3 . Accounting estimates and judgements

Notes to the financial statements (continued)

Under FRS 102, the group recognised deferred revenue for an obligation to transfer goods or services to a customer for which the entity has received consideration or the amount is due from the customer. Under IFRS, the obligation should be recognised as a contract liability rather than deferred revenue. Therefore, at the date of transition to IFRS, the group reclassified £3,191 (31 December 2018: £3,382, 31 December 2019: £3,897) from deferred revenue to contract liabilities. Furthermore, at 1 January 2018, the group recognised additional contract liabilities amounting to £3,191 (31 December 2018: £3,392, 31 December 2019: £3,897) relating to obligations to transfer goods or services to a customer not yet satisfied under IFRS, but recognised as revenue under FRS 102. Statement of cash flows Under FRS 102, a lease is classified as a finance lease or an operating lease. Cash flows arising from operating lease payments are classified as operating activities. Under IFRS, a lessee generally applies a single recognition and measurement approach for all leases and recognises lease liabilities. Cash flows arising from payments of principal portion of lease liabilities are classified as financing activities. Therefore, cash outflows from operating activities decreased by £2,026 and cash outflows from financing activities increased by the same amount for the year ended 31 December 2018, and £2,342 for the year 31 December 2019.

3 . Accounting estimates and judgements

The preparation of the group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Accounting estimates and assumptions The assumptions concerning the future and other sources of estimation uncertainty at the reporting date are described below. The group based its assumptions and estimates on information available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the group. Such changes are reflected in the assumptions when they occur. Development costs The group capitalises costs for product development projects. Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generation of the project, discount rates to be applied and the expected period of benefits. Impairment of non-financial assets Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a DCF model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the group is not yet committed to or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill and other intangibles with indefinite useful lives recognised by the group. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in Note 10.

Fair values on acquisition of Neoconsult ApS and Nomad IP ApS The fair value of the intangible asset acquired on the step-acquisition of Neoconsult ApS and Nomad IP ApS involved the use of a valuation technique and estimation of future cash flows to be generated over a number of years. The key intangible asset acquired was determined to have an economic useful life of eight years and a discounted cash flow model was used over the same period to validate its indicative acquisition date fair value. The estimation of the fair value required a combination of assumptions including cashflow forecasts of the IoT business over 8 years applying a 12% discount rate on the discounted cashflow model. In addition, the deferred and contingent consideration payable required estimation of the level of profitability of the business unit incorporating the acquired entities as well as an assessment of performance on other agreed deliverables on each pre-agreed date. As the deferred and contingent consideration are payable over a three-year period, the expected outflows were discounted to present value. Useful lives of tangible and intangible assets The annual depreciation and amortisation charges for tangible assets are sensitive to the estimated lives allocated to each type of asset. Lives are assessed annually and changed when necessary to reflect expected impact from changes in technology, network investment plans and physical condition of the assets.

Notes to the financial statements (continued)

The carrying value of intangible and tangible assets are disclosed in note 8 and note 10 and the useful lives applied to the principal categories are disclosed in note 2 for tangible and intangible assets respectively. Provisions Provision for expected credit losses (ECLs) of trade receivables and contract assets The group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., by geography, product type, and customer type). The provision matrix is initially based on the group’s historical observed default rates. The group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e. economic growth outlook and unemployment rate) are expected to deteriorate over the next year which can lead to an increased number of defaults, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed. The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the group’s trade receivables and contract assets is disclosed in notes 7 and 16.

Other provisions Provisions are also made for asset retirement obligations, dilapidations and contingencies. These provisions require management’s best estimate of the costs that will be incurred based on legislative and contractual requirements. In addition, the timing of the cash flows and the discount rates used to establish net present value of the obligations require management’s judgement. In respect of claims, litigation, disputes and regulatory matters the group provides for anticipated costs where the outflow of resources is considered probable, and a reasonable estimate can be made on the likely outcome. The ultimate liability may vary from the amounts provided and will be dependent upon the eventual outcome of any settlement. The carrying value of provisions is disclosed in note 14. Defined benefit pension schemes (TBPS scheme) and Long-Term Incentive Plan (LTIP) The cost of the defined benefit pension plan and other employee obligations (e.g. the JT Long-Term Incentive Plan) and the present value of the obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. For the defined benefit pension plan, the parameter most subject to change is the discount rate. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in currencies consistent with the currencies of the post-employment benefit obligation and extrapolated as needed along the yield curve to correspond with the expected term of the defined benefit obligation. The underlying bonds are further reviewed for quality. The mortality rate is based on publicly available mortality tables for the specific countries. Those mortality tables tend to change only at intervals in response to demographic changes. For both the defined benefit pension plan and the LTIP, future salary increases, and pension increases are based on expected future inflation rates for the respective countries. Further details about pension obligations are provided in note 13. As at the financial reporting date, there were two employees on the TBPS scheme and employees on the LTIP scheme. Current and deferred income tax The actual tax we paid on profits is determined according to complex tax laws and regulations. Where the effect of these laws is unclear, estimates are used in determining the liability for the tax to be paid on past profits which is recognised in the financial statements. The Directors believe the estimates, assumptions and judgements are reasonable, but this can involve complex issues which may take a number of years to resolve. The final determination of prior year liabilities could be different from the estimates reflected in the financial statements and may result in the recognition of an additional tax expense or tax credit in the income statement. Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised. The group uses management’s expectations of future revenue growth, operating costs and profit margins to determine the extent to which future taxable profits will be generated against which to consume the deferred tax assets. The value of the group’s income tax assets and liabilities is disclosed on the statement of financial position. The carrying value of the group’s deferred tax assets and liabilities is disclosed in note 12.

Notes to the financial statements (continued)

Inventory provision and impairment Provisions are made for inventory impairment. This provision requires management’s best estimate based on the assessment of various factors relating to the inventory on hand at the reporting date and historical experience. The value of the inventory impairment is offset against the inventory balance on the statement of financial position. Contingent and deferred consideration The group has entered into acquisitions with deferred consideration, including amounts which are contingent on future events, where future payments are dependent upon the provision of future services. The group has recognised the deferred consideration as part of the consideration transferred on the assumption that all conditions related to the provision of future services will likely be satisfied. Refer to the business combinations accounting policy for more information on how the group accounts for the deferred consideration.

Revenue recognition – Estimating stand-alone selling price

Bundled products Bundled products that combine different goods and services are assessed to determine whether there are different distinct performance obligations and hence necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total bundled revenues, i.e. the total transaction price, are allocated among the identified elements based on their respective standalone selling prices. Determining standalone selling prices for each identified component requires estimates that are complex due to the nature of the business. A change in estimates of standalone selling prices could affect the apportionment of revenue among the elements and, as a result, the timing of recognition of revenues.

Leases - Estimating the incremental borrowing rate The group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating). Key judgements In the process of applying the group’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the consolidated financial statements: Determining the lease term of contracts with renewal and termination options The group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). For leases of buildings and technical sites, the following factors are normally the most relevant: • If there are significant penalties to terminate (or not extend), the group is typically reasonably certain to extend (or not terminate) • If any leasehold improvements are expected to have a significant remaining value, the group is typically reasonably certain to extend (or not terminate) • Otherwise, the group considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset. The lease term is reassessed if an option is actually exercised (or not exercised) or the group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

Long term multi-service agreements Where the outcome of long-term multi-service agreements can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the reporting date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Estimation of the contract stage of completion requires management judgement. Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.