all taxable and deductible temporary differences and
unused tax assets and losses except:
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- initial recognition of goodwill
- the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable profit and loss.
- taxable temporary differences associated with investments in subsidiaries interest in joint ventures, where the
timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference
will not reverse in the foreseeable future and
- deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available
against which they can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the
tax asset is realised or the liability is settled, based on tax rates that have been substantively enacted at the
balance sheet date. Deferred tax balances are not discounted.
Current and deferred tax is recognised in the income statements, except to the extent that it relates to items
recognised in other comprehensive income or directly to equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Pensions and other post-retirement benefits
Membership of occupational pension schemes is open to most permanent UK employees of the Company. All
members of defined benefit schemes are contracted out of the earnings-related part of the State pension scheme.
The RMPP defined benefit Plan was closed to future accrual on 31 March 2017.
The pension assets of the defined benefit schemes are measured at fair value. Liabilities are measured on an
actuarial basis using the projected unit credit method and discounted at a rate equivalent to the current rate of
return on a high quality corporate bond of equivalent currency and term. The RMPP Plan was closed on 31 March
2017 and as a result the surplus relating to this Plan has been derecognised in the year.
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). The RMPP defined benefit plan has been closed and no future refunds
will be made to the Group.
For defined benefit schemes, the amounts charged to operating profit, as part of staff costs, are the current service
costs and any gains and losses arising from settlements, curtailments and past service costs. The net difference
between the interest costs and the expected return on plan assets is recognised as net pensions interest in the
income statement. Actuarial gains and losses are recognised immediately in the statement of comprehensive
income. Any deferred tax movement associated with the actuarial gains and losses is also recognised in the
statement of comprehensive income. In the current year there are further impacts on the income statement and
statement of comprehensive income as a result of the closure of the RMPP Plan; these have been described in
further detail within Note 17 to the Group accounts.
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 Company is sterling (£).
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction (or at the contracted
rate if the transaction is covered by a forward foreign currency contract). Monetary assets and liabilities
denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date (or
the appropriate forward contract rate). All differences are taken to the income statement.
Trade receivables
Trade receivables are recognised and carried at original invoice amount less an allowance for any non-collectable
amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad
debts are written off when identified.
Borrowing costs
Borrowing costs are recognised as an expense when incurred unless they are directly attributable to the
construction or development of a qualifying asset, in which case they are capitalised using the weighted average
cost of borrowing for the period of construction/development.
Government grants
Government grants of a revenue nature are recognised to match costs in relation to the performance of certain
specified activities.
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Provisions
Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past
event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at an appropriate pre-tax rate.
Financial instruments
Financial assets
Financial assets are measured at fair value at the balance sheet date. They are classified into the following
categories as appropriate loans and receivables or available for sale as appropriate based on the purpose for which
they were required. Financial liabilities are measured at either fair value at the balance sheet date or as financial
liabilities measured at amortised cost.
Financial liabilities - interest-bearing loans and borrowings
All loans and borrowings are classified as financial liabilities measured at amortised cost.
Financial liabilities - obligations under finance leases
All obligations under finance lease and hire purchase contracts are classified as financial liabilities measured at
amortised cost.
Fair value measurement of financial instruments
The fair value of quoted investments is determined by reference to bid prices at the close of business on the
balance sheet date.
Where there is no active market, fair value is determined using valuation techniques. These include using recent
arm’s length market transactions; reference to the current market value of another instrument which is
substantially the same; and discounted cash flow analysis and pricing models.
Derecognition of financial instruments
A financial asset or liability is derecognised when the contract that gives rise to it is settled, sold, cancelled or
expires.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits (cash
equivalents) with an original maturity date of three months or less. In addition the Company uses Money Market
funds as a readily available source of cash, and these funds are also categorised as cash equivalents.
Auditor’s remuneration
The remuneration paid to auditors is disclosed in the Group financial statements (note 3).
Director’s emoluments
The emoluments paid to Directors are disclosed in the Group financial statements (note 5).
2. Intangible assets
2017 2016
Cost £m —m
At 27 March 2016, 30 March 2015 387 297
Reclassifications (20) >
Additions at 91
Disposals (78) (1)
At 26 March 2017, 27 March 2016 360 387
Impairment
At 27 March 2016, 30 March 2015 387 297
Reclassifications (19) -
Impairment (44) 91
Disposals (78) (1)
At 26 March 2017, 27 March 2016 246 387
Net book value
At 26 March 2017, 27 March 2016 il4 -
The above intangible assets relate to software.
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3. Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m £m £m £m ém £m £m
Cost
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 - = 4 = 38 43
Disposals (1) S (3) (1) 2 (3) (8)
At 27 March 2016 77 58 90 43 1 843 1,112
Reclassification* (12) 8 3 ? 3 23 19
Additions = 2 1 S 25 26
Disposals (16) (20) (64) (17) = (34) (151)
At 26 March 2017 49 46 26 27 1 857 1,006
Depreciation and
impairment
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification* (6) 3 (22) - - 25 -
Depreciation and
impairment 2 = - 4 ~ 38 44
Disposals (2) = (3) (1) : (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Reclassification (12) 8 - - - 23 19
Depreciation and
impairment
(see note 3 and 4) (14) (19) - - - (74) (107)
Disposals (16) (19) (64) (17) - (34) (150)
At 26 March 2017 27 27 26 26 1 758 865
Net book value
At 26 March 2017 22 19 = 1 = 99 141
At 27 March 2016 8 1 = = = 7 9
Depreciation rates are disclosed within accounting policies (note 1). No depreciation is provided on freehold land,
which represents £3 million (2016: £3 million) of the total cost of properties.
In previous years, due to on-going operational losses (excluding the Network Subsidy Payment), impairment
losses have been recognised and the carrying value of some assets have been impaired to zero on acquisition.
In the current year the Group has made a profit from continuing operations and this is expected to be
sustainable. [It additions ie:Group hasisecired Govan utdligito Match 20241, tn this circumstance the
Group no longer considers there to be indicators of impairment, and there has been a change in accounting
estimate to reflect this. The change in accounting estimate has resulted in a reversal of impairment losses in the
current year, and the carrying value of assets has been increased. The reversal is no more than the depreciated
historical cost if the impairment had not been recognised. The reversal of the impairment loss has been
recognised in the income statement for the current year and the change will be applied in future years subject to
a continuous review of trading and funding.4. Investment in subsidiaries
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The carrying value of £50,000,100 relates solely to the Company’s investment in Post Office Management
Services Limited, a 100% subsidiary of the Company. It relates to 50,000,000 shares with a nominal value of £1
and 1 share with a nominal value of £100. The registered address of Post Office Management Services Limited is
Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
5. Investments in joint ventures
2016
2017 (restated)
£m —m
Investment in joint ventures 66 67
Joint ventures
During 2016/17 and 2015/16, 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 (2016: £0.6
million), whose principal activity is the provision of Bureau de Change. First Rate Exchange Services Holdings
Limited is a company registered in the United Kingdom. The registered address of First Rate Exchange Services
Holdings Limited is Great West House, Great West Road, Brentford, Middlesex, TW8 9DF.
6. Trade and other receivables
2017 2016
£m £m
Current:
Trade receivables 69 95
Amounts owed by group undertakings 4 6
Prepayments and accrued income 93 68
Client receivables 144 229
Other receivables 15 15
Total 325 413
Non-current:
Prepayments and accrued income 41 12
7. Cash and cash equivalents
2017 2016
=m —m
Cash in the Post Office Limited Network 666 653
Short-term Bank Deposits 1 45
Total 667 698
8. Trade and other payables
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2017 2016
=m £m
Current:
Trade payables 43 51
Accruals 163 159
Deferred income 33 39
Social security 10 8
Client payables 295 375
Capital payables 11 16
Other payables - 2
Total 555 650
Non-current:
Other payables 22 25
9. Financial liabilities - interest bearing loans and borrowings
2017 2016
£m —m
Department for Business, Energy & Industrial
Strategy 561 465
The loan under the facility is short dated on a programme of liquidity management and matures on average 1 day
after the year end (2016: 1 day). The fair value of borrowings approximate their carrying value due to the short
term maturities of the loan. On maturity it is expected that further loans will be drawn down under this facility,
which expires in 2018. The undrawn committed facility, in respect of which all conditions precedent had been met
at the balance sheet date, is £389 million (2016: £485 million). The average interest rate on the drawn down
loans is 1.0% (2016: 1.0%).
The facility is currently restricted to funding the cash and near cash items held within the Post Office Limited
network.
The facility (including drawn down loans) is secured by a floating charge over all assets of Post Office Limited and
a negative pledge over cash and near cash items. The negative pledge is an agreement not to grant security over
the assets or to set up a vehicle that has the same effect. The Network Transformation provision relates to
payments due to postmasters in relation to the major transformation programme, see the accounting policies note
on page 46 for further details of this provision.
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10. Provisions
Network
Transformation Other Total
é£m £m £m
At 27 March 2016 134 32 166
Charged in capital and investment expenditure 10 73 83
Charged in operating costs - 5 5
Charged in discontinued operations - 44 44
Utilisation (68) (89) (157)
prused amounts in the year - capital and (34) (19) (53)
Unused amounts in the year - revenue trading = (1) (1)
At 26 March 2017 42 45 87
Disclosed as:
Current 28 29 57
Non - current 14 16 30
42 45 87
The Network Transformation provision relates to payments due to postmasters in relation to the major
transformation programme, see the accounting policies note on page 46 for further details of this provision.
Other provisions of £45 million (2016: £32 million) include £37 million for continuing operations, this includes £21
million onerous lease obligations, £9 million severance and £7 million of smaller provisions including £1 million for
personal injury claims. It also includes £8 million in relation to the discontinued operation as disclosed in note 20
to the Group financial statements.
11. Pensions
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 Executive Pension Plan (RMSEPP). Royal Mail Group Ltd is the principle employer of RMSEPP and
Post Office Ltd 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
Royal Mail Pension Plan (RMPP)* UK employees Defined benefit
Royal Mail Senior Executive Pension Plan (RMSEPP) UK senior executives Defined benefit
Post Office Pension Plan UK employees Defined contribution
*The RMPP closed to future accrual on 31 March 2017.
Defined Contribution
The charge in the income statement for the defined contribution scheme and the Group contributions to this
scheme were £3m (2016: £3m) during the year. New employees joining the Group are able to pay
contributions to POPP after they have worked for the Group for a year.
Under the Pensions Act 2008, from 1 May 2017 the Group will auto-enrol all eligible employees into POPP
regardless of their length of service.
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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 2015 using the projected unit method. For RMPP, this valuation was concluded at £62.7m surplus (2012:
£135m surplus) on a Technical Provisions basis. Valuations are carried out triennially and the next one for the
RMPP is due to be carried out as at 31 March 2018. 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 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 2015 using the projected
unit method. For 100% of RMSEPP, the valuation concluded at £17m surplus on a Technical Provisions basis.
The next full valuation for RMSEPP is expected to be carried out as at 31 March 2018.
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;
e Inrelation 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; and
« The Post Office section of the RMPP closed to future accrual on 31 March 2017 and so no further
defined benefits accrue 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).
Payment to the RMPP of £14m (2016: £17m) was made by the Group during the year in respect of regular
future service contributions. The regular future service contributions for RMPP expressed as a percentage of
pensionable pay, has remained at 17.1% (2016: 17.1%) effective from April 2010. Following formal
consultation with employees in 2016, the Trustee agreed to Post Office’s request for the closure of the Post
Office section of the RMPP to future accrual. Closure to future accrual means that no contributions in respect of
normal service accrual will be made after 31 March 2017. However it is expected that there will be redundancy
payments to be made to the RMPP during 2017/18.
Even though RMSEPP had a funding surplus on a Technical Provisions basis at 31 March 2015, under the
Schedule of Contributions agreed for the 2015 valuation, payments of £11m per annum will be made. Post
Office’s share of these payments will be 7% which is £1m per annum. A payment of £1m was made by the
Group during the year. The payments will continue to the later of 30 September 2018 and the date the 31
March 2018 valuation is completed.
A current liability of £1m (2016: £nil) has been recognised for payments to the RMPP and RMSEPP schemes
relating to redundancy. During the year payments of £3m (2016: £3m) relating to redundancy were made.
The weighted average duration of the Post Office section of the RMPP is around 26 years, and for RMSEPP is
around 20 years.
The following disclosures relate to the gains/losses and surplus/deficit in respect of Post Office’s obligations to
RMPP and RMSEPP:
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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 has concluded
that as a result of the Memorandum of Understanding, Post Office no longer has an unconditional right to refund
from the Plan. In light of this, the RMPP pension surplus can no longer be recognised on Post Office’s balance
sheet at 26 March 2017, and the resulting loss has been reconciled in Other Comprehensive Income.
b) Major long-term assumptions
The size of the defined benefit obligation shown in the accounts 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.
The major long-term assumptions in relation to both RMPP and RMSEPP were:
At 26 March 2017 At 27 March 2016
% pa % pa
Increases to benefits that retain a link to pensionable pay 3.4 2.8
Rate of pension increases - RMPP sections A/B a2 1.8
Rate of pension increases - RMPP section C 3.4 2.8
Rate of pensions increases - RMSEPP members transferred
from Section A or B of RMPP 2.3 1.8
Rate of pension increases - RMSEPP all other members. 3.4 2.8
Rate of increase for deferred pensions 2.3 1.8
Discount rate 2.3 3.5
Inflation assumption (RPI) - RMPP & RMSEPP 3.4 2.9
Inflation assumption (CPI) - RMPP & RMSEPP 2.3 1.8
The ultimate cost of the RMPP plan to the Group will depend upon future events rather than the assumptions
made. The assumptions made may not be borne out in practice and as such the cost of the plan may be higher
(or lower) than disclosed.
In common with other defined benefit schemes, the main risk in relation to the arrangements is the value of the
assets does not keep pace with the increase in the value of the liabilities. This can arise for many reasons, but
the most significant risks are as follows:
Investment risk: If the assets of the arrangements fall short of expectations, this will lead to a decrease in the
funded status.
Asset volatility: The arrangements hold return seeking assets (including equities and property) which are
expected to outperform corporate bonds in the long term but give exposure to volatility and risk in the short
term. RMPP does, however, invest in liability driven investment (LDI) assets, for example bonds and swaps, which
mitigate the impact of interest rate and inflation volatility on the funded status.
Inflation risk: Higher inflation rates than expected will act to increase the plan liabilities as benefits will increase
to a higher level than assumed. The arrangements have a maximum pension increase (generally 5% per annum)
written into the rules which limits the increase for many benefits, so limiting the impact of high inflation. This
includes benefits retaining a link to pensionable pay in RMPP. In addition, the arrangement holds assets that
increase in value as price inflation expectations rise, so mitigating the impact of rising inflation
expectations. These assets include LDI assets in respect of RMPP.
Changes in bond yields: A decrease in corporate bond yields will increase the plan liabilities, although this can
be expected to be partially offset by an increase in the value of any corporate bond holdings and, potentially, the
LDI assets.
Pensioner longevity: If members live longer than expected, the liabilities would be greater than currently
anticipated because pensions would be paid for over a longer time than assumed.
Liabilities accrued in the Royal Mail Pension Plan to 31 March 2012 were largely transferred to the Royal Mail
Statutory Pension Scheme. These liabilities are substantially no longer an obligation of the Group and
consequently the transfer resulted in a significant removal of pension risk from the Group.
The following table shows the potential impact on the value of Post Office’s defined benefit obligation in respect of
RMPP and RMSEPP of changes in key assumptions:
5é
Post Office Limited
2017 2016
=m £m
Changes in RPI and CPI inflation of +0.1% pa (9) (5)
Changes in discount rate of +0.1%pa 9 5
Changes in real salary growth of +0.1% pa - (2)
Changes in CPI assumptions of +0.1% pa (4) (1)
An additional 1 year life expectancy (10) (6)
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The sensitivity analysis has been prepared using projected benefit cashflows as at the latest full actuarial valuation
of the plan. The same method was applied as at the previous reporting date. The accuracy of this method is limited
by the extent to which the profiles of the plan cashflows have changed since those valuations although any change
is not expected to be material in the context of the above sensitivity analysis.
Mortality: The mortality assumptions 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
2017
2016
Males 100% x S2PMA
Female members
100% x S2PFA
Female dependants 100% x S2DFA
CMI 2015 Core Projections
with a 1.5% pa long-term trend
Future improvements
106% x S1PMA
101% x S1DFA
101% x S1DFA
Medium Cohort Projections
with a 1.25% pa floor
Average expected life expectancy from age 60: 2017 2016
For a current 60 year old male RMPP member 28 years 27 years
For a current 60 year old female RMPP member 30 years 30 years
For a current 40 year old male RMPP member 30 years 29 years
For a current 40 year old female RMPP member 32 years 32 years
b) Plans’ assets
The assets in the plans for the Group were:
Market value 2017
Market value 2016
Sectionalised RMPP £m £m
Corporate bonds* 394 233
Property 13 11
Private Equity 7 10
Cash and cash equivalents 68 41
Bond/fixed interest funds 25 41
Other loan/debt funds 17 28
Alternative asset funds 8 43
Fair value of RMPP assets 532 407
Present value of RMPP liabilities (322) (184)
Surplus in plan before asset ceiling adjustment 210 223
Less effect of asset ceiling (210) (29)
Surplus in plan after asset ceiling adjustment - 194
*£4 million relates to UK Government Bonds, £365 million to an LDI investment containing UK
Government Bonds (it is a liability driven investment) and £25 million relates to infrastructure debt
holdings and collateralised liability obligations holding which are a combination of GBP, AUD, EUR and USD
denominated and are fixed interest.
57
Post Office Limited
Market value 2017
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Market value 2016
Share of RMSEPP —£m £m
UK equities 1 1
Overseas equities 12 10
Government bonds 2 15
Alternative asset funds 2 2
Property 2 2
Bulk annuity policy* 13 :
Fair value of share in plan assets for RMSEPP. 32 30
Present value of share in plan liabilities for RMSEPP (31) (27)
Surplus in plan for the share of RMSEPP before asset ceiling 1 a
adjustment
Less effect of asset ceiling - (4)
Surplus in plan for share of RMSEPP after asset ceiling 1 2
adjustment
*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 DBO.
A retirement benefit surplus of £1 million is disclosed on the balance sheet, representing the surplus in the
RMSEPP Plan only. As described above, no surplus is recognised for RMPP because Post Office has concluded
that as a result of the Memorandum of Understanding signed on 21 March 2017, Post Office no longer has an
unconditional right to refund from the Plan.
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 liabilities
Changes in the fair value of the plans’ assets are analysed as follows:
Assets Sectionalised Sectionalised
RMPP 2017 £m__RMPP 2016 £m
Assets in sectionalised RMPP at beginning of period 407 379
Contributions paid 17 19
Employee contributions paid 5 6
Finance income 15 14
Actuarial gains/(losses) 92 (8)
Benefits paid to members (4) (3)
Assets in sectionalised RMPP at end of period 532 407
Share of Share of
Assets RMSEPP 2017 RMSEPP 2016
£m £m
Share of assets in RMSEPP at beginning of period 30 31
Contributions paid 1 1
Finance income 1 1
Actuarial gains/(losses) 1 (2)
Benefits paid to members (1) (1)
Share of assets in RMSEPP at end of period 32 30
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Changes in the present value of the defined benefit pension obligations are analysed as follows:
Liabi Sectionalised Sectionalised
RMPP 2017 RMPP 2016
ém £m
Liabilities in sectionalised RMPP at beginning of period (184) (150)
Current service cost (23) (27)
Curtailment costs* 2 (1)
Finance cost (7) (6)
Employee contributions (5) (6)
Experience adjustments on liabilities 6 3
Financial assumption changes (129) -
Demographic assumption changes (5) -
Benefits paid 4 3
Effect of closure of RMPP* 19 -
s in sectionalised RMPP at end of period (322) (184)
Share of Share of
RMSEPP 2017 RMSEPP 2016
£m £m
Share of liabilities in RMSEPP plans at beginning of period (27) (26)
Finance cost (1) (1)
Experience adjustments on liabilities 7 (1)
Financial assumption changes (11) 2
Benefits paid 1 1
Share of liabilities in RMSEPP at end of period (31) (27)
*The gain on curtailment of £2 million is due to redundancies in the year. It is equal to a cost of £3 million in
respect of enhanced retirement benefits granted to certain members, offset by a saving of £5 million due to RPI-
linked in-service revaluation being replaced by CPI-linked deferred pension revaluation. The effect of the closure
of RMPP of £19 million is a past service adjustment as a result of the closure of the Plan and is a one-off adjustment.
Both of these adjustments have been allocated between revenue trading (net credit of £2 million relating to
adjustments linked to current year service) and closure of operations (net credit of £19m relating to adjustments
linked to prior years’ service).
d) Recognised charges
An analysis of the separate components of the amounts recognised in the performance statements of the Group
is as follows:
Sectionalised Sectionalised
RMPP 2017 RMPP 2016 £m
£m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to operating profit from revenue trading:
Current service cost 23 27
Loss due to curtailments 2 =
Effect of the closure of the RMPP (4) :
Total charge to revenue trading 21 27
Analysis of amounts charged to closure of operations:
(Gain) / Loss due to curtailments (4) 1
Effect of the closure of the RMPP (15) :
Total charge to operating profit 2 28
Analysis of amounts charged/(credited) to net pensions interest:
Interest on plan liabilities 7 6
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Interest income on plan assets (15) (14)
Net pensions credit to financing (8) (8)
Net charge to the income statement before deduction for tax (6) 20
Analysis of amounts recognised in the statement of comprehensive
income:
Actual return on plan assets 107 6
Less: expected interest income on plan assets (15) (14)
Less: taxation on surplus recoverable through plan refunds - (2)
Actuarial gains/(losses) on assets (all experience adjustments) 92 (10)
Experience adjustments on liabilities 6 3
Effects of changes in actuarial assumptions on liabilities (134) -
Actuarial losses on liabilities (128) 3
Effect of the asset ceiling (210) =
Total actuarial (losses) /gains recognised in the statement of
comprehensive income (246) (7)
Share of Share of RMSEPP.
RMSEPP 2017 2016 £m
£m
Analysis of amounts recognised in the income statement
Analysis of amounts charged to net pensions interest:
Interest on plan liabilities 1 1
Interest income on plan assets (1) (1)
Net pensions credit to financing - -
Net charge to the income statement before deduction for tax - =
Analysis of amounts recognised in the statement of comprehensive
income:
Actual return on plan assets 2 (1)
Less: expected interest income on plan assets (1) (1)
Less: taxation on surplus recoverable through plan refunds : 1
Actuarial gains/(losses) on assets (all experience adjustments) 1 (1)
Experience adjustments on liabilities 7
Effects of changes in actuarial assumptions on liabilities (11) (1)
Actuarial losses on liabilities (4) (1)
Total actuarial losses recognised in the statement of
comprehensive income (3) (2)
12. Equity
Called up share capital:
2017 2016
£ £
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
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Share premium:
On 7 August 2007 1,000 ordinary shares of £1 each were issue in return for £313 million cash paid by the Secretary
of State for Business, Enterprise and Regulatory Reform. A share premium of £312,999,999 resulted from this
subscription. In April 2008 two ordinary £1 shares were issued in return for £152 million cash paid by the Secretary
of State for Business, Innovations and Skills Reform. A share premium of £151,999,998 resulted from this
subscription.
13. Commitments
Capital commitments contracted for but not provided in the financial statements amount to £xx million (2016:
£51 million).
Details of the Company commitments under non-cancellable operating leases are disclosed in the Group financial
statements (note 19).
14. Related party disclosures
Details of transactions with related parties are disclosed in the Group financial statements (note 21).
15. Capital and investment expenditure
Details of operating capital and investment expenditure is disclosed in the Group financial statements (note 4).
16. Taxation
Details of the taxation gains recognised in the year are disclosed in the Group financial statements (note 7a).
17. Discontinued operations
Details of the discontinued operation are included in note 20 in the Group financial statements.
18. Post balance sheet events
19. Immediate and ultimate parent company
At 26 March 2017, the Directors regarded Postal Services Holding Company Limited as the immediate and ultimate
parent company. The largest group to consolidate the results of the Company is Postal Services Holding Company
Limited, a company registered in the United Kingdom. Postal Services Holding Company Limited financial
statements can be obtained from Finsbury Dials, 20 Finsbury Street, EC2Y 9AQ.
61
Corporate information
Registered Office
Post Office Limited
Finsbury Dials
20 Finsbury Street
London
EC2Y 9AQ
Auditor
Ernst & Young LLP
1 More London Place
LONDON
SE1 2AF
Se itor
Linklaters LLP
One Silk Street
LONDON
EC2Y 8HQ
Post Office Limited
Actuary
Towers Watson Limited
Watson House
London Road
REIGATE
Surrey
RH2 9PQ
Consumer Body
Consumer Focus
4th Floor
Artillery House
Artillery Row
London
SW1P 1RT
62
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Post Office Limited
Audit, Risk and Compliance Board Sub-
Committee
Year ended 26 March 2017
10
ti
12
13
14
15
15
16
17
18
19
20
21
22
23
Glossary
Introduction
Presentation of Consolidated Income Statement
Primary Statements
Operating Profit from continuing operations
Revenue
Costs
POMS
Quality of Earnings
Pensions
Capital and investment expenditure
Closure of Operations
Interest, Cash, Debt, Funding and Hedging
Fixed assets - change in accounting estimate
Property, plant and equipment and non-current assets held for sale
Goodwill, investments and intangibles
Working capital
Provisions
Litigation and Claims- Potential Claims regarding Horizon
Taxation
Post Office Limited (Company only accounts)
FRES - change in accounting policy
Investment in Joint Venture (note from accounts)
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ii
15
21
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27
29
30
32
35
38
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1. Glossary
Below is a listing of key abbreviations used throughout this document with the full
meaning given:
Abbreviation Meaning
AEI Application, Enrolment & Identity
ATM Automated Teller Machine
BACS Bankers' Automated Clearing Services
BEIS Department for Business, Energy & Industrial Strategy
BOI Bank of Ireland
CPI Consumer Price Index
DMB Directly Managed Branch (formerly Crowns)
DVLA Driver & Vehicle Licensing Authority
DWP Department of Work & Pensions
Eagle Deal in August 2012 to sell Post Office Financial Services (POFS) to the
Bank of Ireland, restructure commission rates for personal financial
services and extend the contract to 2023
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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Introduction
This Briefing Book has been prepared to explain the Post Office Limited results for
the year ended 26 March 2017. It is a summary of the key data, trends and
analyses which readers may find useful. It should be read in conjunction with the
financial statements.
Analysis is presented based on a comparison of 2016-17’s results to those of the
prior year.
Comparison against budget is discussed in the Monthly Performance Report
presented to the Post Office Limited Board.
The following points are outstanding:-
1. Clarity on future funding and the implications for our plans and for disclosures
in the ARA
2. The subsequent, formal assessment of going concern and related disclosures
3. The subsequent assessment of the continuation of the impairment of fixed
assets
The financial statements have been prepared on the basis that investment funding
is received and that the fixed asset impairment is reversed, increasing net assets
by £255m. The auditing of this is underway. These issues will be presented in a
future ARC when the timetable is clear.
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 with the
exception of the following:-
Change in depreciation and amortisation accounting estimates
Post Office Limited Group has revised the accounting estimate for depreciation of
fixed assets and amortisation of intangible assets. Rather than impairing fixed and
intangible assets on capitalisation, Post Office Group is now applying depreciation
and amortisation policies which are consistent with the useful lives of the asset
categories. Details are given in section 15. This is subject to audit and final
agreement.
Changes in accounting policy in company only accounts in relation to FRES
In the company only accounts of Post Office Limited, the accounting policy of the
FRES joint venture has been changed to the equity method, which is consistent
with Post Office Group accounts. Details are given in section 23.
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Presentation of Consolidated Income Statement
We have prepared the income statement in line with the decision made by the ARC
on 28 March 2017.
Firstly, we have reviewed the way in which we show exceptional items on the face
of the Group consolidated income statement. Exceptional items comprise the
impaired capital expenditure and major strategic project spend net of investment
funding.
Whilst the disclosure of exceptional items is consistent and transparent, it could
no longer be considered best practice in a public interest company to have this
scale of recurring charges presented “below the line”. We have managed this by
stating the level of operating loss before and after exceptional items.
In 2016-17, we have transitioned to an alternative presentation. We are showing
four columns in the consolidated statement in the current year and preceding
financial year. These are: revenue trading; closure of operations; capital and
investments; and (adding them together) the reported results. The EBITDAS figure
can be directly extracted from the revenue trading column.
The columnar approach is used by a number of other companies including Land
Securities, British Land and Pets at Home. The columnar presentation is more
conventional than our current presentation and allows the reader of the accounts
to clearly see the underlying performance of the Post Office for the current and
preceding financial year.
Secondly, we have shown Mobile and the third party Cash in Transit business under
Closure of Operations but within discontinued operations (as required by IFRS 5).
A £19m one off pension credit relating to prior periods is also shown within the
Closure of Operations and has not therefore been included in EBITDAS. In addition,
the tax charge arising on the reversal of the deferred tax pension asset (£25m)
has been shown within Closure of Operations.
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5. Primary Statements
5.1 Consolidated Income Statement
2016 (restated) £m
Revenue Closure of Capital and Revenue Closure of Capital and
trading operations investment Total trading operations investment Total
Continuing operations:
Turnover 957 s = 957 964 - = 964
Network Subsidy Payment 80 - - 80 130 - - 130
Revenue 1,037 = - 1,037 __1,094 = -_ 1,094
Costs (978) 19 (119) (1,078) (1,016) - (283) (1,299)
Investment funding - - 140 140 - - 150 150
Impairment - - 151 151 - - (136) (136)
Depreciation - - - - (1) - - (1)
Joint venture share 34 = a 34 35 > = 35
Operating profit / (loss) from
continuing operations 93 19 172 284 112 - (269) (157)
Finance costs (7) - - (7) (5) - - (5)
Net pensions financing income 8 - - 8 8 - - 8
Profit / (loss) before taxation
from continuing operations 94 19 172 285 1i5 . (269) (154)
Taxation credit / (charge) 9 (25) : (16) 4 : : 4
Profit / (loss) for the financial
year from continuing operations 103 (6) 172 269 119 - (269) (150)
Discontinued operations:
Loss for the financial year
after tax from discontinued
operations : (47) : (47) = (17) - (17)
Profit / (Loss) for the
financial year 103 (53) 172-222 119 (17) (269) (167)
EBITDAS 13 - - - (17) - = -
Revenue trading represents the underlying trading of the business excluding the Closure of operations
and Capital and investment.
Closure of operations is the £48 million net loss of the Retail Cash in Transit operation which has been
discontinued during the year less the £1 million provision release from the Mobile operation that was
discontinued in prior year plus £19 million one-off pension gain resulting from the closure of the defined
benefit plan. The reversal of £25 million tax losses asset has also been allocated to closure of operations
as this is related to the closure of the defined benefit plan. Prior year results have been restated to show
the Retail Cash in Transit net loss as discontinued, the impact of this on prior year revenue and costs has
been summarised on the following page.
Capital and investment (section 12) includes government funding, impairment of capital expenditure and
transformational spend. In the current year there has been a reversal of impairment to the value of £255
million, further detail is given within section 15.
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EBITDAS is one of the Group’s key financial measures and is calculated by taking Revenue excluding the
Network Subsidy Payment, less costs from revenue trading excluding depreciation, plus joint venture
share. For the year ended 26 March 2017 EBITDAS was £13 million (2016 restated: EBITDAS loss of £17
million) being operating profit from continuing operations of £93 million less £80 million of network
subsidy payment.
Prior year restatement
For the year ended 26 March 2017, the closure of the Retail Cash in Transit operation
(known as ‘Project Iris’) has been treated as a discontinued operation. A prior year
restatement has been made to reflect the Iris results for the year ended 27 March 2016
as a discontinued operation. The restatement made and the effect on the income
statement for the year ended 27 March 2016 has been summarised in the table below.
As per signed I Restatement I Restated
financial i
statements
operation
Turnover 981 (17) 964
Costs (1,040)* 24 (1,016)
Operating profit from continuing operations 105 7 112
before capital and investment
Loss for the financial year from continuing (157) 7 (150)
operations after financing and tax
EBITDAS (24) 7 (17)
Loss for the financial year after tax from (10) (7) (17)
discontinued operations
Loss for the financial year (167) (¢) (167)
*Excludes depreciation of £1 million.
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5.2. Consolidated statement of cash flows
2016
2017 = (restated)
—£m £m
Cash flows from operating activities
Operating profit from revenue trading from continuing operations 93 112
Operating loss from discontinued operations (47) (17)
Total profit before capital and investment 46 95
Adjustment for:
Share of profit from joint ventures (34) (35)
Pension operating costs 24 30
Working capital movements: (1) (81)
[Decrease/(Increase) in trade and other receivables 86 (16)
(Decrease) in trade and other payables (95) (59)
Increase in inventories (1) “
Increase in provisions for discontinued operations 5 3
Increase/(Decrease) in revenue trading provisions 4 (9)
Pension operating costs paid (22) (23)
Cash payments in respect of capital and investment items: (55) (109)
Government grant 140 150
Restructuring costs (195) (253)
(Other : (6)
Net cash outflow from operating activities (42) (123)
Income tax recovered 9 9
Cash flows from investing activities
Dividends received from joint ventures 35 35
Acquisition of insurance business - (44)
Purchase of tangible and intangible non-current assets (115) (136)
Net cash outflow from investing activities (80) (145)
Net cash (outflow)/inflow before financing activities (113) (259)
Cash flows from financing activities
Finance costs paid (7) (5)
Payments to finance lease creditors (8) ~
Proceeds of borrowings from BEIS 96 155
Net cash inflow from financing activities 81 150
Net (decrease) in cash and cash equivalents (32) (109)
Cash and cash equivalents at the beginning of the year 712 821
Cash and cash equivalents at the end of the year 680 712
5.3 Consolidated balance sheet
2017 2016
—£m —m
Non-current assets
Intangible assets 167 44
Property, plant and equipment 141 9
Investments in joint ventures 66 67
Retirement benefit surplus 1 196
Trade and other receivables 11 12
Total non-current assets 386 328
Current assets
Inventories 7 6
Trade and other receivables 326 411
Cash and cash equivalents 680 712
Total current assets 1,013 1,129
Total assets 1,399 1,457
Current liabilities
Trade and other payables (563) (655)
Financial liabilities - interest bearing loans and borrowings (561) (465)
- obligations under finance leases - (8)
Provisions (58) (151)
Total current liabili (1,182) (1,279)
Non-current lia
Other payables (22) (25)
Provisions (30) (16)
Total non- current liabili (52) (41)
Net assets 165 137
Equity
Share capital = “
Share premium 465 465
Retained earnings (302) (330)
Other Reserves 2 2
Total equity 165 137
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6. Operating Profit from continuing operations
6.1. Operating profit bridge analysis
£m
11 2
—_
(50) (7)
(4)
2016 NSP Revenue — Share of Profit People Costs Other Postmasters
from Joint Operating Costs
Venture Costs
2017
6.2 Explanations for key movements are as follows:
« Revenue - section 7
* Costs - section 8
o Cost of sales 8.2
o People Costs 8.3
o Postmaster Pay 8.4
o Other Operating Costs 8.5
6.3 EBITDAS Bridge
£m
”)
Costs from Joint
Venture
People Costs Other Operating Share of Profit
Revenue
2017
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7. Revenue
26 March 27 March
2017 2016 Variance
£m £m £m
Retail
Mails 337 334 3
Retail & Lottery 40 46 (6)
Government Services 114 128 (14)
Payment Services 68 70 (2)
Financial Services & Telecoms
Financial Services 248 234 14
Telecoms 133 130 3
Other income 17 22 (5)
Turnover 957 964 (7)
Network Subsidy Payment 80 130 (50)
Revenue 1,037 1,094 (57)
The decrease in year on year total revenue of £57m to £1,037m (2016 £1,094m)
is driven by the £50m decrease in the Network Subsidy Payment, and a £7m
decrease in turnover.
7.1 Retail
7.1.1. Mails (Underlying improvement of £4.0m)
After adjusting for a planned decrease in the fixed fee, underlying Mails trading
improved by £4.0m.
£m
Total increase 2.5
Add: planned decrease fixed fee 1.5
Underlying trading variance 4.0
2017 2016 Variance
£m £m £m
Parcelforce 18 18 0
Special Delivery 50 50 0
International Priority & Standard 34 32 2
Stamps (1st & 2nd Class plus other
stamps) 25 27 (2)
Labels (1st & 2nd Class) 87 88 (1)
RM Signed For 23 22 i)
Home Shopping Returns 14 12 2
Mails Other (trading) 16 18 (2)
Fixed fee and Mail work 70 68 2
337 334 3
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The key movements within the underlying trading variance are:
e £2.4m increase in Home Shopping Returns (21% increase year on year)
« £3.2m increase in barcoding payments received from Royal Mail
« £1.7m increase in priority services and standard driven by weak pound
supporting overseas postage and Tracked & Signed product performance
Offset by
e £1.9m decrease in stamps (7% decline year on year)
e £1.0m labels decline due to down trading in formats as market place sellers
look to benefit from the cheaper postage price of large letters. 1° class
labels decrease by 1.5% and 2 class dropped by 0.6%
« £1.5m fixed fee
7.1.2 Retail & Lottery (£6m reduction year on year)
Lottery decline of £5.5m (14% year on year), driven by the continued loss of
market share to the Camelot app and expanding network reducing market share.
7.1.3. Government Services (£14.2m reduction year on year)
2017 2016 Variance Variance
£m £m £m %
Dwp 61 75 (14) (19)
Home Office 34 34 ie) 0
DVLA 8 10 (2) (20)
Verify 6 4 2 50
Other Government Services 5 5 (¢) (°)
Total 114 128 (14) (11)
« DWP turnover from POCA accounts has declined by £14m. £3m is decrease in
LIBOR rate; £9.5m lower active accounts; and £1.5m decrease in price.
« Home Office was flat year on year. £0.5m reduction in Passport revenue was
offset by higher UKVI volumes.
« DVLA was £2m down year on year. This was mainly driven by Tax discs (£1.3m)
and Ten Year renewals (£0.5m) as more transactions move online.
« Verify increased £1.6m year on year. £0.6m higher volumes and £1m higher price
per transaction.
7.1.4 Payment Services (£2m reduction year on year)
« £2.2m decrease in housing bill payments, mainly due to a loss of local authority
clients
« £2.5m decline across other bill and payments services due to price competition
and the ongoing decline in bill payments transactions.
« £1.3m decrease in ATM income due to reduced ATM availability during network
and DMB transformation and the general decline in cash usage
« £3.5m increase arising from a review of bill payment accrual methodologies in
the year.
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7.2 Financial Services & Telecoms
7.2.1 Financial Services (£14m increase year on year)
« £0.3m net decrease in PO Savings products
o £10.1m decrease in income due to a smaller savings back book, net of BOI
underpin;
o Offset by £9.8m of additional commissions earned from the re-pricing of the
savings back-book by BOI.
« £3.5m increase in travel money, principally due to £3.0m additional fixed income
arising from renegotiation with FRES.
« £3.3m increase in Moneygram income. Send reduced following the Brexit
referendum but were offset by higher value Receive transactions.
e £6.8m increase in Insurance revenue driven by underlying volume growth of
£1.2m (16%) and the acquisition of the insurance business from BOI in
September 2015.
« £4.2m decrease in Mortgage income (61%) reflecting difficult market conditions.
« £10.6m increase in Banking Services due to the introduction of the new Banking
Framework in Q4 generating framework fees of £4.5m and strong year on year
growth in transactional volumes driven by bank closures and beneficial knock-on
impacts of negotiations to set up the banking framework.
« £4.5m decrease from year on year impact of ceasing NS&I in June 2015.
« £1.0m decrease on Postal Orders consistent with ongoing decline.
7.2.2 Telecoms
The Telecoms Services pillar includes the Post Office Homephone and Broadband
services, as well as sales of mobile top-ups and phonecards.
Telecoms Services revenue of £133.3m (2016 £129.8m) has increased by £3.4m.
This has been driven by an increase in the customer base to 465.5k (2015 459.4k)
plus the effects of the line rental increase of £1 in November 2015, and a further
increase of £0.99 in September 2016.
Income from mobile top-ups was £0.5m below prior year, as transaction volumes
declined as mobile networks actively migrate customers away from pre-pay and
reduce their transaction fees.
HPBB 2016/17 2015/16 Variance
Average customer base 465,488 459,356] 6,132
ARPU £23.28 £22.85) £0.43
13
7.3 Other Income
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2017 2016 Variance
—£m £m £m % __Comments
Supply Chain 12.12 0
Decrease to one off
Gamma (151%) Gamma/BOI income
4 9 (5) received in Prior year
Photo Booth and other im d. (e}
17-22 ()
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8. Costs
8.1 Total Trading Costs Analysis
2017 2016 Variance
Notes £m £m £m %
COST OF SALES 8.2 (113) (110) (3) ___ (3%)
Wages & Salaries (128) (135) 7 5%
Pensions (24) (30) 6 20%
Overtime (6) (8) 2 20%
Bonus & Productivity (16) (15) (1) (5%)
Employers NI (21) (19) (2) (12%)
Temporary Resource (8) (6) (2) (25%)
PEOPLE COSTS 8.3 (202) (213) 11 5%
Postmasters pay 8.4.1 (388) (413) 25) 6%
Legal Costs 8.5.1 (4) (5) 1 27%
Staff & Agent Related Costs 8.5.2 (9) (10) 1 16%
Compliance and Advice Services 8.5.3 (6) (4) (2) (57%)
Brand & Marketing 8.5.4 (18) (25) 7 28%
Property & Facilities Management 8.5.5 (46) (53) 7 13%
TT Infrastructure & IT Services 8.5.6 (100) (102) 2 2%
Finance & Losses 8.5.7 (23) (24) 1 2%
Other Operating Costs 8.5.8 (66) (55) (11) (20%)
Vehicles (4) (3) (1) (44%)
TOTAL TRADING OTHER OPERATING
COSTS (663) (701) 27 3%
TOTAL COSTS (978) (1,016) 38 8%
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8.2 Cost of Sales
Cost of Sales has increased by £2.9m (2.6%), detailed below:
2017 2016 Variance Variance
£m £m ém %
Comments
Increase in line with the overall
oj growth in revenue from the
Tadecors. (7a) (74) @) (1%) Homephone and Broadband
products.
‘i Decrease due to lower POCA
Government Services (28) (29) 1 4% volumes
Mails & Retail (4) (3) (1) (10%)
1 ‘ 1 Overall increase is due to POMS in
9
Financial Services (7) (4) (3) (74%) line with revenue
Total (113) (110) (3) (3%)
Gross Margin detailed below:
2017 2016 Variance
Telecoms 42% 41% 1% _ Increase driven by price increase
Government Due to drop in interest rate from 0.5% to
Services 74% aad (1%) 9.25%
Retail 52% 51% 1% Driven by price increase
Financial Services 99% 99% 0%
8.3. People Costs (2017 £202m vs 2016 £213m)
8.3.1 People costs
People costs represent 26.1% (2016: 26.5%) of the cost base.
The number of people employed has decreased by 1,303 to 5,302 at 26 March 2017
(2016: 6,605), primarily due to redundancies arising from the DMB and Transformation
Programmes and Supply Chain.
« Wages and Salaries have decreased by £7.1m (5.3%) due to BAU headcount
reductions from 5,471 to 4,421.
e Pension costs have decreased by £6.0m (19.6%), reflecting the decrease in basic
pay and £2m net credit relating to adjustments linked to the closure of the pension
scheme (see Section 11).
e Overtime has decreased by £1.6m (20.3%) due to cost control.
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e Bonus related costs have increased by £0.8m (5.1%) due to increase in management
bonus accrual reflecting current performance level which assumes the stretch will be
paid.
e Employer’s NI has increased by £2.2m (12.0%) due to change in the legislation from
April 2016 which has seen an end to contracting out and the national insurance rebate
for those in the Royal Mail defined benefit pension scheme.
« Temporary Resource has increased by £1.5m (24.6%) due to back filling vacancies.
8.3.2 People Numbers
Total period and average employee numbers are as follows:
Period end employees Average employees
2017 2016 2017 2016
Total employees 5,302 6,605 6,054 6,667
Total employee numbers can be categorised as follows:
2017 2016
Administration 1,275 1,261
Directly managed branches 2,807 3,344
Supply Chain 833 1,360
Network and DMB transformation programmes 387 640
Total 5,302 6,605
8.3.3 Average Cost per Employee
Period end employees Average employees
2017 2016 2017 2016
Total *BAU employees 4,421 5,471 5,043 5,557
BAU Staff Cost (£188,617) (£199,191)
Average Cost per employee (£37,401) (£35,846)
*BAU excludes all programmes and discontinued operations
The average number of employees for year ending 26 March 2017 was 5,302 (2016
6,667). The average annual cost per employee, (excluding capital and investment
costs and heads: DMB Programme), has increased by £1,556 (3.5%) to £37,401
(2016 £35,846). This is due to pay award of 1.9% and increased bonus resulting from
an increase in the senior manager population from 501 to 770.
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This reduction was largely
etwork transformation and
“which NI is not payabl
2017 2016 Variance
£m £m £m %
Agents Variable Costs
Agents Fixed Costs
sce IRRELEVANT
Agents Tax
Postmaster Costs
tmaster branch (excluding VAT and NI) is:
decrease on the prior year. The decrease is as a result
of the reduced fixed inco: ments due to the Network Transformation
Programme.
2017 2016
Agency Branches (incl. Mains and Locals and I} :
over 1800 mutliples) i :
Outreach* & Satellite I IRRELEVANT I
DMB
Total Branches
*Outreach-Non fixed location serving & Mobile Post Office vans that
provide service for a limited number of hours per week
projects mainly Sparrow as m ye
Property contracts and the remaining
© jirevevant} iS due to anti money laundering compliance service
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e¢ Offset by reduced general consultancy costs.
8.5.4 Brand & Marketing Costs have decreased by £6.9m (28.2%) year on year. £3.9m
reduction in creative agency fees, £1.7m decrease in advertising costs, £1.6m
reduction corporate communication and customer relationship costs. This reflects
the lack of impact of earlier marketing
8.5.5 Property & Facilities Management costs have decreased by £6.9m (13.0%),
detailed below:
2017 = =2016 Variance
£m £m £m % Comments
Movement in onerous contract provision for loss
. _ making DMB and closure of Supply Chain Sites,
Property (21) (21) offset by increase in rent reviews in year, including
Future Walk, and Swindon rent review
Property Charge (16) (18) 2 9% Reduced estates charges and service charges
erty 9 ° reflecting fewer DMB branches (316 to 286)
Utilities (2) (4) 2 48% Decrease due to review of utilities portfolio
Decrease due to reduction in remote specific
Security (3) (5) 1 24% security monitoring and security solutions due to
fewer properties
: 5 Reduction in maintenance costs for Branch
Maintenance Offica (4) (5) 1 20% Equipment as investment in new agency kit
quip resulted in fewer reactive maintenance call outs
(46) __(53) 7 13%
8.5.6 IT Infrastructure & IT Services costs have decreased by £2.3m
After the reallocation of contact centre costs of £5.9m from IT to other operating costs
there has been an underlying increase of £3.6m.
2017 2016 = Variance
£m ém £m % __Comments
IT Increase Computer Infrastructure costs due to
Infrastructure (26) (22) (3.6) (16%) an ageing estate in legacy point of sale,
& IT Services desktop services started in April 2016
Reduced Prism Operating lease charges (legacy
IT Services (15) (16) 1 8% outsourced services) offset by increase in
Integration and service desk charges
1, Decrease due to reallocation of contact centre
Telephony (9) (15) 5 37% costs of £5.9m from IT to other operating costs
Branch
Infrastructure (49) (48) (1) (2%) Horizon terminal services in branches
Services
(100) (102) 2 2%
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8.5.7 Finance costs have decreased by £0.5m (2.0%), detailed below
2017 2016 = Variance
—Em £m £m % __Comments
VAT Recovery 3 6 (3) 52% Current year VAT rebate is allocated
against individual cost lines
Finance Costs (16) (16) 1 4%
Other includes bureau hedging,
customer bad debt, telephone,
robberies and burglaries and former
Other (10) (13) 3 74% agent’s debt. Improved debt position
and FX valuation gain offset by
increase in audits and losses identified
and robberies and burglaries
(23) (24) 1 2%
8.5.8 Other Operating costs have increased by £10.7m. (19.3%), detailed below:
2017 2016 Variance
=m £m ém %__Comments
Increase due to full year impact
of POMS acquisition
Managed Services & Customer
Management (23) (20) (3) (17%)
Increase due to full year POMS
Shared Services (9) (1) (8) (1573%) acquisition net of shared
services adjustment
Stationery & Contract Penalties (17) (16) (0) (2%)
ee Decrease due to reduced
Logistics qs) (19) 1 6% Volumes of official mail
Total Other Operating Costs (66) (55) (11) (19%)
20
9 POMS
Due to impact of Hawk acquisition which happened in mid-2015/16, underlying
trading in 15/16 has been adjusted to show an annualised view.
Net income is down 2.6% primarily due to an increase in cost of sales relating to
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Travel insurance aggregator spend. Total costs have reduced by 10.8% due to one-off
costs in 15/16 relating to establishing regulatory processes and ensuring POMS was
ready to acquire the Hawk business. Overall underlying profitability has improved by
50% year on year.
2017 2016
POMS P&L £m £m
Actual annualised = YoY %
Gross income 43.0 43.1 (0.2%)
Cost of sales (5.5) (4.6) 19.6%
Net income 37.5 38.5 (2.6%)
Staff costs (3.3) (3.0) 10.0%
Non-staff costs (14.5) (18.8) (22.9%)
POL commission (11.9) (11.5) 3.5%
Total Expenditure (29.7) (33.3) (10.8%)
EBITDA 7.8 5.2 50.0%
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10 Quality of Earnings
2016-17 2015-16 Change
Post Office Limited (consolidated) —£m £m é£m %
Reported profit from continuing operations 93 112 (19) (17)
Network Subsidy Payment (80) (130) 50 (38)
Add back depreciation 0 1 it) ie)
Reported EBITDAS 13 (17) 30 (176)
Bill payments (3)
Pensions one-off item - closure impact on current year costs (2)
HMRC Anti-Money Laundering penalty 1
Telecoms line rental income recognition 1
Gamma one-off income release (5)
Billing corrections re 2014-15 ma
Back-billing to RM for Certificates of Posting work (2)
Fujitsu compensation for poor service in 2013-14 (4)
Change in Telecoms bad debt policy 1
Total adjustments (3) (8)
Adjusted to exclude one-offs 10 (25) 35 (156)
Adjusted for the net one-off items included within EBITDAS, the reported earnings
improvement increases from £30m to £35m, reducing the relative impact of one-offs.
10.3 Bill payments
A review of deferred income in relation to bill payments was completed in the year
which resulted in a one-off credit to the income statement.
10.4 Pensions past service credit
As a consequence of the closure of RMPP to future accruals, a £1.8m credit in
relation to current year service cost has been recognised in the income
statement. The prior year impact of £19m has been taken below the line in
“Closure of Operations”. See Section 11 for further details.
10.5HMRC AML penalty
Following a review by HMRC a £785k provision for historical AML premises
registration non-compliance penalties has been made.
10.6 Telecoms line rental
During the year a correction was made to telecoms line rental income recognition
to recognise revenue over the life of the contract with the customer.
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11 Pensions
11.3 Background
The Post Office participates in pensions schemes and detailed below, the RMPP
closed to future accrual on 31 March 2017.
Scheme Eligibility Type
Royal Mail Pension Plan (RMPP) I UK employees Defined benefit
Royal Mail Senior Executive UK senior Defined benefit
Pension Plan (RMSEPP) executives (closed)
Post Office Pension Plan (POPP) I UK employees Defined contribution
11.4 Assumptions
IAS 19 revised requires a number of assumptions. The choice of assumptions
used for the calculations is the responsibility of the Directors, based upon advice
given by an independent actuary. The key assumptions for the year to 26 March
2017 are set out in the table below.
March March
2017 2016
% pa RMPP Post Office Section
Inflation (RPI) 3.4 2.9
Inflation (CPI) 2.3 1.8
Discount rate (i.e. bond rate) 2.3 3.5)
Rate of increase in Pensionable salaries 3.4 2.8
Rate of pension increases - RMPP A/B 2.3 1.8
Rate of pension increases - RMPP C 3.4 2.8
Rate of increases in deferred pensions 2.3 1.8
Demographic assumptions, for example mortality, remain aligned with the
assumptions used for the actuarial valuation.
Inflation —- RPI
The RPI inflation assumption is set with reference to the breakeven long-term
rate of price 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.
Inflation — CPI
At the last year-end, the assumed margin between RPI and CPI inflation was
1.1% pa. 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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11.5
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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. AA rated corporate bond
yields have fallen significantly since 27 March 2016, suggesting a discount rate
of at least 1% pa lower than last year (FY16: 3.5%).
The current year assumption has been considered with reference to the Willis
Towers Watson 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. Given the
uncertainty of such extrapolation, we have chosen to take a more prudent view
and not taken full credit for the upward slope in the model. This results in a
reduction in discount rate to 2.3%. It should be noted that the discount rate
used in the funding valuation is 1.5%.
EY have challenged whether the discount rate of 2.3% is appropriate and
believe that it is on the prudent end of the range. However, they have reviewed
other assumptions and concluded that, in the round, the assumptions applied in
deriving the pre write-off scheme asset give a valuation which is materially
correct.
Rate of increase in pensionable salaries
At the last year-end, the assumption was 0.1% pa below the RPI inflation
assumption. This reflected an assumption that inflation will be volatile from
year to year and in some years will exceed 5% pa (at which point the 5% cap
will apply). Willis Towers Watson analysis confirmed that lower levels of
inflation volatility could be justified, which has resulted in a pension increase
assumption at the same level as assumed RPI inflation (after rounding).
Other increases to benefits
At current levels of inflation it remains appropriate to set the increases in line
with the relevant inflation measure.
Movements in the defined benefit surplus
The movement in the RMPP defined benefit accounting surplus during the year to
26 March 2017 is detailed below. Scheme assets are assessed at fair value at the
balance sheet date. For example, quoted equities are valued at the latest ‘bid’
price. Scheme liabilities are discounted using a high quality corporate bond rate.
The IAS 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.
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Year ended Year ended
26 March 27 March
2017 2016
£m £m
Opening sectionalised RMPP net retirement bene 223 229
surplus
Current service cost (23) (27)
Curtailment gain/(losses) 2 (1)
Net financing credit 8 8
Employers contributions 17 19
Gain on closure 19 =
Actuarial gains/(losses) (36) (5)
Closing RMPP net retirement benefit surplus 210 223
RMSEPP surplus 1 3
Total net retirement benefit surplus 211 226
Effect of asset ceiling (210) (30)
Closing net retirement benefit surplus 1 196
The current service cost is intended to represent the amount by which the
liabilities will increase due to employing active members for one more year. The
2016-17 service cost, expressed as a percentage of pensionable pay is 28.1%
for RMPP (March 2016 - 28.5%). Payments of £14m were made in respect of
RMPP future service contributions at a rate of 17.1% (March 2015 - 17.1%).
The gain on curtailment of £2m is due to redundancies in the year. It is equal to a
cost of £3m in respect of enhanced retirement benefits granted to certain members,
offset by a saving of £5m due to RPI-linked in-service revaluation being replaced by
CPI-linked deferred pension revaluation. The effect of the closure of POL Fund of
£19m is a past service adjustment as a result of the closure of the Plan and is a one-
off adjustment. Both of these adjustments have been allocated between revenue
trading (net credit of £2m relating to adjustments linked to current year service)
and closure of operations (net credit of £19m relating to adjustments linked to prior
years’ service).
Following formal consultation with employees in 2016, the Trustee agreed to
Post Office’s request for the closure of the Post Office section of the RMPP to
future accrual. Closure to future accrual means that no contributions in respect
of normal service accrual will be made after 31 March 2017. However it is
expected that there will be redundancy payments to be made to the RMPP
during 2017/18.
The net financing credit of £8m, a non-cash item, is reported under finance
income and reassessed annually.
Actuarial gains and losses are recorded directly in the statement of changes in
equity (and not the income statement).
The RMSEPP surplus has decreased to £1m.
11.6 Assessment of recoverability of surplus under IFRIC 14
A retirement benefit surplus of £1 million is disclosed on the balance sheet,
representing the surplus in the RMSEPP Plan only. As described above, no surplus
is recognised for RMPP because Post Office has concluded that as a result of the
Memorandum of Understanding signed on 21 March 2017, Post Office no longer
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has an unconditional right to refund from the Plan. As a result, we de-recognise the
pension accounting asset in the financial statements.
In practice, this simply aligns our accounting with the real world: the existing
surplus belonged to members and was never going to the returned to POL. Whilst
the surplus under accounting methodology is £210m, the funding valuation, which
gives a more realistic view of the value of the scheme, is significantly less. For
comparison, the funding valuation at 31 March 2015 was £62.7m. It is anticipated
that the next triennial valuation due in March 2018, will be lower.
26
12 Capital and investment expenditure
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This section discusses the capital and investment items on the income statement.
12.3Summary
The following investment items were recognised in the consolidated income
statement for the years ended 26 March 2017 and 27 March 2016.
2017 2016
=m £m
Government Grant 140 150
Restructuring:
Business transformation (6) (13)
Network transformation including Postmasters’ compensation (a) (36) (177)
Directly managed branch transformation (b) (18) (23)
TT transformation (9) (30)
Restructuring - severance (46) (29)
- other (4) (11)
Total restructuring (119) (283)
Impairment:
Impairment of intangible assets (56) (93)
Impairment of property, plant and equipment (48) (43)
Reversal of impairment in the year 255 =
Total net impairment 151 (136)
Total capital and investment 172 (269)
12.4Government Grants - In April 2016 the Post Office received grants totalling £140m
from the Government, (April 2015 £150m) to fund capital
transformation.
12.5Restructuring costs can be broken down as follows:
projects and
e £54m (2016: £200m) of restructuring costs ((a)+(b)) relate to Network
and DMBs. These programmes are being implemented to achieve a major
change in the network and are nearing completion. They introduce new
style agency offices and seek to improve the profitability of the DMB
network. The overall figure includes:
o £61m - Network Transformation and DMB_ Transformation
programme costs
o £12m onerous property lease costs
o Offset by a release of £20m in postmasters’ compensation (2016:
charge £102m).
o The remaining £1m is attributable to Network Development, the
follow-on activity from Network Transformation.
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Redundancy costs for the full year amount to £46m (2016: £29m) and
include £19m admin (mainly “OSOP”) severance costs, £8m DMB
severance and £15m NT programme staff severance costs
IT Transformation programme costs of £9m (2016: £30m) are now
decreasing due to the programme reaching the final phase where most
related costs are being capitalised
£6m attributable to the Business Transformation programme, including
£3m for HR-related projects including Success Factors
The remaining £4m include spend on cessation of Financial Services
specialists, Mails strategy negotiations and similar confidential negotiations
with Bank of Ireland.
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13 Closure of Operations
The closure of operations column on the income statement includes the
following:
« £19m one-off pension credit resulting from the closure of the defined benefit
pension scheme (see Section 11 for further detail)
e £25m one-off tax charge resulting from the reversal of the deferred tax asset
in relation to the pension scheme
e Discontinued operations, further detail included below.
As agreed by the Audit & Risk Committee discontinued operations results include
those of both the retail cash in transit operation, which was exited in October 2016,
and the mobile telecoms operation which was discontinued in the prior year. The
mobile operation results included in the table below are a credit of £1 million for 2017
relating to unutilised provision, and a cost of £10 million for 2016 relating to the
closure (split between other operating costs £4 million and capital and investment £6
million).
2017 2016
£m (restated)
£m
Revenue 9 17
People costs excluding restructuring costs (19) (20)
Other operating costs (3) (8)
Operating loss before capital and investment (13) (11)
Operating capital and investment expenditure (34) (6)
Loss before taxation (47) (17)
Taxation =
Loss for the year from discontinued operation (47) (17)
In 2016-17 associated revenue and costs that were incurred in year in relation to
the third party CViT operation have been removed from EBITDAS and transferred
to discontinued items together with the capital and investment expenditure. The
charge to discontinued items is £48m: £13m of EBITDAS loss and £35m of capital
and investment which consisted of redundancy and project cost. Net of the £1m
credit relating to the release of the Mobile provision, the net loss from discontinued
operations is £47m.
In the prior year £7m of EBITDAS loss in relation to external CViT has been
classified as a discontinued operation.
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14 Interest, Cash, Debt, Funding and Hedging
14.3 Net finance costs March 2017 £7m vs March 2016 £5m
26 March 27 March
2016
Em
Interest charged on Government borrowings (5) (2)
Other finance costs (2) (3)
Total finance costs (7) (5)
Interest payable on the BEIS Loan has increased year on year due to higher
draw-down.
Other finance costs include commitment fees to BEIS for the Post Office credit
facility, and settlement and utilisation charges payable to RBS.
14.4Cash, cash equivalents and debt on the balance sheet
26 March 27 March
2017 2016
Net cash/debt analysis £m —m
Cash in the Post Office Limited network 666 653
Short term bank deposits 13 57
Fiduciary cash balances held on behalf of third parties 1 2
Total cash and cash equivalents 680 712
Loans, repayable on demand or less than 1 year (561) (465)
Total 119 247
30
14.5
Loans and borrowings (March 2017 £561m vs March 2016 £465m)
Total cash and cash equivalents decreased by £32m,
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reducing the loan
requirement. This decrease is driven by a decrease in short term bank deposits
due to changes in Treasury daily cash investments targets.
Investment funding of £140m was received in the year, against an investment
spend of £229m therefore increasing the loan over the year. The remaining
difference is driven by working capital movements.
An analysis of the movement in net cash, cash equivalents and debt from £247m
to £119m is shown below
£m
EBITDAS profit 13
Discontinued operations (47)
Net working capital movement (inc. finance leases) (9)
Capital expenditure (115)
Restructuring costs (195)
Government funding 220
Interest (7)
Taxation 9
Other 3
Reduction in net cash, cash equivalents and debt (128)
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15 Fixed assets - change in accounting estimate
Until 2016-17, whilst the Board has considered that Post Office Group is a going
concern, as a loss-making business with no long-term secured funding, we have
capitalised fixed and intangible assets, writing off the cost to the income statement
as soon as the asset is acquired.
In 2016-17 we have delivered an underlying EBITDAS profit and are substantially
profitable at EBITDA (including the network subsidy payment).
Our forecasts demonstrate that we will continue to remain profitable and we have
now secured the £950m working capital facility to March 2021 and subsidy through
to March 2020. In preparing the draft financial statements we have assumed that
the final tranche of subsidy and investment funding will be received before the
accounts are signed. We will reconsider this assumption in light of clarity on the
timing of confirmation of investment funding.
The move to profitability and the funding confirmation are the triggers for the
change in accounting estimate which did not exist at March 2016.
Given the changes in financial performance we are required, where we can
demonstrate a value in use for fixed assets, to stop routinely impairing fixed
assets, reversing the historical impairment where it has a material impact on the
financial statements.
We have taken the following approach when reviewing the fixed asset register and
deciding on which assets should be subject to the reversal of impairment: -
15.1 Focused on material gross book value additions for the current and preceding 2
years (2014-15, 2015-16 and 2016-17) and, by exception, any material assets
in prior years which are estimated to have a significant useful life
15.2 Identified all assets with a value of less than £2.5k — these assets have not been
reinstated
15.3 Reviewed assets under construction and either (1) confirmed the projects are live
and that the associated assets should remain in assets under construction and are
reinstated (2) confirmed the project is closed and that the assets should be
reinstated or (3) the assets should not be reinstated
15.4 Of the assets in 14.1 and 14.3, verified the existence of the assets through
confirmation from IT, DMB post offices, fleet records or BNP Paribas
15.5 Prepared, reviewed and applied appropriate depreciation policies for fixed asset
categories. We reviewed both the actual asset lives of exiting assets as well as
comparator companies in generating depreciation and amortisation periods.
15.6 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 have a
relatively short useful life and in previous periods due to on-going operational losses
(excluding Network Subsidy payment) they have been impaired to zero on acquisition.
In the current year the impairment loss has been reversed and depreciation has been
recognised on a straight-line basis over the following useful lives:
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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, therefore these assets have not
been impaired on acquisition but would be considered for impairment if indicators
existed. They are depreciated on a straight-line basis over the following useful lives:
Range of asset lives
Land and buildings:
Freehold land Not depreciated
Freehold buildings Up to 50 years
Leasehold buildings The shorter of the period of the lease, 50 years or the
estimated remaining useful life
The remaining useful lives of freehold buildings are reviewed periodically and adjusted
where applicable on a prospective basis.
Intangible assets with a finite useful life:
Intangible assets acquired separately or generated internally are initially recognised at
cost. In previous periods these assets are impaired to zero for the reasons noted above.
In the current year the impairment loss has been reversed and the assets have been
amortised on a straight line basis via a charge to income statement over the following
useful life:
Software 3 to 6 years
Intangible assets arising on acquisition or with an indefinite useful life:
These assets are considered for impairment individually in line with Group policy noted
above but are not automatically impaired. Goodwill is considered separately below.
Goodwill
Goodwill is initially recognised at cost, being the excess of the aggregate of the
consideration transferred and the amount recognised for non-controlling interests, and
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any previous interest held, over the net identifiable assets acquired and liabilities
assumed.
After initial recognition, goodwill is recognised at cost less any accumulated impairment
losses. Goodwill is tested for impairment annually as well as when there are any
indicators of impairment.
Non-current assets within subsidiaries
Subsidiaries are considered separate cash generating units and the need for impairment
of assets is considered within the subsidiary and is dependent on whether indicators of
impairment exist within that subsidiary. At a Group level the impairment is adjusted on
consolidation to be in line with Group policy.
15.7 As a result of the review we have reinstated assets with a value of £255m (this
relates to £247m of POL assets and £8m of POMS assets). Audit files have been
created and are currently under review by EY.
34
16 Property, plant and equipment and non-current assets held for sale
16.1 Net Book Values
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The net book value (NBV) of land and buildings, plant and fixtures and intangible fixed
assets at March 2017 was £308m (March 2016: £53m).
As discussed in section 15, the accounts have been prepared on the basis that we will
reverse the impairment in the current year and the carrying value of assets has been
increased by £255m. The reversal is no more than the depreciated historical cost if
the impairment had not been recognised. The reversal of the impairment loss has
been recognised in the income statement for the current year and the change will be
applied in future years subject to a continuous review of trading and funding.
Movements during the year were as follows:
Intangible assets
Software Goodwill Total
2017 2016 2017 2016 2017 2016
£m £m —m £m £m £m
Cost
At 27 March 2016, 29 March 2015 389 297 44 - 433 297
Reclassifications (20) . - .- (20) -
Additions 79 93 - 44 79 137
Disposals (78) (1) - - (78) (1)
At 26 March 2017, 27 March 2016 370 389 44 44 414 433
Amortisation and impairment
At 27 March 2016, 29 March 2015 389 297 = - 389 297
Reclassifications (20) - - - (20) -
Amortisation and impairment (44) 93 - - (44) 93
(see note 4)
Disposals (78) (1) - - (78) (1)
At 26 March 2017, 27 March 2016 247 389 = - 247 389
Net book value
At 26 March 2017, 27 March 2016 123 ' 44 44 167 44
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.
Goodwill in the Group relates to the acquisition from Bank of Ireland of the business and assets
of the joint insurance business. The goodwill sits within Post Office Management Services
Limited. A full impairment review has been carried out and due to Post Office Management
Services (within which this Goodwill sits) being profit making, cash generative and forecast to
continue to be so no impairment is considered necessary.
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Property, plant and equipment
Land and Buildings
Plant Fixtures
Long Short Motor and and
Freehold leasehold leasehold Vehicles machinery equipment Total
£m £m £m £m ém £m £m
Cost
At 29 March 2015 83 55 115 40 1 783 1,077
Reclassification* (6) 3 (22) - - 25 -
Additions 1 . = 4 - 38 43
Disposals (1) - (3) (1) - (3) (8)
At 27 March 2016 77 58 90 43 1. 843 1,112
Reclassification* (12) 8 - - - 23 19
Additions 7 : e 1 = 25 26
Disposals (16) (20) (64) (17) - (34) (151)
At 26 March 2017 49 46 26 27 1 857 1,006
Depreciation and
impairment
At 29 March 2015 74 54 115 40 1 783 1,067
Reclassification* (6) 3 (22) - - 25 -
Depreciation and
impairment 2 - = 4 = 38 44
Disposals (1) : (3) (1) - (3) (8)
At 27 March 2016 69 57 90 43 1 843 1,103
Reclassification (12) 8 - - - 23 19
Depreciation and
impairment
(see note 3 and 4) (14) (19) - = = (74) (107)
Disposals (16) (19) (64) (17) : (34) (150)
At 26 March 2017 27 27 26 26 1 758 865
Net book value
At 26 March 2017 22 19 2 1 = 99 141
At 27 March 2016 8 1 = B 7 : 9
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16.2Capital expenditure
The table below summarises the larger capital items by category:
£m
EUC programmes 11
IT Risk & Resilience il
Network Transformation 19
Front Office IT 2
IT Networks 29
Digital 9
Network Improvements 8
Separation 1
POMS 7
Other 8
Total 105
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17 Goodwill, investments and intangibles
17.1 Investments in joint ventures and associates
26 March 27 March
2017 2016
£m £m
Investment in joint ventures 66 67
Joint ventures
Post Office Limited’s joint venture investment is a 50% interest in First Rate Exchange
Services Holdings Limited, whose principal activity is the provision of Bureau de Change.
Post Office Limited’s share of FRES’ 2016-17 post tax profit was £34m, with £35m being
received as a dividend during the year creating a £1m movement in the carried value
in the balance sheet.
38
18 Working capital
18.1 Inventories (March 2017 £7m vs March 2016 £6m)
26 March 27 March
2017 2016
£m £m
Scratchcards 5
Retail 2
Total 7 6
18.1.1Inventory written off
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The provision for stock write downs and discrepancies is £0.7m (March 2016
£0.6m). Shrinkage and obsolete stock written off at year end was £0.3m.
The increase in scratchcards is primarily due to the number of different games
currently available to customers.
18.2 Trade and other receivables (Current)
Receivables are tabulated below, followed by a detailed explanation of the various
balances.
Receivables
26 March 27 March
2017 2016
Section £m £m
Trade receivables 18.2.1 70 95
Client receivables 18.2.2 144 229
Prepayments and accrued
income 18.2.3 97 73
Other receivables 18.2.4 15 14
Total 326 411
18.2.1Trade receivables
26 March 27 March
2017 2016
£m £m
Sales ledger 22 35
Homephone debtors 6 8
Postmaster debt 3 5
Uncleared debit, credit cards 25 35
Bank of Ireland, FRES cost recovery 12 8
Other 2 4
Total 70 95
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Uncleared debit and credit card have decreased on account of the proximity of
Easter to last year end.
The Bank of Ireland cost recovery debtor relates to marketing and promotional
spend incurred on their behalf. The increase in the FRES debtor in the year
reflects the reversal of a provision against aged outstanding FRES invoices. A
review undertaken during the year has demonstrated that we are now confident
on recovery.
The decrease in sales ledger is mainly driven by a reduced debtor in respect of
BOI (March 2017: £6m, March 2016: £18m) as the trend has been for them to
settle more promptly than in the prior year.
A profile of the sales ledger within trade receivables is as follows:
Trade receivables
26 March 27 March
2017 2016
£m £m
Bank of Ireland 6 18
Bill payment partners 5 7
Others 11 10
Total 22 35
Ageing of Trade receivables:
Debtors over 60 days overdue: March 2017 £nil (March 2016: Enil).
The Post Office does not have a general risk in relation to bad debts due to the
agency and business partner nature of our client base.
18.2.2 Client receivables
Analysis of client balances at year end is as follows:
26 March 27 March
2017 2016
£m —£m
ATM (Bank of Ireland) 90 128
Card Account (JP
Morgan) 24 62
Partner banks 25 32
Others 5 7
Total 144 229
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Card account decreased as last year customers were able to claim a week’s
withdrawals in advance due to year end coinciding with the Easter bank holiday.
The decrease in ATMs is due to the fact that prior year banking activity was
affected by the Easter period.
18.2.3 Prepayments and accrued income at 26 March 2017 total £97m (March 2016
£73m)
26 March 27 March
2017 2016
£m —£m
Accrued income 83 58
Prepayments 14 15
Total 97 73
Year on year increase in accrued income can be explained as follows;
o Bank of Ireland accrual has increased by £12.8m largely due to the inclusion
of £9.8m for the "underpinned" Savings commission, £1.2m for additional
Bank commission and £0.9m for Credit Card profit share.
o Business Banking has increased £3.2m as we've moved to monthly billing
in arrears under the banking framework.
o Banking Services, being accrued for the first time in P12, is £4.6m and
covers the new banking framework fixed fees for January to March 2017.
o Royal Mail increase £1.2m driven by higher volumes.
Prepayments are consistent year on year and comprise:
o Telephony pre-contract costs with Fujitsu is £3m at March 2017 (March
2016: £3m)
o £5m of IT and insurance prepayments (March 2016: £7m).
o £6m of property cost prepayments (March 2016 5m).
18.2.4 Other receivables at 26 March 2017 total £15m (March 2016 £14m)
Other receivables largely consists of FRES tax losses debtor.
18.2.5 Non-current receivables at 27 March 2017 £11m (March 2016 £12m)
This represents prepayments in respect of telephony contracts with Fujitsu.
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18.3 Payables: amounts due within one year
26 March 27 March
2017 2016
Section £m —£m
Trade payables 18.3.1 51 51
Accruals and deferred income 18.3.1 161 163
Client payables 18.3.2 296 375
Advance customer payments 18.3.3 33 39
Capital payables 18.3.1 11 16
Social security 10 8
Other payables 1 3
Total 563 655
18.3.1Trade payables and accruals
26 March 27 March
2017 2016
£m £m
Trade payables 51 51
Accruals, GRNI 81 86
Postmaster, employee pay balances 56 53
Productivity, bonus schemes 17 15
Others 7 9
Accruals and deferred income 161 163
Capital accruals 11 16
Total Trade payables and accruals 223 230
Trade payables and accruals are broadly flat year on year. Capital accruals are
lower this year reflecting the slower pace of project activity.
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18.3.2 Client payables
26 March 27 March
2017 2016
£m £m
Santander 111 145
DVLA 13 18
Utility companies 7 10
Bank of Ireland 4 13
BACS 20 27
Royal Mail 27 25
Others 114 138
Total 296 375
The largest client creditor reduction is Santander, this is due to last year’s
balance reflecting Easter customer transactions, in particular business banking.
Bank of Ireland Client creditors have been affected by lower interest rates being
offered. Customers have been seeking better rates from other financial
institutions.
The DVLA balance has fallen slightly representing the continuing decline in
payments to the DVLA in branch. Customers are moving towards purchasing
directly from the DVLA online.
18.3.3 Advanced customer payments
This category also includes specific, non-client, creditors as follows:
26 March 27 March
2017 2016
£m £m
Advanced customer payments 1
Uncashed postal orders 10 11
Drop and Go 1
Gamma 4
Telephony credit balances 4 4
Homephone line rental advance
payments 13 10
Other bs 2
Total 33 39
The reduction in advanced customer payments reflects a reduction in Bill Payments of
£3.0m as we have released deferred income balances that are no longer required.
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18.4 Payables: amounts due after one year
Payables due after one year
26 March 27 March
2017 2016
£m £m
Rent-free incentives 4 4
Bank of Ireland deferred income
(Gamma) 18 21
Total 22 25
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. A significant
amount of the balance relates to Finsbury Dials (£1.6m).
Bank of Ireland deferred income is recognised in line with an agreed amortisation
schedule through to 2022-23.
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19 Provisions
Provisions (March 2017: £88m vs March 2016: £167m)
DMB
Conversion Network
Vacant/ Transformation Other
Onerous / agent's
leases compensation Total
£m £m £m —m
At 28 March 2016 18 134 i5 167
Charged/ (released) in
capital & nvestment items 11 (24) 43 30
Charged as discontinued
operation 3 41 44
Charged/ (released) in
operating costs 4 4
Utilisation (7) (68) (82) (157)
At 27 March 2016 25 42 21 88
Disclosed as: Current 58
Disclosed as: Non-current 30
DMB conversions at March 2017 relate to leasehold property costs for DMBs that have
been franchised or vacated. The investment charge in the table above is due to the
latest tranche of such properties which will be franchised at some point in the
foreseeable future but which are not currently vacated and where the property costs
are considered onerous.
The Network Transformation provision relates to compensation payments due to
postmasters who have signed up to the new contract terms or for a termination
payment. The provision has been adjusted at year end in line with management's
expectations of the number of remaining future conversions under the Programme.
The Programme is due to end March 2018 and at this point we expect there to be a
number of ‘hard to place’ branches that will not end up converting. For this reason a
provisioning methodology has been applied at year end and based on probability of
branches converting or not converting a proportion of the provision has been released.
This is based on our review and understanding of historic conversions and the
Postmasters ability to find an alternate agent/franchise arrangements. This creates
our best estimate of the risk at year end.
The postmasters’ compensation provision movement in the year is as follows:
£m
Opening provision 134
Charge in the year 10
Utilisation in the year (68)
Release in the year (34)
Closing provision 42
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Other provisions consist of:
e Severance provision of £14m (March 2016: £3m) which largely relates to OSOP.
« Bank of Ireland sales capability investment (Eagle provision) £2m (2016: £2m)
e Personal injury and motor accident claims of £1m (2016: £1m)
« NESP liability of £1m (2016: £1)
e Royal Mail liability due to the Master Services Agreement of £2m (2016: £3m).
e £1m other smaller provisions.
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20 Litigation and Claims- Potential Claims regarding Horizon
Background
20.1 Post Office Ltd has received various claims from postmasters (PMs) alleging
defects in the Horizon system and Post Office’s internal processes.
20.2 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.
20.3 On 8 July 2013, Second Sight published a Report finding shortcomings in Post
Office’s internal training and support to PMs on the Horizon system, but no
systemic problems with Horizon itself.
20.4 Following Second Sight’s July 2013 Report, on 27 August 2013 Post Office
launched a Complaint Review and Mediation Scheme aimed at understanding
and resolving individual complaints made about Horizon.
Mediation Scheme
20.5 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, which was formally closed on 31 March 2016.
Legal Activity
20.6 A Claim Form in Bates & Others v. Post Office Limited, Claim No. HQ16X01238,
was issued in the High Court, Queen’s Bench Division on 11 April 2016. The
first named Claimant is Alan Bates of the JFSA.
20.7 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, which also fixed a cut-off date
of 26 July 2017 for further individuals to join the claim.
20.8 Generic Particulars of Claim were served on Post Office on 23 March 2017.
There have been media reports that the claim could be worth “tens of millions”,
but the claimants have not yet quantified the claim beyond stating on the Claim
Form that they expect to receive “more than £200,000”.
20.9 Post Office must file its Defence by 18 July 2017. A Case Management
Conference has been ordered for 19 October 2017 at which the Court will make
directions to take the claim through to trial. It is unlikely that a trial will be
ordered before the end of calendar year 2018 at the earliest.
20.10 Post Office agents may seek to use the Bates action to dispute repayment of
shortfalls in branch cash holdings, e.g. in defence to BAU debt recovery action.
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Media Activity
20.11 The allegations concerning Horizon and Post Office’s responses to them have
been the subject of media coverage, including the BBC Panorama programme
“Trouble at the Post Office” broadcast on 17 August 2015.
20.12 The Bates & Others claim has received some media coverage in local and
specialist IT press following the making of the Group Litigation Order. Further
media coverage can be expected up until 26 July 2017 as the claimants
advertise to get as many individuals as possible to join the claim before its cut-
off date. Post Office teams continue to monitor and manage media and
communications activity.
Regulatory Activit
20.13 Post Office is engaging with the Criminal Cases Review Commission (CCRC) in
relation to applications from 27 former PMs for the CCRC to review convictions
obtained against 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.
20.14 Post Office’s Legal team is liaising with the CCRC so as to comply with its
statutory obligations under the Criminal Appeals Act 1995, and continues to
provide very substantial documentation to the CCRC for review.
20.15 The CCRC has appointed forensic accountants to assist its review. Post Office
will engage with these forensic accountants as necessary. There is no
estimated date for the completion of the CCRC’s reviews.
Political Activit
20.16 The Horizon claims 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.
20.17 There has been no recent significant political activity. Post Office teams
continue to work with BEIS officials and ministers to keep them appraised of
developments.
Disclosure
19.20 The claim has not been quantified and we have not made a provision. The
relevant disclosure will be made within the Contingent Liabilities disclosure as
consistent with prior year.
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21 Taxation
21.1 Income statement
A breakdown of the tax credit for the year is shown below:
2017 2016
£m £m
Corporation tax credit for the year (9) (9)
Deferred tax credit relating to the origin and reversal of
temporary differences 24 2
Effect of change in tax rate 1 3
Income tax debit / (credit) reported in the consolidated
income statement 16 (4)
A deferred tax liability of £25 million was recognised at 27 March 2016 in
relation to the retirement benefit surplus as a proportion of this surplus was
considered to be recoverable through future contributions. An equal and
opposite asset was recognised in respect of losses available for offset against
future taxable income.
In the year to March 2017 the proportion of the RMPP surplus recoverable
through future contributions has reduced to £nil as a result of the closure of the
Plan. Therefore both the liability and asset were reversed in the current year.
The reversal of the tax losses asset has been presented within the income
statement in the Closure of Operations column. The release of the deferred tax
liability has been recognised within Other Comprehensive Income.
The corporation tax credit for the period of £9m represents the losses that we
expect to surrender to FRES through consortium relief for the period.
POL has significant tax losses that are available for offset against future taxable
profits. It also has unrecognised deferred tax assets relating to fixed asset
timing differences. These tax losses/deferred tax assets could be recognised in
the future should suitable taxable profits arise. The tax losses/unrecognised
deferred tax assets means that the Group should not incur any tax charges for
the foreseeable future.
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22 Post Office Limited (Company only accounts)
Company statement of comprehensive income
At 26 March 2017
2016
2017 (Restated)
£m £m
Profit / (Loss) for the financial year from continuing operations 261 (150)
Loss for the financial year from discontinued operations (47) (17)
Profit / (Loss) for the financial year 214 (167)
Other comprehensive income not to be reclassified to profit or loss in
future periods
Remeasurements on defined benefit surplus (249) (9)
Withholding tax effect 30 -
Income tax effect 25 5
Total comprehensive income for the year 20 (171)
There are no other comprehensive income items that will be reclassified to the profit and loss in subsequent
periods.
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Company balance sheet
At 26 March 2017
2016
2017 (Restated)
£m £m
Non-current asset
Intangible assets 114 -
Property, plant and equipment 141 9
Investment in subsidiaries 50 50
Investments in joint ventures 66 67
Retirement benefit surplus 1 196
Trade and other receivables 11 12
Total non-current assets 383 334
Current assets
Inventories 7 6
Trade and other receivables 325 413
Cash and cash equivalents 667 698
Total current assets 999 1,117
Total assets 1,382 1,451
Current liabilities
Trade and other payables (555) (650)
Financial liabilities - interest bearing loans and borrowings (561) (465)
- obligations under finance leases - (8)
Provisions (57) (150)
Total current liabilities (1,173) (1,273)
Non-current liabilities
Other payables (22) (25)
Provisions (30) (16)
Total non-current liabilities (52) (41)
Net assets 157 137
Equity
Share capital - -
Share premium 465 465
Retained earnings (308) (328)
Total equity 157 137
As described within the Group section of the Briefing Book, in the current year there has been a reversal
of impairment to the value of £255 million in the Group financial statements. The effect in the Company
only accounts is £247 million, being the total excluding POMS impairment reversal of £8 million.
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23 FRES - change in accounting policy
First Rate Exchange Holdings Limited (“FRES”) is a joint venture in which Post
Office Limited has a 50% interest. The investment in the consolidated financial
statements is accounted for under the equity method, valued on the balance
sheet at cost plus post-acquisition changes in our share of its net assets less any
impairment in value. The income statement reflects the Group’s share of post-tax
profits. Each period the value of the asset increases by the share of FRES’s post-
tax pre dividend profit and reduces by any dividend paid.
The value of the net investment as at 26 March 2017 in Post Office Group
accounts was £66m (27 March 2016: £67m). The net investment remains
relatively static as we receive dividends which are broadly equal to our share of
the profits in the period. Given that profitability, the true market value is
substantially higher than £66m so no impairment is required.
Post Office Limited as an individual company prepares accounts under FRS 101.
In 2015-16 and prior, investments in joint ventures within the Company's
Financial Statements were stated at cost less any accumulated impairment
losses. The value of the net investment as at 27th March 2016 was £0.6m.
As signalled in last year’s ARA, amendments to IAS 27 and FRS 101 permit the
use of equity accounting in individual company accounts for accounting periods
starting after 1 January 2016. As a result, we have agreed with the ARC that
Post Office Limited voluntarily changes the accounting policy for accounting for
the investment in FRES in the Company accounts to align it with the Group, as
now permitted by accounting standards.
Equity accounting provides more relevant and reliable information to the reader:
e It removes any confusion from using two different accounting policies.
e The reader understands the financial performance of the investment entity.
¢ It provides a better reflection of the value of the investment.
As a result of the change in accounting policy, the accounts for Post Office
Limited reflect the change in accounting policy and the associated prior period
restatement. The effect on the balance sheet is to increase the value of the
investment from £0.6m as at 26 March 2017 to £66m and in the comparative
period to £67m.
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24 Investment in Joint Venture (note from accounts)
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During 2016/17 and 2015/16, 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.
2017 2016
Joint venture Joint venture
£m —m
Share of net assets
Total net investment at 27 March 2016, 29 March 2015 67 67
Share of post tax pre dividend profit 34 35
Dividend (35) (35)
Total net investment at 26 March 2017, 27 March 2016 66 67
2017 2016
Joint Joint
venture venture
Share of assets and liabi —£m £m
Current assets 222 187
Non-current assets 7 6
Share of gross assets 229 193
Current liabilities (163) (126)
Share of net assets 66 67
Share of revenue and profit:
Revenue 82 79
Profit after tax 34 35
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Audit Results Report to the Audit,
Risk and Compliance Committee
for the 52 week period ended 26 March 2017
Post Office Limited
12 May 2017
Tr I
oo8 EY
The better the question. The better the answer.
Building a better
The better the world works. working world
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The contents of this report are subject to the terms and conditions of our appointment as set out in our engagement letter dated 22 January 2016.
This report is made solely to the ARC Committee, Board of Directors and Management of Post Office Limited in accordance with our engagement letter. Our work has
been undertaken so that we might state to the ARC Committee, Board of Directors and Management of Post Office Limited those matters we are required to stateto
them in this report and for no other purpose.
To the fullest extent permitted by law we do not accept or assume responsibility to anyone other than the ARC Committee, Board of Directors and Management of
Post Office Limited for this report or for the opinions we have formed. It should not be provided to any third party without our prior written consent.
_
EY
Building a better
working world
Ernst & Young LLP Tel: +L...
4/More London Place _aduncant
London SE1 2AF
The Audit, Risk and Compliance Committee
Post Office Limited
20 Finsbury Street
London
EC2Y 9AQ
Members of the Audit, Risk and Compliance Committee,
2016/17 Audit Results Report
We are pleased to present our Audit Results Report for the
forthcoming meeting of the Audit, Risk and Compliance
(“ARC”) Committee. This report summarises our preliminary
conclusionsin relation to our audit of Post Office Limited's
(the “Group” ) financial position and the results of its
operations for the 52 week period ended 26 March 2017
(“the year”).
The audit is designed to express an opinion on the Post Office
Limited (“Post Office” ) Group and Company financial
statementsfor the year ended 26 March 2017 and address
current statutory and regulatory requirements. This report
contains our findings related to the areas of audit emphasis,
our views on Post Office's accounting policies and judgments
and material internal control findings.
This report also contains our preliminary summary of audit
differences, communications regarding our independence and
asummary of communicationswe are required to make to
you.
12 May 2017
This report is intended solely for the information and use of
the ARC Committee, Board of Directors and management. It is
not intended to be and should not be used by anyone other
than these specified parties without or specific written
consent.
We welcome the opportunity to discuss this report with you at
the ARC Committee meeting on 18 May 2017.
Yours faithfully,
Peter Mclver
Partner
For and on behalf of Ernst & Young LLP
The UK firm Emst & Young LLP is a limited liability partnership registered in England and Wales with registered number 0C300001 and is a member firm of Emst & Young Global Limited. A list of members’ names is
available for inspection at 1 More London Place, London SE1 2AF, the firm's principal place of business and registered office. Emst & Young LLP is a mult-<isciplinary practice and is authorised and regulated by the
Institute of Chartered Accountants in England and Wales, the Solicitors Regulation Authority and other regulators. Further details can be found at http:/www.ey.com/UK/en/Home/Legal,
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2 Executive
summary
Accounting
8 matters and
judgements:
significant risks
Other accounting
14 matters and
judgements
Summary of
audit differences
18 2C)= Controt
“\ /* environment
1 9 \ Detailed list of
open items
20 (©) Our audit
opinion
Draft
21 yy Management
representation
letter
\ Independence,
non-audit
services and fees
24
Required
27 communications
with the Audit
Committee
1 I Executive summary
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Our opinion and status of our audit
Our audit work in respect of the group and parent company is in progress towards final
completion. The significant open items required to finalise our audit procedures are:
» Completion of our audit procedures in various areas, including fixed assets
impairment reversal assessment, corporation tax, provision for legal claims,
postmasters’ compensation provision and the finalisation of our substantive leavers
testing relating to our audit work on IT systems;
» Receipt and detailed review of management's going concern assessment together
with underlying supporting documentation;
» Completion of our procedures relating to the audit of the consolidation and the
consolidation journal entries;
» Completion of our procedures relating to the group’s annual report and accounts;
» Receipt of the signed management representation letter (draft in Appendix C); and
» Completion of subsequent events review.
We have included further details of our outstanding areas of audit work in Appendix A.
We will provide an update on the status of our work at the ARC Committee meeting.
On the basis of our work performed to date, we anticipate issuing an unqualified audit
opinion, a draft of which is included in Appendix B.
Our audit of the group’s financial statements for the year ended 26 March 2017 has
been performed in accordance with International Standards on Auditing (UK and
Ireland) in order to provide reasonable assurance that your financial statements are free
of material misstatements.
Audit scope and audit approach for the year ended 26
March 2017
We planned our work using a materiality of; imevarr! We reassessed this based on the
group's actual results and this amount remaifiéd Unchanged. The threshold for reporting
audit differences remained unchanged at i The basis of our assessment of
materiality has remained consistent with prior Years at 1% of group revenue.
Our group audit team, led by Peter Mclver, performed the group audit an
company and subsidiary (Post Office Management Services Limited). The
venture (First Rate Exchange Service) was audited by PricewaterhouseCoopers LLP in
accordance with interoffice instructions provided by our team.
As a result of management's revised estimate of fixed assets and intangible assets
impairment, the Group recorded impairment reversal in 2016/17. Given the
magnitude and highly judgmental nature of the impairment reversal we upgraded the
Impairment of fixed assets and intangible assets inherent risk, as described in our
Planning report dated 10 November 2016, to a significant risk.
Accounting matters and judgements: significant risks
Improper revenue recognition
Reported revenue marginally decreased by} IRRELEVAN mpared to last year
[inrevevanr We performed detailed revenue testing based selected sample (including
‘éy itéMs and representative sample) for each revenue stream. We obtained the
underlying supporting documents for each transaction tested and checked the
correctness of revenue recognition, including timing and amount. We have not identified
any differences above our summary of audit differences threshold. We noted a lack of
controls over revenue measurement in relation to approval of commission rates. We
have summarised further details in Section 2 of this report. For the purposes of our audit
in order to address this issue we did not place reliance on control over revenue
measurement and we increased the sample size selected for testing. However we were
able to rely on controls over revenue occurrence and completeness.
1I Executive summary
Accounting matters and judgements: significant risks
Classification and completeness of “capital and investment”
items
During 2016/17 management changed the presentation of the group consolidated
income statement to a columnar format and adjusted the presentation of the prior year
comparatives accordingly. This revised format has been presented to, and approved by,
the ARC Committee.
This has resulted in a change in the presentation of certain one-off material items which
are now included in a “capital and investments” column compared to previously where
these items were presented in a separate “exceptional items’ line in group consolidated
income statement. Following this change we updated the name of our significant risk
from “Classification and completeness of exceptional items” (as presented in our
Planning Report dated 10 November 2016) to “Classification and completeness of capital
and investment items”.
investment items before tax resulted in afi
Government grant
Tangible and intangible assets impairment
Reversal of tangible and intangible assets
impairment
Network transformation (incl. Postmasters’
compensation)
IRRELEVANT
Other transformation costs (incl.
restructuring)
Total
We challenged management's judgment in respect of capital and investment items
classification and completeness. As a result of our audit procedures performed we have
identified one difference above our, SAD posting threshold related to overstatement of
Royal Mail separation provision by’ rretevaw ‘This was adjusted by management. We have
included this difference in our Summary of Audit differences in section 4.
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Accounting matters and judgements: significant risks
(continued)
Classification and completeness of “capital and investment”
items (continued)
With respect to the government grant, we obtained and checked the underlying
supporting documents. We are satisfied with the recognition of government grant
income in 2016/17.
Postmasters’ compensation provision (valuation and
completeness)
masters’ compensation provision decreased significantly to [amevar(201 5/16:
RELEVANT! We summarised in the table below the changes in the postiridsters
compensation provision:
Postmasters’ compensation provision 27 March 2016
Accrued during the year
Utilised during the year IRRELEVANT
Released (including) maw “hard to place” and {mun “change in journey")
Postmasters’ compensation provision 26 March 2017
During 2016/17 the Group also released f of provision as a result of a change in
estimate in relation to the Post Office brary which are classified as “hard to place”
and unlikely to convert. As at 26 March 2017 the Group had 902 branches not yet
converted (2015/16: 1,429 branches). Based on management's estimate of the
probability of conversion for each branch category, it is expected that approximately 381
branches (2015/16: 1,179 branches) will be converted during the next year.
The Group also releasedi! "provision in respect of “change in journey” branches.
“Change in journey’ relates to branches that have changed from one option under the
Network Transformation project, to another, or have dropped out of the program due to
agreements expiring, or through leaving.
We challenged management assumptions in respect of provision released during
2016/17 and the completeness of provision as at 26 March 2017. We did not identify
any differences above our SAD posting threshold. We are yet to finalise our audit work
in respect of the provision release during the year and closing balance. Ps
1 I Executive summary
Accounting matters and judgements: significant risks
(continued)
Going concern
We understand from management that Post Office Limited is yet to secure its
investment funding for 2018/19 to 2020/21, which is expected to be finalised after
the UK general election and by the time of the Autumn Statement. The Group
extended its existing working capital facility with the 1ent for Business,
Energy and Industrial Strategy ("BEIS") with a limit ojietevanr}o 31 March 2021. We
also understand that the Group has two of its thr idiéS guarant
March 2020. As at 26 March 2017 the Group ha
undrawn facility.
As at the date of this report we have not yet received management's detailed going
concern assessment as we understand from discussions with management that they
are awaiting further clarity on the expected timing of finalisation of investment
funding before preparing this. Accordingly, we are yet to perform our audit
procedures with respect to going concern.
Impairment of fixed assets and intangible assets
Management has revised its accounting estimate in respect of the impairment of
fixed assets and intangible assets following their review of Group’s 2016/17
performance, timeline of transformation program and Post Office Limited
performance going forward. As a result management re-assessed their impairment
assessment of fixed assets and intangible assets. This resulted in an impairment
reversal of jeer) recognised in 2016/17 and decrease of intangible assets
“tweevevant }. At the date of this report we are yet
to review the disclosures iii the financial’statéments.
At the date of this report we have started our audit procedures to check the analysis
performed by management and this is currently in progress. We will provide an
update on the status of this work at the ARC Committee meeting; however, our work
in this area will not be completed by the time of that meeting given it is dependent
upon receipt of management's assessment of the appropriateness of the impairment
reversal.
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Accounting matters and judgements: significant risks
(continued)
Risk of misstatement due to management override, fraud and
error
Other than the matters separately reported to the ARC Committee by management,
we noted no fraud or non-compliance with laws and regulations and did not identify
any instances of management override of controls.
1 I Executive summary
Other accounting matters and judgements
Impairment of goodwill
Management performed an im,
insurance business goodwill of
resulted in headroom of
Office Management Services
The goodwill impairment test
1g amount of assets of
We have checked the impairment analysis prepared by management and challenged
management's assumptions. We worked with our valuations specialists to challenge
both management's pre-tax discount rate of and its five year cash flow forecasts,
in light of historical performance and anticipatéd insurance contracts in the pipeline. We
are satisfied that the goodwill is not impaired even under sensitised conditions.
Pensions valuation and accounting
The Group is part of Royal Mail Pension Plan (“RMPP") and Royal Mail Senior
Executive Pension Plan ("RMSEPP") pension schemes for its employees. The RMPP.
scheme was closed for future accrual as at 31 March 2017 following the consultation
Post Office entered in February 2016. Following the closure of the RMPP scheme the
Group wrote-off its net pension surplus of} i
Due to the complexity and significant balances, we worked with our pensions and
technical specialists to challenge management's specialist assumptions and the
accounting for the scheme closure.
As a result of our audit procedures performed as at the date of this report we noted the
following:
» In our view the discount rate applied when considered in isolation is prudent.
However, we believe there is some scope for increase of the RPI and CPI inflation
assumptions, such that the overall basis produces a liability which is in the range
which is acceptable, but at the prudent extreme of what is reasonable.
» Given our concerns with the management specialist's discount rate methodology
we recommend the ARC Committee confirm they are comfortable with these
assumptions and that they continue to monitor the assumptions applied in the
future.
» Weconsider that the de-recognition of the pension surplus as at the date on which
the Memorandum of Understanding (“MoU”) was signed on 21 March 2017 is in line
with applicable accounting standards (IFRIC 14) given that, as a result of the terms
included in the legally binding MoU, the Post Office no longer has an unconditional
right of refund of any surplus.
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Other accounting matters and judgements
Accounting for Supply chain restructuring (“Discontinued
operation”)
In August 2016, the Group decided to close its Retail Cash in Transit operation.
Management have treated this as a discontinued operation which has resulted in
recognition of liscontinued operation in 2016/17 and restatement of
2015/16 and ré€GGiiition offewm4oss from discontinued operation. As a result of our
audit procedures performed; 7éview of management's accounting paper on the
treatment of the Supply chain restructuring and confirmation received from the Group's
Chairman and the ARC Committee that they viewed Retail Cash in Transit operation as
a separate and major operation, we are satisfied with management's position.
Weare satisfied that management's accounting and presentation of Supply chain
restructuring as a discontinued operation is in accordance with IFRS 5. Additionally, the
Group has used the columnar presentation for the consolidated income statement and
presented the effect from closure of operations in a separate column. We are yet to
finalise our audit procedures in respect of the Annual Report and Accounts review.
Accounting for Joint venture (“FRES”) investment in Post Office
Company financial statements
The company has voluntarily adopted a change in accounting policy for accounting for
its investment in FRES in the parent company financial statements following recent
revisions to IAS 27, FRS 101 and UK company law which now permits entities to use
the equity method to account for investments in subsidiaries, joint ventures and
associates in their separate financial statements. Accordingly, the company now applies
the equity method of accounting for its investment in FRES instead of carrying it at cost.
This resulted in «joint venture investment balance recognised in the Company
financial statements as at 26 March 2017.
We concur with management's rationale that this revised accounting policy provides
more relevant and reliable information to the users of the financial statements.
Accordingly, in our view this change in accounting policy is appropriate and permissible
under accounting standards and UK company law.
Provision for legal claims, including Horizon Subpostmasters’
claim (“Sparrow”)
We met with Post Office management and Group Legal, Risk and Governance Director.
We understood that there was a hearing of the claim at the end of January and the
order was signed at the end of March 2017. No quantification of potential exposure can
be estimated reliably. We have received the most recent update and we are awaiting
the supporting documentation in order to conclude on this matter and finalise our audit
procedures. 6
1 I Executive summary
Summary of audit differences
As at the date of this report we iden
(credith “I that was greater than
by management.
As we are yet to finalise our audit procedures in respect of certain areas as detailed
in Appendix A of this report, we will continue to monitor our audit differences.
\dit differences impacting profit
his audit difference was recorded
Control environment
We did not identify significant control deficiencies during our audit work. However
we have included below some key control observations we identified during our
audit.
We noted certain improvements in the Group's operational controls in the second
half of the financial year following the Control Framework project. However, we
identified control deficiencies in Post Office's revenue process. We identified a lack
of formalised approval process of the changes in customers’ commission rate in the
system and review of customers’ invoices prior to issuance. However we were able
to place reliance on controls over revenue occurrence and completeness. We
communicated these deficiencies to management and understand these
deficiencies are being remediated as part of the Control Framework project, which
was initiated by Post Office prior to the commencement of our audit.
Wealso tested the change management, user access and IT operations controls
over the in-scope applications, including HNGX, CFS, SAP HR, POLSAP. Our
scope was based on our understanding of the Group's systems landscape and the
applications that support the key business processes relevant to both our audit and
the group financial statements. Our testing of these systems identified the following
IT related control deficiencies:
» User accounts are created by third parties without prior formal approval from
Post Office (CFS, SAP HR and POLSAP).
» Lack of a robust formal process to remove user accounts belonging to leavers in
a timely manner (CFS, SAP HR and POLSAP).
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Control environment (continued)
» Lack of segregation of incompatible duties within the change management
process (CFS and SAP HR).
» Periodic review of user access has not been completed on time (SAP HR).
We performed additional procedures to mitigate the impact of these deficiencies on
our audit. Our preliminary conclusion, subject to finalisation of our audit work, is
that we are able to rely on the IT process for the relevant applications for our
2016/17 audit.
We have noted the fact that management had, prior to the commencement of our
audit procedures, identified the need to implement an IT Control framework in
relation to third parties. This IT Control Framework project will also address the
opportunities we identified to further improve the control environment, including:
» Improvement of the controls and oversight over service organisations
» Implementation of a procedure to confirm the accuracy and completeness of IT
system users listing for CFS, SAP HR, POLSAP in coordination with the service
organisations.
We understand that the work in relation to the IT Control Framework project will be
undertaken during FY17/18 and we will review the controls with management in
due course
© 7
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For each of the judgements in this report, this graphic represents our view of the degree
of optimism or conservatism in management's judgement. The extreme ends of this
—_
scale correspond with an adjustment on our summary of audit differences (‘SAD’). EY
2
2 I Accounting matters and judgements: significant risks
Revenue recognition
IRRELEVANT
What is the risk?
There is a presumption within auditing standards, that revenue recognition is a
significant risk and a fraud risk.
Our assessment is that the Post Office Limited's revenue transactions are non-
complex, with no significant judgement applied over the amount recorded.
However, we have identified the following as significant risk areas for revenue
recognition:
» Post Office Limited's revenue represents mainly commission received for
various types of services, e.g. financial products (mortgages and loans), sale of
stamps and packages delivery. Therefore there is a risk associated with the
correct application of commission rates in line with contractual terms and inputs
from Post Office Limited's customers.
» Wealso note that reward and incentive schemes are based on achieving
earnings targets, which may place undue pressure on management to achieve
revenue forecasts and which may result in revenue recognised in incorrect
period.
What judgements are we most focused on?
» Correct application of commission rates
» Occurrence of revenue recorded
What did we do?
We understood the group's process and related controls over the recognition of
revenue, and assessed whether the controls are designed effectively to achieve
this.
From this work, we identified an area of deficiency of controls in relation to the
approval of commission rate changes in the system, and review of invoices prior to
issuance. ©
SAD SAD
O_O @ O O Conservative
Optimist
As a result of this, we took a “not rely on controls” approach to testing the correct
application of commission rates. However we were able to rely on controls over
revenue occurrence and completeness.
We have obtained the full population of revenue journals in the year and have used
data analytics to analyse the entire population in order to identify trends and
anomalies for follow up and to test the appropriateness of manual journal entries
recorded.
We have performed substantive procedures on a sample of 372 transactions from
source data through to general ledger to test that appropriate revenue recognition
has been applied. Where commission rates were applied, we obtained contracts to
verify the correct application of commission rates. With the exception to deficiency
in control described above, we did not identify any issues as part of our testing.
We performed cut off procedures by testing items from revenue recognised during
the year and subsequent to year end to gain assurance over the completeness and
existence of deferred revenue balances. No issues were identified.
For revenue recorded through journal entries, we performed testing to establish
whether a service had been provided in the financial year to support the revenue
recognised.
We performed detailed analytical review procedures and test of insurance revenue
contracts for Post Office Management Services Limited as part of our year-end
audit.
We have not identified any differences above our summary of audit differences
threshold.
At the date of this report the Group is yet to provide to us a paper supporting the
change in estimate for Bill Payments deferred revenue as at 26 March 2017.
Subject to finalisation of our audit procedures in respect of the change in estimate
of Bill Payments deferred revenue, we conclude that revenue, accrued income and
deferred income balances for the 2016/17 financial year are appropriately stated.
2I Accounting matters and judgements: significant risks
Classification and completeness of “capital and investment”
items
What is the risk?
The Group classifies and presents certain one-off and individually material items in the
income statement in a separate column, in order to assist users of the financial
statements in understanding its underlying performance. The presentation of items as
capital and investment items involves significant management judgement and continues
to be subject to external scrutiny.
These costs mainly include the costs in respect of the Network Transformation project.
Previously this project was expected to be finalised by the end of 2017/18. During
2016/17 Post Office General Executives agreed to extend this process beyond 2018 to
provide security to postmasters, assist the National Federation of Subpostmasters wider
negotiation (e.g. product simplification) and the mitigation of the risk of inappropriate
behaviours by postmasters. The main purpose of this project is to turn Post Office Limited
into a breakeven if not profit making competitive business in the.future. Capital and
investment items also include @ government grant income ofjmemavnrirecorded in 2016/17
assets and intangible assets impairment off (2015/16:
RELEVANT}, rEdUIGE by evevanrimpairment reversal due to the change in
Due to the capital and investment items classification being a judgemental area, and
management bonus being based on earnings before capital and investment items, there
is a risk that they may be incorrectly classified as capital and investment items or the
amount recorded is incorrect.
What judgements are we most focused on?
» Classification of costs as capital and investment items
» Quantification and completeness of capital and investment items
SAD
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SAD
Optimistic O OG @ O O Conservative
What did we do?
» We have gained an understanding from management of how the Post Office
Limited's finance team and management check the completeness of Network
Transformation related costs, particularly that the information received from Post
Office Limited’s branches is complete.
» The group continues to incur significant capital and investment costs, which we have
summarised in the table below, together with our assessment of the level of
conservatism in the capital and investment items recorded. We audited the nature
and classification of the each of the categories of capital and investment items and
assessed the conservatism of management judgments applied.
Capital and investment items category
2016 17 2015/16 Our
£m. £m__assessmen!
Government grant income
Business transformation
Network transformation (incl. Postmasters’
compensation)
Directly managed branch transformation
IT transformation
Restructuring: - severance
- other
Impairment of intangible and tangible assets
Reversal of impairment in the year.
Total
more conservative @
IRRELEVANT
- @ more optimistic
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2II Accounting matters and judgements: significant risks
Classification and completeness of “capital and investment”
items (continued)
» We have reviewed and challenged management's paper on “capital and investment”
items, and for the costs above our testing threshold we have requested explanations
and supporting underlying documents.
» Wehave selected a sample of 161 transactions from capital and investment items
(across all categories) in the year and vouched to supporting documentation. We
have challenged management on the nature of these items to understand whether
these costs relate to routine operating activities or relate to capital and investment
items as defined by Post Office Limited’s accounting policies. We have also tested
the correctness of the timing of when these costs were recognised through review of
the support provided.
» Asa result of our audit procedures performed we have identified one
difference above our SAD ling threshold related to overstatement of Royal Mail
separation provision by I eeetevan {This was adjusted by management. We included this
difference in our Summaiy of Audit differences in section 4.
» Wehave vouched costs recorded in the financial statements to underlying
supporting documents,
» Wecoordinated our audit work with the audit procedures performed in respect of
related balance sheet accounts, i.e. Postmasters’ compensation provision and other
restructuring provisions.
» We have performed extended subsequent events procedures through review of cash
payments to current date. We will update this testing up to the financial statements
sign-off date, in respect of capital and investment costs recognised during the year
ended 26 March 2017.
» Wehave agreed the government grant received back to bank statement and
supporting documents. There is no accrued income in respect of the government
grant as at 26 March 2017.
» We have not yet completed our work in respect of the impairment of intangible and
tangible assets, including the change in management's estimate and resultant
1.
reversal of; impairment recognised in previous periods.
10
2I Accounting matters and judgements: significant risks
Postmasters’ compensation
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optimistic ©) (On OO) O Conservative
What is the risk?
There is a risk that the postmasters’ compensation provision is not complete due to
the underlying records of agreements with postmasters, on which this provision is
based being incomplete.
Given the historical data collection issues associated with the provisioning process
and the assumptions embedded in the calculations (success rates on finding
replacement postmasters and conversion anniversary payment instances and
amounts) we also focused on the valuation of the provision, due to the significant
judgment involved.
What judgements are we most focused on?
Weare focused on the completeness of the information used to calculate the
provision, and management's judgement applied in the valuation of the provision.
What did we do?
We have had held discussions with the Post Office Finance Director — Network
and Sales and other senior non finance members of the organisation to discuss the
progress the company is making against its planned targets in respect of
transformation. This enabled us to corroborate our testing results and
management's explanations;
In the year, management have made a change in accounting estimate for the
branches in the termination provision where replacement postmasters have not yet
been found (“hard to place” branches). This lead to
provision. We have assessed the proposed release
value.
alculated the release
In addition to this management also released provision related to “change
in journey” branches. “Change in journey” relates to branches that have changed
from one option under the Network Transformation project, to another, or have
dropped out of the program due to agreements expiring, or through leaving.
Weare yet to finalise our audit work in respect of the provision release.
We have performed an independent reconciliation of the total branches as well as
an analysis of management's reconciliation, focusing on checking the status of the
branches as at 26 March 2017. We have compared this to management's results
to identify anomalies and to help us to challenge the provision analysis provided by
management.
The Postmasters’ compe!
representing decline Ofmneever
change in the year is a8 Torléws:
IRRELEVANT
36-Mari7
Provis
recorded during
52 week period
branches
We performed the following procedures in respect of each of the movements in the
Postmasters’ compensation provision:
Provision accrued (recorded) during the year:
» Weselected a sample of 64 Conditional Resignation Packs (“CRP”) signed in
the year to verify that these have been correctly recognised as an expense in
the year and included in the provision at the year end where necessary. No
issues were noted through this testing.
1
2I Accounting matters and judgements: significant risks
Postmasters’ compensation (continued)
What did we do?
Provision utilised during the year:
» Wehave sampled 25 transactions from the full breakdown of utilisations
during the period. We matched selected transactions to the payments by
vouching to the bank statements. No issues were noted through this testing.
“Hard to place” branches provision release:
» Wechallenged management's assumptions with respect to the release in
provision relating to “hard to place” branches and performed the following
procedures:
» We obtained the full listing of branches included in the termination
provision as at 26 March 2017. Of thes¢
identified by Management as “hard to place”. We checked completeness
of the list of “hard to place” branches comparing them to 500 “hard to
place” branches identified as of.the.and of the last financial year. During
2015/16 management released} mareniof the provision based on the
assumption that only/maempf these branches (-—)) will be converted,
» The number of “hard to place” branches has been also adjusted for the
number of branches expected {o.convert :) based on historical
performance. We checked th “wip robability assumption applied by
management and identified that it is in line with the percentage of
branches which converted branches during 2016/1 } We checked
this rate as part of our provision utilisation testing (s bove).
» Based on the estimated number of branches classified as “hard to place”
the release in provision resulted i hich is equivalent of the
Femaining mw. branches.
As part of our audit procedures performed we did not identify any differences
above our SAD posting threshold.
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Postmasters’ compensation (continued)
“Change in journey” release:
» Our audit work in respect of the release of the:
rovision release related to
“changes in journey”, including the branches reconciliation, is in progress.
Closing balance as at 26 March 2017:
» Weare yet to perform our audit procedures in respect of subsequent cash
payments testing for the period from 27 March 2017 to the date of our audit
opinion sign-off.
12
2I Accounting matters and judgements: significant risks
Going concern
We understand from management that Post Office Limited is yet to secure its investment
funding for 2018/19 to 2020/21, which is expected to be finalised after the UK general
election and by the time of the Autumn Statement. The Group extended its existing
working capital facility with the Department for Business, Energy and Industrial Strategy
(‘BEIS”) with a limit of 31 March 2021. We also understand that the Group
teed to 31 March 2020. As at 26 March 2017 the
f undrawn facility.
As at the date of this report we have not yet received management's detailed going
concern assessment. Accordingly, we are yet to perform our audit procedures with
respect to going concern.
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Impairment of tangible and intangible assets
Management revised its accounting estimate in respect of the impairment of tangible
assets and intangible assets following their review of Group's 2016/17 performance,
timeline of transformation program and Group's performance going forward.
As a result management re-assessed their impairment asse: it of tangible and
intangible assets. This resulted in an impairment reversal i
2016/17 and decrease of intangible assets impairment by)
. At the date of this report we are yet to review the disclosures Tithe financial
statements.
Weare in process of performing the following audit procedures to test the work
performed by the Group:
» Checking the reconciliation of reconstructed fixed assets and intangible asset
register to the trial balance and to impairment charges recognised in previous
years to check for completeness.
» Testing a sample to check existence and completeness of fixed assets and
intangible assets as at 26 March 2017. We are leveraging the work performed by
Post Office team.
» Leveraging our testing of fixed assets and intangible assets additions and
disposals in the current year and previous years to check the valuation.
» Assessing the reasonableness of the depreciation policy of the Group and
reviewing the analysis of assets useful lives prepared by Post Office. We are
auditing depreciation charge recognised in 2016/17.
» Auditing the impairment model and challenging management's assumptions
applied to estimate the reversals of impairment as a result of the change in
estimate and the impairment charge for the year. We will perform these
procedures once we have obtained management's assessment of the
appropriateness of the impairment reversal, including their forecasts and going
concern assessment which is not expected to be received until after the ARC
Committee meeting.
At the date of this report we have started our audit procedures to check the analysis
performed by management and it is currently in progress. We will provide an update on
the status of our work at the ARC Committee meeting. 13
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3 I Other accounting matters and judgements
Impairment of goodwill
IRRELEVANT!
SAD SAD
Optimistic E Oo @ oO Oo Conservative
IRRELEVANT
What is the risk?
The group has goodwill of faim (2015/16:{
Bank of Ireland of the busin nd assets of
jareievert Which relates to the acquisition from
joint insurance business.
What judgements are we most focused on?
» Future cash flow forecast, which includes judgements related future cash flows
generated by Post Office Management Services Limited (100% subsidiary of Post
Office Limited) from insurance revenue, other than travel insurance; and
» Discount rate, short term and long-term growth rates.
What did we do?
We received management's goodwill impairment analy:
this analysis the Company has a sufficient headroom of
based on the following assumptions:
26 March 2017; as per
This has been calculated
(a) Discount rate applied =)
age revenue growth for the 5 year period —fimeevanrWwith higher increase of
in years 2018/19 and 2019/20 corresponditigly."The growth assumptions were
fh the 5-year strategy plan.
(c) Management applied average’ evenue growth rates for the period 2022/23 to
}
» Wechallenged the cash flows forecast by looking at the historical accuracy of the
group's forecasting, which has generally been conservative.
» Weverified the arithmetical accuracy of the model provided;
» Wechecked the reasonableness of the short terms growth rates. We reconciled the
input data to the 5 year plan, we discussed the future growth rates with management
and obtained the underlying supporting documents. No issues were identified.
We engaged our EY Valuation and Business Modelling (V&BM") team who assisted us
in performing the following procedures:
» Anassessment of correctness and appropriateness of the valuation methodology.
Following our V&BM team review of the valuation model prepared by the company
we identified that the model applied was not in compliance with IAS 36 “Impairment
of assets”. Management revised the model to address our comments.
» Anassessment of the reasonableness of management's assumptions with respect
of discount rate, short-term and the long term growth rate used in the model. We
Noted that the discount rate applied is higher than the higher end of what V&BM
consider to be the acceptable rang: eeeld We noted the reduction of discount rate
will increase available headroom.
» They performed corroborative calculations of management analysis where they did
not identify any issues.
» They performed sensitivity analysis sensitising growth assumptions and the discount
rate and did not identify any risk of impairment.
Based on our audit procedures we concurred with management that there is no goodwill
impairment as at 26 March 2017.
14
3II Other accounting matters and judgements
Pensions valuation and accounting
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SAD SAD
OptimisicO O OO @ O Conserve
IRRELEVANT:
What is the risk?
The Group is part of RMPP and RMSEPP pension schemes for its employees and senior
executives. The RMPP scheme was closed for future accrual as at 31 March 2017 following
the consultation Post Office entered in February 2016. Following the closure of the RMPP
scheme the Group de-recognised its net pension surplus Of jimrevevanr!
There is a high level of estimation, subjectivity and management judgement in determining
pension obligations. Minor movements in key assumptions have a material impact on the
amounts recorded on the Group’s balance sheet and Income statement.
Furthermore, there is complexity involved in accounting for the pension scheme closure.
What judgements are we most focused on?
» Accounting for RMPP pension scheme closure
» Economic assumptions (discount rate, inflation rate)
» Demographic assumptions (mortality)
What did we do?
» With the assistance from EY technical specialists we reviewed management's
accounting paper, particularly related to the pension scheme closure for further accruals
as at 31 March 2017.
» We performed an assessment of the independence, objectivity and competency of the
management's specialist (Willis Tower Watson).
» We engaged EY pensions specialists to consider whether Post Office Limited’s key
pension assumptions (economic and demographic) are within an acceptable range.
» We have circularised pension plan assets confirmations to check existence and valuation
as at 26 March 2017. This audit work in is process and we are awaiting responses from
the investment funds.
» Weare in the process of finalisation of audit procedures of the disclosures set out in the
pension note for consistency with IFRS requirements and valuation report prepared by
management's specialist.
As a result of our audit procedures performed as at the date of this report we noted the
following:
» In our view the discount rate ofc} applied when consider in isolation is prudent.
However, we believe there is sdiiié’Scope to increase RPI and CPI inflation
assumptions, such that the overall basis produces a liability which is in the acceptable
range, but at the prudent extreme of what is reasonable.
We presented below a summary of assumptions, including acceptable range for each
assumption:
Financial assumptions Prudent Central Optimistic
Discount rate
Price inflation (RPI)
Price inflation (CPI)
Salary increases (above RPI inflation)
; LPI 5% (RPI) 8)
Pensions increase in
payment (above inflation) ICPI 2
Pensions increase deferment (above CPI) @
Demographic
wen owe IRRELEVANT
Mortality in Hereee
retirement
Female dependants
Refirement age
Commutation®
( The assumptions for salary increases and pension increases in payment have been stated relative to
RPI inflation rather than as absolute figures.
® The assumptions for pension increases (both in deferment and payment) have been stated relative
to CPI inflation rather than as absolute figures.
© Applies to section C members
Applies to section A and B members
Given our concerns with the management specialist's discount rate methodology we
recommend the ARC Committee confirm they are comfortable with these assumptions
and that they continue to monitor the assumptions applied in the future.
We consider that the de-recognition of the pension surplus as at the date on which the
MoU was signed on 21 March 2017 is in line with applicable accounting standards
(IFRIC 14) given that, as a result of the terms included in the legally binding MoU, the
Post Office no longer has an unconditional right of refund of any surplus. 15
3I Other accounting matters and judgements
Accounting for Supply chain restructuring (“Discontinued
operation”)
=
In August 2016, the Group decided to close its Retail Cash in Transit operation. This
resulted in the recognition of af loss from discontinued operation in 2016/17 and a
restatement of 2015/16 with a recognition of ai ss from this discontinued
operation for that year.
We performed the following audit procedures with respect to the discontinued operation:
» Weobtained and read the memo prepared by management and presented to the
ARC Committee for approval in March.
» We obtained confirmation from the Group's Chairman and the ARC members at the
ARC Committee meeting in March that they viewed Retail Cash in Transit as a
separate and major operation.
» We obtained details of the calculation of the impact of discontinued operations for
2016/17 and 2015/16 year ends. We tested a sample of transactions by vouching to
supporting documentation (including contracts, staff costs details and supporting
severance provision calculations). We identified no differences above our summary
of audit differences threshold.
» Wetested the provision recorded in respect of Supply chain restructuring as at 26
March 2017, including frm “in respect severance Costs and jus vin respect of vacant
leasehold properties. Wé did not identify any differences abdvé our summary of audit
differences.
» Wediscussed the nature and details of Supply chain operations with the Supply
chain Director at Post Office. We considered the size and the number of employees
in Supply chain and compared to mobile operation which was treated as
discontinued operation. We also understood that management and the ARC
Committee treated Supply chain as separate and major operation.
As a result of our audit procedures performed we are satisfied with the management's
position that the Retail Cash in Transit operation represents a separate and major
operation and, accordingly, that it is appropriate to recognise Supply chain restructuring
as discontinued operation.
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Accounting for Joint venture (“FRES”) investment in Post
Office Company financial statements
= ee)
The company has voluntarily adopted a change in accounting policy for accounting
for its investment in FRES in the parent company financial statements following
recent revisions to IAS 27, FRS 101 and UK company law which now permits
entities to use the equity method to account for investments in subsidiaries, joint
ventures and associates in their separate financial statements.
Accordingly, the company now applies the equity method of accounting for its
investment in FRES instead of carrying it at cost.
Thi:
esulted in increase of investment in joint venture balance to:
“Jas previously reported in Post Office Company financial s
is no impact on the consolidated financial statements.
We concur with management's rationale that this revised accounting policy
provides more relevant and reliable information to the users of the financial
statements as nearly all of the group's activities occur within the parent, so equity
accounting in the parent closely aligns the parent and group financial statements.
Accordingly, in our view this change in accounting policy is appropriate and
permissible under accounting standards and UK company law. We are satisfied
vestments balance value as restated.
Provision for legal claims, including Horizon
Subpostmasters’ claim (“Sparrow”)
We met with Post Office management and Group Legal, Risk and Governance
Director. We understood that there was a hearing of the claim at the end of January
and the order was signed at the end of March 2017. No quantification of potential
exposure can be estimated reliably. We are yet to receive the supporting
documentation and the most recent update in order to conclude on this matter and
finalise our audit procedures.
16
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4 I Summary of audit differences
IRRELEVANT
Balance sheet (over)/understatement P&L over/(under)statement
Description (all amounts in £m) Year end 2016/17 Year end 2015/16 2016/17
Recorded audit differences: A ” 1
>» Overstatement of provision related to costs associated with Royal Mail separation : I
(capital and investment items) i
Unrecorded audit differences: I R R E L EVA N T
» None
Total — pre and post-tax
Reclassification differences
>» Wedid not identified any reclassification differences.
Disclosure differences
> Our review of the financial statements is still ongoing and hence we have not yet concluded as to whether there are any disclosure differences.
Parent company differences
» Wedid not identify any unadjusted audit differences in the parent company.
5 I Control environment
Scope
As part of our audit of the group's financial statements, we obtained an understanding of
the group's internal controls that was sufficient to plan our audit and determine the
nature, timing and extent of testing performed. Although we did not perform an audit of
internal control over financial reporting, we are required to communicate to you any
significant deficiencies in internal control which we identify during the course of our
audit.
We did not identify significant control deficiencies during our audit work. However we
have included below some key control observations we identified during our audit.
As part of our audit we noted improvement in group's operational controls in second half
of the year following the Control Framework project. However we identified certain
control deficiencies in Post Office's revenue process. We identified a lack of formalised
approval process of the changes in customers’ commission rate in the system and
review of customers’ invoices prior to issuance. We communicated these deficiencies to
management and understand these deficiencies are being remediated as part of the
Control Framework project, which was initiated by Post Office prior to the
commencement of our audit.
We also tested the change management, user access and IT operations controls over
the applications listed in the table opposite. Our scope was based on our understanding
of the group’s systems landscape and the applications that support the key business
processes relevant to both our audit and the group financial statements. Our testing of
these systems identified the following IT related control deficiencies:
» User accounts are created by third parties without prior formal approval from Post
Office (CFS, SAP HR and POLSAP)
» Lack of a robust formal process to remove user accounts belonging to leavers in a
timely manner (CFS, SAP HR and POLSAP)
» Lack of segregation of incompatible duties within the change management process
(CFS and SAP HR)
» Periodic review of user access has not been completed on time (SAP HR)
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We performed additional procedures to mitigate the impact of these deficiencies on our
audit. Our preliminary conclusion, subject to finalisation of our audit work, is that we are
able to rely on the IT process for the relevant applications for our 2016/17 audit.
Manage Manage Manage IT ITCAs/
System Overall access change operations ITDMs
HNGX e Effective Effective Effective Effective
CFS e Reliable* Reliable Effective Effective
SAP HR e Reliable* Reliable Effective Effective
POLSAP e Reliable* Effective Effective Effective
* Subject to finalisation of substantive leavers testing
© - no recommendations were noted.
© - control deficiencies/recommendations were identified.
Management letter
In our management letter we will provide further details on the issues noted above
along with our recommendation. We have noted the fact that management had, prior to
the commencement of our audit procedures, identified the need to implement an IT
Control framework in relation to third parties. This IT Control Framework project will also
address the opportunities we identified to further improve the control environment,
including:
» Improvement of the controls and oversight over service organisations
» Implementation of a procedure to confirm the accuracy and completeness of IT
system users listing for CFS, SAP HR, POLSAP in coordination with the service
organisations.
We understand that the work in relation to the IT Control Framework project will be
undertaken during FY17/18 and we will review the controls with management in due
@) course te
Appendix A I Detailed list of open items
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1. Tangible and intangible assets impairment
reversal assessment
2. Going concem
3. Corporation tax
4. Annual Report and Financial Statements
5. Directors’ Emoluments certificates
6. Letter of representation
7. Finalisation and review of audit procedures
8. Subsequent events procedures, including
unrecorded liability testing.
9. IT systems related controls - finalisation of
substantive leavers testing
10. Finalisation of audit testing of postmasters'
compensation provision
11. Finalisation of audit testing of pension plan
assets
12. Finalisation of audit of legal claims
(“Sparrow”)
13. Bank conformation and Bank of Ireland
(‘Bol’) client receivable confirmation
14. Paper to support the change in estimate
for Bill Payments deferred revenue as at 26
March 2017
vy vv v
Management to provide the final tangible and intangible assets register a
Management to provide full impairment assessment to support reversal of
EY to complete audit procedures as described in section 2 of this report.
Management to follow up on 2018/19 funding resolution from the UK Government following the UK
election.
Management to provide going concem assessment covering at least 12 month period from the
expected sign-off date.
EY to complete audit procedures in respect of review of management's going concern analysis and
forecast.
EY to complete the audit procedures in respect of corporation tax charge.
Management to assist on provision of requested supporting documentation.
Management to finalise the work on the Annual Report and Financial Statements and provide the
final version.
Tie out and review to be completed by EY.
Provision of certificates by management.
Management and EY to table the wording of the draft letter included in Appendix C of this report.
Completion of documentation and final review of audit work.
Provision of information for subsequent events review my management
Review of subsequent events and finalisation of unrecorded liabilities testing performed by EY
Management to provide remaining requested information in respect of substantive leavers testing
EY to finalise the leavers testing once the information has been received.
EY to finalise audit procedures in respect of release of provision related to “change in journey”
branches and test of subsequent cash payments.
Management to follow up receipt of pension plan assets confirmations.
EY to finalise the audit procedures once the confirmations have been provided.
Management to provide supporting documentation for “Sparrow’ legal claim and assessment of
potential exposure.
EY to finalise the audit procedures once the documentation and assessment have been provided.
Management to follow up receipt of bank confirmations and Bol client receivables confirmation.
EY to finalise the audit procedures once the confirmations have been provided.
Management to provide the paper to support the change in estimate.
EY to review the paper and supporting documentation once it is prepared by management.
Management and EY
Management and EY
Management and EY
Management and EY
Management
Management and EY
EY
Management and EY
Management and EY
EY
Management and EY
Management and EY
Management and EY
Management and EY
Appendix B I Our audit opinion
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INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF POST OFFICE LIMITED
We have audited the consolidated Financial Statements of Post Office Limited for the 52 week period
ended 26 March 2017 which comprise the Group Consolidated Income Statement, the Group
Consolidated Statement of Comprehensive Income, the Group Consolidated Balance Sheet, the Group
Consolidated Statement of Cash Flows, the Group Consolidated Statements of Changes in Equity, the
related notes 1 to [@], the Parent Company Statement of Comprehensive Income, the Parent Company
Balance Sheet, the Parent Company Statement of Changes in Equity and the related notes 1 to [@],
The financial reporting framework that has been applied in the preparation of the group Financial
Statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by
the European Union. The financial reporting framework that has been applied in the preparation of the
parent company Financial Statements is applicable law and United Kingdom Accounting Standards
(United Kingdom Generally Accepted Accounting Practice), including FRS 101 “Reduced Disclosure
Framework’.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part
16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in an auditor's report and for no
other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page [@], the directors
are responsible for the preparation of the financial statements and for being satisfied that they give a
true and fair view. Our responsibilty is to audit and express an opinion on the financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors:
Scope of the audit of the financial statements
‘An audit involves obtaining evidence about the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the group's and the parent company's circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the Annual Report to identify material
inconsistencies with the audited financial statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
» the Financial Statements give a true and fair view of the state of the Group's and of the Parent
Company's affairs as at 26 March 2017 and of the Group's profit for the 52-week period then
ended;
» the group Financial Statements have been properly prepared in accordance with 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, including FRS 101 “Reduced Disclosure Framework”,
and
the Group and Parent Company Financial Statements have been prepared in accordance with the
requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
>
>
In our opinion:
» based on the work undertaken in the course of the audit
> the information given in the Strategic Report and the Directors’ Report for the financial year for which
the financial statements are prepared is consistent with the financial statements.
» the Strategic Report and the Directors’ Report have been prepared in accordance with applicable
legal requirements;
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Company and its environment obtained in the course of
the audit, we have identified no material misstatements in the Strategic Report or Directors’ Report,
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to
report to you if, in our opinion:
» adequate accounting records have not been kept by the parent company, or returns adequate for our
audit have not been received from branches not visited by us; or
the parent company financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit,
vvy
Peter Mclver (Senior statutory auditor)
for and on behalf of Emst & Young LLP, Statutory Auditor
London
[e] 2017
Notes:
The maintenance and integrity of the Post Office Limited web site is the responsibility of the directors; the
work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to the financial statements since they were
initially presented on the web site.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
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Appendix C I Draft management representation letter
[e] 2017
Dear Sirs
This letter of representations is provided in connection with your audit of the consolidated and parent
company financial statements of Post Office Limited ("the Group and Company’) for the 52 week period
ended 26 March 2017. We recognise that obtaining representations from us concerning the
information contained in this letter is a significant procedure in enabling you to form an opinion as to
whether the consolidated and parent company financial statements give a true and fair view of (or
‘present fairly, in all material respects,’) the Group and Company financial position of Post Office
Limited as of 26 March 2017 and of its financial performance and its cash flows for the 52 week period
then ended in accordance with, for the Group, International Financial Reporting Standards as adopted
by EU ("IFRS"), and for the Company, Financial Reporting Standard 101 Reduced Disclosure
Framework (“FRS 101”).
We understand that the purpose of your audit of our Group and Company financial statements is to
express an opinion thereon and that your audit was conducted in accordance with Intemational
Standards on Auditing (UK and Ireland), which involves an examination of the accounting system,
internal control and related data to the extent you considered necessary in the circumstances, and is
not designed to identify — nor necessarily be expected to disclose — all fraud, shortages, errors and
other irregularities, should any exist.
Accordingly, we make the following representations, which are true to the best of our knowledge and
belief, having made such inquiries as we considered necessary for the purpose of appropriately
informing ourselves:
Financial statements and financial records
1. Wehave fulfilled our responsibilities, as set out in the terms of the audit engagement letter dated
22 January 2016, for the preparation of the Group financial statements in accordance with
International Financial Reporting Standards as adopted by the European Union, and for the
Company, FRS 101
2. Weacknowledge, as members of management of the Group and Company, our responsibility for
the fair presentation of the Group and Company financial statements. We believe the Group and
Company financial statements referred to above give a true and fair view of (or ‘present fairly, in all
material respects’) the financial position, financial performance (or results of operations) and cash
flows of the Group in accordance with International Financial Reporting Standards as adopted by
the European Union and the Company in accordance with FRS 101 and are free of material
misstatements, including omissions. We have approved the Group and Company financial
statements.
3. The significant accounting policies adopted in the preparation of the Group and Company financial
statements are appropriately described in the Group and Company financial statements.
4. Asmembers of management of the Group and Company, we believe that the Group and
Company has a system of internal controls adequate to enable the preparation of accurate
financial statements of the Group in accordance with International Financial Reporting Standards
as adopted by the European Union and the Company in accordance with FRS 101 that are free
from material misstatement, whether due to fraud or error.
o) been prepared) held through the period to the most recent meeting on [@] 2017.
Either [There are no unadjusted audit differences identified during the current audit and pertaining
to the latest period presented.) or
[We believe that the effects of any unadjusted audit differences, summarised in the
accompanying schedule, accumulated by you during the current audit and pertaining to the latest
period presented are immaterial, both individually and in the aggregate, to the financial
statements taken as a whole. We have not corrected these differences identified by and brought
to the attention from the auditor on this basis.]
Fraud
6 Weacknowledge that we are responsible for the design, implementation and maintenance of
internal controls to prevent and detect fraud.
7. Webhave disclosed to you the results of our assessment of the risk that the Group and Company
financial statements may be materially misstated as a result of fraud.
8. Webhave no knowledge of any fraud or suspected fraud involving management or other employees
who have a significant role in the Group or Company's internal controls over financial reporting. In
addition, we have no knowledge of any fraud or suspected fraud involving other employees in
which the fraud could have a material effect on the consolidated or parent company financial
statements. We have no knowledge of any allegations of financial improprieties, including fraud or
suspected fraud, (regardless of the source or form and including without limitation, any allegations
by “Whistleblowers") which could result in a misstatement of the consolidated or parent company
financial statements or otherwise affect the financial reporting of the Group or Company.
Compliance with laws and regulations
9, Webhave disclosed to you all known actual or suspected non-compliance with laws and
regulations whose effects should be considered when preparing the Group and Company financial
statements.
Information provided and completeness of information and transactions
10. Wehave provided you with:
a. Access to all information of which we are aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
b. Additional information that you have requested from us for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom you determined it necessary to
obtain audit evidence.
11. All material transactions have been recorded in the accounting records and are reflected in the
financial statements.
12. We have made available to you all minutes of the meetings of shareholders, directors and
committees of directors (or summaries of actions of recent meetings for which minutes have not yet
21
Appendix C I Draft management representation letter
13. We confirm the completeness of information provided regarding the identification of related parties.
We have disclosed to you the identity of the Group and Company's related parties and all related
party relationships and transactions of which we are aware, including sales, purchases, loans,
transfers of assets, liabilities and services, leasing arrangements, guarantees, non-monetary
transactions and transactions for no consideration for the year, as well as related balances due to
cr from such parties at the year end. These transactions have been appropriately accounted for
and disclosed in the Group and Company financial statements.
14, We believe that the significant assumptions we used in making accounting estimates, including
those measured at fair value, are reasonable.
15. Wehave disclosed to you, and the Group and Company has complied with, all aspects of
contractual agreements that could have a material effect on the consolidated and parent company
financial statements in the event of non-compliance, including all covenants, conditions or other
requirements of all outstanding debt.
Liabilities and contingencies
16. All liabilities and contingencies, including those associated with guarantees, whether written or
oral, have been disclosed to you and are appropriately reflected in the Group and Company
financial statements.
17. Wehave informed you of all outstanding and possible litigation and claims, as well as litigation
and claims we consider likely to arise, whether or not they have been discussed with legal
counsel.
18. We have recorded and/or disclosed, as appropriate, all liabilities related to litigation and claims,
both actual and contingent, and have disclosed the Group and Company financial statements all
guarantees that we have given to third parties.
Subsequent events
19. Other than described in the Group and Company financial statements, there have been no events
subsequent to period end which require adjustment of or disclosure in the Group and Company
financial statements or notes thereto.
Other information
20. Weacknowledge our responsibility for the preparation of the other information. The other
information comprises the Strategic Report and the Directors’ Report of the Annual Report and
Accounts.
21. We confirm that the content contained within the other information is consistent with the financial
statements.
Accounting estimates
22. Webelieve that the significant assumptions we used in making accounting estimates, including
those measured at fair value, are reasonable.
23. Accounting estimates recognised or disclosed in the financial statements:
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a, Webelieve the measurement processes, including related assumptions and models, we used
to determine the accounting estimates have been consistently applied are appropriate in the
context of International Financial Reporting Standards as adopted by the European Union.
b. Weconfirm that the disclosures made in the financial statements with respect to the accounting
estimates are complete and made in accordance with International Financial Reporting
Standards as adopted by the European Union for the Group and FRS 101 for the Company
c. The assumptions we used in making accounting estimates appropriately reflects our intent and
ability to carry out specific courses of action on behalf of the entity, where relevant to the
accounting estimates and disclosures.
d. Weconfirm that no adjustments are required to the accounting estimate(s) and disclosures in
the consolidated and parent company financial statements due to subsequent events.
Income and indirect taxes
24. We acknowledge our responsibility for the tax accounting methods adopted by the Group and
Company, which have been consistently applied in the current period, and for the current year
income tax provision calculation.
Group audits
25. There are no significant restrictions on our ability to distribute the retained profits of the Group
because of statutory, contractual, exchange control or other restrictions other than those indicated
in the accounts.
26. Necessary adjustments have been made to eliminate all material intra-group unrealised profits on
transactions amongst parent, subsidiary undertakings and associated undertakings.
Retirement benefits
27. On the basis of the process established by us and having made appropriate enquiries, we are
satisfied that the actuarial assumptions underlying the scheme liabilities are consistent with our
knowledge of the business. All significant retirement benefits and all settlements and curtailments
have been identified and properly accounted for.
Use of the work of the specialist
28. Weagree with the findings of the specialists that we engaged to evaluate the corporate taxation
and pension valuations and have adequately considered the qualifications of the specialists in
determining the amounts and disclosures included in the consolidated and parent company
financial statements and the underlying accounting records. We did not give or cause any
instructions to be given to the specialists with respect to the values or amounts derived in an
attempt to bias their work, and we are not otherwise aware of any matters that have had an effect,
on the independence or objectivity of the specialists.
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Appendix C I Draft management representation letter
Going Concern
29.
Note 1 to the consolidated and parent company financial statements discloses all of the matters of
Which we are aware that are relevant to the Group and Company's ability to continue as a going
concern, including significant conditions and events, our plans for future action, and the feasibility
of those plans.
Comparative information - comparative financial statements
30.
In connection with your audit of the comparative consolidated and parent company financial
statements for the year ended 27 March 2016, we represent, to the best of our knowledge and
belief, the following:
> In preparing the Group financial statements for the current year, the comparative figures for
the year ended 27 March 2016 have been restated. The Retail Cash in Transit operation has
been discontinued during the current year and has been presented as part of discontinued
operations. The comparatives in the Income Statement for the year ended 27 March 2016
have been restated and allocated to discontinued operations. The restatement affects
revenue, people costs, and other operating costs. Within this report, the comparative income
statement and statement of comprehensive income for the year ended 27 March 2016 have
been restated. The operating profit from revenue trading on the cash flow statement has also
been restated. There has been no effect on the balance sheet or statement of changes in
equity.
» The comparative amounts have been correctly restated to reflect the above matter and
appropriate note disclosure of this restatement has also been included in the current year's
consolidated and parent company financial statements
» In preparing the Parent Company's financial statement the comparative figures for the years
ended 27 March 2016 and 29 March 2015 have been restated for a change in the accounting
policy with respect to investment in joint ventures. The restatement is in the Parent Company
Financial Statements only. The change in accounting policy is described in more detail in the
accounting policies.
» The Group also voluntarily changed the presentation format of consolidated income
statement to columnar format for 2016/17 and related comparative financial information.
Ownership of Assets
31.
32.
Except for assets capitalised under finance leases, the Group and Company has satisfactory title
to all assets appearing in the balance sheet, and there are no liens or encumbrances on the
Group and Company's assets, nor has any asset been pledged as collateral, All assets to which
the Group and Company has satisfactory title appear in the balance sheet.
We have no plans to abandon lines of product or other plans or intentions that will result in any
excess or obsolete inventory, and no inventory is stated at an amount in excess of net realisable
value.
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33, There are no formal or informal compensating balance arrangements with any of our cash and
investment accounts. Except as disclosed in Note 14 to the consolidated and parent company
financial statements, we have no other line of credit arrangements.
Yours faithfully,
Alisdair Cameron, Chief Financial Officer
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Appendix D I Independence, non-audit services and fees
IRRELEVANT
Introduction
At the Audit Committee meeting on 25 October 2016 we explained the
communications that we are required to make at the planning and conclusion
stages of the audit, as well as during the course of the audit. In this report, we
provide disclosure of the relationships (including the provision of non-audit
services) which bear on our objectivity and independence, the related threats and
safeguards, as well as details of our fees and the other required confirmations.
In this report we provide:
» Asummary of our audit and non-audit fees for the year ended 26 March 2017;
» Details of the relationships and services we have provided to Post Office Limited
and affiliates and the related threats and safeguards in place; and
» Our overall independence assessment and confirmations.
We consider that our independence is a matter that should be reviewed by both you
and ourselves. If you wish to discuss any matters concerning our independence, we
will be pleased to do so at the forthcoming meeting of the ARC Committee on 18
May 2017.
Summary of audit and non-audit fees
All amounts in £000 2016/17 2015/16
Group audit underlying fee* Hi
Audit of subsidiaries pursuant to legislation
Total audit fees
Non-audit services
» Audit related assurance services
IRRELEVANT
» Other (including agreed upon procedures)
Total non-audit fees
Ratio (non-audit fees to audit fees)
* This amount excludes the fees in relation to our of scope work (e.g. on
impairment reversal of fixed assets) which is still to be agreed.
Se 2
Appendix D I Independence, non-audit services and fees
Relationships, services and related threats and
safeguards
The APB Ethical Standards require that we provide details of all relationships
between us and Post Office Limited, its directors, senior management and affiliates,
including all services provided by us and our network to Post Office Limited, its
directors, senior management and affiliates, and other services provided to other
known connected parties that we consider may reasonably be thought to bear on
the our objectivity and independence and the related safeguards that are in place.
We highlight the following significant facts and matters that may be reasonably
considered to bear upon our objectivity and independence, including the principal
threats, if any. However we have adopted the safeguards noted below to mitigate
these threats along with the reasons why they are considered to be effective.
Self interest threats
A self interest threat arises when we have financial or other interests in Post Office
Limited. Examples include where we have an investment in Post Office Limited;
where we receive significant fees in respect of non-audit services; where we need
to recover long-outstanding fees; or where we enter into a business relationship
with you.
We believe that it is appropriate for us to undertake permissible non-audit services.
When the ratio of non-audit fees to audit fees exceeds 3:1, we are required to
discuss this with our Ethics Partner, as set out by the APB Ethical Standards, and if
necessary agree additional safeguards or not accept the non-audit engagement.
We have set out on the previous page a summary of the fees that you have paid to
us in the year ended 26 March 2017, in line with the disclosures set out in APB
Ethical Standard 1 and in statute. We confirm that none of the services listed has
been provided on a contingent fee basis.
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A self interest threat may also arise if members of our audit engagement team have
objectives or are rewarded in relation to sales of non-audit services to you. We
confirm that no member of our audit engagement team, including those from other
service lines, has objectives or is rewarded in relation to sales to you, in compliance
with Ethical Standard 4. There are no other self interest threats at the date of this
report.
Self review threats
Self review threats arise when the results of a non-audit service performed by EY or
others within the EY network are reflected in the amounts included or disclosed in
the financial statements. The table on the following page sets out self review threats
that exist as the date of this report.
Management threats
Partners and employees of EY are prohibited from taking decisions on behalf of
management of your company. Management threats may also arise during the
provision of a non-audit service in relation to which managementis required to
make judgements or decision based on that work. The table on the following page
sets out the management threats that exist as the date of this report.
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Appendix D I Independence, non-audit services and fees
Non-audit services
The table below summarises the independence threats arising from non-audit
services provided and the safeguards we adopted to mitigate those threats.
Fees
Services (and threats) £'000 Safeguards adopted
Other assurance services
Audit related assurance » Engagement clearly structured so that management
services (interim takes final decisions.
peracid verification for » Engagement clearly structured and we are not taking
subsidiary) any decisions on behalf of management.
- Selfreview threat j*raew! No direct impact on the financial statements.
- Management threat
Other
Agreed upon » Engagement clearly structured and we are not taking
procedures (Note
Circulation Scheme
ISAE 3000 Report, BIS
AUP report, DVLA AUP
report, Turnover
certificate)
- Self review threat
- Management threat
any decisions on behalf of management.
» No direct impact on the financial statements.
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Overall assessment and confirmations
Overall, we consider that the safeguards that have been adopted appropriately
mitigate the principal threats identified and we therefore confirm that EY is
independent and the objectivity and independence of Peter Mclver, your Audit
Engagement Partner (“AEP”) and the audit engagement team have not been
compromised.
Weare not aware of any inconsistencies between the group's policy for the supply
of non-audit services and APB Ethical Standards. We are not aware of any
apparent breach of that policy.
We confirm that, in our professional judgement, EY is independent, our objectivity is
not compromised and we have complied with the APB Ethical Standards.
We confirm that your engagement team and others within the firm and network
firms have complied with relevant ethical requirements regarding independence.
@) 26
Appendix E I Required communications with the Audit Committee
Required communication
Terms of engagement
» Confirmation by the Audit Committee of acceptance of terms of engagement as
written in the engagement letter signed by both parties
Planning and audit approach
» Communication of the planned scope and timing of the audit, including any
limitations.
Significant findings from the audit
» Our view on the significant qualitative aspects of accounting practices including
accounting policies, accounting estimates and financial statement disclosures;
» Significant difficulties, if any, encountered during the audit;
Significant matters, if any, arising from the audit that were discussed with
management;
Written representations that we are seeking;
Expected modifications to the audit report;
’
vrvy
Findings and issues regarding the opening balance on initial audits;
Unless covered by other communications on planning matters or significant findings,
this information shall include our views on:
» Business risks relevant to financial reporting objectives, the application of
materiality and the implications of our judgements in relation to these for the
overall audit strategy, the audit plan and the evaluation of misstatements
identified;
» The significant accounting policies (both individually and in aggregate);
» Management's valuations of the group's material assets and liabilities and the
related disclosures provided by management;
» Internal control (without expressing an opinion and based solely on our audit
procedures performed in the context of the financial statement audit), specifically
on:
» The effectiveness of the group's system of internal control over financial
reporting; and
» Other risks arising from the group's business model and the effectiveness
of related internal controls;
» Any other matters identified in the course of the audit that we believe will be
relevant to the Board or the Audit Committee in the context of fuffiling their
responsibilities referred to above.
Other matters if any, significant to the oversight of the financial reporting process;
Reference
Audit
engagement
letter dated 22
January 2016
Audit Planning
Report
(November
2016)
Audit Results
Report
Audit Results
Report
®
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Required communication Reference
Misstatements Audit Results
Uncorrected misstatements and their effect on our audit opinion, unless Report
prohibited by law or regulation; (section 4)
The effect of uncorrected misstatements related to prior periods;
» Arequest that any uncorrected misstatement be corrected; and
In writing, corrected misstatements that are significant.
Fraud At each ARC
» Enquiries of the Audit Committee to determine whether they have knowledge of I Committee
any actual, suspected or alleged fraud affecting the group; meeting
» Any fraud that we have identified or information we have obtained that indicates
that a fraud may exist; and
» Adiscussion of any other matters related to fraud
Going concern Audit Results
» Events or conditions identified that may cast significant doubt on the entity's Report
ability to continue as a going concern, including: (section 2)
» Whether the events or conditions constitute a material uncertainty
» Whether the use of the going concern assumption is appropriate in
the preparation and presentation of the financial statements
» The adequacy of related disclosures in the financial statements
Related parties
» Significant matters arising during the audit in connection with the group's related
Parties including, when applicable:
» Non-disclosure by management;
» Inappropriate authorisation and approval of transactions;
» Disagreement over disclosures;
» Non-compliance with laws and regulations; or
» Difficulty in identifying the party that ultimately controls the entity
Subsequent events
» Enquiry of the audit committee where appropriate regarding whether any
subsequent events have occurred that might affect the financial statements.
None identified
Atfinal ARC
Committee
meeting
27
Appendix E I Required communications with the Audit Committee
Required communication Reference
Subsequent events At final ARC
» Enquiry of the audit committee where appropriate regarding whether any Committee
subsequent events have occurred that might affect the financial statements. meeting
External confirmations None identified
» Management's refusal for us to request confirmations; and
» Inability to obtain relevant and reliable audit evidence from other procedures.
Consideration of laws and regulations
» Audit findings regarding non-compliance where the non-compliance is material None identified
and believed to be intentional. This communication is subject to compliance with
legislation on tipping off; and
» Enquiry of the Audit Committee into possible instances of non-compliance with At each ARC
laws and regulations that may have a material effect on the financial statements Committee
and that the Audit Committee may be aware of.
Significant deficiencies in internal controls identified during the audit Audit Results
Report
(section 5)
Independence
» Communication of all significant facts and matters that bear on EY's objectivity
and independence;
» Communication of key elements of the audit engagement partner's consideration
of independence and objectivity such as:
» The principal threats;
» Safeguards adopted and their effectiveness;
» An overall assessment of threats and safeguards; and
»
Information about the general policies and process within the firm to maintain
objectivity and independence;
» For special interest entities, communication of minimum requirements as detailed
in the ethical standards:
» Relationships between EY, the group and senior management;
» Services provided by EY that may reasonably bear on the auditor's objectivity
and independence;
» Related safeguards;
» Fees charged by EY analysed into appropriate categories such as statutory
audit fees, tax advisory fees, other non-audit service fees;
» Astatement of compliance with the ethical standards; and
» The Audit Committee should also be provided an opportunity to discuss
matters affecting auditor independence.
Audit Planning
Report
(November
2016);
Audit Results
Report
(Appendix D)
Required communication
Group audits
>
>
‘An overview of the type of work to be performed on the financial information of
the components;
‘An overview of the nature of the group audit team's planned involvement in the
work to be performed by the component auditors on the financial information of
significant components;
Instances where the group audit team's evaluation of the work of a component
auditor gave rise to a concern about the quality of that auditor's work;
Any limitations on the group audit, for example, where the group engagement
team's access to information may have been restricted; and
Fraud or suspected fraud involving group management, component
management, employees who have significant roles in group-wide controls or
others where the fraud resulted in a material misstatement of the group financial
statements.
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EY
Reference
Audit Planning
Report
(November
2016)
Audit Results
Report
(Executive
Summary)
28
EY I Assurance I Tax I Transactions I Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality
services we deliver help build trust and confidence in the capital markets and in economies the world
over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In
so doing, we play a critical role in building a better working world for our people, for our clients and for
our communities.
EY refers to the global organisation, and may refer to one or more, of the member firms of
Emst & Young Global Limited, each of which is a separate legal entity. Est & Young Global Limited, a
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organisation, please visit ey.com.
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member firm of Ernst & Young Global Limited.
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©2016 Emst & Young LLP, Published in the UK.
All Rights Reserved.
ey.com
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AUDIT, RISK & COMPLIANCE COMMITTEE CONSIDERATION PAPER
IT Controls Update
Author: Sharon Gilkes Sponsor: Rob Houghton Meeting date: 18" May 2017
Executive Summary
Context
In response to the Deloitte findings from September 2016, the Post Office took a
decision to implement a sustainable IT Control Framework (ITCF). This will help ensure
that there is more confidence in IT operations to mitigate risks in areas such as security
breaches, unreliable data integrity, or loss of service. This will bring the Post Office IT
controls more in line with good industry practice.
We are implementing ISACA’s Control Objectives for IT (COBITS) as the framework that
maps IT operation processes and risks, identifies remediating controls and introduces
evidenced self-assessment and monitoring. The purpose of this paper is to update the
ARC on the implementation progress made and the priorities for FY2017/18.
Questions addressed in this paper
1. What progress has been made in implementing the IT Control Framework?
2. What are the next steps and when do we expect to complete the work?
3. What addition control improvements are planned or in progress?
Conclusion
To date over 100 control gaps have been identified. Of these 4 have been rated as high
risk. We have defined 16 remediation plans and are validating these with the suppliers.
We knew that our IT operating models for the majority of our IT suppliers are different
and not aligned (highlighted in IT strategy). This work has further evidenced the
delivery and control issues this gives rise to.
The work has also reinforced a theme which underlines many of our IT service delivery
issues. The IT eco-systems (IT operating models) for PO and the majority of our IT
suppliers are different and not aligned. This work on the creation of the ITCF has further
evidenced the delivery and control issues this gives rise to. This is covered in more
detail in section 6 below.
The plan has been adjusted as we have moved into detailed planning with our suppliers
- there is no cost impact as a result of this but the timeline moves to the right on certain
outcomes. The development of the ITCF based on COBITS is on track overall, and the
planning adjustments reflected in our updated project timeline (section 7).
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Input Sought
The ARC is asked to note the progress made and comment on the priorities and
approach.
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The Report
Introduction
IT service delivery relies on over 90 suppliers, some of these suppliers operate under
contracts drawn up many years ago which we have inherited within the Group CIO
function. We therefore need to ensure active cooperation and support of the third
party suppliers which makes the project significantly more complex and therefore
more resource intensive.
KPMG are assisting us with identifying the key issues in our ITCF and maturity gaps,
and are working with our teams and IT suppliers to improve the ITCF and enhance the
IT operating model.
It should also be noted that the improvement programme requires the support of the
suppliers and that current contractual obligations upon the suppliers to cooperate do
not exist in many cases. Therefore this is a challenging task, as many of these
suppliers support our critical IT systems and services. We also need to ensure that
improvements minimise the impact on the suppliers’ delivery of existing IT service
levels to us.
What progress has been made in implementing the IT Control Framework?
Item Description Status (As at 26/04/17)
1) End to end process mapping is
being conducted in the form of
‘walk throughs’. This will
identify controls and create a
Process Mapping permanent record of how we Complete
work.
2) Each process will have an
accountable person and
identified responsibles.
Controls will be identified (with
owners) to mitigate risks in our
business operations. These risks
and controls will link logically and
directly into the Post Office’s higher I This activity is now in
Risk and Control I level (group) risks to ensure a clear I progress with reviews for
Matrices (RACMs) I “line of sight” from individual 11 process areas already
controls to Board-level risks. (see underway.
diagram below). This will ensure
sufficient and appropriate controls
are implemented to address the
Post Office’s business risks.
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Gap identification
The process walkthroughs and
results recorded in the RACMs will
identify where controls are absent,
badly designed or inadequate.
Following interviews with
PO process owners, we
have already identified
gaps for 8 out of 11
processes.
We are engaging with
suppliers to complete the
walkthroughs and validate
gaps.
Gap remediation
Remedial steps will also be agreed
with control owners and recorded in
the RACMs for ensuing progress
tracking, evaluation and reporting
via the TrAction tool.
We have set out suggested
remedial actions for 6 out
of 11 processes, having
linked them to existing
improvement plans, where
possible.
Self-assessment
Control owners confirm, using
established software, and evidence
that their control was operating
effectively in the previous period.
Process Owners will be requested
to complete a quarterly checklist to
ensure responsibilities are being
carried out as well as, identifying
any exceptions.
To commence upon
completion of Gap
remediation. Planned
circa June 2017.
Assurance
Internal Audit will perform
independent sample testing of
KPMG outputs, Self-Assessment
and control evidence.
To commence upon
completion of Gap
remediation. Planned
circa June 2017.
1. The diagram below shows how we have ensured that controls examined and
recorded in the RACMs link logically and directly into the Post Office’s higher level
(Group) risks to ensure a clear “line of sight” from individual controls to Board-level
risks.
2. The highlighted areas of the COBITS framework (dark green) are currently included
in this review; with the light green areas being implemented in the second stage of
the project. The grey process areas are not being implemented as they are not
critical control areas to address the business operational risks.
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Board level
ClO Level
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Business Operational Risks
Key Risks and Appetite (Technology
1. IT Processes 2. Cyber Security 3. IT Outsourcing
=S
Key IT Operational Risks
Evaluate, ened /EDMO2 ‘eDM03- ‘EDMO4a
Directand I Framewors ang Ensure Risk Gee Gap
Monitor setting pent Optimisation fected
Delivery Tas
“POOL ‘APOOS ‘aPOo7
Align. I Managetnerr II APOO Nnage frase) Fc Manage
i ‘Management pats Enterprise eae een ape
Organise Framework teey “Architecture on Resources
‘BAIO3 Manage BAIOS Manage >
SasvanamI) (Sane Oopmateal
setene II fenecion ange
saiosnaage
ot
Monitor,
Evaluate and
Assess:
GE Oe) ey
3. We have established process owners for each of the Priority 1 areas above and they
are updating to risk register on a monthly basis and continuously monitored.
Walkthroughs are underway for all 11 process which are progressing well. To date
over 100 gaps have been identified of varying severity. Note this is emerging work
and needs further analysis.
4. To allow easy transfer of our findings into TrAction (PO's self-assessment monitoring
tool), we have aligned our ITCF documentation, including responsibilities RACI
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matrix to the format used for Financial Control Framework recording (see example
in Appendix 1).
5. The gaps have been reviewed with the IT Operations team, the priorities have been
re-assessed due to a number of service improvement activities that are in flight and
have progressed following the initial review in March/April.
6. To date, 20 out of 42 planned supplier walkthroughs have taken place. Of the
remaining 22, we have planned for these to be completed by 26' May.
7. The key critical control failures identified so far and what we’re doing about them:
a. The operational Change Management process seems to work for suppliers who
have been on-boarded within the SIAM tower structure. However, some of
the suppliers who are outside the tower model (e.g. Royal Mail group, Clients
Banks, DVLA (although they have recently been on-boarded), etc.) sometimes
do not supply their change information via the IT change advisory board (CAB)
process. This inconsistency can cause change conflicts. To address this, we
have appointed an interim IT Change Manager (and are in the process of
recruiting an IT Change and Release Manager) to improve adherence and
governance around all types of change.
b. System Data Edits/Reference Data updates are not governed by the CAB
process, and the existing process (currently managed by Atos) has
encountered some issues recently. This issue is now being investigated with
the aim of getting data edits/reference data changes to comply with the
change categorisation and governance model.
c. PO does not have a way to correlate current Firewall changes with a business
justification. Firewall rules govern all external/internal access to PO and are,
therefore, critical. This includes Firewalls managed by Fujitsu, Verizon,
Computacenter, CSC, Accenture, 3M and Atos. There is no clear mapping for
Firewall rules to indicate which critical services are affected by them. We have
an initiative to address Firewall rule governance under the SOC program which
is currently in progress and expected to be delivered by circa September
2017.
d. Following a review of severity 1 and Severity 2 incidents, it has been identified
that an average of 50% of incidents are resolved outside of the SLA for
resolution. We are addressing this by updating our Critical Service list which
will be shared with the Atos Service Desk and Incident management this will
ensure that the incidents are assigned to the correct resolver group and
prioritised correctly.
e. There is a register which captures “known errors”, however, it is not being
utilised. This means that there are no controls in place to minimise service
outages from reoccurring. The "Known Errors” report will be reviewed on a
monthly basis, including trend analysis of recurring problems
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8. The table below provides a summary update for 6 out of the 11 processes in scope,
where gaps have been identified already. The priority assessment (HML) is the
current state and may change as we continue to validate gaps with IT suppliers.
RACM No. I No. L_ I Example of high priority gaps I Exemplar Remedial
Cntris I Gap Actions
s
* All changes to operational
environment are required to 90 I. Review /
through CAB. However, this is improvements to be
not consistent across all ted made under Target
suppliers, which has resulted in
Chonges. 7 16 11 I operational incidents occuring. com Model
+ When changes are put through I , Formal sharing of
and fail, they are supposed to PIR's is to be agreed
produce a Post-implementation with ATOS
review (PIR), however PIR's are
often not shared with PO.
+ Being addressed as
part of the strategic
service desk review
work.
* For Services
identified as critical,
* All service requests and this will be direcly
incidents should be managed addressed unger that
via the IT Service desk Improvement plan.
2. Manage provided by Atos. However, For non-critical
some suppliers have not been i
Requests 2 24 19 integrated within this addressed following
Incidents framework and service completion of tasks
incidents with these suppliers associated with
are carried out on a reasonable Critical Services
endeavours basis by Atos. * To be addressed
under
Review/improvement
s to be made under
Target Operating
Model (TOM)
* This is now picked up
in the monthly
problem review and
is being addressed
and continously
* Problems are actioned and then monitored
closed by ATOS without PO’s * Being addressed as
knowledge or briefing. Once a part of the strategic
call is logged there is no service desk review
visibility for PO as to how it is work.
3. Manage 6 13 5 dealt with. * This will change with
Problems * The problem management the IT TOM work. It
process needs to be further is envisaged that an
improved as ATOS do not ATOS service
review problems from suppliers I Manager will be
out with their tower dedicated to each
arrangement. Head of IT. ATOS
has also been asked
to include recurring
problems across
supplier in the
monthly pack.
+ A Security
Transformation
+ There is a limited Information
Sonwige 3 4 4 Security Management System rue piece eal
(ISMS) in place.
revamped IT
Security Function
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has been stood up to
provide more
proactive IT Security
Operations. This will
include the setting
up of a Security
Operations Centre
(SOC).
+ No awareness of encryption
and post-intrusion protection
on PO desktops and no visibility
over protection implemented on
personal devices connected to I . a security
tie FO network , Transformation
* POIT has no comprehensive IT I programme has been
asset inventory. put in place and a
* Itis unclear where all personal, I revamped IT
commerically or legally Security Function
5. Manage sensitive/privileged data is has been put stood
Security 7 34. I 3 I 8 I 23 I being held. up to provide more
Services + No current capacity to gather proactive IT Security
and analyse logs of security Operations. This will
Felated events. include the setting
* Although ATOS provide an up of » Sacurty
overall aggregate service, there I Qperations Centre
are gaps in the arrangement (Soc).
with suppliers outside their
arrangements, and the
management of IT from current
vendors is not proactively
actioned.
* No common checklist used by
project managers to reference
to instruct them on the
required steps for
implementation plans. The ‘One
Best Way’ pack is not easily
available and regularly used by I © All projects now have
PO PMs. a Service Design and
* Lack of visibility over planing Acceptance plan built
and resourcing for testing as in to capture non-
6. Manage this is primarily handled by functional
Change and 10 13 0 9 4 ATOS. Lack of clarity on requirements. Also
Acceptance whether test plans identify the Heads of IT
Testing necessary resources to execute Service will now be
testing and evaluate results. accountable for all
« Lack of a standard PO process changes being
for post-implementation review passed into the
involving the Project Manager. Operational domain.
* There have been examples
where Change Acceptance and
transition to live has not been
as rigorous as needed (e.g.
Credence service novation to
Accenture)
7. Manage
Service 5
Agreements Initial walkthroughs have taken place with Post office colleagues in IT Vendor
Management, this has highlighted the gaps around contracts being renewed
automatically without the correct process being followed. Further walkthroughs are to
8. Manage 5 be arranged to ensure we obtain a wider scope of issues on how we manage service
Suppliers agreements and suppliers.
9. Manage
Availability 6 Walkthroughs to commence w/c 15th & 22nd May
and Capacity
10. Manage
ee Walkthroughs to commence w/c 15th & 22nd May
Operations
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[fotalto date [58 [104] 5 I 33 I 66 I
What are the next steps and when do we expect to complete the work?
9.
10.
11.
12.
13.
14.
15.
We are on track with interviews for the Priority1 processes, although due to the
nature of the Atos role in managing controls through to the rest of the IT eco-
system, the process of identifying the control gaps with suppliers is taking longer
than planned.
We have re-issued an updated Terms of Reference to all in-scope IT suppliers to
address this, and have active engagement with their relevant Exec Sponsor.
Formal updates on ITCF progress are now a standing agenda item on the CIO IT
Operations Board, and are monitored and tracked through the IT Risk Register.
Further IT Supplier walkthroughs are planned for the coming weeks as we
progress with the gaps identification effort.
We are providing the wider IT team with access to the PO control framework
self-assessment tool (TrAction).
Remediation plans will continue to be agreed with PO nominated process owners
and walkthrough sessions will continue with our IT suppliers to validate the
findings.
The timeline below depicts the key activities and the order in which they are
expected to occur.
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Proposed phases Januai Februai March eae aad
_ a a May July Ct)
Project Kick-Off and Detailed
Project Management project plan
Phase 182: Understand
current state and define
the IT Controls
Framework
Phase 3: Define the
remediation plan
)
coon tas )
Phase 4: Perform ongoing
controls assessment
Testing of controls in place — Control Designs
‘Understand “Ae4s" and Documentation of
Mesos SEA AcmvA :
ee COB Complete MMR Final RACKS Completed ‘complete
FE completes by Kem FH completed jointy by KPMG and POL
i A
* Includes walkthroughs with relevant suppliers
What other control improvements are planned or in progress?
16.
17.
18.
19.
20.
As noted in the update presented to the ARC in March, we are undertaking a
systematic review of the way we manage critical IT services through Atos, and
are developing a proposed new IT operating model which would require ongoing
discussions and re-negotiation with our other IT suppliers.
It was also noted that PO’s outsourced IT operating model would require new
and legacy IT suppliers to be part of the ITCF self-assessment, we will be
embedding this at contract renewal/on-boarding stage.
Internal Audit are supporting the ITCF project to ensure the appropriate
embedding of IT controls, which will provide transparency and addition
assurances over alignment with operational risks.
Working with EY, we will aim to improve the quality and ease of the audit of IT
controls, and in Q3 assess whether and to what extent we need to review the
additional testing performed for the 2016-17 audit.
Following an Internal Audit review of IAM/JML process (identity access
management/joiners-movers-leavers), a PO cross-functional working group has
been created to address identified gaps in the current processes and progress a
remediation plan.
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Appendix: RACM Matrix Sample
prc
iu
leone
iy
it
prc
tere I Aner he,
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RISK AND COMPLIANCE COMMITTEE ADVISORY PAPER
Financial Reporting Controls
Author: Danielle Goddard Sponsor: Amanda Radford, Al Cameron Date: 18 May 2017
Executive Summary
Context
The purpose of this paper is to update the ARC on the status of the Financial Reporting
Controls Framework (the FRC) and the assurance that can be taken as at the financial
year end, as well as the next steps into the second phase of the project.
Questions addressed in this report
1. What is the status of the FRC and what reliance can be taken as at year end?
2. What progress has been made since March and what further work will be
undertaken?
3. What are the next steps into the second phase of the project?
Conclusions
At the financial year end there were 241 controls identified for reliance. Of these 241,
171 (71%) were issued for self-assessment at the end of March. 168 (99% of those
issued for self-assessment) were self-assessed as operating effectively. The remaining
3 were not self-assessed but have been discussed with the control owners and
confirmed as operating effectively for the period.
Of the 70 controls not issued for self-assessment 19 were not due to be operated in
the period, 19 were automated controls which have been sample tested centrally with
no issues noted, 18 controls were in remediation at year end, 11 controls were still
being set to live, and 3 were pending confirmation of ownership.
All 18 controls still in remediation at year end have been reviewed and work-around
controls have been performed or testing procedures are in progress to gain comfort
for year end. The 11 controls being made live for self-assessment relate to the overall
control environment and have been reviewed to ensure there were no unaddressed
risks which could affect year end.
PwC have now tested 72 controls over 11 of the 12 processes; 61 operated
effectively, 11 had exceptions but were classified as minor. PwC are currently
completing their testing over the remaining 1 process and annual controls; this is
expected to be complete by end of May.
We no longer consider any of the original 10 high risks gaps to be high risk. 3 remain
open as medium risk with workaround controls in place, the remaining 7 are closed
and the remediated controls are operating as BAU.
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Areas that have been added to the scope of the FRC in recent months are advancing.
We are documenting Masterdata controls and beginning to agree remediation plans
for identified gaps. The four other areas added recently, of lower risk, are underway.
We are re-assessing controls over fixed assets, given the potential change in
accounting estimate and reversal of impairment. A business review is underway over
the purchase to pay process.
Input Sought
The ARC is asked to note the progress made and comment on the priorities.
The Report
What is the status of the FRC and what reliance can be taken as at
year end?
1. Across the FRC, we are seeking to rely on 241 controls. Of the 241, 168 were self-
assessed in March. 18 controls were still in remediation, 11 were still due to go
live, and 3 were live but not submitted (although discussions with control owners
have confirmed that these were operating effectively). 19 were not due for self-
assessment in the period due to operational frequency, and 19 were automated
controls which are being sample tested centrally.
March 2017 - Total controls 241
Less: Controls in remediation -18
Controls to be assigned -3
Controls to be set to live Li
Controls not due to be operated due to frequency -19
Automated controls subject to central testing -19
Total population for self-assessment 171 I 71%
Self-assessed and operated effectively 168 I 98%
Self-assessed but not operated effectively 0 0%
No self-assessment submitted 3 2%
2. 98% (168 controls) were self-assessed as operating effectively: the other 3 were
not self-assessed. Conversations have been held with control owners to
understand the reason for the 3 not submitted, however all have been confirmed
as having been operated during the period. See appendix 2 for further detail of
March CSA results by process.
3. The April self-assessment is currently being performed and results will be assessed
mid-May.
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4. PwC has now undertaken a further phase of independent sample testing. A total of
72 controls have now been tested across 11 processes with a population of 192
controls (38% sampled). 11 controls need some improvement: these are mostly
re-wording of controls or ownership issues which have since been resolved. See
Appendix 1 for testing results by process.
5. We had 10 high risk gaps in the initial assessment. At end March, no high risk
gaps remain. 3 medium risk gaps remain but had work-around controls in place
providing assurance at year-end.
Gap
Period end checklist
Journal authorisation
Balance sheet review
Independent b/s
review
Branch cash
reconciliation
Review of good
receipting
Payroll segregation
Quality of bank recs
Quality of b/s recs
Spreadsheet controls
Strictly Confidential
March
ARC
May
ARC
Comment
Operating on a monthly basis; period end is not
closed without completion of checklist or
mitigating checks.
Operating on a monthly basis. All CFS journals
over £250k P&L or £1m Balance Sheet impact
receive independent authorisation from an
agreed approver before being processed by a
central independent team.
Monthly FLT Balance Sheet review now in place.
Operating on a monthly basis; Balance Sheet
probity requires independent review before
submission to the Central team.
Reconciliations are now in place for branch
sterling and bureau cash between Horizon and
POLSAP. System reports are being developed
with Fujitsu for cash in transit, where stronger
workaround controls exist.
Operating on a monthly basis with strong return
rate.
Effective workaround controls in place through
independent reviews until Success Factors goes
live.
Operating on a monthly basis. Improvement
noted by external audit team.
Reviews and training underway but continuing
into new financial year; central review
performed for year end.
Remediation completed for all spreadsheets.
PwC are currently testing.
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What progress has been made since March and what further work
will be undertaken?
6.
Since the March ARC we have reduced control gaps from 24 gaps to 18 gaps. We
have performed review procedures and implemented work-around controls to
ensure that we had adequate assurance at year end.
We have also made a further 12 controls available for self-assessment by setting
Control Environment controls live for self-assessment. A further 11 controls still
remain which require setting live for the April self-assessment.
PwC testing has continued and a further 30 (total 72) controls were tested with 3
(total 11) exceptions identified. All exceptions are rated ‘amber’ and not high risk,
and have been or are in the process of being addressed. PwC have now performed
their testing of the final 9 controls to be tested and we are awaiting results.
We are re-assessing controls across Fixed Assets. The financial reporting risk has
changed within fixed assets due to the potential change of impairment and for this
reason we are re-assessing risks and controls in this area.
10.We are also reviewing ownership of controls as part of the new roles and
responsibilities in the finance restructure.
What are the next steps into the second phase of the project?
11.We added Masterdata to the scope of the FCR in Q3. Documentation of processes,
risks and controls has been completed across 2 of the 12 relevant data sets
(Vendor and Customer), with approx. 30 controls being identified and 8 control
gaps (excluding duplicate controls across the 2 processes). Most of the gaps are
due to reliance on manual processes with a lack of monitoring controls. None of
the gaps indicate a risk of material misstatement however are currently in the
process of being prioritised as high, medium or low risk.
12. Documentation of risks and controls is already underway for a further 2
Masterdata sets (GL and Payroll); these will be completed in May 2017.This will
then be extended to cover the remaining in scope data sets; Project Accounting,
Fixed Assets, Bank & Cash, Product, Branch, Stock, Tax and Internal Orders. We
expect these to be completed by end August 2017. Controls will be loaded for self-
assessment and a remediation plan developed for gaps. Additional checks are in
progress to ensure no implications for the financial statements; no implications
have been noted so far.
13. A site visit has been scheduled for early May to review Masterdata controls
operated by Atos, to assess the control environment and any gaps which require
remediation.
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14.As noted previously, in reviewing the programme we have identified a further four
areas that we want to add to FCR which were not considered high risk and were
not in the original scope: agents’ debt; the branch correction process; agent
remuneration; and POMs. A business case is being submitted to cover this, as well
as; the remaining Masterdata work to be performed, Finance Service Centre
controls, and Cash Management and Forecasting controls.
15.The Director of Procurement is leading an end-to-end review of the purchase to
Pay process across our business. End to end processes are currently being
documented, and the team are assessing what can be remediated now as well as
working up alternatives to our SAP solution. In tandem Finance are recasting all
the cost centres and project codes for the business and realigning them with the
new business structure so a significant amount of work is going into seeing where
we can improve our manual controls and generate some automated reporting to
assist with this. The output will be a business case in the coming months, which i.
likely to form part of the Back Office project.
Appendix 1 - PwC independent assurance results
iS
Testing Process Total Controls tested Exceptions
Phase controls in identified
process
Phase 1_ {Client Settlement 14 8 57% ie) 0% 0 0 8 88%
Phase 2 IProject Accounting 7 2 29% L 50% i} 1 1 50%
Phase 2. IRecord To Report 35 14 40% 2 14% 0 2 12 71%
Phase 2. ITax 15 4 27% 0 0% i} i} 4 100%
Phase 2_IFixed assets 18 7 39% 3 43% 0 3 4 29%
Phase 2_ [Payroll 31 12 39% 2 17% ie) 2 10 67%
Phase 3_IBank and Cash 22 7 32% 1 14% 0 1 6 86%
Phase 3_ [Bill to Cash 13 o 38% 1 20% 0 1 4 40%
Phase 3 ITreasury 13 4 31% 0 0% 0 0 4 100%
Phase 3 {Procure to Pay 15 5 33% 1 20% 0 1 4 80%
Phase 3 IStock 9 4 44% 0 0% 0 0 4 50%
192 72 38% 11 15% 0 11 61 69%
There have been no ‘red’ (high risk) exceptions identified. 2 red exceptions were
identified initially however evidence was subsequently provided to PwC which meant
that these exceptions were later re-evaluated as ‘amber’ (low risk).
11 amber exceptions have been identified, mainly relating to ownership issues, and
wording changes. These have since been resolved.
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Appendix 2 - March CSA results by process
Total Controls Control Gaps Control Owners March CSA Results
H/M/L Impact of [Self assessment IControls
Total I Control Owner I No owner Controls No self I Not operated submitted but I to be
Process . mn operated Iassessment Idue to agreed
Controls} Gaps Assigned I assigned ‘i control not I set to
effectively I submitted I frequency
operated live
banks Get 33 I 2 2 1 28 0 2 0 0
Management
Bill To Cash 7 3 7 0 12 0 2 0 0
Control Environment I 21 1 at 0 8 0 1 0 il
Fixed Assets 18 3 18 0 14 0 1 0 0
Payroll 34 1 34 0 29 0 4 0 0
Procure To Pay 24 1 24 0 12 1 10 0 0
Project Accounting 9 2 9 0 3 2 2 0 0
Record To Report 38 3 38 0 30 0 5 0 0
Settlement Process 14 0 12 2 12 0 0 t) 0
Stock 7 2 7 0 5 0 0 0 0
Tax 16 0 16 0 7 0 9 0 0
[Treasury 10 10 0 8 0 2 0 0
241 18 238 3 168 3 38 0 il
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AUDIT, RISK & COMPLIANCE COMMITTEE
Financial Crime Risk Update
Author: Sally Smith Sponsor: Jane MacLeod Meeting date: 18" May 2017
Executive Summary
Context
This paper updates the Audit and Risk Committee on progress with the HMRC Regulatory
Activity project which has been established to manage both the HMRC’s Anti-Money
Laundering (AML) and Counter Terrorist Financing (CTF) audit and the risk assessment
work being undertaken to address Financial Crime Risks.
Questions this paper addresses
e What is the current position on the HMRC Audit and potential Branch Registration
Penalty?
e What is the current position on progress with the Financial Crime risk assessment
work and next steps?
e What are the impacts for Post Office of upcoming regulatory changes
Conclusion
1. HMRC met with us on 22"¢ March to issue their audit findings, including regulatory
breaches which are currently under consideration by them for sanctions. Their
findings are broadly in line with those already identified through our risk
assessment work, and a further meeting was held with HMRC on 5** April to review
the action plan already in place, the work being undertaken on Bureau de Change
and enable Post Office to seek clarification and guidance. The next meeting is
being held on 16* May with a view to agreeing a robust action plan and milestones
with HMRC. Further regular meetings will be held through the year, with HMRC
planning a review of Bill Payments later in 2017.
further update on the penalty for historic branch premises registration
! HMRC also advised there will be no changes to the annual registration
processes for Post Office this year.
3. Product Risk assessments are broadly on plan, with work on Drop & Go nearing
completion and good progress being made on MoneyGram and Giftcards. Risk
Assessment work for POMS and their insurance products was prioritised for April
and is due to be completed in May. A project team and steering group have been
established to address the control weaknesses identified in the Bureau de Change
risk assessment and the HMRC audit.
4. The draft UK legislation of the 4*° Money Laundering Directive was published 17
March and includes requirements that will have significant impacts for Post Office.
The extension of the Fit and Proper regime could have a significant impact,
however the exact implications are difficult to assess until clarification is received
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from HMRC, and it is likely that this will now be delayed as a result of the election
and a transition period is expected.
Input Sought
The ARC is asked to note this update.
The Report
HMRC Audit status
5. As the ARC is aware from previous briefings, the HMRC audit has raised a number
of issues, the majority of which relate to in branch Bureau de Change services,
and in particular:
« Levels at which ID is taken and captured
« Inability to capture linked transactions
« Acceptance of €500 notes
« Inability to prevent business transactions and absence of special due
diligence procedures to address this; Poor practices re customer due
diligence. E.g. collecting hotel addresses for overseas customers
« System limitations which do not prevent transactions above thresholds
« “Sales driven culture evidenced at some large agents could override need to
adhere to regulatory requirements.”
« Transaction monitoring limited by poor systems therefore expected checks
cannot be robustly applied
« Post Office rely on FRES for certain data, but these data feeds are limited
6. Other concerns relate to:
« Frequent changes in Post Office MLRO - there have been 6 registered in the
last 6 years
« No training of non-branch staff prior to 2016
« The sanctions that can be applied to branches that are in breach are limited
« SARs reporting is low given size of network and number of transactions
7. A project team and steering committee have been established by the Bureau de
Change product management team to work on an action plan to address the
weaknesses identified in the risk assessment. A high level overview of this activity
was shared with HMRC when they presented their findings, and there were no gaps
identified in planned activity.
8. A further meeting was held with HMRC on the 5** April to review in more detail the
actions that Post Office is already taking and progress a suitable action plan to
address gaps. At this meeting, HMRC stated that they will work closely with us
and further meetings are planned to agree actions, timescales and milestones,
with the next on the 16 May 2017. There were some areas of specific output
from the meeting:
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« Post Office to update timescales for the current action plan, and initial
estimated implementation/delivery timescales to be scoped for Bureau de
Change activity
« An initial milestone has been agreed to ensure that updated training is
delivered to all staff by the end of June (back office training was delivered in
April, and customer facing training is being delivered 5‘-29' May 2017).
« HMRC have identified missing data in 26k records supplied to them for
analysis, and have asked Post Office to investigate. This investigation is
ongoing.
« HMRC recommended dropping the Bureau de Change ID limits as soon as the
thresholds had been approved internally, even if the capacity/ability to
monitor all the data captured cannot be delivered until later
« HMRC asked that Post Office undertakes a location-based risk assessment in
relation to PEPs risks (e.g. branches within Houses of Parliament and near
Embassies)
« HMRC have advised that they will review Post Office Bill Payments activity
later in 2017.
9. An AML Steering Group, chaired by the General Counsel has been established to
ensure the HMRC action plan is on track and ensure any changes necessary in
relation to the 4 MLD regulations (see Regulatory Update below) are
implemented. Risk assessment work will shortly be commenced on Bill Payments
ahead of the HMRC review expected in the Autumn and the results of this
assessment will be considered by the AML Steering Group.
Financial Crime Risk Assessment Update
10. Work commenced in February on risk-assessment work on further products and
services and is currently on track, although there has been a need to accelerate
the risk assessment of POMS and the insurance products under its umbrella, and
so this has been incorporated into this work and given priority during April, the
action plans in Appendix A give full updates, but in summary:
« Drop and Go - re-assessment of the residual risk has been completed, with
the control strength improving from 18% to 81%
« MoneyGram - work is progressing
« GiftCards - progressing to plan
« Travel Money Card and Postal Orders - work is progressing
« POMS - Risk Assessment has progressed well and should be completed by
mid-May for review by the POMS ARC.
e International Payments —- work is due to commence shortly
11. There continue to be non-conformance issues in the Network, 68 branches were
investigated and actions have been taken in the period October-March, with 16
which were more complex of which:
« 8 have had Bureau de Change ID limits reduced. The Fit & Proper status of
the postmistress for one of these branches is being reviewed in relation to her
taking on a further branch due to ongoing breaches
« 3 Directly Managed Branch non-conformances have been addressed by the
RSM and ASM
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« 8 branches have had remedy letters issued by Contracts Managers
12. There are currently 17 branches being manually monitored.
Anti-Bribery and Corruption (ABC) Risk Assessment update
13. As reported in March, the remediation work is being incorporated over the course
of 2017. Activity to date has included:
e Initial review of ABC policy - further work to be undertaken to update and
amend to ensure all risk assessment recommendations captured. Draft to be
complete June 2017
« Enhanced year end 2016/17 executive declaration to include ABC controls.
« Enhance gifts and hospitality reporting, recording and monitoring - work has
commenced on scoping the requirements for an electronic reporting
mechanism that will aid recording and monitoring.
AML/CTFE training update
14. AML/CTF training for all back office employees was launched in April for completion
by 21% April 2017. Completion rates were poor and this has been raised with GE
and the L300, and continues to be monitored weekly.
15. Network customer facing training was launched on 5° May 2017 for completion by
29% May 2017, and work is being undertaken with the Branch Standards Team on
an action plan to ensure completion. A short AML/CTF awareness film has been
developed, which will be launched around this time to support understanding of
AML/CTF in a Post Office environment.
Regulatory updates
16. The draft UK Legislation for the 4** MLD was published for review on the 17° March
2017, requesting feedback by 12°" April 2017. The main impacts for Post Office
are:
e Vetting: there are increased requirements for ‘fit and proper’ testing
(including skills, knowledge and expertise of the individual to carry out their
function effectively, as well as conduct and integrity requirements) which are
likely to have to be rolled out across the directly managed branch and
postmaster population and require annual review. It is unclear the extent to
which these will apply to assistants and multiples, and Post Office have
requested clarification as to the application of the requirements. This has also
been raised with HMRC, but as yet they have no clarity internally as to how
this test will be administered or applied. Clearly this requirement would
present both an operational and financial burden to Post Office. The Financial
Crime team have made the current Vetting Project team aware, as if HMRC
advise that it includes all agents, and the current fee is applied, this could
capture c. 11k individuals with an additional HMRC fee of c. £1.4m per annum.
e Documentation: Physical or electronic copies of documentation for customer
due diligence needs to be kept during the relationship and for 5 years after a
relationship has terminated. For Bureau de Change transactions that require
customer due diligence (currently £5k and over, but will reduce to £2k and
over following HMRC audit recommendations), Post Office will need to identify
a suitable eKYC solution, as retention of paper copies in branch is not an
option
17.
18.
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e HM Treasury and Home Office will issue a new national risk assessment by
June 2018, with each supervisor assessing and reporting on the AML/CTF risks
in the sectors and businesses they supervise. This will likely impact regulators
and regulated entities interpretation of the requirements of the regulations -
i.e. there may be further amends we need to make on our approach
dependant on the outcome
« Regulated organisations must undertake a full risk assessment that covers
customers, transactions, delivery channels, products and services, and
geographic areas and keep this up to date and available for their supervisory
authority. Post Office will need to ensure this is fully documented and kept
up to date. The risk assessments undertaken to date will meet this
requirement, however these will need to be undertaken for all products and
services and continually maintained
e Policies, controls and procedures must include risk management practices,
internal controls, CDD and the monitoring and management of compliance
with these. Post Office will need to have better documented controls across
the business, and the risk assessment work will partially address this
e Policies, controls and procedures must specify additional measures to prevent
ML and TF use of products and transactions that might favour anonymity. This
may impact Post Office for example, top-up services and the majority of
Bureau de Change and Giftcards are anonymous
« Occasional transaction limit stays at €15k, and the JMLSG guidance still says
three month period is appropriate
« The maximum amount that can be stored on a non-reloadable electronic
device is €500 as long as it can only be used in the UK, however, the limit
reduces to €250 if it can be used abroad. Businesses must also ensure that
no more than €100 can be redeemed in cash. This will impact Giftcards and
Post Office will need to establish what GVS are going to do and how this may
impact branches.
There has been no further guidance or update relating to the Fifth Money
Laundering Directive announced on 30 November 2016.
The Criminal Finances Bill was passed on the 27" April and the updates given in
the January MLRO report remain current, although further impact assessment is
being carried out.
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Appendix A - Action Plans
Status key:
« Green - on track and no issues expected
« Amber - some delays but no significant or material issues
« Red - significant delay or material issues or potential regulatory sanction
Risk Assessments:
Aci ‘y Due Date I Status Comments
Bureau de Change End Complete Report and recommendations issued to product management
January - see remediation plan
Drop & Go Mid May Green The report, product information pack and assessment is being
sent to the product team for sign-off and progression of risk
exception reporting. Control strength has improved from 18%
to 81%
MoneyGram End May Amber Some delays in obtaining required information from
MoneyGram. With product management to obtain further
information for product information pack so that residual risk
can be re-assessed.
GiftCards End May Amber Some delays in establishing regulatory status with GVS
contract and reviewing documents. Information from GVS
now received and with Legal for review
Postal Orders End May Amber Work has commenced and is progressing, provision of initial
assessment and draft documents and initial meeting with
Postal Order product manager
Travel Money Card End May Amber Not yet started due to timing of launch of multi-currency card
and impacts of early ‘teething issues’ in live environment.
Scheduled to commence shortly
International Payments I End May Amber Delayed start due to work on other assessments and
availability of product manager time (also looks after
MoneyGram)
POMS End May Green POMS risk financial Crime risk assessment due to be
completed end April and ABC risk assessment by mid-May.
On track
Bill Payments (19 TBA Given HMRC intention to review later 2017, this needs full
separate services) risk assessment and the funding to enable this
Financial Services TBA 29 products across Banking, Savings, Cards, Mortgages,
Products Insurance and top up services - to be prioritised/funded
Remediation Activity:
Activity Due Date I Status Comments
Bureau de Change TBA Amber Project team established, but BA leaves business beginning of
May so there will be transition to new BA who starts end April.
Steering committee established. Requirements being scoped
and a Change Request for some ‘quick fixes’ for Horizon
submitted. Decision to remove €500 note service.
Drop & Go July Not started I Product team to sign-off residual risk, risk exception to be
drafted and approved for a small number of control
weaknesses that still exist.
MoneyGram TBA Not started _I Dependant on assessment of residual risk
GiftCards TBA Not started I Dependant on assessment of residual risk
Postal Orders TBA Not started I Dependant on assessment of residual risk
Travel Money Card TBA Not started I Dependant on assessment of residual risk
International Payments I TBA Not started I Dependant on assessment of residual risk
POMS TBA Not started I Dependant on assessment of residual risk
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Other AML activity:
Activity Due Date Status Comments
AML/CTF Policy Review July 2017 Amber Although annual review due by end March, awaiting
publication of new legislation to ensure all relevant
information is captured
ABC Policy Review March 2017 Amber Review commenced but resource issues Feb/March
Financial Crime Policy March 2017 Amber Review commenced but resource issues Feb/March
Review
Policy Gap Analysis July 2017 Not Started Dependant on completion of policy amends
Policy control gap action August 2017 I Not Started Dependant on completion of policy amends
plan
PEPs and Sanction Policy July 2017 Not Started Draft in line with new legislation and risk assessment
outcomes
Review of 4" MLD June 2017 Amber Draft legislation reviewed and comments fed back.
Awaiting publication of final legislation
4 MLD Action Plan TBA Not Started Dependant on timing of publication of legislation
HMRC Annual Premises June 2017 Not Started Awaiting HMRC advice to commence process
Registration
HMRC Audit Action Plan TBA Green Initial meetings with AMLS and further meeting May
16" to progress
Risk Appetite Review TBA Not Started Dependant on outcomes from residual risk
assessments to provide evidence to support appetite
changes
Enhanced AML/CTF training I May 2017 Green Back Office delivered, Customer Facing Network
being delivered 5t May.
POMS and Post Office MLRO I July 2017 Not Started
reports
Enhance Gifts and TBA
Hospitality reporting and
recording
Enhance product and service I TBA
online risk assessment tool
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AUDIT, RISK & COMPLIANCE COMMITTEE
Financial Services Conduct Risk Update
Author: Jonathan Hill Meeting date: 19 May 2017
Executive Summary
Context
1. This paper updates the Committee on current risks and actions in respect of
conduct risk. Two of the key risks on the FS Risk register (also reflected in the
Post Office and POMS risk registers) relate to conduct risk and the increasing
demands of the regulatory environment. Conduct risk in the regulated financial
services context refers to risks to customers from poor product design, distribution
and selling processes as well as those risks relating to poor product fulfilment.
2. The Network Conduct Risk Action Plan, agreed between Bol and Post Office and
incorporating the requirements from POMS, has completed except for the
Enhanced User Management project, which is subject to separate project
management and oversight and due to be rolled out in October 2017. Further work
is planned for 2017/18 to ensure that we keep up the momentum on this area.
Questions this paper addresses
3. This paper provides an update on the key conduct risks and how they are being
managed.
Conclusions
4. Although the business faces some conduct risk challenges, some of which are
referred to below, they are being managed within the overall risk appetite. Post
Office has an averse risk appetite for not complying with law and regulations or
deviation from business’ conduct standards. Key assurance on this is provided
through the MI dashboards and reports into and from BoI and POMS (summaries
attached).
5. However, there remain challenges from changes to the business model, including
regulatory changes, which require on-going focus to maintain conformance and
compliance.
6. Increasing regulation as well as the FCA’s continued focus on the themes of conduct
risk, culture and vulnerable customers will be a continual challenge for the FS
business.
Input Sought
7. The Committee is asked to note these developments.
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The Report
Key Risks, governance and management information
8. Conduct risks are measured and reviewed by FS&T Risk together with our Principals
on an on-going basis and management information is provided on the key risk
areas. Conduct risk metrics and reports are reviewed at the Bol-Post Office
Customer and Conduct Risk Committee and POMS-Post Office Joint Compliance
Committee, which meet monthly. The BoI metrics consistently show that we are
operating within tolerance. The POMS metrics require further work including
amending MI to take into account the provision of a new life insurance provider
(Royal London) on 31 January 2017.
Current risks and issues
Customer Relationship Managers (CRMs)
9. At the March meeting, the Committee asked FS&T to explain more about the CRM
programme, its controls and how it ensured that advice was not given to the
customer.
10. As at 5 May we had 508 active CRMs of which 414 were digital tablet enabled, the
plan is to have 673 CRMs in place by April 2018 with all of these being tablet
enabled
. The CRM programme is subject to risk assessment with FS&T Risk operating 1*
review and control for CRM conduct and compliance risks. This includes an
updated risk register with actions.
. All live CRMs and the Post Office Area Sales Performance Managers (ASPM) have
been trained in compliant introductory conversations
. Once live, CRMs are monitored in line with the T&C Framework supported and
coached by an ASPM.
. Ongoing product specific “Product Knowledge Tests” are completed through
direct access to the online CRM learning academy
. All CRMs continue to be monitored through Video Mystery Shopping and
Customer Validation Calls for both quality of Customer Experience and
Compliance.
. Poor outcomes are reported and actioned through the ASPM coaching structure
including any comments that could be construed as advice would be considered
here.
. Tablet content is reviewed and approved by FS&T Risk and our Principals before
go-live.
11. Both Bol and POMS receive CRM compliance MI monthly at their respective
Customer and Conduct and Joint Customer Conduct Committees. Below is the
summary MI reported for April 2017. We currently have a red metric reported for
VMS. A key reason for this was the result of a pilot to the referral of credit card
leads by CRMs in 75 branches (direct to the credit card call centre via the branch
telephone).
12. Monitoring of the pilot through video mystery shopping concluded that there was
inadequate compliance being demonstrated, particularly around ensuring that
recorded regulatory messages were being heard by customers. As a result Post
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Office took the decision to halt this pilot after 6 weeks. This was an example of the
monitoring controls working in practice.
13.
CRM Summary Management Information
Current April Previous Exceptions and trends
Month/Qtr. Month/Qtr.
Significant cause of reds
ae were 18 ‘red’ shops from
VMS results I Less than 10% completed, 45 completed 7 i
the credit card activity
(month) red 15 red 11 red (24%) . .
pilot which has been
(29%)
suspended.
At least 90% of Avg. span of control is
Spans of teams within 92.3% in 92.3% in span currently 14.4:1. 3
control Span of Control I span ave in Sp Support Managers have
20:1 an exception in place
72.4% in “On- Amber rating caused by
No of CRMs oa 75% of going” new cohort in Phase 6
by T&D Me least 80 — CRMs in On- 27.6% in training commenced 14""
status Su ort going “Individual March and 100% enter
Pe support Supervision into ISP for a min of 8
(ISP)” weeks, max 16 weeks.
At least 80% A Savings PK tests are
on pass rate on first I Wit ae ce scheduled for Q1. T&C PK
attempt. Test is scheduled for Q2.
Savings No CRMs branches are
product . aa No significant currently demonstrating
. No bias shown significant : pn "
mix issues issues no bias in their
(Q4) introductions
Cuaeener No 45 Savings CVCs
anita At least 90% a No significant completed, no issues
Validation i" significant i
compliance ji issues raised
Calls issues
POL FS Risk confirmed
No more than 1 Ne aphedd No upheld that there were no
Complaints I upheld complaint I —., viaints eon vaines complaints received for
overall P P any individual CRM in
April.
BOI No red rated Mae A 3 Amber and 7 Reviews will be in
Regulatory viride reported in 3 Green in completed in Qt
Reviews April March P :
Cash Savings Remedies
14. From 1% December 2016, all savings providers have been required by the FCA to
provide, at the point of sale, prescribed information in the form of a standardised
summary box. This is to ensure customers have the appropriate information they
need to be able to compare products.
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15.
16.
17.
18.
19.
20.
21.
22.
In order to facilitate a more responsive and cost efficient rate change process in
Post Office, a decision was taken to supply this regulatory information to customers
in a separate Summary Box leaflet, rather than to include it within the product
application pack.
Initial levels of conformance with the new requirements were varied. The teams
have worked closely to ensure branch colleagues understand and conform to the
compliance requirements. This has seen a marked improvement from the 50%
conformance at launch to 78% currently. Whilst this is a good step forward, the
level of conformance needs to improve. Actions are being taken to support this:
the relevant savings material is being updated with a sleeve at the front for the
summary box to be inserted into. This should enable high levels of compliance to
be maintained. These changes will be delivered later this year. The monitoring of
this activity will be reviewed at the C&CRC in July 2017.
Future issues
FCA Business Plan and Risk Outlook.
The FCA has published its annual business plan and key risk outlook in April. Its
cross sector priority areas of focus include firms’ culture and governance and
consumer vulnerability and access to financial services. FS&T have undertaken
significant work on the importance of embedding an appropriate culture and how
we interact with customers through the network conduct risk action plan. This work
will continue in the current FS&T work plan.
In addition we need to re-focus and agree our vulnerable customer policy to
articulate our approach and to manage the demands of our stakeholders who have
requested our approach to this. The updated draft policy will be presented to the
RCC in July 2017.
Senior Managers and Certification Regime
The Senior Managers and Certification Regime will expand to all FSMA regulated
firms by 2018; the precise timetable remains unclear but an update paper is
expected from the FCA in Q1 2017/18.
Firms will need to put in place a ‘Statement of Responsibilities’ map, recording the
allocation of responsibility to a senior manager for every part of its business areas
and management functions. It will also need to identify any significant
management/material risk takers that will be ‘certified persons’. Firms must certify
these as ‘fit and proper’ on an annual basis. There are also conduct rules for all
staff undertaking regulated business under this regime.
It still remains unclear what the precise requirements will be for Appointed
Representatives, but for POMS planning is already taking place to work through
the implications. FS&T Risk is working with POMS to ensure that we are supporting
the implementation of SM&CR in POMS.
Insurance Distribution Directive
The FCA has recently published a consultation paper outlining the requirements to
be in place for February 2018. These include new requirements on a customers’
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best interests rule, record keeping, commission disclosure and the training
requirements for the new regime (15 hours CPD).
23. This could have significant impact on how insurance products are sold and
intermediated. POMS is driving a project group to assess and implement the
changes with FS&T risk and the wider network.
Jonathan Hill
Head of FS&T Risk & Regulation
May 2017
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POMS CONDUCT RISK SCORECARD
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Rating Criteria (errierns
Area Measure Green IAmber IRed Mar-17] Feb-17I Jan-17} Dec] Nov Oct] SeptI
[Complaints 1,000 - [1,500 -
Number of Opened complaints 1o-1,000]1,500_I2,000 314] 264] 321] 283 345I 391 479)
fo%-_ [21%-_I31%-
Percentage of upheld complaints 20% _I30% _I100% 36.8%I 31.3%I 27.5%] 28.7%) —-28.1%I 29.0%! _33.9%I
No of FOS cases upheld fo-3 [4-7 [8+ 0] 1] 1 0] 0 2I 0]
Mystery Shopping/VMS ea I en I peo
Proportion of shops rated red in the month H1o% _I20% __I100% 0% 13% 20% 0% 14% 0% 13%
Number of shops rated black in month q o a I I 0I I I 0I fl
Branch Monitoring Number of red rated findings in the month 5 5-9 10+ 5 2
[Call Validation - Royal London [To be agreed wi
[Call Validation - POL
lo%-__[11%- 15%
ICall Monitoring (Travel) Percentage of red rating calls in the month. 10% [14% __I100% 19% 20% 15%I 5% 4% 6% 5%I
a ee
[Call Monitoring (Life) Percentage of red rating calls in the month Hom I14% _I100% 6% 22%
[Cancellations Percentage of products to sales, cancelled withinthe 0%- I6%- I11%-
(Motor, Home, Pet,) cooling off period (14 days) 15% [10% [100% 4.1% 2.9%I -2.8%I 3.1%] 3.1% 3.3%I 2.8%
Cancellations Percentage of products to sales, cancelled within the }0%- I10%- I15%-
(Life & Over 50s) [cooling off period (30 days) jo% [14% _I100% 9.0%] 6.5% 6.7% 6.9%I 8.9%
[Claims (Travel, Protection, Home lo%- Io%- Ia1%-
land Pet) Percentage of claims repudiated 15% [10% 100% 6.1% 4.6% 4.6% 7.4% 5.3% 9.3%I 7.6%
[Training & Competence Percentage of POMS staff completed mandatory, Hi00% - I95%- 89% -
training 195% _I90% _Io% 100%I 100%I 87%
Percentage of Call Center staff completed mandatory [199% los%- lao%-
training jo5% _I90% _Io% 100%I 100%] 100% 100%I 100%! —_100%I
Percentage of Branch staff completed mandatory 100% - }95%- —[90%-
training (MS and CRM) j95% __I90% __I0%
[Customer Satisfaction Proportion of customer responses to NPS surveys that
(ces) confirm adequate information was provided at the I80_I79-60_I>59 77% 82% 88% 93% 93% 93% 93%
Net Promoter Score point of sale in the previous 3 months
(NPS) (Scores based on 3MRA) 35 [34-30 _I>30 42 a2 40I EX) 40 42 40)
Financial Promotions Financial Promotions right 1st Time [s0%+ [35-49% I __-35%I 45% 65% 52% 30% 49% 40% 90%
Iirsctavis Number of Severe Incidents (rated 1 or 2) 0 a 2 3] 1 1 I o il 2
Number of unresolved Incidents fo-15 16-20 [20+ 21 20 a4 19 v7 410 15
PoLo0423390
BOI - Post Office Money branch distribution
How we performed against our aims in April 2017
Using a range of key risk indicators, we measure our conduct performance against each of our FACE Customer Charter commitments and promises. This tells us how
well we're doing against our targets and highlights areas where we could improve our performance. We also use our performance to give ourselves an overall risk
rating. This month, we rated our overall performance as Amber. The risk ring shows the relative ratio of green, amber and red rated key risk indicators. Our tolerances
are shown on page 13.
Our March risk ratings and how How we performed against our FACE Customer Charter commitments and promises in March
they compare to February
Red rated mystery shops >I _ Risk ring and overall Green rated Amber rated Red rated March ratings v
performance ré KRIs. KRIs KRIs February ratings
Black rated mystery shops o> ions
Mutiple red/black shops o “\ > 15
Aor Brated mortgage cases <> > 2
D rated mortgage cases o 1 5 4 1 > 1
MS meeting QAT benchmark <> i a 0
Distribution complaints v av 2
Mis-selling complaints idl This month we were within tolerance for 19 out of the 20 KRIs we M 0
Based on the weighted
e
e
e
e
e
e
e
e
@ Conduct survey results > cumulative outcome of Measured. 15 of our KRIs were rated green and 4 of our KRis were rated Red KRis - One KRI
© NPS survey results the kRlewemescured amber. One of our KRis was rated red. In comparison, in February we femained red, and
ihicmonth car overall ‘exceeded tolerance in one of our KRIs and in January we were within no KRls fell to red.
@ Branch product knowledge <> z tolerance in all our KRis. On average, in each month between October
risk rating for March is :
@ Branch regulatory knowledge <> ‘Amber. I and March, we were within tolerance in 19 of the KRIs we measured and
. r 7
@ Specialist/CRM knowledge o exceeded tolerance in only one.
@ Branch advertising reviews _--<>-_ Distribution of KRI risk ratings between October 2016 and March 2017
@ Advertising breaches/issues <>
e
e
e
e
e
e
Social media breaches/issues <>
Savings cancellations or
Matched credit card usage <>
Competent specialists o
Supervisor spans of control <> _—_—_—_-____*____, ——__,
$$ —e— °
BOI supervisor reviews ——
‘Specialist mystery shops - Overall, levels of red-rated shops remained in tolerance at 8.6% for the three months ending in March. Levels of red-rated mortgage
shops decreased slightly during the three months to the end of March, with three out of 34 shops, or 9%, being rated red. Post Office continue to provide an update
on the action plan implemented November 2016 (Action 012) at the C&CRC. All MSs are receiving refresher training in the advisory process as part of the Rome 2.3
deployment throughout March/April 2017.
Black shops - One mortgage shop was rated ‘black’ in March, where the adviser was judged to have provided unsuitable advice following unchallenged conflicting
ies from the mystery shopper. This is the second black rated video in two months and whilst this is not considered indicative of an underlying systemic issue at
this stage, previous black rated videos have identified similar failings and, as such, this area is being revisited as part of the Rome 2.3 deployment training and the
situation is being monitored closely. This was the first VMS for the MS in question.
CRMs - Red rated shops increased to 21% (14.8%) for the three months to the end of March. This was predominantly as a result of mystery shopping reviews of the
Credit Card pilot - where customers could be invited to call the contact centre from the branch telephone to apply. 15 out of 32 shops (45%) were rated red - NB, a
number of these shops were rated in April, so are not yet fully reflected by the dashboard. Accordingly, the pilot has been suspended and will only recommence when
the BOI and POI Risk teams are satisfied that compliance requirements will be met by CRMs going forward.
Distribution complaints - Levels of branch-related complaints logged increased slightly in March but remained within tolerance.
Savings mystery shopping - initial mystery shopping of Post Office Counter Colleagues in relation to the mandatory provision of the Summary Box Leaflet performed
by BOI and ABA in November and December 2016 highlighted significant levels of non-compliance (50%) with the compliant sales process. Post Office took immediate
action to remind staff of the mandatory requirements in this regard. In addition, amendments are being made to the application pack for the new tax year and a copy
of the Summary Box Leaflet is now being sent to all customers with their welcome pack. Mystery shopping continued throughout March, as it currently running at 78%
compliance. Further enhancements are planned to the application packs.
<> Remained green <P Remained amber <P Remainedred A Improved to green A Improvedtoamber VW Felltoamber W Fell tored
BOI Group classification : Red (confidential)
1
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AUDIT, RISK AND COMPLIANCE COMMITTEE
Safety
Authors: Martin Hopcroft Sponsor: Al Cameron Meeting date: 18 May 2017
Executive Summary
Context
1.1 The ARC requested a regular update on our management of risks around safety of
our people and customers.
1.2 Safety performance is reported monthly to the Group Executive and at each Board
meeting, together with information on health and wellbeing.
1.3 Accountability for safety has transferred to Operations from HR, recognising that
the greatest risks are to our people in the field.
1.4 Our Health & Safety performance has improved significantly in the past 6 years
and we have a rolling 3-year plan to drive health and safety compliance and year
on year risk reduction, targeting a reduction in four key safety metrics: accidents;
lost time accidents; days lost; and personal injury claims.
Questions this paper addresses:
2.1 What is going well across health and safety and what is not going so well?
2.2 What are we doing to mitigate the key risks, including driving and robberies?
2.3 Are there any significant emerging risks?
Conclusion:
1. Performance continues to remain strong for all four of the key health and safety
metrics, including absence accidents and lost days. Benchmark data has been
requested from a number of sources and providers and is expected during May
and will be shared on future reports.
2. Mitigating action has reduced road risk which remains at a low level.
3. The number of CViT attacks remain low, however, there has been an increase in
Post Office robberies and a review is being undertaken by the Security team.
4. Property H&S training workshops have been delivered to Persons in Control of
Directly Managed branches and coaching provided to Supply Chain Managers.
5. Following the restructure of the GE and their direct reports, individual ‘deep dive’
H&S sessions have been delivered to lead teams.
6. We have undertaken an annual deep dive review of safety and agreed a number
of areas for focus in 2017/18 including a review of road policy, guidance for lone
workers, safety of vacated buildings, competency and statutory compliance.
7. A number of initiatives have been implemented to raise awareness of mental
health resources, including support for ‘Time to Talk’ initiatives. From July we
aim to train and introduce 60 Mental Health First Aiders to provide proactive
support to colleagues across all areas of the business.
Input Sought
The ARC is requested to note the update on safety.
Strictly Confidential Health & Safety Report May 2017
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The Report - H&S Metrics
Summary of Safety Performance - Year End - Period 12 (Mar 16/17)
All Accidents - YTD Cumulative at Period 12
(Target to achieve a 5% year on year reduction)
250
200
—o— 2015/16 All
2150
s —#— 2016/17 All
"5 100
3 2018/16
< ‘Absence
50 2016n'7
Absence
0
P1 P2 P3 P4 PS P6 P7 P8 PO PIOP11P12
Period
Accidents have reduced by 35% and Lost time accidents by 61%
YTD P12 (Mar 2017) v 15/16
Lifting / Handling related accidents have reduced about 50% in 2 years.
A lower number of accidents were reported this Winter.
Big improvement in ‘lack of attention’ related incidents reduced by 50%
compared to 2015/16
Days lost due to Accident
900
800
700
600
500
400 pe
300
200 4
100 4
Days
Pi P2 P3 P4 P5 P6 P7 P8 PS P10 P11 Pi2
2015/16 a 2016/17 Ported
Post Office lost days have reduced 71% (219 in 16/17 v 792 in 15/16)
DMB lost days P12 YTD : 45 (316 in 2015/16)
Supply Chain lost days P12 YTD : 174 (470 in 2015/16)
Support lost days P12 YTD : 0 (6 in 2015/16)
Trauma days lost: Supply Chain P12 YTD: 144 (302 in 15/16)
Post Office CViT Robberies — P12 (Mar 17)
There have been 19 incidents reported in 2016/17 compared to 15 in
2015/16 which was an exceptionally strong year, however, this is a
reduction on numbers reported in 13/14 and 14/15. There were no
incidents reported in December, January and March and 1 incident
reported in February. Possible reasons for the reduction are new delivery
and collection times and routes and activity across the industry shifting
towards ATM related attacks which are on the increase.
Directly Managed Branch
Accidents YTD P12
Year to Date
014/15 100
i516 75
016/17 62
Supply Chain Accidents YTD P12
Year to Date
014/15 121.0
15/16 104.0
016/17 60.0
Post Office (All branch types) Robberies
~ P12 (Mar 17)
There were:
18 incidents in November v 12 (15/16),
19 incidents in December v 11 (15/16),
20 incidents in January v 9 (15/16)
16 incidents in February v 9 (15/16)
14 incidents in March v 9 (15/16)
(152 incidents in 2016/17 v 104 in 2015/16)
A review of causation and mitigating activity is
being undertaken by the Security Team and a
paper being prepared for GE with a discussion
at the GE Sub Committee in May.
Strictly Confidential
Health & Safety Report May 2017
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1.60
1.40
1.20
1.00
0.80
0.60
LTIFR - All Business - P12 2016/17
0.40
0.20
0.00
PL P2 P3 Pa PS
——_TIFR DMB
——ATIFR Target
P6
——=TIFR Supply Chain
= “LTIFR PO Benchmark
7 Ps P9 P10 Pai P12
——TIFR Post Office
—ATIFR World Class
Lost Time Injury Frequency Rate (LTIFR)
Supply Chain
YTD P12 - 0.586
2015/16 out turn - 1.042
2016/17 target - 0.990
All Post Office - Employee
YTD P12 - 0.168
2015/16 out turn - 0.370
2016/17 target - 0.350
PO Benchmark - 0.480
Road Traffic Incidents - All / At fault
P12 - Mar 16/17
200
150
PS P4 PS P6 PT P8 Pd
P10 Pit
2015/16 All 2016/17 All
2015/16 "at fale! ee 2016/17 ‘at fault!
Current road risk performance has
improved by 41% compared to P12
YTD 2015/16.
‘at fault’ incidents are also down by
40% P12 YTD (Mar 17).
New providers have been confirmed
for maintenance and accident
management for Commercial fleet
and for provision, maintenance and
accident management of Business Car
fleet. Enhanced MI and accident
analysis expected from 2017/18 as
well as improved training and
compliance checks.
The Mobile Phone Policy has been
communicated with additional
measures being considered by the GE
H&S Sub Committee in May.
P12
Strictly Confidential
Health & Safety Report May 2017
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The Report
2.1 What is going well across health and safety and what are the current activities?
2.2 What are we doing to mitigate the key risks, including driving and robberies?
SAFETY
Performance continues to remain strong across all key health & safety metrics, including
absence accidents and lost days (see Report-H&S Metrics). Current activities include:
1. Person in Control Training
Refresher Person in Control training has been undertaken by all Supply Chain and
Directly Managed Branch Managers. Initial feedback has been very positive.
2. Property related risk
¢ The overall level of risk at year end is low with property compliance 96.55%.
« All planned Asbestos removal has been completed.
e All High and Medium actions from the fire risks assessments are closed.
e Our site audits have evidenced that we are managing our buildings and
housekeeping is improving.
« Revised log books have been agreed for distribution to sites early Q1 17/18
3. Health & Safety Activity Calendars - To ensure Health & Safety activities are
undertaken, H&S calendars have been updated and launched for 2017/18. H&S BPs
are attending Lead Team meetings to help raise awareness and compliance.
4. Road Risk - The volume of road traffic incidents continues to reduce. There is a
requirement to create one overall driver policy and to provide additional guidance
and training to all commercial and business drivers including grey fleet using own
vehicles.
5. Security / Robbery Risk - A report is being developed by Security Manager to
support a GE discussion in May, due to the increase in number of Post Office
robberies November to March. CViT related incidents remained low in Q4 (18 in Q4
14/15, 11 in Q4 15/16 and only 1 incident in Q4, 16/17).
6. Hosted Directly Managed branches — The H&S team are attending branch site
meetings to provide advice and support to project teams and Branch Managers prior
and during transfer. Post Office and WHSmith H&S Managers and Property
Compliance Managers are working closely to share processes and documentation.
What additional activity has been undertaken to address specific risks?
1. Compliance to Driving and Mobile Phone Policy
Policy has been communicated on the Intranet, H&S home pages and reinforced at
team meetings. Developing an online training module for business drivers.
Environmental Policy
The Property Compliance and H&S teams are working closely with legal, Servest and
IT to minimise risk associated with waste, especially hazardous. Guidance has been
issued to Persons in Control.
Security and lone working in Support Centres
H&S, Property and Security Managers are reviewing the personal security
arrangements in place at all Support Centres and satellite locations. A report will be
discussed at the GE Safety Board in June.
Strictly Confidential Health & Safety Report May 2017
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4. Trauma Support and Self Harm / Suicide Policy
Additional training has been provided to call handlers in Chesterfield and the HR
Service Centre to help them manage ‘difficult calls’, including threats of suicide.
Similar appropriate training will then be extended to their team leaders, contract
advisers and field advisers who may benefit. A Suicide Policy is also being developed.
2.3 Are there any significant emerging risks for 2017?
1. Simplifying Supply Chain, Support OD, DMB Programme
e« H&S BPs are monitoring absence, accident trends and causation and working closely
with lead teams, providing training to ensure the focus on safety, attendance
management and wellbeing continues.
e Induction programme including H&S content is under review to ensure all line
managers of new managers and employees complete the H&S Checklist.
e Support and training is being provided to Supply Chain Shift Managers to prepare
for external OHSAS 18001 audit, ensuring records are brought up to date, managers
are upskilled and prepared for the external interview.
2. Deep Dive Review of Safety and areas of high risk
Following a deep dive review undertaken by the GE H&S Sub Committee to identify
key risks for 2017/18 and required intervention, a number of areas have been
prioritised, including a requirement to strengthen road policy and its application,
guidance for lone workers, the safety of our vacated buildings, security guidance
for agents, competency of line managers / Persons in Control and compliance.
3. Mental Health
A number of initiatives have been implemented to raise awareness of mental health
resources, including support for ‘Time to Talk’ initiatives. In July 2017 it is planned
to train and introduce 60 Mental Health First Aiders to provide proactive support to
colleagues across all areas of the business.
Strictly Confidential Health & Safety Report May 2017
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AUDIT, RISK AND COMPLIANCE COMMITTEE INFORMATION
PAPER
Change Risk Update
Author: Jenny Ellwood Sponsor: Angela Van Den Bogerd Meeting date: 18 May 2017
Executive Summary
Context
This report provides an update on the key risks being managed within the Change
Portfolio. It also provides a high-level analysis of the Change risk profile, how the
portfolio is performing and the key challenges being faced.
Questions addressed in this report
e What are the top risks currently being managed within the Portfolio and what is the
performance of risk management based on the mitigation plans?
e¢ What are the types of portfolio risks and how has this mix changed?
e What is the current churn rate of portfolio risks and what are future projections?
e What is the current risk weighting of the portfolio/how is this expected to change?
Conclusion
1. There has been some slight changes to the top risks reported in March, the
Resourcing — Off Payroll has reduced in impact and probability following the
completion of a number of mitigations. However the two previously reported
risks i) Complex Change Portfolio Delivery and ii) IT Vendor Renegotiation / IT
Supplier Capacity remain red and continue to be closely reviewed and monitored.
2. The type and mix of the portfolio, broadly, remains unchanged at this reporting
cycle. Portfolio and key Programme risks continue to be regularly reviewed at a
monthly risk workshop.
3. The Portfolio Risks have reduced to 27 and remain consistent with the nature and
complexity of the individual projects and the timeline.
4. Confidence remains that the current top risks reported are being managed
appropriately and do not currently create substantive risk to our plans. The
health checks with each Programme is also allowing us to explore in greater
detail, with the Programme leads, the key risks being managed.
5. The current residual risk exposure is tracking within appetite and threshold.
Input Sought
The ARC are asked to note the progress made since the last ARC, the top risks being
faced, how they are being managed and mitigated and to advise on any additional
areas/topics that should also be taken forward.
Strictly Confidential
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PAGE 2 OF 8
The Report
What are the top risks currently being managed within the Portfolio?
1.
There are currently 27 open risks being managed at a Portfolio level (a reduction
of 4 from the last ARC report in March 2017). The current top risks are:
i) Complex Change Portfolio
ii) IT Vendor Renegotiations/Capacity of key IT Suppliers
The Resourcing-Off Payroll working Legislation risk has reduced in impact and
probability following the completion of the key mitigating actions. A full update
is provided later in this report.
Work continues to maintain, and in time, reduce the impact and probability of
the Complex Change Portfolio Delivery risk. Following the rescheduling of three
specific Programmes (Enhanced User Management, Success Factors and
Transaction Simplification) delivery activity is now slightly congested in May
through to August. From a network and agent’s perspective, there is nothing to
suggest that we cannot deliver in line with the plan and at this stage there are no
changes being proposed. However, test capacity is finite and the dependency is
that each Programme commences and concludes their testing without any major
problems and delays. This area of the plan requires close monitoring as delays
have already been experienced.
The work on the Integrated Plan continues with the next phase of actions being
around the interlocking of the IT Delivery Road Map. This will provide a view of
the plan from an IT lens, particularly from an IT capability perspective, both from
an internal and an external view from our key third parties. This will enable us
to identify any conflicts and then work will commence on how best to mitigate
e.g. investing in improving our test rig capabilities. Work continues between the
IT Portfolio Manager and the People & Change Director on a review and
improvement to the end to end change process. The Technology Architecture
team are assisting in reviewing a portfolio management tooling system
(ServiceNow) to integrate with the end to end change planning tool.
Planning continues on monthly basis when change delivery leads meet to review
activities and highlight issues which require resolution
Risk Title Risk
Current iticath
RAG Mitigation Plan
Target
Due date
iil)
Complex
change
portfolio
delivery
The next phase of
Transformation will
have increased
dependencies and
interconnectivities
leading to more
complexity to
manage, which if
not managed well
could significantly
impact our
execution plans.
Develop single Business/IT Master Plan
to schedule/smooth Change Delivery
Gune 17)
Create a single view of all Change
(Complete)
Ensure clear lines and demarcation of
accountability between Change
Programmes and Enterprise Portfolio
Management activities (Complete)
Prioritisation exercise to be completed
to identify they key activities to be
progressed (Complete)
Produce new integrated plan and
identify scheduling and hotspot
constraints in line with prioritisation
exercise above (June 17)
May 2017
Strictly Confidential
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Risk Title Risk Current Mitigation Plan Due date I Target
* Implement central dependency tracking
to allow increased visibility,
management and control (Complete)
* Analyse high-level dependencies to
ensure robustness and integrity of high
level plan (May 17)
6. There are two current IT Third Party risks which are closely linked; IT Vendor and
Capacity of Key IT Suppliers.
7. With regard to IT vendor renegotiations, since the last ARC the contract
negotiations have continued and good progress has been made to align to
Fujitsu’s new global operating model. A ways of working approach to
redesigning the IT operating model has been agreed with Atos. Work will
convene in May to transition.
8. There are still significant capacity issues (particularly around testing and people)
between suppliers and the Post Office. Work is underway on confirming our
demand requirements. This will allow us to provide our suppliers with an
increasingly accurate medium to long term forecast of demand against which the
suppliers will be able to build additional capacity and thereby remediate these
capacity issues. In the interim we are managing these issues by scheduling
within existing capacity constraints. We acknowledge this is a sub-optimal
solution.
Risk Title Risk en Mitigation Plan Due date I Tazget
@ There is a risk that * Establish Legal support to assist in ‘Ongoing
IT Vendor _ I IT Vendors vendor contract renegotiations
Renegotiations I engagement (Complete)
proves difficult and * Hire negotiation and procurement
they display poor expertise (Complete)
behaviours through * Contract Managers are in place to
renegotiations manage transition and ensure
which could impact Vendor SLAs and commitment is
successful change maintained (Ongoing)
delivery * Leverage GE/Board and other
connections (Ongoing)
Risk Title Risk curent Mitigation Plan Due date "oe
(ily There isa risk that + Secure persistent delivery teams ‘Ongoing
Capacity of key IT suppliers aligned to strategic goals and
Key IT cannot meet our purpose of POL (Ongoing)
Suppliers change demands * Continue monthly reviews with
due to pace of Vendors (Range of meetings are
change and activity in place - ongoing)
concurrency * Contract Managers to monitor vendor
resulting in delays capacity and delivery and escalate
to delivery plans issues to TDG and GE (Ongoing)
9. The Off Payroll working legislation is now in force (6 April 2017). Whilst this risk
could have delayed some of our change activities the mitigations which were
agreed and managed have helped reduce this risk to an amber position and
ensure there were no Post Office change programmes at risk as a result of the
new legislation.
10. We now have agreed ways of working with our remaining contractors. Some of
the roles are now considered out of scope of IR35 and therefore there has been
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POST OFFICE PAGE 4 OF 8
11.
12.
no change to their daily rate. Other roles have remained in scope and we
reviewed the outcome on a one to one basis. Some have remained on the same
daily rate, others we have had to slightly increase to retain the skillset.
Work continues with AMS and Sopra Steria (SSR) on the potential transition of
43 AMS workers to SSR. Five AMS workers (Outside of the 43) were transitioned
in phase 1 where Post Office bought out the contractors and moved these to
SSR. Currently the 43 AMS contractors are all working in an ‘Inside IR35’ status
with 18 receiving a rate uplift to their daily rate. It should also be noted that
these contractors will only have their role status reassessed at either an
extension point to their current contracts or if they are offered a different
contracting role within POL.
Although this is clearly an improving situation, at this stage, we still need to
continue to monitor as we cannot be sure that some contractors are not still
looking for alternative employment.
Risk Title Risk
Current
Due Target
Mitigation Plan bao
Resourcing I HMRC legislative
Payroll I from April 17 cause
working I significant impact
Legislation I to Transformation
@ There is a risk that Obtain appropriate legal / tax expert May 17
advice (Complete)
Work with Business Leads to run through
contractor resource and their criticality to
the Programmes and develop action plan
/ contingency approach (complete)
POL to develop new review process to
onboard ‘new’ contractors. Update:
Interim process is in place, currently now
documenting this process (May17)
Reforecast change demand to identify
required resource and skill requirements
for a three month rolling profile (in
progress)
Continue to communicate to Contractors
and GE/Exec in progress)
HR to confirm the preferred mix of
change resource in terms of perm to
contractor (June 17)
Review the Contractor ‘Transfer’ option
with AMS (May 17)
- Off changes effective
current resource
model.
13
. A full list of the 27 portfolio risks is shown as an Appendix.
What are the types of portfolio risks and how has this mix changed?
14. At the last ARC meeting there were 31 portfolio level risks. Since then Change
has seen a net decrease in the number of open portfolio risks which now stand at
27. This was the result of the closure of 4 risks namely:
e Business process management: this risk related to the efficiency of our
Business Processes following the delivery of the Transformation Programme.
The risk was closed on the basis that the completed mitigations had brought
the current severity and likelihood rating within target and tolerance. Such
mitigations included the development of a BAU business process management
framework, standards and BPM Centre of Excellence within the Central
Change Team. In addition, arrangements had been made to ensure that
business process changes will be assessed and agreed by the Design Authority
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e Supply Chain: this risk related to the possibility that changes made from the
Supply Chain Programme could impact on operational performance in the
wider business areas. This risk had been closed as the programme has almost
completed delivery and the risk had not materialised
e Cost of voluntary redundancy: this risk has been reviewed by Finance and has
been closed as it as specific to the Supply Chain programme
e Cost Reduction Initiatives impact Transformation requirements: this risk has
been closed on the basis that the Strategy to Plan work has been completed,
a priority list of activities has been approved and is incorporated within the
integrated high-level change plan.
15. Anew risk has been added to the portfolio, around data management, which
replaced two older data related risks. This risk is around whether the current
level of data governance / single source of data within the Post Office is sufficient
to support the delivery of change. To explain further some of our change
activities will be changing data sources/requiring access to accurate data to
develop their requirements. Mitigations have been agreed with the Business
Information team which include: i) Programmes engaging as early as possible
with Data SME to ensure any data related milestones are accurate and
achievable, and; ii) to escalate any problems to the change team for visibility
and escalation of this risk if it does impact scope and deliverables.
16. The table below, illustrates how the mix of risks at portfolio level continues to
flex and shows the open portfolio risks by severity.
Total
0 2 14 li 0 27
0 2 15 13 0 30
0 2 14 15 0 31
0 2 14 16 0 32
Dec-16 0 0 17 18 0 35
% of total (current 0% 7% 52% 41% 0% 100%
period)
Figure 1: Please note the minor/moderate risks are managed at a local level and not escalated to the Portfolio view.
What is the current churn rate of portfolio risks and what are future projections?
The next table details the number of risks open and closed over the last 6
months.
Portfolio Open/Closed Risks
ee eee OD SS OS
Sie oi 2 a
No. of Opened Risks ———No. of Closed Risks
Figure 2: A comparison of open/closed risks (by month)
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17. Monthly Programme health checks commenced in April where the key focus was
to discuss on a one to one basis with the key Programme and Business leads the
main issues, risks, milestones and dependencies together with the cost and
benefit realisation activities. These went well and allowed a more detailed
discussion, which will be built upon each month to increase visibility and
awareness of the challenges, risks and also opportunities in the plans.
What is the current risk weighting of the portfolio and how is this expected to change?
18. Each risk has a weighting score calculated by multiplying their impact/probability
scores. When added together this provides a cumulative portfolio score.
700
600
(432)
(396)
(362) (262) (366)
(325) (323) 82) 19) i590) Amber
(a6) BF?
80x Blood Red
°
AprA6 May-16 Jun-16 Jub16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Marl? Apr-l7
8 8 8 8
FE
Figure 3: Current cumulative portfolio risk weighting score by month
19. The overall risk severity score has reduced by 12% since March 2017. This has
been the result of risk closures. The risks continue to be monitored in line with
the change portfolio risk review process.
20. Figures 4 and 5 illustrate the anticipated impact of a reduction in the number of
active risks (within the current portfolio) over the next 6 months will have on the
residual risk weighting. In part this is because a significant number of the
current portfolio risks will reach their target risk weight (which will be in line with
risk appetite). This does not taken into account, of course, the impact that newly
identified risks will have on the portfolio.
>10:20% >20%
IMPACT*
(% of inancialtargot EBITOAS £100)
1%
IMPACT?
(6 of financiltarget EBITOAS £100m)
215% >510% >10-20% 320%
g
bd:
&
*
I
3
“10% 10-26% 50-80% > 80% =
LIKELIHOOD LIKELIHOOD
Figure 4: Current portfolio risk weighting (April 2017) Figure 5: Projected portfolio risk weighting (Nov 2017)
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Appendix: Transformation Portfolio risks
PAGE 7 OF 8
Risk Title wer II Ney
1 I IT Networks Branch and Admin Delivery Risk
2 I IT Vendor Renegotiations
3 I Complex Portfolio Planning & IT Management
4 I IT Networks Branch incumbent supplier proactive engagement
5 I IT Delivery Capability v
6 I IT Supply Chain v
7 I STRN ePOS Solution Uncertainty
8 I Financial risk - Insufficient Funds to deliver Transformation
9 I Delivery - Integrated Plan Delivery Performance
10 I Capacity of IT Key Suppliers v v
11 I Data Risk
12 I Resourcing Risk - Payroll Legislation v v
13 I Transformation Delivery oversubscribed
14 I Portfolio Plan
15 I Unintended consequences on Operational Performance - Process
16 I Availability of Key Skills and Knowledge
17 I Unintended consequences on Operational Performance - People
18 I IT Strategy - Alignment with Transformation
19 I Financial risk - Benefits/Revenue Realisation
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Grid
Ranking
CURRENT
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Ranking
TARGET
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Grid Grid
Ranking Ranking
CURRENT TARGET
May
Risk Title ARC
Deployment of Non-Compliant Solutions/Systems - (Breach of LRC reqts)
21 I Responsible use of public funds
22 I Strategy & Design: Conflict between current BaU and Transformation activities
23 I Accounting & Reconciliation
24 I Reputational Damage - Media risk
25 I Reputational Damage - Political stakeholder risk (local government)
26 I Reputational Damage - Political stakeholder risk (national government)
27 I Poor coordination of communications about change activity with stakeholders and employees.
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AUDIT, RISK AND COMPLIANCE COMMITTEE NOTING PAPER
Tax Update
Author: Mark Dixon Sponsor: Alisdair Cameron Meeting date: 18°" May 2017
Executive Summary
Context
This paper provides an interim tax update for the Audit, Risk and Compliance
Committee including an overview of our principle taxes, changes to the POL tax team,
a summary of the recent HMRC review and our response.
A full update, including a discussion of tax risks and a proposed tax strategy is on the
agenda for the November ARC.
Questions addressed in this report
I
What main areas of tax are we responsible for at POL?
What is the status of the Senior Accounting Office (“SAO”) certification?
How are we managing the risks arising from the OSOP process?
What were the findings of the HMRC Governance Report?
How are we responding to HMRC’s Governance Report?
What items are currently open with HMRC and how are we addressing them?
What legislation is emerging, how will it impact POL and how are we responding?
nput Sought
The Audit, Risk and Compliance Committee is asked to note the Tax Update. A
further update will be provided at the November meeting.
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The Report
What main areas of tax are we responsible for at POL?
1. Post Office Limited (“POL”) has responsibility for compliance across three main areas
of taxation: Value Added Tax; Corporation Tax; and, employment taxes/PAYE. A
brief background and overview of each the impact of these taxes on POL is provided
below.
Value Added Tax
2. The Post Office has a VAT group (the “Group”) consisting of Post Office Limited, Post
Office Management Services Limited and Postal Services Holding Company Limited.
All three companies share the same VAT registration number and an aggregated
return is completed and submitted to HMRC. The Group is in a recovery position and
receives a VAT refund on a quarterly basis from HMRC.
3. VAT is the most complex area of taxation for the Post Office as a result of the special
partial exemption arrangements with HMRC. These arrangements and associated
processes are well defined. An overview is presented below.
4. VAT is charged at three rates: standard rate - 20%; reduced rate - 5%; and, zero
rate - 0%. Certain supplies are specifically exempt from VAT. POL also receives
income that is outside the scope of VAT i.e. transactions regarded as supplies of
neither goods nor services.
5. The Group makes a combination of taxable supplies and exempt supplies and is
therefore a partially exempt business and is unable to recover all input VAT. In
order to calculate which input VAT can be recovered, POL analyses input VAT into
three segments:
1. Input VAT directly attributable to taxable supplies, which can be recovered in
full.
2. Input VAT directly attributable to exempt supplies, which cannot be
recovered.
3. Input VAT on other business expenditure, which is apportioned between
taxable and exempt supplies using a specific method agreed with HMRC.
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Outside the
Taxable Supplies Exempt Supplies Scope of VAT
Standard Zero
Rated - 20% Rated - 0%
Commissions for Sales pene
of Royal Mail/Parcel Travel Ticketing cme Postage Stamps
Force Worldwide - Commissions ** Commissions and Labels
non-USO" products
Homephone / Insurance
Telephony Commissions
Senices to Post Office
DVLA/ Card Account
Environment Agency (POCA)
Services to CViT “* Bill Payments -
post payments
ID Verification Banking
Services Services
Post Shop tlems - Lottery
Retail Commissions
Bill Payments -
pre payments
* non-USO - non-Universal Service Offering products - i.e. offering of products that are not part of
Charter. USO products (postage stamps and labels) included as "Outside the Scope of VAT".
* Local Authority bus passes, National Express tickets etc.
** CVIT - Cash and Valuables in Transit.
Table: Taxable Supplies, Exempt Supplies and Outside the Scope of VAT at the Post
Office
6. In accordance with the arrangements with the Royal Mail Group (“RMG”) post-
separation in October 2013, POL buys postage stamps (and labels) from RMG and
sells them on as principal. The sale of stamps is treated as being outside the scope
of VAT and income from sales of postage stamps is specifically excluded from POL’s
partial exemption calculations (see below).
7. The Group has agreed a special partial exemption method with HMRC for preparing
the VAT recovery calculations, splitting the calculation into two business segments:
Mails and Non-Mails. As a result of this beneficial arrangement, the Group’s actual
recovery rate is c. i «I KPMG supported with the design and implementation of
the partial exemption tnethod post-separation from RMG. In a presentation to
management they recently estimated that as a result of this work the input VAT
recovery enhancement is c. [IRRELEVANT per annum. However, this changes with
8. A worked example of the special arrangement on partial exemption is attached as
Appendix 1.
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9. There is a risk that HMRC may revisit the arrangement if there are significant
changes to the business. We have considered the recent structural changes and
discussed them with external advisers. We are comfortable that they are merely
organisational in nature, rather than fundamental business changes, and would not
therefore generate such a challenge.
10.Due to the complexity and benefit that VAT generates, we have a long-standing
advisory relationship for VAT with KPMG which pre-dates the demerger from Royal
Mail. In addition to specific VAT advice, we have access to a KPMG helpline for
indirect taxes.
Corporation Tax
11.POL is currently loss-making and, as a result, _¢
payments. As at March 2016 the Post Office had ; IRRELEVANT of trade losses that it
is carrying forward which will be used to reduce future" Corporation Tax liabilities.
12.First Rate Exchange Services Holdings Limited (“FRES”) is a joint venture with Bank
of Ireland and is profitable. As is permissible, certain of POL’s losses are used to
reduce the tax liability in FRES. POL obtains full. value for these losses fro!
The value of losses sold in 2015/16 was: LIRRELEVANT I POL received cash o' H
from FRES in July 2016 representing the vaiue of the losses at the prevai ing tax
rate.
13.We currently outsource the preparation of our tax computations and returns to
Wilkins Kennedy, a top 20 firm of accountants. Wilkins Kennedy also provide day-
to-day corporation tax compliance advice.
14.KPMG provide more specialist advice in this area, including ensuring we obtain the
correct capital allowances treatment for our land and buildings.
Employment Taxes/PAYE
15.The day-to-day administration of these taxes are dealt with by the HR team with
oversight by the Tax function.
16.During 2016, HMRC performed a review of Employment Taxes as part of their Know
Your Client process. The review resulted in an assessment for tax Offm n respect
of staff entertainment costs. There were no other areas of non-compliance.
17.The main area of complexity in employment taxation arises from our relationship
with sub-postmasters. Historically, the tax status of sub-postmasters has been the
subject of representations to HMRC and even cases before the courts. More recently,
the tax status of agents operating under the Network Transformation contracts has
been the subject of complex and protracted discussions with HMRC. HMRC have
ruled that individuals operating under the Locals and Mains models are self-
employed. For those agents transferring from traditional PAYE contracts, this has
led to a change in their tax status. Rather than having PAYE and NIC deducted at
source, they have changed to self-assessment and, if the levels of their VATable
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activities are sufficiently high, become VAT registered in relation to their PO
business.
18.The financial benefit to POL of agents transferring from traditional contracts to Locals
or Mains contracts is that POL is no longer liable to employer’s NI contributions for
the agents on traditional contracts. Additionally, due to the way in which POL’s VAT
recovery method is structured, POL is able to recover VAT charged by agents in full.
Therefore, POL’s costs have been reduced through Network Transformation.
19.The introduction of the Apprenticeship Levy will support the government's target of
recruiting 3 million apprentices by the year 2! i
organisations with a wage bill of more than
the wage bill at anything ove!
through POL payroll has been implemented. The cost to POL is less than
annum.
What is the status of the SAO certification?
20.A nominated “Senior Accounting Officer” (“SAO”) has to certify that appropriate
accounting arrangements are in place. We are obliged to notify HMRC of the name
of the SAO by the end of the period allowed for filing accounts (i.e. 9 months after
the end of the accounting period, 31 December). We must also provide a certificate
to HMRC within this timeframe. Alisdair Cameron is the SAO for the Post Office.
21.We submitted the notification and certificate for the 2015/16 financial year in
December 2016. The update for the 2016/17 financial year is in progress and we
expect to provide the certification to HMRC by 31 July 2017.
How are we managing the risks arising from the OSOP process?
22.As part of the OSOP process, we have taken the opportunity to review the tax
structure. Historically, the tax positions have been focused on VAT with little in-
house capability around either corporation tax or employment taxation. As the Post
Office moves closer to taxable profits and with the changing employment taxation
landscape, we have taken the decision to recruit a broader based Tax Manager role.
Whilst VAT is complex, the methodology and associated processes are documented
and understood and as a result we are making the VAT Specialist positions
redundant.
23.In order to ensure a smooth transition to the new structure we are engaging two tax
secondees from professional services firms, one specialising in VAT and the other a
tax generalist. These secondees will work with us to complete our tax strategy and
ensure that all taxation processes are fully documented before handing over to the
permanent Tax Manager position.
What were the findings of the HMRC Governance Report?
25.The Governance review was initiated by HMRC as part of their Business Risk Review
(“BRR”) programme, which is an ongoing programme performed annually through
a review for each tax regime (VAT, Corporation tax, Employment Taxes) on risk
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issues. There is an established matrix which HMRC use to establish whether a
business is high, medium or low risk for tax accounting purposes. In their recent
review dated January 2017 consider the level of inherent risk for the Post Office to
be moderate to low. Our aim is to be rated as low risk for BRR purposes. POL is
a fledgling organisation for tax accounting purposes and we would expect to
achieve a low risk tax status in the next two years. The governance measures
being put in place will help achieve this.
26.Given that POL is still evolving and developing, following its separation from RMG,
HMRC’s review found that POL’s governance tends to increase risk and that Tax
should be more embedded in the risk management process.
27.The detailed findings of the review together with POL’s responses are set out in the
table in Appendix 2.
28.The key findings were:
e POL should have a documented tax risk management process.
e The Accounts Receivable and Accounts Payable VAT accounting summary
matrices and tax code determination should be reviewed by the HMRC VAT
Specialist.
¢ The HMRC Direct Tax Specialist considers the Detailed Tax Computation
Query Sheet (the “Tax Pack”) to review issues raised.
« Employment Tax/PAYE processes should be fully documented and adhered
to.
How are we responding to HMRC’s Governance Report?
29.A remediation plan has been drawn up in response to the results of the Governance
review (see Appendix 2).
30.The key changes as a result of the review are as follows:-
For all tax regimes (VAT, Corporation Tax, Employment Taxes and PAYE), a
monthly issues log has been created for completion by the tax team working with
relevant colleagues in the business. The log highlights current known issues and
allocates a risk measure (high, medium, low) to each of the issues. PAYE and
Employments taxes issues logs are reviewed by the Senior Taxes Manager. There
are currently no high risk items.
For PAYE, the tax accounting processes have been mapped and documented.
The Senior Taxes Manager now produces a monthly Summary of Current Issues
report, which includes discussion around degree of risk, based on the issues logs.
This is distributed to the Chief Financial and Operations Officer and Financial
Controller to inform them and of relevant tax issues.
The Senior Taxes Manager reports immediately to the Head of Treasury, Tax and
Insurance on any tax issues and updates the issues logs as appropriate. Issues
are then escalated to the Chief Financial and Operations Officer via the Financial
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Controller either immediately, through the weekly incident reporting or through
the monthly Summary of Tax Issues according to their materiality.
In response to HMRC, part of how we are embedding tax policy and understanding
of tax risk will be an annual review of policy with the ARC and Board. This paper
provides an interim tax update ahead of a review of the proposed tax strategy and
tax risks at the November ARC.
31.We are in the process of developing a Tax Strategy for POL. Finance Bill 2016
introduced the requirement for certain businesses in the UK to publish their tax
strategy on the internet so that it is freely available to the public. This therefore
has the potential to have significant reputational impact. The legislation stipulates
that the strategy must set out: the group’s approach to risk management and
governance arrangements in relation to UK taxation; the group’s attitude to tax
planning; the level of risk that the group is prepared to accept in relation to UK
taxation; and the group’s approach to dealings with HMRC. The strategy must be
published before the end of the first financial year beginning after 15 September
2016. The Post Office is therefore required to publish its strategy before 31 March
2018. We will present our proposed strategy to the ARC at the November 2017
meeting.
What items are currently open with HMRC and how are we addressing them?
HMRC VAT Audit
32.HMRC have notified POL that they will perform a VAT audit in May 2017. They
have sent out an initial information request and they will conduct work starting in
May. The information is to be provided to HMRC by 14 May. Whilst HMRC VAT
audits are typical for large businesses such as POL, this will be POL’s first since
separation and creation of its own VAT registration. The HMRC audit will focus in
part on recommendations arising out of HMRC’s Governance Review (as discussed
above).
33.In advance of HMRC’s audit, PwC have been asked by internal audit to conduct a
VAT review to look at POL’s VAT accounting processes to establish the robustness
of declared VAT liabilities on VAT returns and to identify any potential areas of
weakness. PwC will report on their findings in May. Preliminary findings indicate
no significant issues. The current controls in place enable POL to manage VAT
efficiently. Whilst the detailed report is not yet available, indicative areas of
improvement include contingency planning for key tax personnel, formalisation of
documentation of processes/controls, implementation of a risk management
framework for VAT and documentation of the management of the change process
for VAT.
34.The planned changes to the structure of the tax team, including seconding two
tax professionals to support the documentation of processes and transition to the
new Tax Manager will help mitigate the risks identified.
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2014/15 Corporation Tax Return and Capital Allowances
34.HMRC has issued an enquiry on the 2014/15 Corporation Tax return. This
consisted of various questions relating to tax and accounting treatments in the
return and accompanying computations. POL has made responding
representations to POL’s Corporation Tax officer. We are currently awaiting a
response from HMRC. We do not expect this to have any impact on the 2014/15
corporation tax liability.
Non-Resident Landlord Scheme
35.POL had previously withheld an amount from payment of rent to one of its landlords
on the basis that it had no evidence that the landlord was UK resident. The landlord
has now offered evidence that he is UK resident and POL has paid over the withheld
amount (£3,700). POL is now seeking repayment from HMRC.
What legislation is emerging, how will it impact POL and how are we responding?
Corporation Tax Losses
37.Where a Company has been loss-making for tax purposes trade losses can be used
against future trading profits to reduce its liability to Co As at March
2016 the Group had accumulated trade losses of over In the past
once we start making taxable profits we would therefor‘ pected to pay
taxes until all these losses were exhausted.
38.It is expected that, from 1 April 2017, the use of existing tax losses will be restricted
NTand then I This has the effect of a
deferral Of tax losses. “Wé are looking at the impact that this will have on POL.
This was included in the draft of the recent Finance Bill but was taken out of the
shortened version that received Royal Assent prior to the election. It is likely to be
included in a new Finance Bill in the autumn although there is uncertainly around
timing of implementation.
Corporate Criminal Offences
39.The Criminal Finances Bill is expected to take effect from September 2017. The
Bill introduces Corporate Offences, comprising the failure of an organisation’s
agent(s) to prevent the facilitation of UK tax evasion and the failure of foreign tax
evasion offences. We are working with Legal, Risk and Governance to review the
potential effect on POL.
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IR35 in the Public Sector
40.Recent changes to IR35 represent a major new cost and administration burden to
organisations impacted. The changes affect any organisation covered by the
Freedom of Information Act 2000. POL is therefore captured by the changes.
Where workers are engaged via personal service companies, POL will be required
to review each contractor’s employment status and operate PAYE/NIC where
appropriate.
41.Further to any legislative updates, POLs default position is that new contractors will
be classed as ‘Outside’ IR35 unless they are assessed otherwise or performing a
substantive role within POL. A number of steps have been taken to ensure
contractors are managed in line with ‘off payroll’ engagement guidelines
communicated by BEIS which includes a number of POL contractors having Tax and
NICs deducted at source where they are ‘Inside’ IR35. Also, a full assessment and
audit process is now in place to ensure contractors are correctly classified.
HMRC’s Removal of the Sub-Postmaster Concession
41.HMRC provides an Extra Statutory Concession on the remuneration of sub-
postmasters. It provides that, where a retail trade is carried on from the same
premises as the sub-post office and a sub-postmaster receives remuneration as
an office holder from the Post Office, this income can be treated as a trade
receipt.
42.HMRC’s concession was available for individual operators who held ‘traditional’
contracts with Post Office, under which they were required to pay income tax and
Class 1 National Insurance Contributions (NIC) at source, and who also had a
retail business at the same premises. Under the concession, these operators
were, prior to 1 April 2017, allowed to defer the payment of income tax (PAYE)
by aggregating their Post Office remuneration with their retail turnover and then
off-setting their business (including PO) overheads.
43.As expected the concession for sub-postmasters was withdrawn with effect from
1 April 2017, though existing users of the concession will be permitted to continue
using it through grandfathering provisions until 31 March 2018.
44.The removal of the concession may create a benefit to POL, should operators
decide to move away from traditional contracts on to new models, by removing
employers’ NI contributions.
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Appendix
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1. Worked Example of Partial Exemption Calculation
2. HMRC Governance Report - Remediation Plan
1. Contextual Overview
Allocation of Outputs
1. Total group revenues of £8,000
are spit between Mails and Non-
Mails and then Taxable Supplies,
Exempt Supplies and income that
{Is Outside the Scope of VAT
Revenues
2. This provides % allocation rates
to be used fo apportion overheads
between the Mails and Non-Mails
businesses
‘Overhead Allocation Rates (%)
3. Foreach segment (Mails and
‘Non-Mails) a VAT Recovery % is
calculated based on (Taxable
‘Supplies) /(Taxable Supplies +
Exempt Supplies)
VAT Recovery %
4, Input tax recovery is then
calculated first by looking at
lrecly attributable inputs and then
overheads
hhout Tax Recovery
5. Any input tax that is directly
attributable fo either taxable
supplies or exempt supplies Is first
Isolated
Directy Attributable input Tax
= Agents Fees
+= Other Directly Attibutable
6. Input tax on business
overheads is allocated to elther
Malls or Non-Malls according to the
Overhead Allocation Rates
calculated above (1.2. 500 is
apprortioned 40% to Mails and 60%
Overhead input Tax
Input tax on overheads
7. For each business segment
VAT Recovery Is then calculated
using the VAT Recovery Rate for
that busines caleulated above (Le.
10036 for Mails and 33.3% for Non-
Malls)
Overhead input Tax
Input tax recovered on overheads
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2. HMRC Governance Report - Remediation Plan
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HMRC Process Remediation Remediation Remediation Status Frequency Remediation Bus Owner I Update (09/05/17)
Recommendation Owner Title proposed deadline
(ref no to HMRC
report)
Follow up Governance I Tax HMRC Governance Follow up review ‘Annual ‘One-off 31/12/17 (TBC) _I HMRC N/A
Review (1) governance review
Documented tax risk I Tax Tax Manager Risk assessment I Report to Financial Controller As ‘As necessary I 31/01/17 Mark Dixon I Nothing material to report in
management process I governance = reporting immediately on any high-level necessary March 2017.
(2) tax issues as and when they
become apparent
‘At end of each month producea I Lastday I Monthly 31/01/17 Mark Dixon I Nothing material to report in
high-level summary of current I of each March 2017
tax issues, identifying degree of I month
risk and progress in dealing with
them, to share with CFO and FC
Create and maintain a VAT Created- I As necessary I 31/01/17 Mark Dixon I Document created and stored
issues log, to highlight current I ongoing in shared area before
known issues and allocate a risk 31/01/17. Document updated
measure (high/medium/low) to 03/04/17.
each of those issues
Create and maintain with HRSC I Created- I Asnecessary I 31/01/17 Mark Dixon I Document created and stored
a PAYE issues log, to highlight I ongoing in shared area before
current known issues and 31/01/17. Document updated
allocate a risk measure 03/04/17.
(high/medium/low) to each of
those issues
Create and maintain with HRan I Created- I Asnecessary I 31/03/17 Mark Dixon I Document created and stored
ET issues log, to highlight ongoing in shared area before
current known issues and 31/01/17. Document updated
allocate a risk measure 03/04/17.
(high/medium/low) to each of
those issues
Create and maintain a CT issues I Created- I Asnecessary I 31/03/17 Mark Dixon I Document created and stored
log, to highlight current known I ongoing in shared area before
issues and allocate a risk 31/01/17. Document updated
measure (high/medium/low) to 03/04/17.
each of those issues
Liaise/meet with PAYE (Tracy Monthly Monthly 28/02/17 Mark Dixon I Corresponded with both TW
Wilkes)/HR (David Ascott) action and DR in March 2017. No
monthly to review current
PAYE/ET issues to inform
known issues reported from
both.
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completion of PAYE/HR issues
logs
Review of AR and AP I Tax HMRC Governance VAT audit N/A ‘One-off 30/03/17 HMRC Tnitial request for info
VAT processes (3) governance review received. To be completed by
30/04/17.
Request for further CT I Tax HMRC Governance CT audit N/A ‘One-off 31/03/17 HMRC Information provided to Clare
information (4) governance review Beachell on 13/03/17.
Highlighted areas of _ I Tax HMRC Governance VAT audit N/A ‘One-off 30/03/17 HMRC HMRC have not yet asked for
KPMG to be reviewed I governance review any further information on this
(5) point.
‘Actions around Tax Tax Manager Risk Confirm with internal audit that I Complete I One-off 28 702/17 Garry Internal sign off that controls
possible governance management the risk of misclassifying Hooton are now in place which reduce
misclassification of expenditure in the annual the risk of misclassifying
expenditure in annual accounts as per the BTA End to expenditure.
a/cs as per BTA report End Fin Man has been mitigated
(6)
Mapping oF Tax Tax Manager Employment tax I Liaise with HRSC and (as Meeting inI One-off 28/02/17 Mark Dixon I In progress. Mapping of PAYE
PAYE/employment tax I governance necessary) HR to ensure that Bolton on processes now complete. Still
accounting processes PAYE/ET processes are 06/02/17 awaiting sign off from HRSC
2) documented before sharing with HMRC.
Mapping oF Tax Tax Manager SAO - HRSC HRSC to produce updated sign- I Complete I One-off 31/12/16 Hector Done - completed on
PAYE/employment tax I governance off note on PAYE processes and Campbell 23/12/16
accounting processes accountability
@)
‘Additional undertaking I Tax Tax Manager Tax Strategy Write Tax Strategy to be Drafted ‘One-off 28/02/17 Mark Dixon I WIP ahead of finalisation
governance published on-line before Board meeting
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AUDIT, RISK AND COMPLIANCE COMMITTEE
Author: Johann Appel Sponsor: Jane MacLeod Meeting date: 18 May 2017
Executive Summary
Context
The purpose of this paper is to update the Committee on the PO Business As Usual
Internal Audit (BAU) and Business Transformation Assurance (BTA) activity and key
outcomes. This includes details of the work completed since the last Audit, Risk and
Compliance Committee (ARC) meeting in March and progress with current and prior
year Internal Audit Plan.
Questions this paper addresses
e Is the Internal Audit Plan on track? What progress has been made since the March
ARC meeting?
e What progress is being made with completion of audit actions?
« Have any significant issues arisen that the committee should be aware of?
Conclusion
1. Progress against plan (2016/17):
The 2016/17 audit plan has substantially been completed, with all remaining audits now
in reporting stage. Four audit reports were issued since the March ARC, while a further
five reports are currently being cleared with management. At the time of writing this
report, the status of the 2016/17 plan was as follows:
2016/17 BAU Plan Status 2016/17 BTA Plan Status
2 = Completed @
= Completed
= Draft Report «Dealt Report
= Advisory cif to = Advisory
2017/18
Total Audits 13“) Total Audits 12
original plan 12 +1 carried forward from 2015/16 + 4 additions - 4 postponed/replaced
Full summaries of 2016/17 Audit Plan Status are included in Appendix 1a and 1b.
2. Progress against plan (2017/18):
Execution of the 2017/18 audit programme is well underway, with three reviews in
fieldwork, while a further three are being scoped. Progress with the 2017/18 plan will
be reported in more detail from the next ARC meeting.
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3. Open and Overdue Audit Actions (as at 10 May 2017):
Audit Action Status: BAU BTA
Open (not yet due) 41 10
Overdue (<30 days) 1 0
Overdue (30-60 days) 0 5
Total 42 15
4. Significant Issues:
There are no significant issues we believe the committee should be made aware of.
Input Sought
The Committee is asked to note and provide comment as necessary.
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The Report
5. Changes to Plan since March RCC and ARC
2016/17 Plan: There were two changes to the 2016/17 BTA plan:
e The review of Data Management & Quality was cancelled as this is currently being
addressed as part of the Back-office Transformation programme and the GDPR
project. It was agreed that Deloitte would provide limited scope advisory work to
inform Post Office on best practice for data management and quality.
e The planned review of the Target Operating Model was replaced with advisory
work, which is intended to help inform management’s decision on the way forward
with the project.
Full plan details can be found in Appendices 1a & 1b.
2017/18 Plan: Following a request from management, a review of the VAT Process
was added to the plan.
6. Internal Audit Reviews Completed
We have finalised three BAU reviews and one BTA review since the March ARC
meeting. Following is a summary of the key findings from these reviews:
Audit Key Messages
Identity and Access e Lack of overall IAM governance (e.g. no ownership of the
Management (Joiners / end to end process, no process diagram).
Leavers / Movers) e IAM- JML access management responsibilities (RACI) and
controls are not clearly and transparently defined.
« Line managers not well informed about their responsibilities
regarding IAM-JML process.
e Insufficient controls over Joiners, Movers, Leavers,
Appendix 2a specifically:
o No assurance that access rights are limited to a need to
know basis.
o HR does not have a full overview of all parties working
for PO (employees, contractors).
o No assurance that access rights are reviewed when
someone moves role/function & no periodical access
reviews performed.
o No assurance that leavers’ access rights are removed.
« Data and system owners have not been identified.
« Non-compliance with the access control standard/policy.
FS - Branch Network Sales performance and the quality of interactions with
Sales Process customers were only monitored in relation to mortgage
specialists and customer relationship managers (CRMs) and
not for counter colleagues and non-CRM branch managers,
who also have the capability to introduce or complete the
sale of financial products and services.
Appendix 2b
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« Mortgage specialists were unable to capture relevant
information on any known changes to a customer’s future
expenditure and early repayment charges, potentially
adversely impacting the quality of mortgage
recommendations.
e Regarding the sale of home insurance, specialists did not
consistently provide customers with a complete description
of the key benefits, features, limitations and exclusions of
the cover.
Network Operations - e The team’s objectives have not been formalised and
Branch Auditing published to the wider business, consequently there is
(1st Line Assurance) limited understanding and appreciation of the limits of their
role.
¢ The audit programmes used for cash checks and
compliance testing have not been subject to regular review
and update for at least 18 months. Current resources limit
Appendix 2c possible coverage to a maximum of 10% of branches per
year.
e For the past year there has been no follow-up activity on
non-conformance from audits, reducing the level of
assurance provided.
BTA - Business Case ¢ Overall, the application of the OBW methodology has led to
Development an improvement in the quality of business cases submitted
and no significant instances of non-compliance with the
framework were identified.
e Some further improvements have been identified related to
the framework and associated guidance. Specifically:
Appendix 2d o Programme funding approvals were not consistently
tracked;
o Changes to project costs and benefits were not
consistently captured within business cases and
associated documentation.
Management have accepted the audit findings and corrective actions have been
agreed. Executive summaries of the above three audits are attached as Appendices
2a - 2d.
7. Reviews In Reporting
Review Status / Remarks
1. I Financial Reporting Controls Draft Report (all 4 phases now complete)
Framework - Independent Testing
2. I FS - Branch Network Sales Quality I Draft Report - corrective actions and
Assurance Process timelines being reviewed by management
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3. I Network Branch Service Centre -
Handling of Agents Queries and
Complaints
Draft Report - corrective actions and
timelines being reviewed by management
4. I BTA - Project Expenditure
Approval Process
Draft Report - reviewing additional
information and comments provided by
management
5. I BTA - 3 Party Vendor
Management
Draft Report - corrective actions and
timelines being reviewed by management
8. Reviews In Progress
Review
Status / Remarks
1. I IT Controls Framework (Advisory -
carried forward from 16/17 plan)
Ongoing - providing challenge and input to
the project.
2. I IT Security Transformation
(Advisory- carried forward from
16/17 plan)
Ongoing - providing challenge and input to
the project.
3. I VAT Process
(Addition to 17/18 plan)
Fieldwork — This audit is focussed on the
correct application of VAT rules, as well as
governance and oversight over the process.
9. Reviews In Planning (Q1 2017/18)
Review
Status / Remarks
1. I Mails Process
Management requested that we bring this
audit forward to Q1, with particular focus
on the controls over mails segregation and
service credits paid to RMG.
2. I SAP Success Factors - Payroll
(Change)
Being scoped.
3. I SAP Success Factors - Employee
Central and EUM (Change)
Being scoped.
10. Updates on Internal Audit Overdue Actions
As from 1 February we have rolled out an improved audit action tracking process to
provide early reminders to action owners of actions that are due within the next
month. Action owners are asked to provide a status update and flag where there is a
risk that completion dates will not be met. This information is then pro-actively
shared with the relevant GE owner.
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Audit actions are generally being completed on time. The status of open audit actions
at 10 May 2017 was as follows:
BAU Audit Actions:
There were 42 actions open, one of which was overdue for less than 30 days. The
overdue action relates to the Data Protection audit - The Information Protection and
Assurance team is currently designing a process that will be easier to follow and not
overly cumbersome for smaller projects. It is expected that this action will be
complete by mid May.
BTA Audit Actions:
There were 15 actions open, 5 of which were overdue for between 30 and 60 days.
Of the overdue actions, one relates to the Separation PIR (GE sponsor - Rob
Houghton) and four relate to the Information Security review (GE sponsor - Rob
Houghton / Jane MacLeod). Due to workload and competing priorities, management
have requested extension to the deadlines and we continue to track the progress of
these actions.
END OF REPORT
Confidential ARC 18 May 2017
Appendix 18
IBAU 2016/17 Plan status as at 10 May 2017 Reporting
Actions
comment
‘Audit Title Chee ‘Timing. avid ‘Status Report Rating I High I Medium tow I CoSec deadline Due RCC ‘Due ARC
conta Timing
pata Protection
ae oy, Nata 3 fis 0 8 oyoyz017 —0samuary2017 a0 January 2017
tig
ering smaceos I as na o 2 a tis s0%amuary2017— 20 samary 2047
ranean compatoce wrest, gt na 1818 exxye0s7—sosamuary2017 a0 samuary 2017
fromanternecovryand ——Acameron
IResilience (Macleod) a2 Q3 frinal 3 5 o 27/10/2016 03 November 2016 17 November 2016
taey and Access eames
Hanagement dines, Movers, SME I ge I ag Irnat 6&0 axyayzei7 oa anch2017 27 Mach 2037
[Leavers) ‘
[Branch Audit 1st Line Melis: Qs Q4 final 0 5 °o 02/03/2017 09 March 2017 carmen agar. Delaves! ue to therVetting suck (management request
seasons —necmte Tas I asa fins 2 &eaunoi7—aaahantr——araaantr_URBETOCEmat eva Dc operon
Geckos
programme independent Acameron I 37a I a3/ag [ora Revrt vs 2v/onn017 ——o4May2017 ab Mayaor7 ut be competed over phases
esting
fess Deane enor selee N. Kennett a4 Draft Report n/a 27/04/2017 (04 May 2017 18 May 2017,
evatyArurance rocer
etwas Cia
[Handling of Agents Queries and ane a3 Q4 = JDraft Report n/a 27/04/2017 (04 May 2017 18 May 2017,
ia th cameron)
plats
fs contro framework fiéwork-tobe
cont rama rvouwtton I @3 Feéwork-tbe a Prana rain readin wand ogo srs on een
pce Td Pay GREAT ga Wi GOS BA
Advisory) (Addition) R. Houghtor aa reported in 2017/18 vi FY 2017/18 FY 2017/18 fai rk and ongoing: Security Transformati
[Management - PO Macleod) Q3_—_I 2017/18 J Postponed to 2017/18 Fy 2017/18 FY 2017/18 2017/18.
er Pr AC 4 I 2017/18 Ipostponed to 2017/18 Fy 2017/18 F278 ee ee ceronenmmaye
sane epaced
fr & operation Governance Postonedto 2017/18o alow new T Conta Fameworktote
A. Cameron QZ I 2017/18 Jwith IT Controls
end sk Management fertile Ml designed, mpimerted and embedded
terre witha
vveyManasenen A teneion 2 Canceled te BTA covered S mor venient rd Party
"Jpollowine further review and discussion with the CIO (Rob Houghton) t was agreed to update the rating forthe IT OR report from Average to Adverse
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Appendix 1b
BTA- 2016/17 Plan Status as at 10 May 2017 Actions Reporting
Comments
Key Audit Revised
No. Audit Title rei Timing Timing ‘Status Report Rating] High I Medium low: Due RCC ‘Due ARC
aa] at nat TE SS May 29 — 8 May HE
End to ond Financ
1 toand analy Der Foal report ued and presented to ARC
Se nya ay
2 Portfolio Management OF#1 —_D.Hussey aa Qt }Final v 2 Final report issued and presented to ARC.
i a ee Te
3 Digital Programme Mobilisation M.George © inet H i Final report issued and presented to ARC.
a righiight Report a a eT Ce
{Planning Boot Camps. LRusey Foal report ued and presented to ARC
Communications and ai a2 IFinal 0 2 1 14 July 2016 28 September 2016
© ‘Stakeholder Management O.tuseey Final report issued ara presayned t0'ARG;
Fe a oer IE” BBE
7 Information Security J.MacLeod C3 amninal Final report issued and presented to ARC.
fan in
Caeway [ea Fin SE a ch aa ch TF
9 Business case Development xd Boge To be reported at May ARC
ji a4 Draft Report ‘09 March 2017 27 March 2017 Management request. information
ro Pele perdu APPP%8nytaog request delayed Reldwork and report
Clearance, Tobe reported at May ARC.
a3 Q4 [Draft Report DS MAYAON 18 May 2017 Merged with BAU 3rd Party Vendor
11 ard Panty Vendor Management A. Cameron Menageren i. lformation of mn
16 an Veritn delayed elder
a2] ad Ichangedta waz areed to change the vei
eget Operating Made vavoen fakes scuranee to aitary wort A
Tarps Operating Mose, ind Bogard a memorandum with advice will be
brepared or managerent
a] aa Canceled ie nea review doen
‘ .
jent and Quality J. Macleod Icancelled 2016 and a project now on the way to
imgrove gverance oer dt, lot
to provide ined scope sory wore
Ox Blood Red rated risk aa Icancelled
‘Support Services a3
Transformation jeanemtiset
a3
POCA {Cancelled
a3
Back Office Tower Transition
cancelled
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Appendix 2a
INTERNAL AUDIT EXECUTIVE SUMMARY:
Identity and Access Management Ref. 2016/17-01
GE Sponsors: Jane MacLeod - Group LRG Director;
Al Cameron - Group CFO; Rob Houghton - Group CIO;
Martin Kirke - Group HR Director
1. Background
Identity and Access Management (IAM) is the security and business framework (policies,
procedures and processes) which enables the right individuals to access the right
resources at the right times for the right reasons, preventing inappropriate access to
information.
2. Audit Objective and Scope
Significant internal control weaknesses have been raised (by external and internal
auditors) in recent years over Post Office’s Identity and Access Management (including
joiners, movers, leavers’ (JML) access rights). This review evaluated the current status of
the overall identity and access management process and more specifically the joiners,
movers, leavers’ access management processes and the associated controls.
It was not within the scope of this audit to review access rights to individual applications.
3. Key Observations
This audit identified major weakness in the following areas:
1. Process Governance
¢ Lack of overall IAM governance (e.g. no ownership of the end to end process, no
process diagram).
« IAM-JML access management responsibilities (RACI) and controls are not clearly and
transparently defined.
2. People training and awareness
e Line managers not well informed about their responsibilities regarding IAM-JML
process.
3. Joiners, movers, leavers’ processes and controls
e No assurance that access rights are limited to a need to know basis.
e HR does not have a full overview of all parties working for PO (employees,
contractors). Additionally there is no overview of 3" parties (suppliers) accessing PO
data /systems.
No assurance that access rights are reviewed when someone moves role/function.
Periodical access reviews not in place (for LAN, share drives and all applications).
No assurance that leavers’ access rights are removed (timely).
Data and system owners have not been identified (responsibilities assigned).
Non-compliance with the access control standard/policy.
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Appendix 2a
INTERNAL AUDIT EXECUTIVE SUMMARY:
Identity and Access Management Ref. 2016/17-01
4. Conclusion
This report has been rated Adverse as in our opinion IAM (Joiners, Movers, Leavers’
access rights) requires immediate management attention to improve control to a
satisfactory level of maturity.
A fundamental gap in the IAM process is the lack of overall governance. Currently the
IAM and the joiners, movers, leavers’ (JML) processes are run in silos by the functions
involved (HR, line managers, IT) without any oversight or ownership of the end to end
process to ensure controls are effective and information is accessed only on a need to
know/have basis. Furthermore the lack of clear data and system owners puts the
responsibility for ensuring adequate access to information with the line managers.
Additionally there are no mechanisms in place to ensure such accesses have been
granted appropriately and removed on a timely basis.
The issues raised in this report are not new as they have been raised previously by
external and internal auditors and insufficient progress has been made to mitigate the
risks linked to inappropriate access to information. An effective IAM is also part of the
basic controls of cyber security.
5. Management Response
The findings from this audit demonstrate that Post Office has some way to go to define its
approach to data and embed appropriate controls around access to Post Office’s systems
and the resulting access to, and use of, data. It has been agreed by the GE sponsors of
this audit that the LRG Director will take overall accountability for the end to end IAM
process which will have dependencies on HR, Operations and IT. A working group will be
set-up to design what a good IAM/JML process looks like end to end, followed by a gap
analysis comparing the design with the current processes and an implementation plan
which will seek to embed controls and a self-assessment regime into the final processes.
- Jane MacLeod (Group LRG Director) -
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Appendix 2b
INTERNAL AUDIT EXECUTIVE SUMMARY:
FS- Branch Network Sales Process Ref. 2016/17-05
GE Sponsors:
Kevin Gilliland (Chief Executive - Retail)
Nick Kennett (Chief Executive - FS &Telecoms)
1. Background
Post Office Limited (POL) is an Appointed Representative (AR) of the Bank of Ireland
(UK) Plc (Bol) and Post Office Management Services Limited (POMS) offering a range of
financial products and services to consumers. As an AR, POL has a regulatory responsi-
bility, via its AR agreements and contractual obligations, to operate effective systems
and controls to manage and oversee sales activity across its financial services business.
2. Audit Objective and Scope
This review assessed the adequacy and effectiveness of POL’s sales process within the
branch network (both Directly Managed and Agency branches) to manage and mitigate
mis-selling of financial products and services. The review did not involve the Agency Local
branch network, as these branches are unable to introduce, nor do they have the capability
to complete the sale of any financial product or service under the Post Office Money brand.
3. Key Observations
Sales performance and the quality of interactions with customers are only monitored in
relation to mortgage specialists and customer relationship managers (CRMs) and not for
counter colleagues and non-CRM branch managers, who also have the capability to
introduce or complete the sale of financial products and services. To address this weak-
ness, management is developing a Mystery Shopping programme for counter colleagues
and a new Training and Development Framework for Directly Managed Branches.
Until recently, mortgage specialists were unable to capture relevant information on any
known changes to a customer’s future expenditure and early repayment charges,
potentially adversely impacting the quality of mortgage recommendations. The
Mortgage system will be changed by Bank of Ireland to incorporate functionality to
gather this information. All Specialists and Supervisors will be trained and accredited to
use the new system. Key regulatory requirements will be in scope of this training.
Regarding the sale of home insurance, specialists did not consistently provide customers.
with a complete description of the key benefits, features, limitations and exclusions of
the cover. An additional step will be included into the sales process, by providing
customers with a verbal description of the key benefits, features, limitations and
exclusions of the home insurance product.
4. Conclusion
Staff were generally able to articulate the scope of their role and how financial products
and services were introduced and sold to customers with use of appropriate supporting
sales aids, systems (where relevant) and other documentation. Staff interviewed also
recognised the importance of achieving good customer outcomes. The branch based sales
model appeared generally to be operating as designed. However, some gaps have been
identified in the breadth of POL’s management oversight of the sales process for those
colleagues whose primary roles are not the sale of financial products (i.e. Branch Managers
and Counter Colleagues), as well as in the design of the sales process (i.e. in relation to
Home Insurance products) and the quality of sales interactions observed, which may lead
on occasions to poor customers experience and potentially to customers detriment.
A number of actions to mitigate the risks identified have already been initiated by
management.
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Appendix 2c
INTERNAL AUDIT EXECUTIVE SUMMARY: Network
Operations - Branch Auditing (1° Line) Ref. 2016/17-06
GE Sponsor: Al Cameron, Chief Finance and
Operations Officer
1. Background
Directly Managed, partner and agency branches are subject to various types of audit
visits, conducted by the Network Operations Team (a 1° line assurance activity). They
carry out unannounced visits to branches, principally to check declared cash and stock
balances. They also conduct limited compliance questioning and testing and are
responsible for conducting training and interventions across the Network.
Following several rounds of restructure, changes of reporting lines and a significant
reduction in resource (from approximately 200 in early 2016 to 80 in January 2017),
there is a need to ensure that this first line activity provides the business with sufficient
assurance over the integrity of its branch operations. The current resourcing plan is to
reduce the field team by half again at the end of 2017/18 when NT funding ceases.
2. Audit Objective and Scope
The objective of this audit was to assess the design and operating effectiveness of
internal controls over the first line Branch Auditing activity. The scope included:
¢ The overall objectives, remit and performance against objectives;
e Gap analysis, risk appetite, capability and capacity;
e Adequacy and balance of coverage;
* Outcomes of audits and levels of Assurance obtained; and
¢ Utilisation of resources.
3. Key Observations
This audit identified several medium priority findings. Key audit observations were:
¢ Lack of formal objectives: The team’s objectives have not been formalised and
published to the wider business, consequently there is limited understanding and
appreciation of the limits of their role.
e Assurance provided by Network Operations is limited and reactive: The audit
programmes used for cash checks and compliance testing have not been subject to
regular review and update for at least 18 months. Current resources limit possible
coverage to a maximum of 10% of branches per year.
e No follow-up of non-conformances from audits: For the past year there has
been no follow-up activity on audit reports, reducing the level of assurance provided.
4. Conclusion
We have found that current activities provide limited, reactive assurance over the controls
in operation in branches. An average of 10% of the branch estate is subject to audit visits
throughout the year. The work programmes used have not been reviewed or updated since
early 2016 and the outputs from the Compliance Audit tool are limited and unreliable. The
training materials used for new postmasters have not been reviewed and updated for two
years.
This report has been rated Average as the programmes, tools and training content have
not been reviewed and there is no tracking of themes or follow up of non-conformances.
5. Executive Comment
Mark Ellis, as the new Network Director, is scoping a piece of work to stand back from the
way we work today and revert with an end plan on how we should both support and
manage agents, recognising that we do what we have done for a long time without a great
deal of challenge. These actions should fit within that broader project.
- Al Cameron, CFOO -
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Appendix 2d
INTERNAL AUDIT EXECUTIVE SUMMARY:
BTA - Business Case Development
GE Sponsor: Alisdair Cameron (Chief Finance and
Operating Officer)
1. Background
Previous Business Transformation Assurance reviews have highlighted a key risk theme
regarding the inconsistency in overall quality of business cases, lack of detail within the
business cases submitted, and issues have been raised related to business cases’
financial management and reporting. During 2016 Post Office deployed a new change
methodology, “One Best Way” to provide improved governance over change projects and
programmes.
2. Audit Objective and Scope
The objective of this review was to give an independent view of the effectiveness of the
business case development process in place across Post Office Limited (POL), which is
governed by the One Best Way (OBW) methodology. The following aspects have bene
assessed: consistency of application of the OBW transformation methodology (covering
the quality and content of business cases), clear and robust documentation to support
assumptions, and that it is appropriately reviewed.
The review focused on a sample of four programmes across the transformation
programme, chosen randomly: IT Networks, Paddington, HR Transformation and Branch
Information Improvement.
3. Key Observations
Overall, the application of the OBW methodology has led to an improvement in the quality
of business cases submitted and no significant instances of non-compliance with the
framework were identified.
However, some further improvements have been identified related to the framework and
associated guidance, particularly in ensuring business cases provide a comprehensive
representation of the change programmes’ aims and its associated costs and benefits; as
well as a need to track budgetary approvals more effectively.
4. Conclusion
We have rated this report Satisfactory (with exceptions) as the identified
improvements would strengthen the internal controls around business development
cases, cost and benefits tracking.
5. Management Response
Iam happy with the review and the findings identified. It is good to note that the
application of the OBW methodology has led to an improvement in the quality of
business cases submitted, and no significant instances of non-compliance with the
framework were identified. The recommendations within the report and the agreed
actions will further strengthen our approach and control of the delivery in line with the
business case.
- Angela Van Den Bogerd (People and Change Director) -
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AUDIT, RISK AND COMPLIANCE COMMITTEE PAGE 1 OF 3
8.1) Top Risks
Author: Richard Williams Sponsor: Jane MacLeod Meeting date: 18 May 2017
Executive Summary
Context
The purpose of this paper is to provide an update on the profile of our Top Risks to drive
our risk governance disclosures in the Annual Report & Accounts, including disclosure
of our “Principal Risks”. The Central Risk Team has supported GE members in reviewing
and reporting.
Questions this paper addresses
e What changes have there been to our Top Risks? What is the impact on our overall
risk profile? What are the key “risks of the moment” to focus on?
Conclusion
1. The Top Risks is a summary based on feedback from all GE members and is a
consolidated view across the POL business. In a number of cases, the scoring is
based on factual incidents which have occurred.
2. Since January, changes to the Top Risks have included the following;
e We have 11 ‘Top Risks’ (down from 15 in January) - Overall our “red” risk profile
has decreased, mainly driven by the removal of the risks as noted above, as
either no longer deemed a Top Risk or by combination of existing risks.
e Since January, 2 new ‘Top Risks’ risks (defined as red rated risks having a score
> 12) have been added: Increase in Regulation and Royal Mail Industrial Action.
e 1-risk has decreased (IT Delivery Capability 4:4 to 4:3).
e 2 risks with an impact/likelihood mix but no overall change in their evaluation
(Cyber Threat and Conduct).
e 6 risks have been downgraded and therefore removed (Third Party Relationship
Management, Change Portfolio Delivery, Customer Experience, Royal Mail
Alignment, Payroll Legislation - IR35 and POL People Capability).
e There are 4 risks that have been noted as “risks of the moment” having potential
to impact us over the next quarter and these are receiving particular attention
from Risk Owners (Cyber Threat, Increase in Regulation, Government Funding &
Headroom and Market Developments/Competition in FS & T).
3. The Appendix shows;
e The main risk categories consistent with those set out in the placemat.
e Acomparison of red rated risks as at May 17, compared to the assessment
undertaken in January 2017 (where red means a rating greater than
3:4 / 4:3).
Input Sought
4. The Committee is asked to consider the proposed changes, as highlighted in blue,
to our Top Risks for the disclosure, including the impact of recent risk incidents, and
suggest any further changes.
Strictly Confidential Post Office ARC, May 18 2017
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PAGE 2 OF 3
Details
5. Changes to the Top Risks since January are shown in blue font on the attached
Appendix. These include the following:
e 2newrisks; (Impact : Likelihood)
o Increase in Regulation (4:3)
o Royal Mail Industrial Action (4:3)
e 1risk with a decrease;
o IT Delivery Capability (4:4 to 4:3)
e 2risks with an impact/likelihood mix but no overall change in their evaluation
o Cyber Threat (3:4 to 4:3)
o Conduct (3:4 to 4:3)
e 6risks downgraded and therefore removed;
o Third Party Relationship Management (4:4)
o Change Portfolio Delivery (4:4)
o Payroll Legislation - IR35 (3:5)
o Customer Experience (4:3)
o Royal Mail Alignment (4:3)
o POL People Capability (4:3)
6. Overall our “red” Risk Profile has decreased, mainly driven by the combination of
the downgrading and removal of Top Risks (Change Portfolio Delivery, Royal Mail
Alignment, Payroll Legislation - IR35 and POL People Capability) and through the
merging into other related risks (Third Party Relationship Management into Reliance
on Strategic Third Party Alliances and Customer Experience into Market)
7. The 4 “Risks of the Moment” have been noted by the Risk Owners as most current
(“proximity”), e.g. potential to impact us over the next quarter, and are highlighted
on the Appendix by an asterisk. They are a combination of risks highlighted in
January, new entries and risks removed or not deemed current (IT Impacting Ability
to Trade, Change Portfolio Delivery, Payroll Legislation-IR35 and POL People
Capability).
The 4 Risks of the Moment are;
o Cyber Threat
o Increase in Regulation (new)
o Government Funding & Headroom
o Market Developments/Competition in FS & T
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PAGE 3 OF 3
8. Summary of Top Risks (by score order)
‘Appx al
pee % GE Owner isk Description Score
1 Commercially Alasdair
Sustainable Cameron i
2 Competitiveness Kevin Gilliland
3 Dependency on IT Rob Houghton
third parties
4 Competitiveness Nick 43
Kennett
5 Cyber Threat / Rob Houghton / 43
Information Jane Macleod
Security
6 Financial Rob Houghton p43
Reporting / Hl
IT Control Failures
7 Compliance (inc Nick Kennett/ 43
conduct risk and Kevin Gilliland
supervision)
8 Compliance (inc ‘Jane Macleod / 43
conduct risk and Nick Kennett
supervision)
9 Market Kevin Gilland/ 43
(trust, brand, Alisdair Cameron
social purpose)
10 Customer Nick Kennett / 43
Relevance Kevin Gillland/
(access, ability to. Martin Edwards
trade)
11 Customer Nick Kennett / 34
Relevance Kevin Gillland/
(access, ability to Martin Edwards
trade)
Strictly Confidential Post Office ARC, May 18 2017
APPENDIX - POL Key Risks
Principal Risk
GE Risk Owner
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Top Risks - May 17 (Red Scored Risks only)
Data Privacy & Records Mat
Outsourcing Governance
Health & Safety
ace
OPERATIONAL
Cyber Threat /
Information Security
Financial Reporting /
IT Control Failures
TECHNOLOGY
Dependency on IT third parties
Financial Crime & Fraud
Compliance {ine conduct risk
and supervision)
LEGAL & REGULATORY
Legal & Litigation
EBITDAS Growth, inc Scorecard
Financial Resources / Cash
FINANCIAL
Commercially Sustainable
(subsidy dependence)
BAU
CHANGE
Transformation
Competitiveness
Market
(trust, brand, social purpose)
STRATEGY
Customer Relevance
{access ability to trade)
Staff Resourcing
PEOPLE
Staff Engagement
Jane MacLeod
Alisdair Cameron
Alisdair Cameron
Jane Macleod
Rob Houghton /
Jane Macleod
Rob Houghton
‘ane Macleod
Nick Kennett /
Kevin Gililand
Jane Macleod /
Nick Kennett
Jane Macleod
Alisdair Cameron
Alisdair Cameron
Kevin Gililand
Nick Kennett
kevin Gilliland /
Alisdale Cameron
kevin Gililand
Nick Kennett /
Kevin Gland /
Martin Edwards
Martin Kirke
Martin Kitke
IRRELEVANT
NB: Changes made are highlighted in blue
Proximity Risks noted by Risk
(proximity potential to
impact ovr the next quarter, and
POST OFFICE
HARM TABLE - MEAUREMENT CRITERIA
Version: 18th Feb 2016, post RCC & ARC
Labe
scoring
IRRELEVANT:
Impact on* Likelihood of*
‘IRRELEVANT
3 [Major
2 [Moderate]
T [Minor
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AUDIT, RISK AND COMPLIANCE COMMITTEE
Executive Declaration
PAGE 1 OF 4
Author: Deana Herley Sponsor: Jane MacLeod Meeting date: 18 May 2017
Executive Summary
Context
The Post Office Annual Report and Accounts (ARA) includes a statement that the Board
has assessed the effectiveness of its risk management and internal control framework.
To support this statement management have developed the following processes,
Control-Self Assessment (CSA), Weekly Incident Reporting, Whistleblowing, Grapevine
(reporting line for Postmasters), Complaints, Internal Audit and Executive Declaration.
The Executive Declaration process supports Group Executive (GE) members considering
(and attesting twice yearly), if any additional disclosures are required in our ARA as a
part of year-end procedures.
The purpose of this paper is to share the results of the Executive Declaration.
The approach to disclosure as set out in appendix 1 was collectively agreed by RCC on
4 May 2017. The items are linked through to the disclosures and Risk Note in the ARA.
Questions this paper addresses
1. What are the results of the Executive Declaration?
Conclusion
e The results (73 items) have been reviewed for materiality and consistency against
Internal Audit and Business Assurance reviews, resulting in 15 items of materiality
being summarised in appendix 1 including:
> 3 items of material significance that may impact our going concern assessment
and _ will therefore be disclosed in detail in the ARA re -
f Working Capital Facility (item 12);
- Net liabilities provision (13 item); and
- Uncertainty over future investment from HMG (14 item).
> 12 items to be disclosed generically in the Risk section of the ARA.
e Outputs (27 items) which require an ‘accounting judgement’ to determine the need
for adjustment have been shared with Financial Controller for review.
e 31 items were also considered by the owner, but were determined as being not
material or sufficiently addressed by other generic disclosures.
Input Sought
The Committee is asked to review the information provided in appendix 1 and:
e confirm the approach to disclosure as set out in this paper;
e note the items to be disclosed; and
e consider whether there are any other matters that should be considered.
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POST OFFICE PAGE 2 OF 4
Appendix 1 - Items for ARC attention
Statement Items GE Member Action
Alisdair Cameron I Description of risk to Swindon is
linked through to Risk Note as a part
of risk to IT impacting ability to trade.
Rob Houghton —_I Description of risk around IT controls
is linked through to Risk Note as a
part of the risks to IT delivery
capability and IT impacting ability to
trade.
Rob Houghton —_I Description of risk around threat to IT
is linked through to Risk Note as a
part of risk of cyber threats.
Alisdair Cameron I Description of risk around the
Banking Framework is linked through
to Risk Note as a part of risk to
regulatory compliance.
Kevin Gilliland Description of risk around evolving
Nicholas Kennett I card payment rules and associated
costs is linked through to Risk Note as
a part of the risk to regulatory
compliance.
Martin Kirke Description of the risk around meeting
vetting obligations is linked through to
Risk Note as a part of risk to regulatory
compliance.
Liabilities and Alisdair Cameron I Description of risk around HMRC
contingencies, Jane MacLeod regulated activities is linked through to
Confidential
POST OFFICE
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PAGE 3 OF 4
Statement
Items
GE Member
Action
including those
associated with
guarantees*.
Any legislative,
regulatory or
contractual
compliance issues
that have come to
light.
Material new
contracts or
extensions entered
into, direct awards
and where I have not
followed the contract
process.
Risk Note as a part of the risk to
regulatory compliance.
HMRC has informed Post Office, through the Post Office GC and MLRO that there are instances where we hav:
not met our AML regulatory duties for Travel Money (and possibly Bill Payment), foreign exchange and
MoneyGram and gift cards. This has been reported centrally. This may result in Post Office incurring penalties
and remedial costs; details have not yet been determined by HMRC:
Regulation 20 -Policies and Procedures:
+ No risk assessment of “normal and expected” FX transactions
* — POLRisk assessment shows current overall FX controls as “ineffective”
Regulation 7-Application of customer due diligence measures:
+ 26K transactions have mandatory data capture which appears to have been overridden or data lost
Regulation 8 -Ongoing monitoring:
+ Breaches of due diligence thresholds not captured by central monitoring
+ Not identifying potential business relationships
* PEP and Sanctions checks not applied
Regulation 19 -Record-keeping:
+ 26K transactions have mandatory data capture which appears to have been overridden or data lost
+ — Unable to identify what and where due diligence information held
Regulation 21 -Training:
+ ___Failure to train non branch staff prior to 2016
Jane MacLeod
Nicholas Kennett
Description of risk around AML duties
is linked through to Risk Note as a part
of the risk to regulatory compliance.
Nicholas Kennett
Description of risk around global
telecoms-attack is linked through to
Risk Note as a part of risk of cyber
threats,
IRRELEVANT
Nicholas Kennett
Description of risk around Ofcom
proposals in standalone landline and
telephone service changes is linked
through to Risk Note as a part of the
risk of regulatory compliance.
Jane MacLeod
Mark Davies
Nicholas Kennett
Description of risk around non-
compliance with PCR is linked through
to Risk Note as a part of risk to
regulatory compliance.
ARC
18 April 2017
Confidential
POST OFFICE
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PAGE 4 OF 4
Statement
‘on material contracts
that I am sponsor for*.
Obligation breaches
Material events that
could crystallise
before the end of the
reporting period
above.
IRRELEVANT
Confidentia
L ARC
1é
GE Member
Action
Alisdair Cameron
To be disclosed
Jane MacLeod
To be disclosed
Jair Cameron
Martin Edwards
To be disclosed
Jane MacLeod
Nicholas Kennett
Description of risk around New Money
Regulations is linked through to Risk
Note as a part of the risk to
regulatory compliance.
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AUDIT, RISK AND COMPLIANCE COMMITTEE PAGE 1 OF 3
8.3 Principal Risks for the Annual Report and
Accounts 2016/17
Author: Richard Williams / Deana Herley Sponsor: Jane MacLeod Meeting date: 18 May 2017
Executive Summary
Context
Our principal risks form a part of the Governance statement in the Annual Report and
Accounts (ARA). These are drafted based on the top risks agreed by Group Executive
members (refer to Paper 8.1) and are supported by the Executive Declaration process
(refer to Paper 8.2). The draft principal risks set out in appendix 1 could have a material
impact on Post Office’s results, condition and prospects.
Question addressed in this report
1. Are the principal risks as set out in appendix 1 the correct risks for inclusion in the
ARA and are the descriptions of those risks appropriate?
Conclusion
1. The draft principal risks set out in appendix 1 were considered by the central risk
team, at the time of drafting, to be the correct risks for inclusion and to have
appropriate descriptions.
Input Sought
The Committee is asked to agree the inclusion of the draft principal risks, as set out in
appendix 1, in the ARA 2016/17.
Strictly Confidential Post Office ARC, May 18 2017
Appendix 1: Draft Principal Risks (Mapped)
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Draft Principal Risks
Top Risks
I Executives Declaration
STRATEGIC RISKS
Comp: e Threat
Post Office faces both opportunities for and
threats to income from our competitive market
place. These include:
« Responding quickly enough to new entrants,
different strategies, business models, current
competitors with new products and
technologies is essential to growth.
« Use of digital channels customer journey,
new products and back office functions is
changing propositions and customer
expectations.
« Dependencies on third parties and alignment
of strategy with partners.
Unattractive network proposition
As we transform the Post Office may not be able
to retain, or attract sufficient new, retail
partners because of the complexity and controls
of our new network proposition and value
retailer, which could lead to a decline in Network
numbers below 11,500.
[7/8] Market
Developments /
Competition (Retail,
Financial Services and
Telecoms)
[11] Digital
Competency
[9] Network Proposition
Cyber threat
Post Office is dependent on the continued
availability of its information systems and
associated infrastructure. These could be
threatened, either due to internal issues,
external events or cyber-attack.
[1] Cyber Threat /
Information Protection
[3] Cyber Threats
[9] Telecoms cyber
attack
IT delivery capability and IT impacting
ability to trade
The next phase of IT Transformation will have
increased dependencies and interconnectivities
as we replace legacy systems and implement a
new integrated service. This could impact
service delivery and continuity of IT services.
[2] IT Delivery
Capability
[3] IT Impacting Ability
to Trade
[1] National Stock Centre
Swindon.
[2] IT Controls
Framework
Stakeholder funding
Delays in agreeing the remainder of our funding
could result in a deferral of investment plans
and consequentially in implementation of our
strategy.
[6] Government
Funding and Headroom
Industrial Action
There are a number of commercial process
dependencies supplied by and to Royal Mail
Group (RMG) the risk of a major crisis or
industrial action affecting such a key partner
could lead to material disruption to Post Office
through loss of service to customers,
Postmasters, and business partners. It may also
cause Post Office to fail to meet financial service
regulatory requirements.
[10] Royal Mail
Industrial Action
Strictly Confidential
Post Office ARC, May 18 2017
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LEGAL AND REGULATORY
Compliance
Post Office operates under an extensive
regulatory environment, covering areas such as
financial and postal services, telecoms,
This environment continues to evolve,
particularly in the financial services and
telecoms areas, and we need to ensure that the
changing requirements continue to be identified
and met. Changes to regulation could also
impact our ability to meet targets and goals.
procurement, competition law and data security.
[4] Conduct Risk
[5] Increase in
Regulation
[4] Banking Framework
[5] Card Payment rules
are evolving and cost of
processing is rising
[6] Vetting issues
[7] HMRC fine in the
registration of premises
[8] AML duties
[10] Ofcom’s proposal
for standalone landline
and telephone services
[11] Non Compliance
with PCR
[15] New Money
Laundering Regulations
Strictly Confidential
Post Office ARC, May 18 2017
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AUDIT, RISK & COMPLIANCE COMMITTEE
Supply Chain Pilot of the Placemat
Author: Richard Williams/Deana Herley Sponsor: Jane MacLeod Meeting date: 18 May 2017
Executive Summary
Context
In January 2017 the ARC agreed that the placemat methodology would be piloted in
Supply Chain, and it was agreed that the results of the pilot would be brought back to
the May meeting. Since then the central risk team have worked with senior Supply Chain
management to develop and roll out the underlying methodology that would enable
assessment of those risks relevant to Supply Chain. This paper summarises the initial
results of the pilot.
Questions this paper addresses
« What have we learnt?
e How has the pilot been implemented?
¢ How is it scalable and where next?
Conclusion
1. During the pilot the central risk team developed a suite of tools to enable local
management to assess the level of risk relevant to each business area and the
effectiveness of the control framework. The initial results for Supply Chain are being
reviewed; and will be released as part of a wider review of Finance and Operations. As
the placemat methodology is rolled out more widely, it will be possible to establish
more objective comparative risk assessments.
2. A suite of tools and the accompanying methodology has now been developed and this
will facilitate the roll out across the business. The assessment of risks and controls is
undertaken through workshops with the relevant line managers. In the case of the
Supply Chain pilot, this enabled management to better understand the risks affecting
their particular areas of responsibilities, assess the effectiveness of the various
controls, and ensure a greater awareness of areas where risks could be outside
perceived appetite.
3. The pilot in Supply Chain required approximately 20-25 man days of work from the
central risk team, and a number of risk workshops attended by line management. This
included a one off exercise to produce the documentation setting which set out the
minimum standards for the business, templates, workshops etc.
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4. Following discussions with the CFOO it is proposed that the process now be applied to
the other areas within Finance & Operations with a view to these being completed in
time for reporting to the September RCC and ARC.
Input Sought
5. The Committee is asked to review this report and note the direction of the roll out of
the Placemat approach.
The Report
What have we learnt?
6. Implementation of the Placemat in each business area will enable management to:
e identify the top risks which may prevent strategic outcomes;
e embed a risk framework which is aligned to business strategy;
e achieve a consistent application of minimum standards;
e enhance the risk culture and risk ownership at all levels and improve our ability to
identify, understand and proactively respond to risks in a prioritised way;
e improve the understanding and identification of cross functional risks and
dependencies;
e link capabilities, key processes, risks, controls and assurance activities which help
to understand the impact of future change;
e inform the Internal Audit planning process and over time refocus activity on the
effectiveness of governance and assurance arrangements; and
e develop appropriate and proportionate framework for continuous reporting of risks
with the opportunity for pragmatic challenge at RCC, ARC and Board.
7. As part of the process, ‘business area leads’ in conjunction with their lead teams and
Risk Champions were requested to consider risks to key processes. From which,
applicable Placemat principle risks were identified and where reliance is placed on the
controls operated by a different business area. This process demonstrated the
dependencies, and helped to assess the adequacy of existing controls and the need
for any remediation or additional controls.
8. The risk rating process takes into account:
Likelihood and impact of risks
Effectiveness of design and operation for controls (self-assessment)
Minimum standards by principle risk
Reported risk incidents and exception requests
Internal and external assurance, including audit findings and follow up
9. Once the initial review is completed each business area will review the Placemat at
regular intervals (quarterly) through risk discussions to provide a continuous pulse
of the business risk and control environment.
10. The principal risks will also need to be reviewed periodically to ensure that the
Placemat continues to assess and report on the risks that the business considers
to be most significant.
2
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How has the pilot been implemented?
11. We presented proposed principal risks to the ARC back in January 2017. Subject
Matter Experts (SME) were subsequently identified and, with their assistance, the
Central Risk Team developed a suite of documentation, which describe the expected
governance, risk management and control arrangements as well as minimum
standards and key risk indicators, where they currently exist.
12. As a starting point the Supply Chain capabilities listed within the Target Operating
Model (TOM) were re-agreed with management to help identify risk and controls
associated with the key enabling processes to those capabilities.
13. The outputs of this exercise informed which principal risk categories of the Placemat
were applicable or where reliance was placed on controls operated by another area.
A series of follow up sessions were held with key personnel to establish an
understanding of those key processes, risks, controls and assurance in greater
detail. The design and operation of a sample of controls were also tested. Assurance
activity was also mapped to risks and controls.
14. As an initial output of the pilot, the Risk Register for Supply Chain has been reviewed
and updated to better reflect risks to capabilities and Placemat principal risks. As a
second output a ‘Risk and Control Matrix’ (RACM) has been developed which
describes existing controls. This process enables risks to be prioritised and ensures
that remediation proposals are pragmatic.
15. As a final step the Placemat will be populated by assessing and rating each principle
risk based on a combination of: risk scoring, existing controls, sample testing,
minimum standards, incidents, exceptions and assurance.
16. Although risk ratings are subjective, greater consistency will be achieved by
reference to the harm table and development of minimum standards.
17. Once the placemat is populated an overview can be obtained of those risks which
must be remediated. Further work is underway in Supply Chain to develop this
view.
18. Completion of the Placemat will then allow the development of the following:
a. an integrated risk management information pack to support discussion at lead
team meeting, including key risks, control effectiveness, assurance activity and
risk incidents and losses.
b. Key Risk Indicators (KRIs) and risk scenario testing, to further enhance
management of risk.
c. On-going support mechanism for review and re-assessment.
How is it scalable and where next?
19. The approach taken to implement the pilot was designed for wider roll out. For
example the documentation that sets out the minimum standards for the business,
templates, workshops etc.
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20. Approximately, 15 man days have been spent by the Central Risk Team in
developing the supporting documentation, as well as additional time spent
preparing for and conducting workshops. More complex business areas will
necessarily require more time, although the templates for the supporting
documentation now exist. Roll out will require the support and cooperation from
key personnel within each business area, and resource within the Central Risk and
Assurance teams.
21. Following completion of the initial Placemat assessment by each business area,
regular reviews can be undertaken by the relevant Risk Champion, as well as more
formal re-assessment of Placemat ratings at agreed intervals to ensure it remains
current.
22. We have been asked by the CFOO to replicate the scalable approach with colleagues
from wider Finance and Operations teams to give us the ability to assess a
consolidated / holistic view of key risks proportionately, understand the
interdependencies and prioritise any remediation activity. This work is now
underway and results will be brought back to July RCC meeting and September
ARC.
Conclusion
23. The Placemat approach, and development of the supporting documents, tools and
outputs has supported Supply Chain management to create a central view of its
key risks which can therefore be prioritised (based on controls and assurance
activity). We propose that Supply Chain undertakes a reassessment of Placemat in
September.
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AUDIT, RISK & COMPLIANCE COMMITTEE GOVERNANCE UPDATE
8.5 Business Continuity & Crisis Management Update
Author: Tim Armit Sponsor: Jane MacLeod Meeting date: 18" May 2017
Executive Summary
Context
Implementing pragmatic strategic recovery capabilities and identifying impacts
continues across all sites. Swindon has been assessed and strategies for recovering
key assets is being undertaken. Chesterfield is planning a full day exercise at the
recovery site. Industrial Action planning is being facilitated through a workshop to
assess the impact of a Royal Mail strike. Changes to the Business Protection Team
(BPT) following the Horizon incident has been undertaken.
Questions this paper addresses
What does “good” business continuity look like?
Where is Post Office against this measure currently?
How do we move towards “good”?
How would we demonstrate we had achieve it?
What are the current major pieces of work?
oa FoNP
Input Sought
The Committee is requested to note the report.
Strictly Confidential
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Conclusion
This report describes what is seen as best practice within business continuity by the Business
Continuity Institute and ISO standards. It then considers how the Post Office currently
measures up to this level, how we will move any areas which might be red or amber towards
green, which would be “good”. Finally it shows how the Post Office will demonstrate in an
ongoing manner that “good” is in place and being maintained.
From this report many work packages will be developed across the company.
Summary
As a current holistic overview with the exceptions listed below should a major incident befall
Post Office operations we will be able to continue to open branches and serve customers in a
timely manner.
Exceptions to this where further investigation is required to improve resilience or determine
the capability are:
e Key IT systems
e Suppliers
¢ Bolton
« Chesterfield Recovery Site Full Day Test
The capability to operate at the Sungard Leicester Recovery site has been proven. The next step is to
now take a cross section of key areas from Chesterfield to work for a full day at the recovery site. How
this is to be done and who is involved is now being planned. The exercise is aimed for the end of June
2017.
¢ Swindon Review
A visit to Swindon has been undertaken and an assessment of the options for recovery are being
considered. What is key to Post Office and Royal Mail is being analysed and strategies to recovery key
operations at an alternative Supply Chain Depot are being reviewed. Options will be discussed with
Supply Chain management for agreement in June 2017.
« Royal Mail Industrial Action planning
There is a real risk that Royal Mail may strike later in 2017. A workshop is being facilitated in to bring
together all operational areas which might touch Royal Mail operations in any way. The objective of
this is to assess the impact on Post Office operations of Royal Mail being down. Then to consider what
options are open to Post Office operations to mitigate any impacts which would become intolerable.
¢ Business Protection Team Enhancement
The Horizon failure on Sunday April 30°" demonstrated there were weaknesses in the incident response
at all levels. Within Post Office the initial response team to all major incidents is called the Business
Protection Team (BPT). The membership of this has now been reviewed and strengthened. Alternative
telephone numbers and contact details for long weekends have been added and it has been made clear
that every member is empowered to invoke the team at any time. Simple “how to” instructions have
been written and distributed.
Strictly Confidential
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What does “good” business
continuity management
look like?
Where are we
What do we have to do to get
to green
How do we demonstrate
“good”
A management system in
place aligned to IS022301
A Management System is in
place
Continue to review and maintain
the system
Full system in place and used in
tenders to prove our capability
Management system
operational and signed off
The system is operational
and signed off
Continue to use the system
Signed off and used in our
approach to BCM and tenders
Impacts of the loss of
buildings, systems, suppliers
and people are understood
Work has started on this and
there is varying levels of
information across locations,
business areas and IT.
Formally document impacts
across agreed variables (cash
flow, income, reputation etc) for
each business area, location and
system. Agree impacts with the
owners and use this as a base for
all recovery strategies.
Strategies in place ensure impact
tolerance thresholds are not
breached.
Risks in which the operations
work are understood,
mitigated or planned for
Work has been completed by
CBRE on facilities risks across
all offices. Further
operational and continuity
risks are being captured in
ongoing work. Risks to
systems are being captured
by IT.
Formally document the risks to
each location in which we
operate. Identify all key risks to
the resilience levels of our
systems.
Document all outcomes and
agree with business and location
owners what the risks are and
discuss if increased resilience is
required or if better recovery
planning is needed.
Risks are known and signed off.
There are “no surprises” to senior
management should a risk be
realised, that risk will be in line
with our plans and has been
considered.
Levels of resilience are increased
where the risk and cost of
solution mitigate it.
Strictly Confidential
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Recovery strategies for
locations and business
processes are in place
Finsbury Dials is a low
criticality building and all
staff have the capability to
work at home.
Chesterfield is a key
building and a tested
recovery solution with
Sungard is in place.
Bolton is a secondary level
critical building and whilst
there is a home working
capability there is no
proven alternate work
solution in place.
Cash Centres at London,
Hemel and Birmingham
can mutually support each
other.
Supply Chain depots can
mutually support each
other.
Swindon is a single point
of failure but strategies to
restore key operational
areas have been
considered.
Test this by having everyone
work at home for a day across
the summer.
Test this in late June by working
from Sungard for a full
operational day.
Work with the Bolton team to
agree a strategy by September
to recover operations
Test the capability to stand up
alternative Bureau machines.
Review with the Supply Chain
locations at a workshop in May
how this would operate.
Continue to work with Swindon
team on options at other depots
and to agree what is critical and
how to liaise with RM.
Everyone can work at home on
their own devices.
A call centre and finance function
can operate to acceptable
business levels at the remote site
A Bolton HR operation can be
operational to meet business
requirements in an alternate
manner.
London and Birmingham are
proven to work in a stand alone
manner for a day. Hemel
services are proven to be
recovered at another site.
Methods to switch routes,
agreement to move drivers and
evidence that sites can support
each other is proven through
testing.
An alternate capability is
recovered at a depot to
demonstrate systems can pick
items, secure items can be
managed and service can be
restored.
Strictly Confidential
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What does “good” business
continuity management
look like?
Where are we
What do we have to do to get
to green
How do we demonstrate
“good”
Plans to respond to crisis are
in place
Stay Calm manuals are in
place for all locations.
These are very large and
hard to use documents
but they are well known
and used by many areas.
Finsbury Dials has a high
level crisis team in place.
There is a Business
Protection team in place
to respond to all major
incidents.
Review and simplify these
documents to ensure they are
user friendly and known by all
that need them.
Document the crisis plan for
Finsbury Dials and how this
would support a crisis anywhere
in the Post Office
Enhance the BPT membership, its
empowerment, ensure all
members understand this role,
test this and link it to all forms of
crisis.
Exercises run in all locations to
prove the team understand their
roles and the documents work for
them.
Exercise run to prove the team
understand the plan and their
roles.
Exercises to be run to prove the
membership can work together
on acrisis response. There are
many live invocations of this.
team which we learn from each
time.
Strictly Confidential
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What does “good” business
continuity management
look like?
Where are we
What do we have to do to get
to green
How do we demonstrate
“good”
Plans to recover business
operations are in place
e There are some specific
service to customer plans
in place.
e There are a few strategies
to allow operations to
continue should IT
systems fail (Polsap,
Credence).
e There are very few
specific business
continuity plans in place
for business areas.
Ensure these plans are still valid
and upto date and simplify the
approach (currently many are
over 40 pages long).
Group the strategies in place into
plans for specific business areas
and share what is known to work
with other areas with similar
challenges.
Document a simple plan for
every business unit.
Annual review and annual
challenge by customers pass
each year.
Reaction and response to IT
system failure is known and
works efficiently each time they
are needed within minimal
impact on business.
All areas work through table top
tests and all staff are aware of a
plan in place and how it affects
them. As a standard KPI a
questionnaire can be sent to all
staff to confirm awareness.
Plans to mitigate the loss of
key suppliers are in place
There is a list of key suppliers.
and their services. In current
contracts the continuity
capability of suppliers is
required.
Every supplier is documented
and the service they supply is
shown with the impact of a
failure to supply this service
documented. The recovery time
and capability of this supplier is
then proven and the Post Office
plan to cover the failure is
documented.
Suppliers work with the Post
Office to demonstrate their
recovery capability.
In Post Office tests the capability
to continue operations without
key suppliers is challenged.
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What does “good” business
continuity management
look like?
Where are we
What do we have to do to get
to green
How do we demonstrate
“good”
Tests of plans have been
undertaken
Some IT DR testing has been
undertaken where possible.
Initial high level crisis
exercises have been run.
An initial Chesterfield to
Sungard exercise has been
run.
A communication test to the
GE crisis team and to the BPT
team has been completed.
Continue to work with the IT DR
team on the capability to test
systems and to ensure where
tests are undertaken results and
capability are passed to the
business.
Complete further crisis exercises
in all key areas and continue to
enhance the central crisis team
through exercise
Run a full day exercise in June
2017 of the capability to operate
Chesterfield at Sungard
Run out of hours communication
tests of the capability to contact
all key areas.
Create a test programme for all
offices and business areas across
the Post Office and work through
the entire estate to ensure all
areas are aware of their plans
and their strategies are proven.
Annual full switch over DR of all
key systems is undertaken.
Annual crisis exercises for all
areas are completed and more
complex challenges are used
each year.
Chesterfield can relocate to
Sungard at anytime to operate in
a normal manner.
Every member of staff can be
contacted by SMS, email at
anytime of night or day.
Every function and key office
across the estate has an annual
exercise.
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What does “good” business
continuity management
look like?
Where are we
What do we have to do to get
to green
How do we demonstrate
“good”
Training of personnel involved
has been completed
Other than through initial
workshops and exercises no
structured training has been
completed.
Identify business continuity
champions in each location and
business area. Run training
workshops to introduce them to
business continuity and their
responsibilities within their own
area.
Champions are in place across all
key areas with a good knowledge
of the subject, proven through
review, that can take
responsibility to drive BC in their
own areas.
All areas are subject to customer challenge and to internal audit review.
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AUDIT, RISK & COMPLIANCE COMMITTEE NEW POLICY PROPOSAL
Author: Jim Carter and Kelly Taylor Sponsor: Martin Kirke Meeting date: 18 May 2017
Executive Summary
Context
The Modern Slavery Act 2015 (the Act) challenges slavery, domestic servitude, forced
and compulsory labour and human trafficking. Post Office is required to produce an
annual slavery and human trafficking statement (Statement) setting out what steps
have been taken to ensure its business and supply chains are slavery free. This paper
attaches the second Statement which documents progress on our previous year’s
commitments and outlines the actions that we are committed to taking this year 2017
-18. This must be approved by the Post Office Board and signed by a Director.
Questions addressed in this paper
1. Why do we need to create this policy?
2. What are the key points to note about the new policy?
3. What are the implications for the board and the business?
Conclusion
e Post Office has been undertaking due diligence on its business and supply chains
to identify any risk areas.
e Post Office has prepared a revised Statement in line with the legislation which must
be published within 6 months of year end.
e A steering group was appointed in January 2016 and is responsible for proposing
actions, creating relevant project plans and continuing to develop and monitor our
approach to MSA legislation.
e The steering group has identified that the highest level of risk is within our Agency
network. We have already begun to take action to address this risk including
amending our contracts with our Postmasters to require compliance with the Act.
e The first Post Office’s MSA Statement was prepared using Home Office guidance
and in consideration of other available Statements by UK and international
companies.
e The nature of the legislation allows for the organisation to build a robust approach
to the MSA over time. Our MSA statement, therefore, requires updating every
twelve months and will outline progress on previous commitments and actions we
are taking in the next twelve months.
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Input Sought Input Received
The ARC are asked to approve the We consulted all members of the MSA
2017/18 statement and endorse actions Steering Group which comprises of
for the business to take forward this representatives across functions
financial year. including Legal, Postmaster Contracts,
Procurement, Risk, Employee Relations
and Learning and Development. We have
also gained approval from the RCC to
submit the Statement for 2017-18 to
ARC.
The Report
Why do we need to create this policy?
The requirement to publish a Statement applies to “commercial organisations” which
(a) supply goods or services and (b) have a total turnover of not less than £36,000,000.
It will therefore not apply directly to Postmasters if their turnover is less than £36 million
per year.
However, Postmasters are part of the Post Office supply chain. Post Office must state
what steps it has taken to ensure that slavery and human trafficking is not taking place
in any of its supply chains or in any part of its business.
Post Office is required to produce an annual slavery and human trafficking statement
setting out what steps have been taken to ensure its business and supply chains are
slavery free. This paper attaches the second Statement (Appendix 1) which documents
progress on our previous year’s commitments and outlines the actions that we are
committed to taking this year 2017 -18. This must be approved by the Post Office Board
and signed by a Director.
The due diligence that we have undertaken so far indicates that there is a potential
risk of non-compliance within our agency network. The reason for this is that there
are a large number of people employed by Postmasters (including multiple partners)
but who are not employees of Post Office or POMS. They work directly for the
Postmasters (including multiple partners). We have already taken action to begin to
address this risk including reviewing our contracts with our Postmasters to require
compliance with the Act.
What are the key points to note about our new policy?
Since 2016 we have been required under the legislation to publish a Modern Slavery
Statement. This documents what actions we will be taking for the following year with
regards to MSA. In 2016 we made three specific commitments and progress on these
commitments is outlined below:
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Commitments from 2016 Statement
Progress on 2016 commitments
Updating Postmaster's selection and
appointment process to address MSA
requirements
We have now reviewed the Postmaster’s
contract and believe that it is robust
enough to cover the MSA legislation. We
have also supplemented the contract
process with a set of Guidelines for
Postmasters (Appendix 2)
Amending our standard form
procurement contracts.
We have reviewed our standard form
procurement contracts and believe that
our ‘applicable laws’ clause covers POL
for breaches of MSA. Our PQQ process
has also been amended to take account
of MSA and suppliers must confirm that
they comply with their obligations under
the MSA and provide a copy of their MSA
Statement.
Developing a communication and
training plan to ensure our suppliers,
staff and agents are aware of Post
Office’s obligations in relation to Modern
Slaver and informing them about the
Modern Slavery Helpline.
We have now produced a communication
plan for roll out in 2017, (Appendix 3).
The MSA is also now referenced in our
Whistleblowing Policy (Appendix 4) and
will be added to our Code of Business
Standards, which is currently being
redrafted (Appendix 5).
A training plan remains under
development. This year, however, our
commitments are focussed on raising
awareness. The Steering Group
anticipate the training requirement to
increase as we move towards 2018 as
we begin to build a suitable due diligence
and compliance capability.
The proposed Statement for 2017-18 (Appendix 1) outlines a series of commitments
to be actioned this year. The focus for 2017 will be on increasing awareness and
understanding across POL of the MSA.
¢ Roll out our MSA Communication Plan
e Review our approach to audit and compliance and make recommendations
around a suitable regime to take forward and implement as our key 2018-19
commitment.
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« In the light of the recommendations from our review of audit and compliance, to
develop a relevant Training Plan.
In drafting the statement for this year we assessed progress of other organisations in
this area. We looked at statements from international companies with complex supply
chains to get a flavour for content and examples of initiatives.
Many companies have not yet published their Statements, but we have looked at a
variety to ensure that our approach is consistent. By way of an example, Ford have
published a statement which is approx. 2 pages long. They recognise their supply
chain is extensive and complicated and that it presents challenges. Some of Ford’s
initiatives are similar to ours - this is encouraging given that Post Office’s business
and supply chains are not as extensive as Ford.
We also looked at what one of our key partners was doing:
WH Smiths
e Statement not yet published.
e They use the Ethical Trading Code of Conduct and Human Rights Policy. It
incorporates the ILO Conventions to scope out the current position on Modern
Slavery related matters.
« The policy specifies a person who takes responsibility for the Code.
There are no significant costs identified in fulfilling our commitments for 2017-18.
The statement for 2017-18 was developed by the MSA Steering Group which comprises
of representatives from Legal, Postmaster Contracts, Procurement, Risk, Employee
Relations and Learning and Development. Members were heavily involved in the
development of the statement and supporting documentation. The statement and
programme for 2017-18 was presented to the RCC on 4 May 2017 and was approved
for submission to ARC.
What are the implications for the board and the business?
By not updating our Modern Slavery Act Statement every year the business could be
liable to prosecution under the Act. This could result in the worst case scenario with a
heavy fine and subsequent public exposure. The Act allows for organisations to evolve
a robust approach and that is why a renewed commitment every twelve months is
required. As long as we continue to make reasonable progress year on year Post
Office Limited will be compliant with the legislation.
We are confident that the detail in our Statement, our commitments documented last
year and our proposed actions for this year are appropriate at this stage. We will monitor
developments, however, and keep the adequacy of the Statement under review.
The new Statement must be published on our external website within the first six
months of the new financial year.
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Appendix
1. Modern Slavery Statement 2017-18
Postmaster Guidelines
Communication Plan 2017
Extract from Whistleblowing Policy
Extract from Code of Business Standards
ol ge ip
1. Modern Slavery Statement 2017-18
Post Office Limited (Post Office) & Post Office Management Services Limited (POMS)
Modern Slavery Transparency Statement 2017-18
May 2017
Executive Summary
This statement sets out the steps we have taken during the last financial year to ensure that
Modern Slavery is not taking place in any of our supply chains or any part of our business. It is
made pursuant to section 54(1) of the Modern Slavery Act 2015 (MSA). The Statement also sets
out our commitments for the next twelve months with regards to the legislation.
Our business
Post Office is the UK’s largest retail network and the largest financial services chain in the UK
with more branches than all of the UK’s banks and building societies put together. We have
provided services for more than 370 years and currently supply more than 170 products and
services (mails & retail; financial services; governments services; and telephony) from a
Network of more than 11,500 Post Office branches nationwide.
Post Office directly manages around 2% of the Network branches. The remainder of the branches
are managed on an agency basis by Postmasters and multiple partners.
Our supply chains
We currently operate throughout the UK, however our supply chains connect with suppliers with
a global reach.
Banking services
Our banking services are provided through a joint venture with the Bank of Ireland (Bol).
Postmasters
Postmasters can operate one or more branches. As agents they have control on how they run
their branches on a day-to-day basis. All those working in an agency Post Office branch are
employees of the Postmaster.
Multiple partners
A large proportion of the agency part of our network is run by multiple partners.
Trade Unions
In our directly managed branch network, we work closely with the Communications Workers
Union (CWU) and Unite (CMA) Communications Managers Association.
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Third Party Suppliers/Procurement
We also procure products and services from a wide range of national and international
businesses.
lity and due diligence
Responsibility for our Modern Slavery initiatives currently resides with a steering group which
was appointed in January 2016. It is tasked with the development of a project plan to carry out
due diligence and implement change.
Where are the risks of Modern Slavery at Post Office/ POMS?
The due diligence that we have undertaken so far indicates that there could be a risk of non-
compliance within our agency network because there are a large number of people employed by
Postmasters (including multiple partners) but who are not employees of Post Office or POMS.
They work directly for the Postmasters (including multiple partners). We will be taking action to
address this risk (see below).
What we have done so far
e Our Whistleblowing Policy has been updated to include references to concerns about
Modern Slavery.
¢ Our Code of Business Standards will reference the issue of Modern Slavery.
e We have adapted the Post Office recruitment policy to address MSA requirements.
* We conducted an assessment of the Post Office procurement process to ensure it aligns
with the MSA. As part of this process we have conducted a review of the criteria used by
Post Office to evaluate whether suppliers meet Post Office’s minimum tendering
requirements. As a result of this we have now reviewed our standard form procurement
contracts to ensure that they cover POL with regards to the MSA legislation.
« Our PQQ process has also been amended to take account of MSA. Suppliers must now
confirm that they comply with our MSA Statement.
e We have reviewed the Postmaster Contract of Engagement and have written Guidelines
for Postmasters to assist them in complying with MSA legislation.
Next steps
Throughout 2017 we will be committed to a programme of ‘Building Awareness’. This includes:
e Rolling out our MSA Communication Plan across all of POL, including our directly
employed colleagues, postmasters and supply chain.
« Reviewing our approach to audit and compliance and make recommendations around a
suitable regime to take forward.
« In the light of the recommendations from the review of audit and compliance, to develop
a relevant Training Plan in support of any proposed new regime.
Our policies
We currently operate the following policies that describe our approach to Modern Slavery:
* Code of Business Standards
« Whistleblowing Policy
Further information
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If you have any concerns about the issues raised in this statement or if you think you have
identified signs of Modern Slavery then please either contact us in the first instance or call the
Government's Modern Slavery Helpline on
2. Postmaster Guidelines
Modern Slavery Act 2015
Guidance and Contractual Standards for Postmasters.
1. WHY DO I NEED TO KNOW ABOUT THIS?
1.1 The Modern Slavery Act describes a number of offences which will constitute modern slavery.
For example, it makes it an offence for any person, irrespective of whether they have a Post
Office, or any other kind of business, or are acting in a purely personal or domestic capacity
a) to hold another person in slavery or servitude in circumstances where the person
knows or ought to know that the other person is held in slavery or servitude; or
b) to require another person to perform forced or compulsory labor in circumstances
where the person knows or ought to know that the other person is being required to
perform forced or compulsory labor; or
c) to arrange or facilitate the travel of another person with a view to that person being
exploited.
1.2 Indicators of forced labour would include:
Abuse of vulnerability
Deception
Restriction of movement
Isolation
Physical and sexual violence
Intimidation and threats
Retention of identity documents
Withholding of wages
Debt bondage
Abusive working and living conditions
Excessive overtime
1.3The Act ensures that perpetrators of modern slavery can be given suitably severe
punishments for modern slavery crimes, including life sentences.
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1.4The Act applies to you and you have a personal legal obligation to comply with it.
2. PURPOSE OF THIS GUIDE
2.1 This Guide does not give an overview of the Act but it does explain Post Office Limited’s
contractual standards on modern slavery. These instructions have contractual effect.
2.2 Post Office’s contractual standards apply to all Postmasters, including sub-postmasters,
franchisees, operators and any other agents operating Post Office branches or outreach
services.
2.3 Compliance with these standards does not of itself ensure compliance with the Modern
Slavery Act. It remains the responsibility of Postmasters to ensure they comply with the Act.
2.4We are committed to ensuring no one suffers any detrimental treatment as a result of
reporting in good faith their suspicion that modern slavery of whatever form is or may be
taking place in any part of our business, including in a Post Office branch or any retail
business associated with it, or in any of our supply chains. Detrimental treatment includes
contract termination, corrective action, threats or other unfavourable treatment connected
with raising a concern. However, if a postmaster has been involved in any breach of the Act
or these standards, we may take corrective action against him/her, which may include
contract termination. Individuals that have concerns about modern slavery practices will be
able to notify Post Office by contacting the Network Business Support Centre (NBSC) or
Grapevine.
2.5 Post Office Limited may amend this Guide and the contractual standards at any time.
3. POST OFFICE CONTRACTUAL STANDARDS
3.1 You must ensure that you read, understand and comply with this Guide and the Modern
Slavery Act 2015. Further information regarding the Act can be sourced from the
Government's website gov.uk
3.2You are responsible for the prevention, detection and reporting of modern slavery in any
part of your Post Office branch and any associated retail business or supply chains.
3.3 You must notify Post Office Limited as soon as possible if you believe or suspect that a
breach of, or conflict with the Act has occurred, or may occur in the future. You must do this
in the following by contacting the Network Business Support Centre.
3.4You should raise any concerns you have about any issue or suspicion of modern slavery in
any parts of your or our business or supply chain at the earliest possible stage.
3.5 You should report it to us even if you are unsure about whether a particular act, the
treatment of workers more generally, or their working conditions within any tier of your or
our business and/or your or our supply chains constitutes modern slavery.
3.6 We aim to encourage openness and will support anyone who raises genuine concerns in
good faith in relation to modern slavery, even if they turn out to be mistaken.
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4. FAILURE TO MEET THE CONTRACTUAL STANDARDS
4.1 Any Postmaster who fails to comply with these contractual standards and/or the Modern
Slavery Act 2015 is at risk of contractual action, including possible immediate contract
termination.
3. Communication Plan 2017
Proposed MSA Communication Plan
Audience What How/channel Call to action
Policy statement on
All intranet intranet Read
headline - link to policy
L300 statement direct email read the statement
Central team headline - link to policy
colleagues statement one focus email read the statement
headline - link to policy
Supply Chain statement one focus email read the statement
headline - link to policy
Branch teams - DMB statement one focus email read the statement
headline - link to policy
Branch teams - agents I statement branchfocus email read the statement
reminder where to find
all info One/intranet read
"what this means to read, understand,
Branches - DMB you" one focus email think
"what this means to read, understand,
Branches - agency you" branchfocus email think
"what this means to read, understand,
Central teams you" one focus email think
all reminder One/intranet read
Branches - DMB how to report one focus email know where to go
Branches - agency how to report branchfocus email know where to go
Central teams how to report one focus email know where to go
all reminder One/intranet read
4. Extract from Whistleblowing Policy
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"Whistleblowing" refers to the act of exposing potential or actual wrongdoing and/or
dangerous practices by reporting it either internally within an organisation, or
externally, for example to a regulator. The law on Whistleblowing is contained in the
Employment Rights Act 1996 as amended by the Public Interest Disclosure Act 1998.
Wrongdoing includes criminal activity, civil offences (including negligence, breach of
contract, breach of administrative law), miscarriages of justice, dangers to health and
safety or to the environment and the cover up of any of these.
Workers should raise a concern if they are aware of, or suspect, wrongdoing which
affects others (e.g. customers, members of the public, colleagues or the Post Office).
Some examples (this is a non-exhaustive list) of situations where a worker may raise
a concern are:
. Financial Crime including Fraud, Money Laundering and financing of terrorism,
Bribery and Corruption,
. Giving, offering or taking of bribes,
. Financial mismanagement,
. Misreporting,
. Practices that could put individuals or the environment at risk,
. Breach of Post Office internal policies and procedures (including the Code of
Business Standards),
. Concerns about slavery or human trafficking, and
. Any conduct likely to damage Post Office’s reputation.
A Whistleblower is a person who raises a genuine concern relating to any wrongdoing
including any of the above. If a worker has any genuine concerns related to
suspected wrongdoing, they should report it under this Policy.
If a worker is uncertain about whether something is within the scope of this Policy,
they should seek advice from the Whistleblowing Officer, whose contact details are set
out in this Policy.”
(Extract from Section B. Context)
5. Extract for inclusion in Code of Business Standards (currently
being redrafted)
Modern slavery is a crime and a violation of fundamental human rights. It takes
various forms, such as slavery, servitude, forced and compulsory labour and human
trafficking, all of which have in common the deprivation of a person's liberty by
another in order to exploit them for personal or commercial gain.
Post Office is committed to acting ethically and with integrity in all our business
dealings and relationships and to implementing and enforcing the systems and
controls set out in our Modern Slavery Statement (available on our intranet) with the
aim of ensuring that modern slavery is not taking place anywhere in our own business
or in any of our supply chains.
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The prevention, detection and reporting of modern slavery in any part of our business
or supply chains is the responsibility of all Post Office employees at all levels, as well
as of its directors and officers.
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AUDIT, RISK & COMPLIANCE COMMITTEE
10.1) Whistleblowing
Author: Jane MacLeod Meeting date: 18 May 2017
Executive Summary
Context
Post Office has a Whistleblowing Policy which was adopted in May 2016, and adopted
by POMS in September 2016. The policy requires an annual report to the ARC.
Questions this paper addresses
. What whistleblowing reports have been made this year?
. What actions have been taken to investigate these reports?
. What issues do these reports raise?
Conclusion
1. Whistleblowing concerns relating to either POL or POMS can be raised in a number
of ways including to line managers, other senior managers, through the Speak Up
Jine, to the General Counsel via the email address
! GRO or in certain cases through external reporting
lines such as to a regulator.
2. Postmasters can also raise concerns through the Grapevine reporting line and
website, although concerns raised this way are investigated by the Security team.
We are currently looking at how to identify those reports made through Grapevine
that should be considered as ‘whistleblowing’.
3. Customers frequently use the Executive Correspondence Team (‘ECT’) to raise
concerns and we are also looking at how to identify those reports that could
potentially raise whistleblowing issues.
4. In the period from end March 2016 to date only 4 reports have been received
through whistleblowing channels. This seems low, although previous years have
not had materially more reports: 3 in 2014-15, and 7 in 2015-16. The numbers
would be higher if we included Grapevine and the ECT, although at this stage we
cannot estimate these.
5. The reports in the current year related to the following:
. A report was made to the FCA by an individual who was concerned that it
appeared to be a normal practice for staff at a specific branch to be able to
initiate transactions under a single log-in. The FCA referred the concern to
Bank of Ireland. Bank of Ireland requested Post Office’s assistance to
respond to the complaint. POL provided a response to Bol as to the
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required Horizon protocols and there has been no follow up from the FCA or
Bol.
. An anonymous report was made to the Speak Up line expressing concern as
to the software procurement practices at Post Office. The CIO and Head of
Procurement were asked to review the software procurement processes and
confirm that they were satisfied that the processes are appropriate so as to
ensure that requirements are properly scoped and relevant procurement
processes followed. Their advice was that while anomalies will always occur,
and the processes are cumbersome, overall they believe the processes are
sufficiently robust.
. Two separate anonymous reports have been made recently regarding
certain practices being followed by the postmasters in specified agency
branches. As these reports were only received a few days ago, they are still
being investigated by the Financial Crime and security teams.
6. The whistleblowing policy is referenced in many of the other Post Office policies
and the Code of Conduct. Since the beginning of the calendar year we have issued
communications across the business reminding colleagues of the whistleblowing
policy and how concerns can be reported. Interestingly the report raised in
relation to software procurement followed one such communication. The Code of
Conduct is currently being reviewed and will be re-launched shortly. This will also
emphasise the reporting options for whistleblowing.
Input Sought
The Committee is asked to note the report.
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