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16 . Financial risk management
Notes to the financial statements (continued)
Liabilities from financing activities Other
Net debt as at 1 January 2018
Cash flows Acquisitions - finance leases Foreign exchange adjustments
Net debt as at 31 December 2018
Cash flows Acquisitions - finance leases Foreign exchange adjustments
Net debt as at 31 December 2019 Borrowings £’000 Leases £’000 Sub-total £’000 Cash £’000 Total £’000
(51,000) (14,591) (65,591) 16,930 (48,661)
2,124
2,124 - (2,046) (2,046) - 2,124 - (2,046) -
(51,000) (14,513) (65,513) 16,930 (48,583)
6,500
-
2,394 8,894 (9,671) (777) (945) (945) - (945)
(44,500) (13,064) (57,564) 7,259 (50,305)
Cash flows Acquisitions - finance leases Foreign exchange adjustments
Net debt as at 31 December 2020
12,000
-
2,211 (818) 14,211 3,343 17,554 (818) - (818)
(32,500) (11,671) (44,171) 10,602 (33,569)
Movements in borrowings are the aggregate movement of draw downs and repayments as disclosed in the cash flow statement.
16 . Financial risk management
This note explains the group’s exposure to financial risks and how these risks could affect the group’s future financial performance. Current year profit and loss information has been included where relevant to add further context.
Risk
Exposure arising from Measurement
Market risk - foreign exchange Future commercial transactions recognised financial assets and liabilities not denominated in GBP Cash flow forecasting sensitivity analysis
Market risk - interest rate Long-term borrowings at variable rates Sensitivity analysis Cash flow forecasting
Credit risk Cash and cash equivalents, trade receivables and contract assets Debt level reporting
Management
Accounts receivable and payable matching Spot and forward FX transactions to limit exposure
Monitored but limited exposure as currently no long term borrowings at variable rates
Credit limits monitoring
Liquidity risk Borrowings and other liabilities Rolling cash flow forecasts Availability of committed credit lines and borrowing facilities
Notes to the financial statements (continued)
The group’s financial risk management is predominantly controlled by a central treasury department (group treasury) under policies approved by the board of Directors. Group treasury identifies, evaluates and hedges financial risks in close co-operation with the group’s operating units. The board provides written principles for overall risk management.
Market risk - Foreign exchange risk Exposure The group’s exposure to foreign currency risk at the end of the reporting period, expressed in pounds sterling was as follows:
31 December 2020 31 December 2019 31 December 2018
USD £’000
EUR £’000
CAD £’000
USD £’000
EUR £’000
CAD £’000
USD £’000
EUR £’000
CAD £’000
Trade receivables 1,998 739 58 1,539 759 24 680 283 6
1,998 739 58 1,539 759 24 680 283 6
31 December 2020 31 December 2019 31 December 2018
USD £’000
EUR £’000
CAD £’000
USD £’000
EUR £’000
CAD £’000
USD £’000
EUR £’000
CAD £’000
Trade payables 702 255 - 2,200 1,393 - 1,973 121 -
702 255 - 2,200 1,393 - 1,973 121 -
The aggregate net foreign exchange gains/losses recognised in profit or loss were:
USD £’000
EUR £’000
CAD £’000
Foreign exchange gains or losses (92) 27 (0 .4)
Notes to the financial statements (continued)
Risk management The group operates internationally and is exposed to foreign exchange risk, the US dollar, Euro, Canadian dollar, Australian dollar and Danish Krone. The group’s treasury department is responsible for reviewing, monitoring and management of the group’s risk management policies in response to foreign currency exposure. The group’s overall strategy is to reduce, eliminate or mitigate foreign exchange risk and related uncertainties. This is achieved through an ultimate objective to natural hedge exposures in payables against receivables insofar as possible, and limit exposure by maintaining balances in currency to cover short term net payable demands in each currency. The group measures its risk exposures by maintaining a 2 year rolling cash forecast and performs monthly reviews and reforecasting of foreign currency cash flows. Where material committed exposures are identified, the risk and certainty around the cashflows are assessed and appropriate actions taken to reduce risk in line with the foreign exchange policy, e.g. through financial hedging instruments.
Price risk The group has no price risk exposure for the year ended 31 December 2020.
Credit risk Credit risk arises from cash and cash equivalents, contract assets and outstanding receivables.
Risk management Credit risk is managed for the group through a ‘Know Your Customer’ (“KYC”) process which includes a credit check performed by an independent 3rd party to ensure customer risks are understood and appropriate action taken before the customer is on-boarded. Credit limits are applied in accordance with the assessed risk and where necessary deposits held on account until such time as considered necessary to reduce an assumed assessed risk e.g. businesses with little or no payment or credit history. It is mandatory for all new consumer customers to agree to pay through direct debit and any additional sales made to existing account holders require an internal review of the customers payment history to mitigate the credit risk from our consumer business.
Impairment of financial assets The group has two types of financial assets that are subject to the expected credit loss model: • Trade receivables for sales of inventory and from the provision of telecommunication services • Contract assets relating to contracts with customers While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, any potential impairment losses are deemed immaterial.
Trade receivables and contract assets The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.
To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. The expected loss rates are based on the payment profiles of sales over a period of 24 months before 31 December 2019 and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The group has identified the GDP and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. In addition, reviews are performed with the group’s debt collection team and management to ensure a reasonable loss rate is applied.
Notes to the financial statements (continued)
On that basis, the loss allowance as at 31 December 2020, 31 December 2019 and 31 December 2018 was determined as follows for both trade receivables and contract assets:
31 December 2020 Current More than 30 days past due More than 60 days past due More than 90 days past due More than 120 days past due Total
Expected loss rate 0.24% 0.30% 3.24% 5.67% 83.78% Gross carrying amount - trade receivables 18,585 5,611 632 321 7,411 32,560 Gross carrying amount - contract assets 198 Loss allowance 44 17 20 - 198 18 6,209 6,308
31 December 2019
Expected loss rate 0.53% 0.57% 2.25% 5.15% 7.01% Gross carrying amount - trade receivables 22,985 4,920 1,580 483 6,800 36,768 Gross carrying amount - contract assets 415 - - - - 415 Loss allowance 121 28 36 25 1,477 687
31 December 2018
Expected loss rate 0.10% 0.55% 1.81% 6.43% 32.18% Gross carrying amount - trade receivables 29,622 3,854 1,184 403 4,091 39,154 Gross carrying amount - contract assets 515 - - - - 515 Loss allowance 31 21 21 26 1,316 1,415
The loss allowances for trade receivables and contract assets as at 31 December reconcile to the opening loss allowances as follows:
Opening loss allowance at 1 January
Increase in loan loss allowance recognised in profit or loss during the year Receivables written off during the year as uncollectable Unused amount reversed
Closing loss allowance 31 December 2020 £’000
687
6,015
422 (28)
6,308 2019 £’000
1,415
2018 £’000
1,024
291 1,008
290 728
221 396
687 1,415
Trade receivables and contract assets are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due. Impairment losses on trade receivables and contract assets are presented as provision for and write-off of bad debts within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. Significant estimates and judgements
Impairment of financial assets The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the group’s past history and existing market conditions, as well as forward-looking estimates at the end of each reporting period. Details of the key assumptions and inputs used are disclosed in the tables above.
Notes to the financial statements (continued)
Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash balances and ensuring the availability of funding through an adequate amount of committed credit facilities to meet obligations when due and to close out market positions. Management monitors rolling forecasts of the group’s liquidity reserve (comprising the undrawn borrowing facilities below) and cash and cash equivalents (note 7) on the basis of expected cash flows. This is generally carried out at group level. In addition, the group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios and managing current and planned debt financing.
Financing arrangements The group had access to the following undrawn borrowing facilities at the end of the reporting period:
Refer to note 7 for more information relating to the above financial liabilities.
Maturities of financial liabilities The tables below analyse the group’s financial liabilities into relevant maturity groupings based on their contractual maturities for all non-derivative financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
Variable rate 2020 £’000 2019 £’000 2018 £’000
- Expiring beyond one year (RCF) 37,500 5,500 30,000
37,500 5,500 30,000
Contractual maturities of financial liabilities at 31 December 2020 less than 6 months
6-12 months Between 1-2 years Between 2-5 years
Over 5 years Total contractual cash flows
Non-Derivatives
Trade payables and other payables 35,322 - - - - 35,322 Borrowings 2.5% preference shares Lease liabilities 541 541 21,102 12,598 - 34,783 100 100 400 600 10,000 11,200 1,151 1,151 3,635 4,233 2,468 12,638
Carrying amount (assets)/ (liabilities)
35,322 32,500 10,000 11,670
Total Non-Derivatives 37,114 1,792 25,137 17,431 12,468 93,943 89,492
Contractual maturities of financial liabilities at 31 December 2019
Non-Derivatives
Trade payables and other payables 32,235 - - - - 37,235 Borrowings 2.5% preference shares Lease liabilities 633 633 1,286 44,552 - 44,500 100 100 200 200 10,000 10,600 1,184 1,184 4,243 5,277 3,118 15,007 37,235 44,500 10,000 13,064
Total Non-Derivatives 39,152 1,917 5,729 50,029 13,118 107,342 104,799
Contractual maturities of financial liabilities at 31 December 2018
Non-Derivatives
Trade payables and other payables 40,284 - - - - 40,284 Borrowings 2.5% preference shares Lease liabilities 1,046 32,046 996 21,992 - 56,080 100 100 200 200 10,000 10,600 1,199 1,199 4,671 6,148 4,187 17,406 40,284 51,000 10,000 14,514
