POL00447846
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Post Office Limited - Document Classification: INTERNAL
POST OFFICE LIMITED
AUDIT, RISK & COMPLIANCE COMMITTEE REPORT
Title: FY22/23 ARA Update paper Meeting Date: I 27 November 2023
Tom Lee, Group Financial
Controller; 5
Authors: Dan Ward, Head of Financial and Sponsor: Kathryn Sherratt, Interim CFO
Technical Accounting
Input Sought: Noting and Approval
The Committee is asked to:
i. note the updates made to the Post Office Limited (“POL”) Group Annual Report and
Accounts (“ARA”) for the year ended 26 March 2023 (“FY22/23”) since it was
presented to ARC on 7/11/23, including conclusions drawn on the significant
estimates, judgements and accounting decisions;
ii. note the assurance activities undertaken on the ARA ahead of planned signing;
iii. note the plan for completion and signing timetable; and
iv. approve the ARA be recommended to the POL Board for approval and signing.
Previous Governance Oversight
e ARC 7/11/23
Executive Summary
The ARA presented is in final form, with the exception of a) any minor amendments to drafting
which may arise following continued reviews by Finance, PwC and Copywriters, to ensure
consistency, and b) any subsequent events which may arise ahead of signing, which Finance
will continue to monitor. All assurance activities are complete save for any items presented by
PwC in their report to ARC. No material changes have been made to the judgements and
estimates presented to ARC on 7/11/23, with the final positions included in the ARA being:
- Going Concern (“GC”) - assumption remains consistent, being that of a GC but with a
C “The
consistent. A number of the required funding items have been progressed as detailed in
the report.
- Horizon Shortfall Scheme (“HSS”) — remains consistent ai
- Suspension Remediation review (“SRR”) - remains consistent at :®
- Post Office Process Review (“PPR”) — retained as a non-adjusting Post Balance Sheet
Event (“PBSE”), however_a note has been included within contingent liabilities to cross
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- POL Cash Generating Unit (“CGU”) impairment - reduced from {
some additional Freehold Land and Buildings in the asset base.
- Tax risks - a contingent liability has been included in the ARA following discussion at
ARC on 7/11/23. This is high level and does not reference the specific risks.
Assurance activities have been completed including Deloitte review of front half metrics (see
separate report presented by Deloitte), GE attestations over accuracy and completeness of
their respective statements and Executive declarations identifying material items to be aware
of have been received (see separate paper). These activities are in addition to the PwC audit
over the financial statements which is well progressed (see separate report by PwC). Meetings
have been held with all Board members where requested, to discuss the Going Concern position
in more detail and enable any concerns to be raised and addressed ahead of the Board meeting
on 28/11/23.
ARC is requested to review this paper alongside the ARA, Executive Declarations paper and
Deloitte paper and approve a recommendation be taken to Board that the ARA be approved,
subject to final approval from a Board sub-committee on Monday 11 December 2023 (to be
established by the Board on 28/11/23).
Report
ARA status and assurance
1. The ARA is substantially complete and can be presented to Board for approval. Ahead of
signing, the ARA may be updated in respect of the following:
a. Finance review —- the Finance team continue to perform consistency checks over
the document which may elicit minor amendments.
b. PwC - reviews are well progressed but will continue until the point of signing.
Additionally, the finalisation of audit items, see PwC’s separate report, may
require further amendments.
c. Subsequent events - should any other matters come to light ahead of signing
that are deemed material and will need reflecting in the ARA.
d. Tax - the disclosures in note 8 of the ARA will be amended prior to signing to
reflect the final financials for the year, with the current disclosures being
produced in early November.
2. The ARA has been reviewed by a significant number of interested parties with comments
reflected in the version presented to ARC. These parties include - management, GE, ARC,
Board, UKGI, DBT and PwC. In addition specific reviews have been undertaken by an
external Copywriter, TB Cardew, Deloitte and Pinsent Masons over defined items / areas.
3. The Remuneration Committee report has been through Remuneration Committee
(“Remco”) review and is expected to have been formally approved by RemCo prior to
27/11/23.
4. Deloitte’s review over Front Half metrics and statements has been completed. Of the 119
in scope item, 16 were identified as having issues / discrepancies. The findings were all
relatively minor in nature and have either been addressed in the latest version of the ARA
or have been confirmed by management as not requiring update. See the separate report
presented by Deloitte for the detailed findings.
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5. GE ownership of ARA sections has previously been established. Declarations have been
sent to all GE owners of sections to attest to the accuracy and completeness of their
sections, see Appendix 1 for further details of ownership. These will be obtained and filed
prior to signing. In relation to sections of the ARA owned by Board members, attestations
have not been sought from the Chairman or CEO as they will be formally approving the
ARA at the Board meeting and signing the ARA, thus attestation/approval is implicit in the
signing. Similarly an attestation has not been obtained from the Remco chair as formal
approval of their section is obtained as part of the Remco meeting and as part of the Board
meeting through the overall ARA approval.
6. A separate paper has been produced by the Internal Audit and Risk team regarding GE
attestations which help to establish the completeness of disclosures in the ARA.
8. Discussions have been offered to all Board members ahead of the Board meeting on
28/11/23 to discuss the Going Concern assumption in greater detail. No Board members
i jption was however general consensus
would be beneficial. Management has explored this
with UKGI and DBT however due to both a subsidy and funding classification risk DBT are
unable to grant an extended waiver. Wording has been included in the Letter of Support
to provide comfort that DBT will continue to work with POL to obtain additional waivers
should they be required. The waiver provided by DBT is to 31 July 2024.
Key updates to the ARA
9. Following the Financial Reporting Council’s (“FRC”) review of the POL FY20/21 ARA in
Sept-Nov 2022, amendments have been made to the ARA to both disclose the review that
was undertaken (see the Finance and Business Review (“F&BR”) section of the ARA) and
to ensure their recommendations are reflected. Details of the findings and amendments
made are documented in Appendix 2.
10. The Going Concern (“GC”) disclosure has been updated to reflect PwC and ARC Chair
review comments, principally relating to the wording around th
addition to the expected funding position as at the time of signing. We would like to draw
ARC's attention to the GC disclosures in the Directors Report and in Note 1 of the ARA.
11. rovision has reduced from
ig discussions with PwC, and the prudence included in
the ee ae payout levels, management had determined to use the lower end
of the range
12. HSS and SRR remain consistent at eee espectively.
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he announcement of the request for
adjusting Post Balance Sheet Event (“PBSE”), as seen in note 25 in the ARA. Management
have added a note in the contingent liability section to cross reference to the PBSE given
it is material. PwC is comfortable with this approach.
14.
cussions on 7/11/23, the POL CGU impairment has reduced fro!
etaining some additional costs related to freehold buildings as a result
whic shows that they can be supported by a FVLCOD approach. Additional wording has
been added to the ARA regarding asset values, clearly stating that freehold land and
buildings have not been impaired on the basis that the FVLCOD approach resulted in those
assets being fully supportable.
15. Acontingent liability has now been disclosed regarding the tax risks faced, being IR35 and
corporation tax on Remediation Matters (“RM”) items. The disclosure doesn’t include any
specifics but notes that risks exist that could have a material impact. See note 20 in the
ARA for further details.
Going Concern
16. An updated GC assessment has been produced and is included in the reading room. The
primary change has been to update the forecasts using managements 7+5 view, which
includes an increase of £24m in Inquiry costs, taking the running costs of Inquiry and RM
beyond the £150m expected funding level for FY23/24 and FY24/25. HMT have recently
declined DBT’s request to include a contingency of £40m in the £150m funding request,
hence creating this downside in the forecasts. Management has agreed updated wording
to the LOS to reflect the need to access such contingency funding as our forecasts are
indicating an additional amount of funding is required for the RU/Inquiry activity.
17. The impact of the above is to bring the anticipated rward,
from February 2025 to October 2024, with the breach remaining in place from that point
onwards, until March 2025 where headroom bounces back marginally.
18. Management's assessment is that this does not alter the overall isis) position, as:
ge
Factored into the GC model base case are costs of in relation to SPMP from July
2024 to March 2025, which are treated as unfunded in the model.
19. Managements latest GC assessment is included in the reading room and a copy of the
finalised Letter of Support is included in Appendix 3.
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20. A table of the funding items required, including status and expectation at point of signing,
has been included in Appendix 4. Progress has been made over the past few weeks
however, with the following now delivered:
a. HSS funding extension to 31/3/25
b. SRR funding extension to 31/3/25
Finalist id usage waiver to 31/7/24 due to be signed 24/11/23
IRRELEVANT
d. ‘Later or Support Wording Tinalsed arid agreea With DBT ana AMT Thote this will
be signed closer to ARA signing date — target 6/12/23)
Timetable to completion
22. Between the ARC meeting on 27/11/23 and proposed signing on 11/12/23 there are a
number of items to be completed. These are outlined below along with target dates where
relevant.
a. HSS extension to 31/3/25 signed - complete
b. SRR extension to 31/3/25 signed - complete
be signed
- finalised, due to be signed 24/11/23
CMA clearance of Inquiry and RM operational funding - expected 1/12/23
Letter of Support from DBT signed - expected 6/12/23 (wording agreed)
DBT confirmation of Inquiry and RM operational funding - expected 8/12/23
CMA clearance of SPMP funding - expected 8/12/23
Post Balance Sheet Events checks complete - 8/12/23
All drafting and checks on ARA complete - 8/12/23
PwC audit completion - expected before 8/12/23
Board sub-committee meeting - 11/12/23
. Representation letter signed by CEO - 11/12/23
m. ARA signed by Chairman, CEO, Remco Chair and PwC - 11/12/23
oRY ose >on
23. The proposed Board sub-committee has been diarised for the morning of 11/12/23 with
the ARA signing scheduled for the afternoon on the same date, assuming all approvals are
granted. Members of the sub-committee are being finalised, with the proposal:
Chairman (Henry Staunton)
ARC Chair (Simon Jeffries)
CEO (Nick Read)
UKGI NED (Lorna Gratton)
Attendees - Interim CFO, Remco Chair, Group Financial Controller, Head of
Financial Accounting, PwC
eaooo
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24. It is proposed that the Remco Chair attend the sub-committee meeting such that approval
to release the FY22/23 bonus’ can be obtained and minuted at the same time, and with
the Chair being fully cognisant of the ARA status when approving the position.
25. To assist the CEO with fulfilling his duties as the Responsible Person under Government
requirements, a separate paper has been produced and should be referred to alongside
this report and prior to signing the ARA.
26
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Appendix 1: GE accountability over ARA
The below outlines the agreed ownership of the ARA section by GE members and delegates.
Attestations have been obtained from all GE members regarding accuracy and completeness of
their sections. Note Chairman, CEO and Remco Chair attestations not obtained as these are
obtained via the Remco and Board meetings.
Section Team Operational responsibility GE respon:
Chairmans Foreword Comms Patrick Bourke Richard Taylor (+Chairman)
CEO Statement Comms Patrick Bourke Richard Taylor (+CEO)
Finance and Business Review Finance Tom Lee Alisdair Cameron*
Corporate Governance and Board of Cosec Rachel Scarrabelotti Ben Foat
Directors
Remco Chair's Statement; Reward lan Rudkin Karen McEwan (+Remco Chair)
Directors Remuneration Policy;
Annual Remuneration Report
Fairness, Diversity and Inclusion Culture Juliet Lang Karen McEwan(+Remco Chair)
Risk Management Risk and IA Johann Appel Alisdair Cameron*
Energy & Carbon Reporting H&S and Martin Hopcroft / Mark Cazaly Alisdair Cameron*
Comms
Directors Report Finance Tom Lee Alisdair Cameron*
Financial Statements Finance Tom Lee Alisdair Cameron*
Signing of ARA Cosec Rachel Scarrabelotti Ben Foat
*Kathryn Sherratt is covering as Interim CFO
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Appendix 2: FRC findings and actions
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paren FRC comment / question Management response hanges made to ARA
Cash Generating
Units (“CGUs”)
Why the whole branch network for POL
is deemed to be one CGU as opposed to
individual stores or locations.
Historical Why the HM provisions (HSS, OC and
matters PR) were not discounted.
provisions
Alternative Queried the prominence of Trading
Performance Profit in the ARA vs IFRS profit
Measures measures e.g. operating profit or profit
before tax.
Lease cash flow
disclosures
To consider disaggregating the time
bands used to disclose lease liabilities,
currently <1 year, 1-5 years and >5
years.
Cash flow details
Further descriptions could be included
regarding working capital and operating
cash inflows.
Should include the summarised financial
information for FRES as opposed to
stating POL’s share.
Joint Venture
reporting
Accrued income
financial asset
Accrued income would usually be
included as a financial asset in the
financial instruments note.
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Rational is based around the scale and location of
branches, combined with product offering
generates a fluid / transient customer base.
Additional description added in Note 1 regarding the
decision to have the POL Network as a whole CGU.
Reference to this has been made in the FRC
disclosure in the F&BR section.
Reference to this has been made in the FRC
disclosure in the F&BR section.
The year in question had low risk-free rates thus
discounting was not material. Provisions have been
discounted where material and relevant disclosure
is included.
Chairman and CEO statements now reference
standard profit measures ahead of Trading Profit.
When the CEO and Chairman statements are
produced, management will ensure statutory
measures feature more prominently.
None
No changes made as the current split is standard
for most organisations. However consideration is
being given as to whether additional explanation
would be relevant and management will work with
PwC.
'Specific wording added regarding the calculation in
ithe F&BR section.
Management will include further commentary on
these areas, however at present they remain
unchanged as the cashflow position is not yet
finalised.
The descriptions in the F&BR have been expanded
when compared with FY20/21.
Joint venture - suggested inclusion of the
summarised financial information for FRES as
opposed to stating POL’s share. This has been
updated in the note 11 of the ARA.
Note 11 in the ARA has been updated to include a
summary of FRES’ financial position as opposed to
POL’s share, with a description of the change
included.
The balance related to contract asset which are
correctly excluded from the financial assets
classification. However the language used in the
disclosures will be amended to make it clearer.
Language made clearer regarding the contract
assets, see note 1.
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Appendix 3: DBT Letter of Support
Department for Business &
Trade
Old Admiralty Building,
To the Board of Directors London SW1A 2AY
100 Wood Street
LONDON
EC2V 7ER
6 December 2023
Dear Sir/Madam,
LETTER OF SUPPORT — POST OFFICE LIMITED - IN CONFIDENCE
1. This letter is intended to assist the board of directors (the,“Board”) of Post Office Limited (“POL” or
the “Company”) with its assessment of the Company's! IRRELEVANT __ I in relation to the
signing of the Company's Annual Report and Financial Statements in respect of the year ended 26
March 2023 (the “FY22/23 ARA’). In providing this letter to you, the Department for Business and
Trade (“DBT” or the “Department”) would remind the Company and the Board that the determination
of whether the Company will be in a position to meet its liabilities as they fall due is the responsibility
of the Board and not DBT, and that DBT expresses no view on this subject.
2. The Department is aware of POL’s financial plans and the projected funding requirements of the
Company out to 31 March 2025. The Department also recognises that the Company has identified
that, based on current forecasts, DI
3. ..ln_liaht_of the above. the Board. informed DBT. that without additional:
i IRRELEVANT
‘at the point of signing the FY22/23 ARA. The decision.
a going concern basis is therefore predicated oni. -
ane. where. this has not been committed by the date of signing the FY22/23 ARA,
4. The Secretary of State is the sole shareholder of the Company and, moreover, in light of the vital
public services that the post office network provides to millions of customers across the United
Kingdom, DBT reiterates that it places a high priority on the Company's ability to deliver its policy
i DBT has ‘historically strongly supported the company
‘and will continue to work to prevent these circumstances from arising. Significant funding has already
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been provided and/or committed to the Company to ensure that these policy objectives have been
met in the past, including to mitigate risks arising from certain legacy claims connected with the
Horizon IT System. These include the Horizon Shortfall Scheme (formerly the Historical Shortfall
Scheme) as well as claims relating to overturned criminal convictions or prosecutions (together
Horizon Liabilities), and claims relating to the Suspension Remuneration Review, Policy and
Process Remediation (‘PPR’), together with claims connected with redress to postmasters who
Ss). DBT intends
ito enable
POL to settle its liabilities as they fall due, subject to HMT consent and subject to the Application of
the Subsidy Control Act 2022, and consideration of the advisory outcome of the referral process to
the Subsidy Advice Unit of the Competition and Markets Authority (“CMA”) where required.
5. The Department understands that, based on POL’s financial plans and the projected funding
to i from the date
of signing the FY22/23 ARA. The commitment of financial support in each case is a present subject
to certain caveats, to reflect steps in the clearance and approvals process that are still underway as
at the time of signing this letter. They may also be subject to conditions set out in an agreement
relating to a funding area.
capacity throughout the!
December 2023.
The Department will sign al.
This is a temporary measure to rei
amendment will be accompanied by ai.
‘periods of time during the g
assess the need for this. The
will be subject to the consent
9. Noting POL’s current need to }
of its membership of the Note. Circulation Scheme, th
BT will consider the case provided to it by POL”
__ IRRELEVANT
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ensure that POL can continue to have access to sufficient financing
signing as practicably possible, subject to HMT consent.
Technology Investment Plans
10. DBT acknowledges the Company's funding request, which sets out POL’s investment plans to
continue working on its exit from and replacement of the Horizon IT System until at least June 2024,
including work on associated scope that is considered critical to POL, and to extend its contractual
arrangements with Fujitsu for the Horizon infrastructure support arrangements until at least the end
of FY24/25.
11. The Department intends to provide sufficient funding to POL to ensure that the necessary activities,
agreed between POL and DBT following their funding bid in June, can be completed. This is subject
to HMT consent, the application of the Subsidy Control Act 2022 and consideration of the advisory
outcome of the referral process to the Subsidy Advice Unit of the CMA. It is expected that these
conditions will have been met prior to the signing of POL’s FY22/23 ARA but in circumstances in
which this is not possible the Department will use best endeavours to ensure such arrangements are
in place as soon after signing as practicably possible.
12. The Department also acknowledges that POL is intending to submit a further funding request in early
2024 to fund the continuation of its work to exit from and replace the Horizon IT System after June
2024, and DBT will work collaboratively with POL on this submission to ensure clear alignment
between parties and to minimise the risk of delay to the technology investment plans.
Horizon Liabilities and Other Liabilities
13. DBT acknowledges that it already has in place arrangements with POL for the funding of
compensation associated with the Horizon Shortfalls Scheme, Overturned Convictions and
Suspension Remuneration Review and that POL also requires a funding commitment for liabilities
associated with Policy and Procé Ri diation (“PPR”). Furthermore, DBT acknowledges POL’s
position that having self-funded ; costs (including handling costs) associated with the
Horizon IT scandal to date, the pany can no longer afford to make any further contribution to
these costs from its own funds. It has therefore submitted a funding request to the Department to
make sure that all handling costs of the schemes associated with the Horizon Liabilities, as well as
costs associated with the Post Office Horizon IT Inquiry (the “POHIT Inquiry”), from the start of
FY23/24, can be funded by the Department.
14. The Department intends to provide sufficient funding to POL to ensure that these activities are
appropriately funded, subject to the application of the Subsidy Control Act 2022 and consideration of
the advisory outcome of the referral process to the Subsidy Advice Unit of the CMA. It is expected
that these requirements will have been met prior to the signing of POL’s FY22/23 ARA but in
circumstances in which this is not possible the Department will use reasonable endeavours to ensure
such arrangements are in place as soon after signing as practicably possible.
15. The Department also recognises that the arrangements it has in place, and/or which it plans to put in
place, are intended to make sure that (1) the Horizon Liabilities, (2) the costs associated with handling
payments linked to the Horizon Liabilitie:
POHIT. Inquiry, are fully funded, Howevel
i IRRELEVANT
sufficient notice of the change and underlying causes, and it notes" th
i already been provided to it by POL regarding some risks
IRRELEVANT:in FY23/24 and FY24/25, specifically in relation to (3) above, although the precise scale
3
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and timing of these risks is still to be finalised. The Department is working with POL and intends to
provide sufficient funding for these
solutions to support the Company .
i This will be subject to HMT consent.
Unfunded Risks
_jaced by POL linked to the
— Al _ “lestablished to resolve
the Horizon Liabilities and the Other Liabilities. The Department expects that in the event of these
risks crystalizing POL will provide sufficient notice of that occurrence, whilst accepting that in some
cases, such as the decision resting with’ imelines are outside the control of
the Company. In these circumstances the ith POL to develop solutions to
support the Company inI
Notification of Changes
17. Whilst DBT is not currently aware of any impediment to the provision of funding envisaged under this
letter, DBT will notify the Company if, at any time, it becomes aware that impediment could occur. As
noted throughout this letter, a number of the funds referenced within are subject to the consent of HM
Treasury.
Yours sincerely,
Chief Financial Officer
4
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Appendix 4: Government funding requirements and status
Funding area
completion
N -
N/A
7 IRRELEVANT
Y
Y
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