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ZillowCountrywide plc Annual Report 2017 C o u n t r y w i d e p l c A n n u a l R e p o r t 2 0 1 7 Resetting Refocusing Responding Countrywide plc is the leading integrated property services provider bringing people and property together across the residential, commercial and financial services sectors. With a network of over 850 branches, the Group has the largest estate agency and lettings network is the largest independent mortgage broker, and is the leading provider of surveying and conveyancing services in the UK. 54,205 properties exchanged* 125,000+ residential and corporate properties under management* £17.7bn of mortgages completed* * for the year ended 31 December 2017 Operational and financial highlights Subdued residential property market • 1.2 million (2016: 1.2 million) second-hand home sales • Stamp duty changes for first-time buyers • Brexit uncertainty dominates sentiment UK Sales and Lettings • 41,722 homes sold (2016: 50,362) • Properties under management: 62,646 (2016: 65,352) London Sales and Lettings • 8,778 homes sold (2016: 10,951) • Properties under management: 26,644 (2016: 25,792) B2B • Market leader in surveying; 365,223 surveys completed (2016: 364,957) • Corporate properties under management 36,624 (2016: 36,635) • 3,705 new homes sold (2016: 4,896) Financial Services • £17.7 billion of mortgages completed (2016: £15.7 billion); +13% despite challenging market conditions Cost focus • Cost initiatives continue to deliver and strong focus on cash delivers significant growth in operating cash flow; +108% year on year * For 12 months to 30 June 2017 and 30 June 2016 Total income (£m) 671.9 -9% (2016: 737.0) Adjusted EBITDA1 (£m) 64.7 -23% (2016: 83.5) Loss for the year (£m) Operating cash flow (£m) (208.1) -1,286% (2016: 17.5 profit) 58.1 +108% (2016: 27.9) Basic LPS (p) (89.6) -1,215% (2016: 8.0 EPS) Adjusted EPS2 (p) 8.4 -57% (2016: 19.3) 1 Earnings before interest, tax, depreciation, amortisation, exceptional items, contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as ‘adjusted EBITDA’. Please see note 4 for reconciliation and note 2(w) for justification of this alternative performance measure. 2 Adjusted earnings per share is calculated on profit for the year before exceptional items, amortisation of acquired intangibles, contingent consideration and share-based payments (net of taxation). Strategic report 02 At a glance 04 Executive chairman’s statement 06 Our business model 08 Our markets 10 Our strategy 12 Risk management and principal risks 18 Segmental review 18 UK Sales and Lettings 18 London Sales and Lettings 20 B2B 22 Financial Services 24 Chief financial officer’s review 28 Our people Corporate governance 30 Board of directors 32 Chairman’s introduction to corporate governance 33 Corporate governance statement 35 Report of the Nomination Committee 38 Report of the Audit and Risk Committee 44 Directors’ remuneration report 58 Directors’ report 61 Statement of directors’ responsibilities in respect of the financial statements Financial statements 62 Independent auditors’ report 69 Consolidated income statement 70 Consolidated statement of comprehensive income 71 Consolidated statement of changes in equity 72 Consolidated balance sheet 73 Consolidated cash flow statement 74 Notes to the financial statements 118 Company balance sheet 119 Company statement of changes in equity 120 Notes to the Company financial statements 125 Appendix (forming part of the financial statements) 131 Company Information 132 Forward-looking statements For more information, view our website: www.countrywide.co.uk Annual Report 2017 Countrywide plc 01 Financial statementsStrategic reportCorporate governance At a glance We operate across the UK residential and commercial property market and financial services sector to bring people and property together. We focus on having the right brands in the right location that serve customers across all property-related services. We have a portfolio of 65 brands ranging from local or national presence to internationally recognised brands. Breadth of our offering FOR SALE TO LET Sales Lettings Mortgages and insurance 850+ branches Surveying Conveyancing Land and new homes Asset management Commercial Our brands 02 Countrywide plc Annual Report 2017 • Location of our brands Strategic report Our segments UK Sales and Lettings Our UK business consists of approximately 649 physical locations across 52 brands. We have unparalleled coverage of the UK property market and are uniquely placed to support our customers across the residential sales and lettings market. London Sales and Lettings Our London business consists of approximately 231 physical locations across 13 brands recognising the distinct characteristics of the London market and serving our customers’ residential sales and lettings needs across a variety of price bands. Total income (£m) Adjusted EBITDA (£m) Total income (£m) Adjusted EBITDA (£m) 205.2 -17% (2016: 247.8) 14.9 -47% (2016: 27.8) 155.3 -10% (2016: 172.6) 11.5 -44% (2016: 20.6) Read more on our segmental review pages 18 to 19 Read more on our segmental review pages 18 to 19 B2B As one of the largest property businesses serving corporate clients in the UK, we provide services to most major lenders, investors, house builders, commercial businesses, corporations, local authorities and housing associations. Financial Services We have a dedicated network of over 650 mortgage and protection consultants operating under the Countrywide brand, and in Mortgage Intelligence, we own one of the most successful networks of advisors in the UK. The Buy to Let Business and Mortgage Bureau provide specialist lending to those market segments. Total income (£m) Adjusted EBITDA (£m) Total income (£m) Adjusted EBITDA (£m) 220.7 -2% (2016: 224.8) 35.6 +13% (2016: 31.5) 87.3 -1% (2016: 88.2) 19.7 -13% (2016: 22.7) Read more on our segmental review pages 20 to 21 Read more on our segmental review pages 22 to 23 Annual Report 2017 Countrywide plc 03 Financial statementsStrategic reportCorporate governance Executive chairman’s statement Getting back to what we do best After another disappointing year, we have started 2018 with a management change and a recovery plan is underway.” The under-performance of our business over the last three years has resulted in us making significant management change in the Group. Industry expertise in all areas of our business is key. Within Sales and Lettings, the previous strategy resulted in us losing a lot of that expertise. In the Group, we are fortunate in that we have an industry veteran, Paul Creffield, who has been promoted to the role of Group operations director. His deep understanding of the market and operations means that we have quickly been able to identify what we need to do to begin addressing our under-performance. I am greatly encouraged by the number of high calibre industry business leaders that we already have within our Sales and Lettings business and a number of similarly experienced and high calibre industry people who previously left us and want to rejoin now that Paul is in this role. Fundamentally, Countrywide has a unique market position given its breadth within the property services industry. We have established and trusted brands that resonate with customers, together with dedicated and committed colleagues who are the cornerstone of our business. The strong areas in the Group, Financial Services and B2B, have unfortunately been overshadowed by the poor performance in our core Sales and Lettings business units. We believe that these business units are fixable, know what we have to do to restore them and the steps to take that should result in a return to profitable growth. This will take time but ultimately there will be much upside for our Group and our shareholders, whose patience has been sorely tested recently. 04 Countrywide plc Annual Report 2017 2018 – The foundations for recovery In the fourth quarter of 2017 an analysis was undertaken of the Sales and Lettings businesses to understand why the strategy, which had been pursued from 2015, was not delivering growth and had in fact resulted in Sales and Lettings losing substantial market share and profitability. On 24 January 2018 the Group’s chief executive left the business and I agreed to take over as executive chairman. The promotion of Paul Creffield, an industry veteran with over 35 years’ experience, who has been with the Group since 2006, to the position of Group operations director, means that operationally the business is being led by someone with a deep understanding of our business and the market. Sales and Lettings – back to basics Our analysis of the events of the last three years is that there is a clear strategic direction required for Sales and Lettings. We have the largest sales and lettings footprint in the UK, comprising strong regional brands that have resonance in their market place. The heart of our strategy will be about going ‘back to basics’ as this offers the greatest opportunity for value creation for shareholders, colleagues and customers. Our aim is to restore our Sales and Lettings business back to profitable growth. Key to this will be the drive to increase our pipeline which has decreased significantly. The restructuring of the Group in 2015 assumed that Sales and Lettings was a single retail business and a retailer was recruited to lead this area. There was a failure to appreciate that in fact these are trading businesses each with very different characteristics and customer bases requiring different operational expertise. Sales customers will generally transact every 10 to 15 years and are either selling or purchasing what is their most valuable asset, while Lettings customers are on average committing annually. A consequence of integrating these areas into one business was the loss of experienced industry Sales and Lettings professionals at every level who were not replaced, and significant dilution of operational expertise, which affected our ability to both win and complete mandates. At the same time as pursuing a retail model, the Group moved to a centralised model and applied a ‘one size fits all’ to what was, and should be, an entrepreneurial culture and business. Within the branch network, managers lost the autonomy to recruit, develop and promote colleagues and were no longer able to market locally and to price to win instructions. Centralisation also led to us adding substantial overheads to the Group. Critically, we lost focus on offering a fully integrated service to our clients, resulting in loss of ancillary income and profitability. In 2012, every £1 of income earned by the estate agency business was matched by a further 50 pence of income generated from estate agency referrals. By 2017, this had reduced to 38 pence for every £1. All of the above changes were felt more acutely in the UK business than in London. Strategic report Cost efficiency The Group’s cost base has grown considerably over the last three years as the Group pursued a more centralised operating model. This, coupled with inefficiencies in our end-to-end processes, as a result of previous acquisitions that have yet to be fully integrated, presents opportunities to enhance the customer experience and reduce cost at the same time. Our aim is to get things right first time for the customer, to enhance and digitally enable the customer experience and to strive for cost leadership in our sector. Our strategic priorities are: • reduce overheads and drive cost efficiency in our central support functions • invest to address our legacy IT infrastructure and line of business applications • contact centre optimisation to improve customer experience through localisation and improved productivity Financial discipline and cash flow The Group’s historic cash conversion has been poor and steps were taken towards the end of 2017 to bring greater financial discipline to the Group’s budgeting and forecasting processes and a more rigorous focus on working capital management and capital allocation. Our aim is to reduce net debt to adjusted EBITDA to 1.5-2.0x over the medium term, from the year end level of 2.97x, and strive to lower this further over the longer term. Our strategic priorities are: • drive better working capital management • improve capital discipline and capital allocation • leverage the Group’s purchasing power through better procurement • strengthen the balance sheet Outlook 2018 will not be an easy year for the Group as we strategically reset the business. As the UK’s largest property services business, with well-known and trusted brands, the Group is supported by able, experienced and dedicated colleagues and we are determined to build on this foundation to ultimately restore profitable growth and benefit our customers, shareholders and colleagues. Peter Long Executive chairman 8 March 2018 We operate in a highly fragmented and dynamic market that has seen online businesses also enter the market. Previous management believed that it too should offer a digital fixed fee proposition in order to compete with the online players. The resulting hybrid digital fee proposition, however, led to confusion for our customers who expected to receive a full service at a reduced fee. We have already begun to take a range of actions that we believe can deliver profitable growth in our Sales and Lettings business: • ensure the right level of staffing and industry capability at area, regional and branch level • restore Lettings capability and expertise • deliver complementary financial and conveyancing services to customers as an integral part of their property transaction • decentralise decision making and empower area, regional and branch managers • define our digital proposition for Sales and Lettings • deliver the performance metrics and measures to enable each business to measure progress internally and against the market An immediate focus is on ensuring we have the right level of headcount and industry capability at area and regional level. It is testament to the respect Paul holds in the market that since his appointment a number of the good people who left us under the previous management, want to come back to work with him. Building back this right level of resource will drive the growth in our Sales and Lettings pipelines. We are focused on restoring Lettings capability back at regional, area and branch level and in our customer service centres. We believe that continued growth in the rentals market provides huge opportunity for operators who deliver the highest levels of compliance and service to landlords and tenants. Given that, for most of our customers, buying a home is the most expensive transaction they will undertake in their lifetime, the relationship we build with them over the course of their property lifetime is important not only for them but also for us. Our branch network provides a valuable distribution channel for the introduction of complementary services provided by the Group’s other divisions to grow its revenue and profit. There has not been enough focus on this important area and we aim to restore ancillary income to the sort of levels achieved in 2012 and beyond. In terms of decentralisation, we are determined to restore the local entrepreneurship in our branch network, including the freedom at a local level to drive marketing, pricing, hiring and development. This underpins our philosophy, to make our regional, area and branch managers accountable for driving branch-based profitability and giving them the freedom and tools to win back share in their markets. There will still be processes and accountability but we do not want our agents constrained as they have been by bureaucracy and centralisation. Our foray into digital in the form of a hybrid fixed fee offering served only to dilute our full service proposition. We have withdrawn the hybrid digital, fixed fee offering. We need to define what digital means for us as an organisation and this will be determined as we build the detailed recovery plan. Finally, as a result of all the changes, we have begun to take steps to restore the management information and key performance indicators that allow our regional, area and branch managers to manage performance on instructions, listings market share, on pipeline and on exchange income. Annual Report 2017 Countrywide plc 05 Financial statementsStrategic reportCorporate governance Our business model Our purpose is to bring people and property together. We are uniquely placed to support our customers at every stage of their property journey through a combination of national reach and local expertise. Creating value through our strategic priorities Customers People Products and services Cost efficiency Financial discipline and cash flow Our values Products and services FOR SALE TO LET Sales Lettings Mortgages and insurance Surveying Conveyancing Land and new homes Asset management Commercial How we create revenue B2C Estate agency Lettings Mortgages and insurance Conveyancing B2B Mortgage lending and distribution Land and new homes Asset management Commercial property management Utilising our scale and diverse offering for the benefit of our customers Multichannel Branch network Complementary products Strategic partnerships Optimising our resources Brands People Cost efficiency Cash Connecting people and property 06 Countrywide plc Annual Report 2017 Strategic report Creating value through our strategic priorities Our vision is to create sustainable shareholder value through being the provider of choice for all residential and commercial property services in the UK. Customers People Products and services Read more on our strategic priorities on pages 10 to 11 Utilising our scale and diverse offering for the benefit of our customers Multichannel Branch network Complementary products Strategic partnerships We utilise all our channels to market our products and services effectively: in branch, telephony or online, to suit our customers’ needs and enhance their experience with us. Our national network of 850+ branches is the foundation of our operating model. We are investing in our existing branch network to provide industry expertise and local knowledge. We offer a suite of services to meet all property-related needs of our B2C customers including vendors, buyers, landlords and tenants. We optimise revenue streams through appropriate cross-divisional referral of services. Our B2B customers, including financial institutions and national developers, benefit from our scale and view our extensive network as an attractive route to market for their products. Read more on our segmental reviews on pages 18 to 23 Optimising our resources Brands People Cost efficiency Cash Through our multiple brand strategy we can focus on specific sectors of both regional and national housing markets and tailor products appropriately. We invest in industry experts who understand their local markets and the needs of our customers to ensure the delivery of high levels of customer service. Ensuring that we have a lean and efficient organisation in our support functions, whilst supporting our colleagues in the branch and fee earners in B2B, is critical to success. We are focused on strengthening our balance sheet. We are rigorous in our capital allocation and cash is a key performance metric for all business units. Annual Report 2017 Countrywide plc 07 Financial statementsStrategic reportCorporate governance Our markets A look back over the year …and a look forward to what 2018 has in store Annual house price growth Source: Land Registry Over 10% 8% to 10% 6% to 8% 4% to 6% 2% to 4% Under 2% The mortgage market Total mortgage approvals ended 2017 up 1.9%* on the previous year. This growth has been driven by a 7.0%* increase in the number of homeowners remortgaging in the face of the first interest rate rise by the Bank of England for ten years. The number of mortgages taken out to fund a house purchase fell 1.5%*; a large part of this was driven by a 28%* fall in the number of buy to let mortgages taken out. Squeezed household finances may result in credit conditions tightening slightly over the course of 2018, which has the potential to hamper growth in the number of approvals, but while the Bank of England chose to increase the base rate by 0.25% in November, the level of competition between lenders means that mortgage rates are low by historical standards. * Source: Bank of England statistics Summary In 2017, the housing market remained stable. House prices rose by 5.2% (source: Office of National Statistics) over the year and 1.2 million homes were bought and sold, down 1.4% from 2016’s total. In the lettings market, rental growth picked up, with the average rent rising 2.4% over the year (Countrywide lettings index). The structural drivers of the market remain the same. Sales House price growth steadily slowed over the course of 2017, ending the year at 5.2%. Most of this growth was generated by regions in the North and the Midlands, whereas prices in the capital rose 2.3%, more slowly than in each of the other ten regions. This North–South divide was also reflected in the number of homes sold. Between 2016 and 2017 1.4% fewer homes were sold, but an increase across the North offset a larger fall in London and parts of Southern England. While general elections tend to bring with them a degree of uncertainty, the impact of the 2017 election on the housing market was limited. Instead the year was characterised by the lingering impact of the extra 3% stamp duty surcharge from 2016 on second-home owners and the tapering of interest tax relief on landlords. Taken together they have proved to be a disincentive for would-be landlords to purchase, with first-time buyers increasingly taking their place. Lettings The lettings market has been buffeted by politics and policy over the last two years, but is returning to a new normal (please see graph on the opposite page). In 2016 the number of rental homes on the market rose 14% as investors brought forward purchases to beat the introduction of the 3% stamp duty with 7% growth in London and 15% across the rest of Great Britain, but stock levels fell back in 2017 with 20% fewer rental homes on the market in London and a 3% drop across Great Britain as a whole. Overall, however, the total number of rented homes in England grew 3.4% (source: English Housing Survey). Between 2016 and 2017 the rate of rental growth picked up by a third, rising from 1.8% to 2.4%. Much of this pickup has been driven by a return to growth in the capital, where rents resumed their upward trend after falling back in 2016. London went from having the slowest rate of rental growth in England to the fastest, driven by fewer landlord purchases leading to fewer homes on the market. 08 Countrywide plc Annual Report 2017 Strategic report Commercial 2017 ended with a flourish for the investment market. Q4 volume of £16.5 billion was the strongest quarter since Q2 2015 and pushed the annual total for 2017 to £58.8 billion, up 25% on 2016 and 38% above the ten-year annual average. This was characterised by a small number of very large transactions in London; after adjusting for that, the market grew moderately. 2017 saw record investment into the specialist sectors, surpassing volume for both retail and industrial for the first year ever, accounting for a record 17% of UK volume. 2017 also delivered an all-property return in excess of 10%, a level almost unthinkable twelve months ago. With the exception of retail sectors, capital values have been restored to their pre-referendum levels and, in the case of industrial, charged ahead. However, reflecting greater aversion to risk, values between prime and poorer quality secondary assets have diverged post referendum, a theme which is expected to continue into 2018. In commercial sectors the investment rationale for UK commercial real estate remains sound relative to other asset classes. The spread between the all-property transaction yield and ten-year gilt yields currently stands well in excess of 400 basis points, comfortably ahead of the long term average. Even if anticipated interest rate rises in the US and UK prompt a softening of gilt yields, there is sufficient margin to ensure UK property retains its fair value status. Outlook for 2018 There are risks to the economy and property markets in the coming years, but overall we expect markets to remain subdued. Brexit uncertainty will affect confidence and add caution to much needed investment decisions, but a healthy labour market will continue to support property moves. Wage growth should also pick up a little from mid-2018 as higher inflation feeds into wage demands, but, despite rising inflation, the interest rate environment will be supportive. Although rates will rise, it is likely they will remain below 1% throughout 2018 and 2019. House prices will grow in most areas of the country, with the structural undersupply of homes supporting prices. The Government’s target to build 300,000 new homes per year will be difficult to achieve in the short term with rising construction costs and skill shortages. Across Great Britain we expect house price growth of 1% in 2018. Stamp duty relief for first-time buyers will make little difference to activity levels, but will support prices in the first-time buyer sector of the market. Transaction volumes and market turnover are still low by historical standards as movers stay put for longer. Current and forecast activity is now only a little above a baseline level which reflects moves on a need, rather than a desire, basis. The prospects for the rental market look stronger. Conditions are still largely favourable on the demand side given poor house purchase affordability, but the new stamp duty arrangements are dissuading landlord purchases, especially in London. New taxation will bite harder over the next three years, making profit more susceptible to landlords’ levels of borrowing. That could lead to an increase in sales by the most highly geared landlords, reducing supply and boosting yields. In combination with fewer new landlords, this will support rents. Low mortgage rates and competition among lenders will support the housing market. Despite the likelihood of small rises to the base rate in 2018 and pressure on lenders’ margins, mortgage rates will remain low by historical standards. At the all-property level, the recovery in capital values in 2017 arguably counts against a repeat of the same in 2018. Our total return forecast is circa 6% for 2018, with income providing the main component of return alongside a small degree of capital value growth. However, value movements will be wide ranging at the sector level, with further falls reflecting risks around the occupier markets. Rental homes on the market London GB 30% 20% 10% 0% -10% -20% -30% -40% 4 1 - t c O 4 1 - v o N 4 1 - c e D 5 1 - n a J 5 1 - b e F 5 1 - r a M 5 1 - r p A 5 1 - y a M 5 1 - n u J 5 1 - l u J 5 1 - g u A 5 1 - p e S 5 1 - t c O 5 1 - v o N 5 1 - c e D 6 1 - n a J 6 1 - b e F 6 1 - r a M 6 1 - r p A 6 1 - y a M 6 1 - n u J 6 1 - l u J 6 1 - g u A 6 1 - p e S 6 1 - t c O 6 1 - v o N 6 1 - c e D 7 1 - n a J 7 1 - b e F 7 1 - r a M 7 1 - r p A 7 1 - y a M 7 1 - n u J 7 1 - l u J 7 1 - g u A 7 1 - p e S 7 1 - t c O 7 1 - v o N 7 1 - c e D 8 1 - n a J Annual Report 2017 Countrywide plc 09 Financial statementsStrategic reportCorporate governance Our strategy Our strategic priorities Countrywide is the UK’s leading integrated property services group. Our strategy is to be the provider of choice for residential and commercial property services in the UK. Our aim is to deliver sustainable shareholder value through the investment in our people and in delivering market-leading products and services across all our channels for our customers in Sales and Lettings, Financial Services and commercial sectors. Business units Customers People UK Sales and Lettings and London Sales and Lettings Read more on pages 18 to 19 • Focus on the highest level of service delivery that our home buying, selling and letting customers expect through our branch network • Invest to restore Lettings expertise and focus • Provide customers with digital tools to manage their sales and lettings journey with Countrywide Financial Services Read more on pages 22 to 23 • Focus on highest levels of client service • Ensure our mortgage customers have the best level of protection through life and general insurance products and drive Group value by greater conveyancing attachment • Improve retention and renewal • Invest to restore the right leadership, capabilities and skills at branch, area and regional level • Restore the local entrepreneurship in our branch network, including the freedom at a local level to drive marketing, pricing, hiring and development – our ‘Freedom within a Framework’ • Deliver the performance metrics and measures to enable each business to measure progress internally and against the market • Invest and grow the number of mortgage and protection consultants in our branch network • Improve productivity through investment in sales skills • Continue to support our people to achieve industry recognised qualifications in financial services • Improve remortgage conversion through focus on the highest levels of client service B2B Read more on pages 20 to 21 • Focus on highest levels of client service and delivery for our existing lender client contracts as well as targeting new business opportunities • Continue to build on our combined offering to developers and property investors providing ‘joined up’ services for acquisition, development, management and sales/lettings • Invest in recruiting, developing and retaining the best surveyors, people and leadership in the industry • Continue to invest and build upon our successful graduate programme, the surveying and conveyancing academy, that attracts, retains and develops the best people in the industry COST EFFICIENCY • Reduce overheads and drive cost efficiency in our central support functions • Invest to address our legacy IT infrastructure and line of business applications • Contact centre optimisation to improve customer experience through localisation and improved productivity FINANCIAL DISCIPLINE AND CASH FLOW • Drive better working capital management • Improved capital discipline and capital allocation • Leverage the Group’s purchasing power through better procurement • Strengthen the balance sheet 10 Countrywide plc Annual Report 2017 Strategic report Products and services Relevant KPIs Relevant risk factors • Promote products and ancillary services which suit our customers’ needs • Optimise promotional and marketing spend to increase pipeline • Deliver capital and resource allocation against service line profitability • Increased focus on servicing the high value home sales market particularly in London and other major conurbations In Sales • Number of exchanges • Average fee In Lettings • Properties under management Overall • Income growth • Adjusted EBITDA growth • Continue to grow the channels building on the strength of our specialist mortgage distribution networks: Mortgage Intelligence, The Buy to Let Business and Mortgage Bureau • Continue to offer multiple channels – high street, telephony and digital – with an integrated customer journey across those channels • Market share of total amount and number of mortgages written • Number of mortgage protection policies sold • Income growth • Adjusted EBITDA growth • Invest in new techniques and technologies to drive innovation in our Surveying and Valuation businesses to increase productivity and enhance customer service • Surveying market share and average fee • Increased referral rates of conveyancing from Sales and Lettings • Corporate properties under management • Number of new home exchanges • Income growth • Adjusted EBITDA growth • Financing and capital risk • Exposure to UK housing market trends • Resilience of IT infrastructure and cyber security • Changing regulatory environment • Increasing competition in the evolving markets we operate in • Securing and retaining excellent people • Financing and capital risk • Exposure to UK housing market trends • Potential loss of a major business partner or contract • Resilience of IT infrastructure and cyber security • Changing regulatory environment • Increasing competition in the evolving markets we operate in • Financing and capital risk • Exposure to UK housing market trends • Professional indemnity exposure • Potential loss of a major business partner or contract • Increasing competition in the evolving markets we operate in • Securing and retaining excellent people OUR PEOPLE AND OUR VALUES Responsible We do the right thing. We listen, take time to understand and always tell the truth. Personal We are a people business. We care about our customers and each other. We have fun. Straightforward We keep it simple, dealing with the complicated things so our customers don’t have to. Passionate We love working with property and we work hard, knowing what we do really matters. Annual Report 2017 Countrywide plc 11 Financial statementsStrategic reportCorporate governance Risk management and principal risks Identifying and managing the risks to our business The Group recognises that the successful management of risk as part of our everyday activities is essential to support the achievement of its strategic objectives. The Board is responsible for the overall stewardship of our systems of risk management and internal control. The Board in conjunction with the Audit and Risk Committee regularly undertakes a robust assessment of the principal risks facing the Company. A summary of the principal risks and uncertainties facing the Group is provided on pages 14 to 16. The Group’s Risk Management Framework The Group operates a Risk Management Framework (RMF) which seeks to establish an interactive set of arrangements and processes to support the effective and consistent management of risk. The outputs of the RMF provide assurance that risks are being appropriately identified and managed and that an independent assessment of management’s approach to risk management is being performed. The Group has continued to embed the components of the RMF to ensure that they are aligned with evolving regulatory requirements within our businesses. The eight components of the RMF are shown in the diagram below: Risk strategy A comprehensive view of how risk management is incorporated across all levels of the business. During the year we reviewed the Group’s risk strategy and the associated risk appetite framework. The outputs of this review are a series of macro-level risk appetite statements proportionate to the nature, scale and complexity of risks faced by our business. Risk governance The Group operates a three lines of defence model. Responsibility for approving, establishing and maintaining the RMF rests with the Board. There is a clear organisational structure in place with documented, delegated authorities and responsibilities from the Board to the chief executive and the Executive Committee. Individual business units are responsible for executing their activities in accordance with these delegated authorities. 1 Risk strategy 8 Risk assurance 2 Risk governance Purp o s e Str a t e g y Customers 7 Risk monitoring and reporting 3 Risk culture Colleagues Products and Services V i sio n 6 Risk control V alues 4 Risk identification 5 Risk assessment 12 Countrywide plc Annual Report 2017 Strategic report Three lines of defence: 1 First line of defence 2 Second line of defence 3 Third line of defence Senior management is responsible for ensuring risks associated with our business activities are identified, assessed, controlled, monitored and reported, and establishing an appropriate culture and tone at the top. Our ‘control’ functions, and the Executive Committee, set policy and frameworks for managing key risks. Internal Audit supports the Audit and Risk Committee and provides independent assurance on the system of risk and internal control. Underpinning the Countrywide RMF is the ‘three lines of defence’ model: Third line • Review first and second lines • Provide an independent perspective and challenge the process • Objective assurance over the control environment Second line • Develop and oversee the RMF • Oversee and challenge risk management • Provide guidance and direction • Set policy First line • Deliver day to day risk management • Follow the Group RMF • Apply internal controls and risk responses Countrywide plc Board Audit and Risk Committee Executive Committee Executive Risk Committee (ERC) Group Risk and Compliance Committee Group Health and Safety Committee Group Information Security Committee UK Sales and lettings and London business units Financial Services business unit B2B business unit Group function leadership teams Risk culture Operating principles and expectations for risk management are driven by a clear tone at the top. During the year we continued to reinforce expectations regarding keeping our business and our customers safe and legal. Our Code of Conduct provides the basis for establishing our expectations of our employees and this is reinforced via an annual programme of compliance and ethics training. Risk identification Effective risk management requires that the Group has a complete understanding of the risks it faces, which are defined in our risk universe. Risk assessment A standardised assessment framework is used to evaluate our risk exposure at both business unit and overall Group level, enabling consistent measurement. Risk assessment follows both a bottom-up approach through individual business unit/functional teams and a top-down quarterly review by the Executive Risk Committee, the Audit and Risk Committee (ARC) and the Board. Risk control Controls operate across the business at entity level, through policies and associated control standards, and locally through individual business unit operating procedures. A self assessment of controls against the Group policy minimum control standards was completed during the year. Risk monitoring and reporting Monitoring and reporting of the Group’s risk exposures are undertaken through management committees. The ARC receives a consolidated risk report on a quarterly basis, detailing the risks facing the Group and the expected six-month position against a series of planned mitigating actions. The ARC is also provided with regular reports on the activities of the Group risk and compliance function. Risk assurance Assurance on the management of risk is provided across the three lines of defence model. Management committees consider outputs from reviews performed by the first line (e.g. quality assurance results and management reviews), the second line (e.g. risk reviews conducted in relation to specific themed areas) and the third line via reporting provided by Internal Audit on the results of findings from individual audits and progress in implementing agreed management actions. The results of this assurance activity are reported to the relevant level within the Group. Annual Report 2017 Countrywide plc 13 Financial statementsStrategic reportCorporate governance Risk management and principal risks continued Principal risks and uncertainties facing the Group The Board has undertaken a robust assessment of the Group’s principal risks. Crystallisation of these risks could cause the Group’s future results of operations, financial condition and prospects to differ materially from current expectations. This includes the ability to maintain appropriate levels of capital or achieve stated targets and commitments and other expected benefits. In addition, risks relating to the Group that are not currently known, or that are currently deemed immaterial, may individually or cumulatively also have the potential to have a material adverse effect on the Group’s future results of operations, financial condition and prospects. The table below sets out the principal risks faced by the Group, together with mitigating factors and associated commentary on any changes in risk profile. Risk and impact Mitigation Change Commentary Financing and capital structure The effective management of its debt and access to finance is central to the Group’s ability to achieve its strategic objectives and profitability. The Group has been supported by a syndicate of six banks since its IPO in 2013 through the provision of a revolving credit facility (RCF). The RCF expires in March 2020. The facility also contains covenant thresholds in relation to net debt/adjusted EBITDA and to the level of interest cover. The Group also needs to ensure that it has the funding required to deliver on its strategy and future growth plans and that it manages its debt and cash balances effectively. Failure of the Group to comply with its existing debt covenants may lead to a default on the Group’s borrowings and a requirement for the Group to repay any amounts outstanding or to renegotiate the terms of its facility. Exposure to UK housing market trends The UK housing market continues to follow cyclical trends and continues to be impacted by the changes to stamp duty in 2016/17 and continuing uncertainty around the implications of the UK’s exit from the European Union. There is a high correlation between the volumes and prices of houses sold and business performance within areas such as estate agency, conveyancing, surveying, mortgage broking and other complementary services that we offer. New The Group undertakes open and regular communication with its lending institutions, and expects to engage with its banking group to amend and extend its facilities during the second half of 2018/early 2019. The consideration of debt covenants and available headroom is built into the Group’s planning, budgeting and forecasting processes, with regular monitoring undertaken against covenant compliance. The Group has developed a detailed annual operating plan and budgets that seek to restore the Group back to profitable growth, and to improve its management of corporate and working capital. 2017 has seen a deterioration of business performance and consequently a worsening of the Group’s leverage ratio. With the support of the lender group, in February 2018, the Company agreed an amendment to its covenant thresholds to provide the Company with the financial flexibility to invest in the business. The Board has acknowledged the need to bring the leverage ratio back in to the Group’s medium term target of 1.5–2.0x and has launched a number of initiatives to address this through 2018. Increase We carry out regular high level reviews of UK housing market results and trends including analysis of a number of key forward-looking indicators. We have also sought to diversify the mix of products and services that we offer in recent years to reduce our dependency on UK house prices and sales volumes. For example, revenue from our B2B and Financial Services businesses has increased. Our Lettings business also tends to be more stable and counter-cyclical to the UK housing market. Additionally, we took positive action on costs and cash flow during 2017 and continue to see this as an area of focus in 2018. Our performance during 2017 was disappointing, primarily due to the changes we made over the last 24 months in our Sales and Lettings business. The outlook for 2018 continues to be challenging. We expect economic growth to be subdued, holding back the pace of income growth and inhibiting housing market transactions and house price growth. Added uncertainty from Brexit negotiations will weigh on confidence in the near term. We have begun to take a range of actions to restore the Sales and Lettings business back to profitable growth. 14 Countrywide plc Annual Report 2017 Strategic report Risk and impact Mitigation Change Commentary Professional indemnity exposure The previous downturn in the UK housing and commercial markets and impact of sub-prime lending exposed the Group to a higher level of professional indemnity (PI) claims within the Surveying division. Decrease We have generally continued to see improvements in PI through maintained focus during 2017, ringfencing the £1.8 million exceptional charge arising in the year on one claim (note 10), and the volume of claims has considerably reduced. In addition, we have seen a positive experience in the number of claims withdrawn which has resulted in a reversal of previously held reserves. We seek to embed risk management in our day to day operations as this delivers recognisable benefits for our clients as well as for Countrywide. We consciously changed our risk profile, by avoiding higher risk lenders/client types. Monitoring arrangements include operational controls implemented for review and audit of surveyor outputs and targeted use of automated valuation models to aid checks in perceived higher risk cases. We have continued to invest in providing our workforce with technology that aids compliance. In respect of legacy claims, we continue to review the claim trends and inputs underpinning the existing professional indemnity provision. We carry different professional indemnity insurance arrangements for our commercial business, Lambert Smith Hampton, as potential individual exposures could be larger. By doing this we protect our overall Group cover and effectively ring-fence commercial risks, delivering a financially beneficial position for the Group overall. Potential loss of a major business partner or contract We have a number of material commercial relationships with banks, insurers and other firms. The loss of one of these contracts, or a significant reduction in volumes or fees, could have a significant impact in revenues in more than one area of our business and on the Group’s profitability. We have an agreed approach to corporate client relationship management with key relationship responsibilities defined at senior management level, and supported by key Executive Committee members. Regular reviews are undertaken with key clients to ensure continued focus on investment to maintain service levels and compliance with contractual requirements. We operate a centralised team with responsibility for liaising with key customers and developing new contract opportunities. No change We continue to benefit from strong relationships with our corporate partners and we have retained existing, as well as won new, contracts during 2017. We recognise the importance of the continuing success of our key partner alliances as part of our ongoing B2B strategy. Resilience of IT infrastructure and cyber risk The business relies upon a series of interdependent systems for operational performance and financial information and a failure of one of these or a security breach could impact the Group’s operations, reputation and future profitability. The Group’s systems could also be subject to the increasing risk of cyber attacks. The Group has continued to implement a series of progressive service improvement plans to support operational performance. No change In-house information security team monitors information security risks and potential data breaches. Group-wide training has been implemented to advise colleagues of good information security practices and data protection requirements. We are progressing activity under the Group General Data Protection Regulations (GDPR) project to support the businesses in delivering additional data-related safeguards required as a result of the introduction of the GDPR in May 2018. During 2017 we have continued to enhance our IT capabilities through the implementation of new front end security enhancements (e.g. patching) to current systems. We have further centralised our IT teams, by aligning our support service across the IT estate, in line with our development roadmap. This has included strengthening our core IT team and technical capabilities. As part of the ISO 27001 certification which we maintain for a number of our key business areas, there are business continuity plans in place for key business processes. Annual Report 2017 Countrywide plc 15 Financial statementsStrategic reportCorporate governance Risk management and principal risks continued Principal risks and uncertainties facing the Group continued Risk and impact Mitigation Change Commentary Changing regulatory environment Our businesses operate across multiple regulated sectors. Failure to meet current legal or regulatory requirements could lead to financial penalties and/or reputational damage, including withdrawal of authorisation or licences required for the Group to do business. Increase We have established an appropriate tone at the top, which is cascaded through the Group via our Code of Conduct, Group policies and associated compliance and ethics training. Expertise within the main business areas is supported by centralised legal and compliance teams which closely monitor existing business practices and any changes. Specific projects are mobilised to address material regulatory changes (e.g. the GDPR). Robust complaints management systems are in place across all operating divisions, with thematic analysis in place. We operate across a range of regulated sectors and seek to maintain close links and open dialogue with our regulatory bodies and have continued to monitor regulatory developments and their impacts on our businesses. Where appropriate, we have developed implementation plans to deliver required changes and enhancements. The overall cost of regulation continues to grow (for example, via the funding of the Financial Services Compensation Scheme and costs associated with changes to align with the GDPR). Increasing competition in the evolving markets that we operate in Countrywide operates across a range of highly competitive markets, a number of which are experiencing changes due to technological advancements. Increasing competition, from existing competitors or new entrants, could lead to a reduction in market share and/or a decline in revenues. Increase Our strengths lie in the expertise and advice we are able to offer our customers across our range of services. We are reinvesting in Sales and Lettings to strengthen our industry experience so that locally we can support our customers and their changing needs to ensure their overall experience with Countrywide is a positive one. Our business strategy is to concentrate on our strengths of being an integrated property services provider to bring people and property together. We have continued to provide increased customer choice developing our propositions to align with consumer trends, for example, providing digital tools to complement our core service offering. We have developed colleague incentive schemes that seek to drive the link between Group value-related services which benefit our customers as well as the Group’s businesses. We monitor our service offering continually in order to meet and exceed our customers’ expectations. Securing and retaining excellent people Our ability to deliver our strategy is dependent on us attracting, developing, motivating and retaining people of the highest quality. An inability to recruit or retain talent could impact our ability to deliver our financial performance and growth targets. During 2017, we saw an increased level of churn as a result of the changes made in our Sales and Lettings business. Increase We continue to invest in the development of our people and our training and development programmes across our businesses. We operate a range of employee benefits that seek to incentivise and motivate performance across all levels of management. These are overseen by the Remuneration Committee. We have developed a structured approach to talent recruitment by investing in internal capability and support our employer of choice strategy. People are the heart of our business and essential to deliver our strategy. The loss of front line industry expertise we saw in our Sales and Lettings businesses impacted our performance. Replacing this expertise is a key area of focus and we are seeing early signs of this as some of the people who had previously left are coming back. Following the increased level of churn in 2017, we began to take steps in the second half of 2017 to invest at the branch area and regional level in our Sales and Lettings business. We monitor our overall levels of employee engagement to drive activity that focuses on attrition, morale and other potential pressure points to improve operational efficiency. 16 Countrywide plc Annual Report 2017 Strategic report The EU referendum The result of the EU referendum in June 2016 and the proposed exit of the UK from the EU has increased the overall level of macroeconomic uncertainty. The Group considered the impact of this uncertainty on the business, recognising the potential knock-on effect on property prices, mortgage approvals and volume of transactions. The directors believe the Group’s strategy creates a diversified stream of revenues which reduces the impact as outlined in the ‘exposure to UK housing market trends’ risk. Viability statement The Group’s prospects are assessed through the Group’s strategic planning process, including review by the executive team of the three-year plan with business unit functional leaders. The Board participates by means of an annual strategic away day and approval of the three-year plan, which is followed by the development of a detailed annual operating plan and budget, also signed off by the Board. Financial projections for the next three years are compiled from estimates of financial performance after taking into account principal risks. A central review of debt covenant compliance and headroom is completed. Key assumptions underpinning the strategic plan include: market volume forecasts, market share growth forecasts and cost reductions, including benefits from existing major rationalisation benefits. The Group is financed through a revolving credit facility (RCF) of £275 million provided by a syndicate of six lender banks which have supported the Group since its IPO in 2013. Whilst the existing facility expires in March 2020, the Board has a reasonable expectation that the Group will be able to amend and extend its facility upon expiry with its existing banks or to bring new lenders into the syndicate. Assessment of viability The directors have assessed the viability of the Group over a three-year period, taking account of the Group’s current position and the potential impact of the principal risks and mitigating actions detailed above. The directors have determined that a three-year period to 31 December 2020 is the most appropriate timeframe as: this period aligns with the Group’s business planning and budgeting cycle and the performance measurement period for the long term incentive plan; and demand is driven by consumer confidence which is difficult to project beyond a three-year period. The strategic plan reflects the directors’ best estimates of the prospects of the business. The plan was then flexed by overlaying the possible financial impact of a number of scenarios beyond those included in the plan. These scenarios are based on those principal risks (above) considered to be most important, namely: exposure to UK housing market trends (volumes and house price levels); increasing competition (volumes and fees); and regulatory compliance (incorporating professional indemnity, the changing regulatory environment and the impact of change in legislation in respect of tenancy fees). These scenarios were tested against: a short term house price crash/decline in transactional volumes with a slow return to growth; and a slower, yet continuing, decline in house prices/ transactional volumes. These scenarios included the relative knock-on impact of reduction in earnings within our estate agency operations to other related areas of the Group. The results take into account the availability and effectiveness of mitigating actions, including the flexing of capital expenditure and changes to our cost base. Each of these actions would be potentially available to avoid or reduce the impact of the identified risks. The directors considered the financial and operational impact of these severe, but plausible, scenarios to determine their overall effect on the Group’s financial position. This assessment considered the Group’s expected financial position, existing banking facilities and potential management actions. The results of the stress testing showed that the Group would be able to withstand the impact of those scenarios by adjusting its operating plans. Viability statement Based on their assessment of prospects and viability above, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period ending 31 December 2020. The directors also considered it appropriate to prepare the financial statements on the going concern basis, as explained in the basis of preparation paragraph in note 2 of the accounts. Annual Report 2017 Countrywide plc 17 Financial statementsStrategic reportCorporate governance Segmental review Sales and Lettings Key performance indicators – UK* Key performance indicators – London* Number of exchanges Average fee per exchange (£) Number of exchanges Average fee per exchange (£) 41,722 -17% 2,381 -5% 8,778 -20% 8,267 +3% 17 16 41,722 50,362 17 16 2,381 2,511 17 16 8,778 10,951 17 16 8,267 8,054 Average number of branches Rental properties under management (average) Average number of branches 666 -15% 62,646 -4% 246 -12% Rental properties under management (average) 26,644 +3% 17 16 666 783 17 16 62,646 65,352 17 16 246 278 17 16 26,644 25,792 * 2016 restated from prior year following internal restructuring of operations between UK, London and B2B. 18 Countrywide plc Annual Report 2017 Strategic report UK Sales and Lettings Summary London Sales and Lettings Summary • Total income down 17%; adjusted EBITDA* £14.9 million, • Total income down 10%; adjusted EBITDA* £11.5 million, down 47% down 44% • Properties under management 62,646, down 4%; • Strong Lettings performance in premium brands, Lettings income down 8% Hamptons International and John D Wood • 41,722 homes exchanged, down 17% • Properties under management 26,644, up 3%; Lettings • Average FTE down 1,000 or 21% to 3,710 income flat year on year • 8,778 homes exchanged down 20% • Average FTE down by 299 or 14% to 1,848 Operating review 2017 has been another disappointing year for UK Sales and Lettings. As a result of the new strategy launched in 2015 we made a series of structural changes to the business, closing 200 branches, and bringing together our Sales and Lettings business as well as changing the way we measured performance in the business. It is clear that these changes in strategy were flawed. The impact of these structural changes continued well into the first half of 2017 as we saw a high level of attrition of some of our most experienced Sales and Lettings people, which impacted performance for the whole year. We are taking steps to arrest the decline and believe that we can recover this division to profitable growth and improve market share. The internal issues were further exacerbated by the tough 2016 comparatives owing to changes in the stamp duty regime and the uncertainty in consumer confidence as a result of UK’s decision to exit the European Union. Operating review The London housing market has been slower than the rest of the UK to recover from the double impact in 2016 of material increases in stamp duty on high value properties and second homes plus the UK’s decision to leave the European Union. Housing transactions in London declined by 22% during 2017 and similarly properties available for rent fell by 20%. The structural changes implemented in UK Sales and Lettings in Q4 2016 did not extend to our premium brands where stability was maintained with respected and experienced managers continuing to lead our teams in Hamptons International and John D Wood. We also retained separate specialist management structures for Sales and Lettings. Sales The volume of houses exchanged nationally was broadly flat year on year at around 1.2 million, but the number of houses exchanged by Countrywide outside of London fell by 17%. Adjusting for branches closed in Q4 2016; the number of exchanges still fell by 10%. Consequently Sales income has fallen 24% and the impact has been widespread across all our regions. Average house prices increased by 3% but, owing to competitive pricing pressure, our average fee fell by 5%. Sales Exchanged units fell by 20% – both Hamptons International and John D Wood performed well in a challenging London market, with a strong performance in Lettings. This resilience in the premium brands was offset by our mid-market London business where changes in management resulted in headcount falling year on year by 14%, and this has clearly had an impact on our results. Since August, one of our most experienced managers has been leading the team to address the issues and to turn around that business. Our digital proposition was rolled out to over 50% of the network. We have since determined that selling a low cost partial estate agency sales service alongside the traditional full service offering does not work and have withdrawn that product offering. We need to define what digital means for us as an organisation and this will be determined as we build the detailed recovery plan. Lettings Our Lettings services fared better than Sales owing to the recurring nature of the fee income. Nevertheless, a 4% reduction in properties under management to 62,646, coupled with an 11% fall in the number of lets agreed, resulted in an 8% decline in Lettings income. * See note 4 of the financial statements for reconciliation to statutory measures. The average price of houses sold was up 3% and our average fee achieved grew by 3%. Additionally web chat has been rolled out across Hamptons International, making it easier for our customers to engage with us. Lettings Lettings revenue accounted for 51% of total income in London compared to 46% in 2016. Overall Lettings income was flat year on year. Annual Report 2017 Countrywide plc 19 Financial statementsStrategic reportCorporate governance Segmental review continued B2B Summary Key performance indicators • Income down 2%; adjusted EBITDA* up 13% to £35.6 million • Strong year for contract retention and new lender relationships in Surveying • New technology roll out for lenders and customers in Surveying and Conveyancing • Excellent contract retention in Lambert Smith Hampton in a challenging commercial market * See note 4 of the financial statements for reconciliation to statutory measures. Number of surveys/ valuations completed 365,223 Surveying average fee (£) 197 +4% 17 16 365,223 364,957 17 16 197 190 Corporate properties under management (average) 36,624 Exchanges – new homes 3,705 -24% 17 16 36,624 36,635 17 16 3,705 4,896 20 Countrywide plc Annual Report 2017 Strategic report Operating review Through its diverse portfolio of businesses, our B2B business unit delivered adjusted EBITDA growth of 13% through improved levels of productivity, enabled by the deployment of digital platforms in Surveying and Conveyancing. Surveying Our Surveying business delivered another year of growth in both revenue and adjusted EBITDA and maintained the highest levels of service demanded by our lender clients. This growth has been delivered in a market that was broadly flat for house purchase mortgage approvals with some growth in the remortgage market. The business benefits from a blue chip lender client base and this continues to be a strong platform to deliver its services to home movers and remortgage applicants across the UK. This position was further strengthened in 2017 with key contract retentions including Nationwide Building Society and Barclays Bank, alongside key contract wins including Leeds Building Society and Coventry Building Society. The Surveying business continues to help lead the industry with the introduction of new techniques and technologies to better assess property risk for its lender clients. At the beginning of 2017, we embarked on the roll out of a substantial technology investment programme. The business has rolled out the latest tablet-based mobile valuation software with integrated, highly accurate lender form mapping. Throughout the year a booking and allocation module has being developed for launch in early 2018, optimising surveyor workload to deliver daily operational efficiencies. Further technological developments in the programme included a new customer and product portal, plus the Valuation Risk Hub, which transforms the way property risk is assessed for all mortgage applications. Linked to assessing property risk, professional indemnity claims have been a significant focus for the business over the past eight years and we continued to make progress in this area. Investing in a sustainable professional surveying resource is a priority for the business to underpin the growth in capacity required to ensure service delivery. We have introduced over 140 new surveying professionals into the industry over the last three years through this scheme and plans are set for this to continue. Conveyancing Our Conveyancing business revenue declined in line with Group property sales volumes but it took steps to reduce costs and therefore delivered an adjusted EBITDA consistent with 2016 with a margin improvement achieved through an improvement in the use of in house lawyers and through cost savings. Development of our customer portal technology was completed in 2017, with full roll out across the agency network expected to complete in 2018. The portal provides an improved digital instruction platform for our customers and colleagues, whilst allowing for electronic and secure communication between customers and our property lawyers during the conveyancing process. The business has continued to build on the success in 2016 in improving customer service, and in 2017 saw a record year as measured by the customer through our net promoter scores (NPS) of 38+ and FEEFO rating of 4.3/5. In this regard the business celebrated its success by winning a number of awards including the ESTAS 2017 National Conveyancing Provider and the Mortgage Finance Gazette Awards 2018 - Best Conveyancing Firm. Land & New Homes and Asset Management Our Land and New Homes business won key schemes throughout the year. Key to the success was the combined approach between Sales and our consultancy business, ikon, and the performance of Lanes New Homes. Our Asset Management portfolio of businesses works closely with corporate clients by delivering services relating to sales, lettings, property management and emergency relocations. In 2017 the business continued to execute its growth strategy and delivered growth in adjusted EBITDA. Lambert Smith Hampton (LSH) Despite the challenging uncertain economic and political environment during 2017, Lambert Smith Hampton, our commercial business, delivered a strong performance. LSH retained every major customer that came up for renewal in 2017. Revenue saw a marginal 0.2% increase year on year, with adjusted EBITDA increasing by 9.6%. Annual Report 2017 Countrywide plc 21 Financial statementsStrategic reportCorporate governance Segmental review continued Financial Services Summary Key performance indicators • Income down 1% and adjusted EBITDA* of £19.7 million, down 13% • Overall growth in the UK mortgage market of 4% • Total value of mortgages completed in the year was up 13% to £17.7 billion (2016: £15.7 billion) * See note 4 of the financial statements for reconciliation to statutory measures. Number of mortgages arranged Total mortgages written (£bn) 96,031 +6% 17.7 +13% 17 16 96,031 90,262 17 16 17.7 15.7 Average number of mortgage and protection consultants Number of mortgage protection policies sold 666 +5% 60,876 +14% 17 16 666 633 17 16 60,876 53,467 22 Countrywide plc Annual Report 2017 Strategic report Operating review In 2017 the UK mortgage market grew by approximately 4% year on year, with overall gross lending finishing at £257 billion (2016: £245 billion). The Q1 year on year comparatives were skewed by the strong trading in Q1 2016 driven by changes in stamp duty surcharge on second homes and buy to let properties, whilst all subsequent quarters saw consistent growth in the market year on year. Overall mortgages completed grew from £15.7 billion in 2016 to £17.7 billion in 2017. This was as a result of strong performance from our network, Mortgage Intelligence (MI), (up 15%), together with our recently acquired telephony business, The Buy to Let Business (TBTLB) (up 30%), and Mortgage Bureau (up 21%). This offset a weaker performance from the core field sales team, which was heavily impacted by the reduction in activity in Sales and Lettings, resulting in year on year lending volumes being down 10%. MI operates a network and club for third party appointed representatives (AR) and directly appointed (DA) mortgage brokers respectively. MI provides regulatory oversight for sales made by the network and assists both the network and the club through arranging mortgage and insurance deals with our panels of lenders and insurance providers. The network firms employ over 400 regulated individuals, all of whom are contracted to sell only the financial products arranged by MI. The DA firms are not exclusively contracted by MI and therefore are free to choose how they do business. In 2017, MI generated £10.2 billion (2016: £8.8 billion) of gross mortgage distribution from the club and the network. TBTLB conducts our specialist business in the buy to let sector, and now also handles all customers who wish to transact by phone. The business relocated to larger premises during the year and has focused on growing its advisor numbers to meet increased demand. The business has experienced growth from both its strong existing customer relationships and reputation in the buy to let market, as well as from new telephony referrals from our Sales and Lettings branch network. As a result of the expansion and new streams of revenue, the business has increased its gross distribution to £1.5 billion (2016: £1.1 billion), an increase of 30% year on year. Mortgage Bureau is our specialist new build mortgage brokerage. In 2017 Mortgage Bureau has focused on building its relationship with other Group new build businesses, as well as on independent growth from its direct relationships with new build developers. As a result, the business has increased its gross distribution to £0.8 billion (2016: £0.7 billion), an increase of 21% year on year. The remortgage sector, representing approximately 39% of the overall market, experienced 9% growth, whilst the first-time-buyer sector, representing approximately 23% of the market, grew by 11%. The buy to let sector continued the decline which started in Q2 2016. Further to the changes in the underlying sectors, in November 2017, the Bank of England approved an increase in the base interest rate from 0.25% to 0.5%, the first increase since July 2007. Most lenders were swift to pass the change in rate on to their customers and this is starting to raise the consciousness of the public to the possibility of further rate increases in the future. As such, the remortgage sector is expected to continue growing in 2018. As previously announced in our 2017 interim report, we renewed our long standing relationship with our significant partner, Aviva, in order to supply our customers with market-leading mortgage protection products. The launch of a new platform in early H2 has had a positive impact on our sales conversion, with competitive pricing ensuring that more customers can afford to benefit from important life cover and a wide range of associated protection products. Annual Report 2017 Countrywide plc 23 Financial statementsStrategic reportCorporate governance Chief financial officer’s review Overall Group income fell by 9% to £672 million and saw a 23% reduction in adjusted EBITDA to £65 million principally as a result of the disappointing performance in our Sales and Lettings businesses. Our statutory results were further impacted by restructuring and significant impairment charges relating to historical acquisitions, resulting in a loss for the year of £208 million.” Segment results UK Sales and Lettings London Sales and Lettings Financial Services B2B Central Services Total Group The Group has reset the strategy in its Sales and Lettings businesses to go ‘back to basics’ and to focus on restoring industry expertise at branch, area and regional level, and to recognise that the skills and experience we need in Sales is different from Lettings. As set out in the chairman’s statement, over the past three years we also took on significant central costs, and did not see the cash conversion coming through. We seek to fundamentally reshape the business as part of a turnaround strategy, which is likely to take three years and will result in further restructuring and cost efficiency plans in 2018 and beyond. The Group incurred exceptional charges of £225.9 million comprising; restructuring costs of £7.9 million in respect of redundancy costs and cost optimisation; exceptional impairment charges against goodwill (£192.3 million) and brand names (£12.9 million), with associated impairment charges of £9.4 million against other associated intangible and tangible assets and £1.6 million impairment charges against current assets; and a £1.8 million charge in respect of an historic professional indemnity claim. Finance costs have increased by £2.9 million during the year as a result of increased margins applicable under the revolving credit facility and the full year impact of the interest rate swap taken out in July 2016. Net debt has reduced during the year by £55.9 million to £192.0 million. Results Our business units all reported a reduction in income as a result of continuing challenges in the trading environment exacerbated by the full-year impact of branch closures and staffing changes made in the Sales and Lettings businesses. These changes most significantly affected the UK and London Sales and Lettings business units’ income and profitability, with income reducing by 17% and adjusted EBITDA declining by 47% to £14.9 million. The Sales and Lettings business also refers business into Financial Services and B2B and their adverse performance has also impacted on Financial Services and B2B’s Conveyancing operations through the reduced level of referrals and ability to drive a wider Group value from the network. Our Financial Services business revenue declined by 1% due to strong performance from The Buy to Let Business, Mortgage Bureau and Mortgage Intelligence but profitability suffered due to lower referrals from Sales and Lettings resulting in adjusted EBITDA of £19.7 million, down 13%. B2B has delivered adjusted EBITDA growth of 13% driven by the performance of our Surveying and Lambert Smith Hampton businesses. Our central costs were down 11% on the prior year and benefited from improved financial disciplines - notably from the recovery of circa £1 million non-recurring benefit arising from collection of deferred consideration receivable in respect of a prior investment disposal which had been fully provided (within adjusted EBITDA) during 2016, and from circa £2.5 million in respect of retrospective rebates secured across a number of suppliers following the conclusion of external benchmarking exercises. Total income Adjusted EBITDA1 2016 £’000 Variance % 2017 £’000 205,186 155,304 87,324 220,745 3,319 247,820 2 172,553 2 88,174 224,785 2 3,623 671,878 736,955 2017 £’000 14,888 11,547 19,660 35,576 (16,984) 64,687 2016 £’000 27,846 2 20,551 2 22,682 31,498 2 (19,029) 83,548 Variance % (47) (44) (13) 13 (11) (23) (17) (10) (1) (2) (8) (9) 1 Earnings before interest, tax, depreciation, amortisation, exceptional items, employment-linked contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as ‘adjusted EBITDA’ (see note 4 for reconciliation and note 2(w) for justification of this alternative performance measure). 2 Restated from prior year following internal restructuring of operations between UK, London and B2B. 24 Countrywide plc Annual Report 2017 Strategic report Income statement Reconciliation of statutory operating profit and adjusted EBITDA (see note 2(w) and 4) Adjusted EBITDA Contingent consideration Share-based payments Depreciation and amortisation Share of profit from joint venture Exceptional income Exceptional costs Operating (loss)/profit UK £’000 14,888 — (336) London £’000 11,547 (397) (316) Financial Services £’000 19,660 (969) (271) B2B £’000 35,576 (62) (457) All other segments £’000 (16,984) (2,501) (243) 2017 Total £’000 64,687 (3,929) (1,623) (14,881) (5,249) (2,770) (7,583) (3,007) (33,490) — — — — — — — — 690 — 690 — (168,477) (168,806) (48,586) (43,001) (1,304) 14,346 (3,844) 23,630 (3,658) (225,869) (25,703) (199,534) 2016 Total £’000 83,548 (6,834) (2,477) (32,872) (13) 35,714 (48,203) 28,863 Contingent consideration Contingent consideration of £3.9 million (2016: £6.8 million) relates to previous acquisitions where the consideration arrangements require the vendors to remain in employment and as such have been treated as a post-combination employment expense; they are being accrued over the relevant periods specific to each of the agreements, with commitments extending out to 2021. Certain of this contingent consideration is also subject to performance conditions being satisfied, with target adjusted EBITDA levels which must be achieved in order to realise the full payment, with a reduced payment made if targets are not fully met. Accruals for contingent consideration are therefore reviewed at each period as future earn out assumptions are revisited and any credits to the income statement in respect of downward revisions to estimates are reported in the same way. Share-based payments The share-based payment charge to the income statement of £1.8 million (2016: £2.5 million) comprises: a decreased charge in respect of annual nil-cost option grants under the three-year long term incentive plan (LTIP) to senior managers amounting to £0.8 million (2016: £1.3 million) as a result of aligning non-market conditions to underlying performance across grants; increased share incentive plan (SIP) charges of £0.9 million (2016: £0.8 million) arising from employee participation; deferred bonus share plan charges of £0.1 million (2016: £0.1 million); and elimination of any IPO plan charge after this fully unwound during 2016 (£0.3 million). The Group has seen a significant decline in profitability since 2014 and therefore the impact of truing up for non-market conditions, matching reward to performance, has seen the share-based payment charge reduce accordingly since 2014, becoming a less material feature of the income statement after the vesting of all elements of the IPO scheme in March 2016. However, as the Group is now in a turnaround situation, it is anticipated that the incentivisation of performance will result in future LTIP awards which, provided Group performance meets these targets, will see the share-based payment charge continue to increase and re-introduce material volatility into the income statement. Depreciation and amortisation Our depreciation and amortisation charge continues to be separated to indicate the depreciation and amortisation that relates to assets purchased for use in the business and amortisation arising on those intangible assets that have been recognised as a result of business combinations. The underlying depreciation and amortisation charge increased by £6.2 million to £27.7 million, the principal drivers of which were: a £3.0 million increase in amortisation of computer software as a result of increased levels of investments, accompanied by a £3.2 million increase in depreciation of tangible fixed assets. Amortisation of intangible assets recognised through business combinations has decreased by £5.6 million, to £5.8 million, as expected as we previously noted that £6.6 million of the annual charge relates to intangible assets recognised in 2007, when the Group was taken private, which would end in 2017. Exceptional costs During 2017 the Group commenced a strategic transformation agenda for the fundamental turnaround of the business. We have reported exceptional costs of £225.9 million (2016: net costs of £12.5 million), which have been disclosed in further detail in note 10, comprising: Strategic and restructuring costs During 2017 the Group implemented a number of material cost optimisation projects, resulting in a number of exceptional costs in relation to the project and related restructuring costs. The principal elements have been: £4.4 million in respect of redundancy and associated people-related restructuring costs; £1.7 million in respect of consultancy costs, all associated with specific projects scoped to tackle cost optimisation; and £1.9 million of property closure costs. Impairment charges The Group also incurred the following impairment charges arising from the annual impairment review of goodwill and indefinite life intangible assets. Following the assessment of recoverable value against carrying value, the following impairments were charged: • £192.3 million in respect of goodwill associated with the UK (£151.3 million) and London (£41.0 million) cash generating units (see note 14); • £12.9 million in respect of brand names associated with the UK (£8.4 million) and London (£4.5 million) cash generating units (see note 14); • £5.3 million in respect of customer contracts associated with the UK (£4.1 million) and London (£1.1 million) cash generating units and the Professional Services (B2B) cash generating unit (£0.1 million) (see note 14); and • £4.1 million in respect of non-current assets: £2.7 million in respect of intangible fixed assets (computer software) and £0.1 million tangible fixed assets associated with the UK cash generating unit; £0.7 million tangible fixed assets associated with the London cash generating unit; and £0.6 million write-off of an available-for-sale investment (see note 14, 15 and 16c). In addition, impairment charges of £1.6 million have been made against the carrying value of trade receivables which relate to assets arising in prior periods where circumstances in relation to collectability have changed during the year. In light of the impairment charges triggered against brand names in the previous two years, as part of the wider turnaround plan, we will undertake an assessment in 2018 to reassess our brand strategy and the related impact on the useful economic life of our brands currently held as indefinite. Annual Report 2017 Countrywide plc 25 Financial statementsStrategic reportCorporate governance Chief financial officer’s review continued Exceptional costs continued Professional indemnity provisions During 2017 the Group received reduced numbers of professional indemnity valuation claims, in line with expectations, and achieved closure of a number of challenging cases. Estimating the liability for PI claims is highly judgemental and we updated our financial models to reflect the latest inputs and trends and took advice from our panel of lawyers in respect of open claims. The judgemental nature of the provision, and progress made during the year on some individually significant claims aligned with the low level of claims made, would have provided progress on unwinding the provision. However, an individually significant claim has resulted in the need to increase the provision by £1.8 million. Interest Whilst our drawdown on bank borrowing facilities decreased from £290 million at the prior year end to £210 million at 31 December 2017, the margin increased from 2.75% to 3.0% over LIBOR. To mitigate exposure and volatility arising from interest rate changes, the Group entered into an interest rate swap to convert floating levels of interest on the revolving credit facility into a fixed rate on specified levels of revolving credit facility drawdown from 20 June 2016. The interest cash flows on the first proportion of the revolving credit facility were hedged, and therefore this value moves over the period to March 2020 in line with the original forecast drawdowns. Consequently our finance costs increased and were incurred at fixed margin higher than LIBOR (see note 21). In addition, future interest charges will also increase as the interest rate swap became ineffective at the end of 2017, as forecast drawdowns will no longer be met as we seek to deleverage the business. As a result of this prospective ineffectiveness, future revaluations of the interest rate swap forming the cash flow hedge will be charged to the income statement and not through reserves. Taxation A tax charge of £5.7 million (2016: £10.7 million) was recognised on underlying profits of £25.2 million (2016: £52.7 million) which represents an effective tax rate of 22.6% (2016: 20.3%). The Group also recognised an exceptional tax credit of £9.7 million (2016: £8.7 million) on losses before tax of £237.2 million (2016: £33.2 million) which results in an overall tax credit for the year of £4.0 million (2016: £2.0 million charge). This represents an effective tax rate of -1.9% (2016: 10.0%). The principal reason for the tax credit is the £210.4 million impairment of goodwill, brands and customer contracts which resulted in unwind of the related deferred tax liability. Countrywide’s business activities operate predominantly in the UK. All businesses are UK tax registered apart from a small operation in Ireland. We act to ensure that we have a collaborative and professional relationship with HMRC and continue to enjoy a low risk rating. We conduct our tax compliance with a generally low risk approach whilst endeavouring to maintain shareholder value and optimise tax liabilities. Tax planning is done with full disclosure to HMRC when necessary and being mindful of reputational risk to the Group. Transactions will not be undertaken unless they have a business purpose or commercial rationale. In addition to our corporation tax contribution, our businesses generate considerable tax revenue for the Government in the UK. For the year ended 31 December 2017, we will pay corporation tax of £1.4 million (2016: £5.2 million) on profits for the year, we collected employment taxes of £128.7 million (2016: £158.0 million) and VAT of £87.7 million (2016: £94.2 million), of which the Group has incurred £36.4 million and £3.0 million (2016: £44.3 million and £3.3 million) respectively. Additionally we have paid £11.8 million (2016: £12.8 million) in business rates and collected £38.7 million (2016: £41.7 million) of stamp duty land tax though our Conveyancing business. Profit for the year – underlying and statutory The Group reported underlying profit attributable to equity holders (‘underlying earnings’) of £19.5 million (2016: £42.0 million), a decrease of 54% for the year ended 31 December 2017. The Group’s statutory loss after tax of £208.1 million (2016: profit of £17.5 million) is after exceptional costs of £225.9 million (2016: net costs of £12.5 million), contingent consideration charges of £3.9 million (2016: £6.8 million), share-based payment charges of £1.8 million (2016: £2.5 million) and non-cash charges of £5.8 million for amortisation of acquisition-related intangible assets (2016: £11.4 million) related to historical acquisitions, together with the corresponding tax effect. Earnings per share Adjusted earnings per share declined to 8.4 pence (2016: 19.3 pence). Statutory basic earnings per share declined to a loss of 89.6 pence (2016: 8.0 pence). These are based on the weighted average number of shares in issue of 232.3 million (2016: 216.7 million). A reconciliation of the basic and underlying earnings per share is provided in note 13. Cash flow Cash generated from operations increased by £30.2 million to £58.1 million for the period (2016: £27.9 million), aided by effective management of working capital accompanied by a reduction in payments on unwind of legacy professional indemnity claims Capital expenditure on tangible assets of £6.9 million (2016: £17.9 million) has been focused on planned branch refurbishments, and in respect of intangible asset expenditure of £7.6 million (2016: £11.1 million) on the development of software, specifically new technology platforms to deliver online offerings to our customers. Net debt The net debt position as at 31 December 2017 was £192.0 million (2016: £247.9 million). The Group’s net debt to adjusted EBITDA ratio is 2.97x (2016: 2.97x). Net debt reflects a decrease of £36.8 million due to the net proceeds received in respect of the share placing undertaken on 9 March 2017. The Board has previously acknowledged the need to bring the leverage ratio down to the Group’s medium term target of 1.5-2.0x. The net debt reconciliation is provided in note 20. Net debt maturity and changes to committed bank facilities The Group’s available bank facilities (excluding overdraft arrangements available) at 31 December 2017 comprised a £340 million revolving credit facility and accompanying £60 million accordion facility repayable in March 2020. In February 2018 the Company agreed an amendment letter relating to its term and revolving credit facility with its lender partners which provides the Company with the financial flexibility to invest in the business as it takes action to restore the Sales and Lettings business back to profitable growth. The Group reduced its borrowing capacity to a £275 million revolving credit facility (RCF) (retaining the £60 million accordion facility) which remains repayable in March 2020 and also took the opportunity to refresh the related financial covenants. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in our segmental reviews on pages 18 to 23. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out above in our financial review, with further details of the borrowing facilities set out in note 20. In addition, note 33 of the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit and liquidity risk. 26 Countrywide plc Annual Report 2017 Strategic report A description of the Group’s principal risks and uncertainties and arrangements to manage these risks are detailed in the strategic report on pages 14 to 16. The Board is not recommending the payment of a final dividend (2016: nil pence), giving a total 2017 dividend of nil pence (net) per share (2016: 5.0 pence). As at 31 December 2017, a total of £210 million was drawn down from the £340 million RCF (amended to £275 million in February 2018). During the year, the Group has complied with the financial covenant requirements, being the leverage ratio (the ratio of net debt to adjusted EBITDA) and interest cover (the ratio of adjusted EBITDA to net interest payable), which are subject to testing dates at 30 June 2018, 30 September 2018 and 31 December 2018. However, 2017 has seen a deterioration in business performance and consequently a worsening of the headroom on covenants, in particular the leverage ratio. The Group benefits from a supportive lender group of six banks who have provided borrowing facilities since March 2013. The lender group agreed an amendment to its leverage covenant thresholds in February 2018. Within the chief financial officer’s review of the 2016 annual report, my predecessor noted that in light of the uncertainty surrounding the outlook for the residential property market and a desire to invest in key organic strategic initiatives, our dividend policy was to be revised to 30-35% (previously 35-45%) of underlying profit after tax (underlying profits being measured as profit after tax but before exceptional items, amortisation of acquired intangibles, contingent consideration and share-based payments). Within the 2017 interim report, he further noted that the market for housing transactions remained challenging and was expected to remain uncertain for some time, noting that it was prudent to refrain from paying an interim dividend and committing to review the situation at the full year. In assessing the Group’s ability to continue as a going concern, the Board has reviewed the Group’s cash flow and profit forecasts against these covenants. The impact of potential risks and related sensitivities to the forecasts were considered in assessing the likelihood of a breach of the covenants, whilst identifying what mitigating actions are available to the Group to avoid a potential breach. Given the scale of challenge required to turn around the Sales and Lettings business and the desire to invest in cost and growth initiatives to build a sustainable and profitable business for the long term, whilst remaining committed to reducing our leverage, the Board has decided that there will be a nil dividend recommendation for 2017. The Group’s performance is dependent on a number of market and macroeconomic factors including the impact on customer confidence and transactional volumes in the UK housing market from interest rate changes and government policies which are inherently difficult to predict. Specifically, a range of assumptions underpin the profit and cashflow forecasts for the period to 31 December 2019, including: • Recovery of the pipeline to 2017 levels; • Achieving the volume of forecast exchanges per branch and associated productivity measures in other areas of the Group; • Mitigation of the potential impact of new government legislation banning lettings tenancy fees; and • Successful realisation of internal corporate cost saving initiatives currently underway. Failure to achieve one or more of the above would result in lower adjusted EBITDA with a consequent negative impact on headroom of the leverage and interest cover covenant ratios and higher projected net debt. If the Group’s forecast is not achieved, there is a risk that the Group will not meet the net debt to EBITDA leverage covenant and should such a situation materialise, the banks reserve the right to withdraw the existing facilities. Without the support of the lender group, the Group and Parent Company would be unable to meet their liabilities as they fall due. Given the timing and execution risks associated with achieving the forecast and therefore remaining within the leverage ratio as stipulated by the banking covenants, the directors have concluded that it is necessary to draw attention to this as a material uncertainty which may cast significant doubt about the Group’s and the Parent Company’s ability to continue as a going concern in the basis of preparation to the financial statements. The directors have confirmed that, after due consideration, they have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. Dividend The key judgements exercised by the Board in relation to the current year dividend proposal have been: • the recent performance of the business; and • net debt to EBITDA leverage levels. In assessing future dividends, the Board will consider: • the future investment in the business; • net debt to EBITDA leverage levels; and • reward to shareholders. Other information Tenant fees The draft Tenant Fees Bill in November 2017 sets out the government’s approach to banning lettings fees paid by tenants. We expect that this will be introduced in 2019, and we are continuing to evaluate the potential impact and are putting in place mitigating actions. Pensions As at 31 December 2017 the net defined benefit scheme liabilities were £5.6 million (2016: £3.7 million). The movement in the scheme liability was as a result of the £6.3 million reduction in the value of the scheme assets (including a £4.7 million actuarial loss) exceeding the reduction in the value of the obligations. Pension payments of £2.0 million (2016: £1.9 million) were made in the year, in line with the payment profile agreed with the trustees in 2016 and remains in place for another three years. The next triennial revaluation is due in 2018. A pensioner buy-in of all remaining non-insured pensioners was concluded during December 2017 which allowed transformation of the scheme’s risk profile, without requiring any additional funding from the Company, thus maintaining the current payment profile for Company contributions. Tax strategy The Group’s Board approved strategy in relation to tax is published on our investor relations website in line with HMRC guidelines. Corporate governance The Group’s policies regarding risk management and corporate governance are set out in the risk management section on pages 12 to 17 and in the corporate governance report on pages 33 to 43. Himanshu Raja Chief financial officer 8 March 2018 Annual Report 2017 Countrywide plc 27 Financial statementsStrategic reportCorporate governance Our people Our employees are our greatest asset and key to profitable growth Our people We have strength and depth across our UK and London Sales and Lettings branch networks, and in our Financial Services and B2B businesses. Whilst we have lost some experienced Sales and Lettings professionals, we have managed to win: • 38 Best Estate Agent Guide (Rightmove EA Masters) Awards; and • 32 ESTAS including: • Seven Gold Awards and 18 Best In Country Awards • Best Large Estate Agency Group • Best Large Lettings Group B2B collected a string of awards in 2017 including: • Best Survey Provider • Best Conveyancing Firm • Most Outstanding Law Firm • Best Residential Conveyancing Services • Winner of the National Provider ESTAS Financial Services won multiple awards including: • Countrywide Mortgage Services - Best Customer Service Broker • Mortgage Bureau – Best New Build Mortgage Broker • Mortgage Intelligence – Mortgage Network of the Year • The Buy to Let Business – Best Buy to Let Broker Award winning reward Winner of the ‘Best Voluntary Benefit’ (Employee Benefit Awards) for our exclusive Under One Roof employee benefit programme. Under One Roof has been a huge success since it was introduced in February 2016. This benefit goes to the heart of doing the right thing by our people. Colleagues, and their close family, receive discounts on Countrywide products and services from day one of employment. More than 2,000 colleagues have collectively saved over £3 million by making the most of the award winning scheme. Recruitment In 2017 Countrywide launched a new careers website which showcases all of our businesses and is easy to use whilst portraying our purpose and values. This was tied in with the creation of an in-house recruitment team to support the entire business. The team introduced a consistent process which ensures a positive experience for candidates, suppliers and our hiring community. Countrywide is now able to utilise more advanced data to inform decisions around attracting candidates and resource planning by business unit. The introduction of the Apprenticeship Levy has opened the door for employee development at all levels – 90% of new apprentices in 2017 were existing colleagues. In 2017 we launched the Countrywide apprenticeship programme with 40 new apprentices. This encouraged talent into the business and also provides the opportunity for our people to achieve a recognised qualification within Countrywide. As we enter 2018, we now have 18 different qualifications ranging from twelve months to five years and we have plans to grow this further in 2018. This will form a key part of helping our people develop their careers within the property business. In October Countrywide signed the Armed Forces Covenant. This means that service leavers and the military spouses community have the opportunity to join Countrywide. We grant current and future reservist employees leave to train and fulfil their military duties as well as support reservists within the workforce who wish to join us. We also promote career opportunities within the property sector for members of the Cadet Forces by holding insight days in collaboration with the Career Transition Partnership. Training and development Countrywide has a flexible approach to on the job learning in the form of iLearn. It gives colleagues the opportunity to take learning courses online either via a desktop or mobile device. This provides colleagues with relevant and personalised courses that will help them in the roles that they perform. In comparison to traditional, classroom-based learning, colleagues can take courses at times that suit them and in a timeframe that fits around their work. Our Surveying business continues to attract 20+ trainee surveyors each year who will become RICS qualified and begin their career within an award winning surveying team. To support our colleagues in Sales and Lettings we have launched a new Career Development Framework. This clearly maps opportunities within the business and is supported by online and classroom-based training programmes. In 2017 our voluntary turnover reduced to 27% (2016: 29%) and employee relations cases across Countrywide reduced by 28% in 2017 compared to 2016. 28 Countrywide plc Annual Report 2017 Strategic report Gender diversity Employees 5,979 4,698 Female Male Board 3 6 Senior management* 26 66 * Senior management comprises employees with responsibility for planning, directing or controlling the activities of the Group or a strategically significant part of it. Directors of subsidiary companies are included only to the extent that the subsidiary is significant in the context of the Group as a whole. Equal opportunities We are committed to a policy of equal opportunity and diversity in employment and recognise that this is essential to ensuring the success and growth of the organisation. To this end, we make every effort to select, recruit, train and promote the best candidates for the job. We aim to treat all employees and applicants, fairly and appropriately, regardless of age, gender, civil partnership or marital status, pregnancy or maternity leave, disability, race, religion or belief, sex or sexual orientation, and to ensure that all opportunities are available to everyone and that no one suffers discrimination, harassment or intimidation. Human rights While the Group is accountable to investors, we take into account the interests of all our stakeholders, including our employees, our customers and our suppliers, as well as the local community and the environment in which we operate. Countrywide’s reputation is one of its key assets and, as a major player in the UK property services sector, adhering to the highest standards of integrity, personal conduct, ethics and fairness is deemed to be of vital importance. Due to the regulatory requirements in the UK we have judged that human rights are not a material risk for the business. We do, however, work closely with our third party external suppliers to ensure their human rights and ethics policies are aligned with those of Countrywide. Our support function in India, WNS, has a foundation called WNS Cares Foundation. It takes care of providing education and a lot of other facilities and benefits to the children in the society. This foundation exists in all the countries WNS operates from and is actively involved in child education. More information on the foundation can be found by visiting www.wnscaresfoundation.org. Modern slavery We are committed to ensuring that there is no modern slavery or human trafficking in our supply chains or in any part of our business. Our Anti-slavery policy reflects our commitment to acting ethically and with integrity in all our business relationships and to implementing and enforcing effective systems and controls to ensure slavery and human trafficking are not taking place anywhere in our business and in our supply chains. This strategic report was approved by the Board of directors on 8 March 2018 and signed on its behalf by: Peter Long Executive chairman Annual Report 2017 Countrywide plc 29 Communication and engagement Countrywide’s internal communication aims to be timely, open and honest, providing colleagues with the information they need that links directly to the Company’s purpose and values. A key channel for communication and engagement activities is our intranet. We now have over 60% of colleagues regularly using Our Place for their news and business-related information and tools. The introduction of a Group-wide recognition programme exclusively on Our Place in April 2017 saw over 30,000 thank yous being issued in the first nine months. High Fives encourage colleagues, managers and executives to recognise performance and behaviours of colleagues who reflect the values of Countrywide and go the extra mile. Charitable giving Countrywide supports a workplace charitable giving scheme so that employees can donate to their charities of choice tax efficiently through payroll deduction. The subsidiary businesses are also encouraged to support causes within their local communities, and employees from across the country participate in a number of local initiatives. We operate in local markets, our people are local and our brands are local, making our contribution to the local community an important part of our charitable giving. Financial statementsStrategic reportCorporate governance Board of directors As at the date of signing the directors’ report, the following people were directors of the Company: Peter Long Executive chairman David Watson Deputy chairman and senior independent non-executive director Himanshu Raja Chief financial officer Cathy Turner Independent non-executive director Richard Adam* Independent non-executive director N NA R RNA A N R David joined the Group in September 2013 as non-executive director of the Company and is the senior independent director. David is currently a non-executive director of Hermes Fund Managers Limited and T R Property Investment Trust plc, where he chairs the audit committees. He has extensive industry and accounting experience. David has had a distinguished career as a finance director. Most recently he was finance director of the general insurance division of Aviva. Prior to that he held various other senior financial roles at Aviva and at Prudential and M&G Group. David is a chartered accountant and a graduate of City University Business School. Peter was appointed non-executive director of the Company in February 2016 and took over as non-executive chairman at the Company’s Annual General Meeting (AGM) on 27 April 2016. On 24 January 2018 he became executive chairman of the Company. He is also chairman of Royal Mail plc and Parques Reunidos Servicios Centrales S.A.U. A respected business leader, Peter had a long and successful executive career in the travel industry. This included transforming a small UK tour operator, First Choice, into Europe’s largest leisure travel group, TUI Group. In February 2016 after a planned succession transition period Peter stepped down as chief executive of TUI AG joining its Supervisory Board and where on 13 February 2018 he was appointed vice chairman. He was formerly senior independent non-executive director of RAC plc (2001—2005) and Rentokil Initial plc (2005—2014). He was also a non-executive director of Debenhams plc (2006—2009). 30 Countrywide plc Annual Report 2017 Himanshu joined the Board in June 2017 and assumed the chief financial officer role effective 1 August 2017. Himanshu brings 25 years’ experience in large multinational organisations in the business and IT services, software and telecommunications sectors. He was previously chief financial officer of G4S plc where he was responsible for finance, treasury, tax, IR and M&A and IT and procurement. At G4S, Himanshu strengthened the controls and governance across the group, delivered significant cost transformation and oversaw a significant improvement in profitability and cash flow. Himanshu was previously chief financial officer of Misys plc, under private equity ownership, and, prior to that, was chief financial officer of Logica plc, where he was responsible for the sale of the Group to CGI in a £2.1 billion transaction. Himanshu graduated in law from the University of Wales, and qualified as a chartered accountant in 1989. Cathy was appointed non-executive director of the Company and chairman of the Company’s Remuneration Committee on 31 July 2013. Cathy is also a non-executive director and chair of the remuneration committee for Aldermore PLC and Old Mutual Wealth. She is a partner at the senior advisory firm Manchester Square Partners LLP. She is an honorary fellow of UNICEF UK and a member of the board of the Gurkha Welfare Trust. She is a former council member of the Royal College of Art. She has extensive industry experience working with Deloitte & Touche, Ernst & Young and Towers Watson in her early career. She subsequently joined Barclays PLC, where she was a member of the group executive committee with responsibility for human resources, corporate affairs, strategy and brand and marketing. During her time with Barclays she was also director of investor relations for four years and had extensive experience in remuneration in her many roles. She was chief administrative officer of Lloyds Banking Group PLC. Cathy is a graduate of the University of Lancaster. Richard was appointed non-executive director of the Company in June 2014 and chairman of the Company’s Audit and Risk Committee in August 2014 and will step down from both positions at the Company’s AGM on 25 April 2018. A chartered accountant qualifying with KPMG in 1982, Richard has nearly 30 years’ experience as a finance director of private and listed businesses having gained a wealth of experience from executive and non-executive roles spanning the media, infrastructure, construction and services sectors. From 2015 to 2017 he served as senior independent non-executive director of Countryside Properties plc and chaired its audit committee. From 2007 to 2016 Richard was group finance director of Carillion plc and for the seven years before that of Associated British Ports Holdings plc. He was also previously non-executive director and chairman of the audit committee of FirstGroup plc and SSL International plc. Richard is a graduate of the University of Reading. Corporate governance Executive chairman Executive director Independent non-executive directors Non-independent non-executive director 1 1 6 1 Jane Lighting Independent non-executive director Rupert Gavin Independent non-executive director Natalie Ceeney Independent non-executive director Caleb Kramer Non-executive director NA R N R R Jane was appointed non-executive director of the Company in June 2014. She has spent her career in broadcast media, including chief executive officer of Channel 5 Broadcasting, chief executive officer of Flextech plc and founder and chief executive officer of Minotaur International. She was formerly non-executive director at Paddy Power plc, a senior independent director at Trinity Mirror, a trustee of the Royal Television Society, governor of the National Film and Television School and a member of British Screen Advisory Council. Rupert was appointed non-executive director of the Company in June 2014. He is chairman of the board of trustees of Historic Royal Palaces and also chairs the Honours Committee for Arts and Media. Rupert has a range of other board positions, at both chairman and director level in a variety of businesses, with a strong consumer bias. Most recently he was chief executive officer of Odeon and UCI Cinemas Group between 2005 and 2014. He was previously at the BBC, where he was chairman and chief executive of BBC Worldwide, and also at BT, where he was managing director of the consumer division, prior to which he was at the Dixons Stores Group latterly as deputy managing director. Natalie was appointed non-executive director of the Company on 28 April 2017. Natalie chairs the board of Innovate Finance, and leads an independent strategy consultancy practice. After training as a strategy consultant at McKinsey & Company, Natalie’s executive career has included chief executive officer roles at HM Courts and Tribunals Service, The Financial Ombudsman Service, and The National Archives, and as a member of HSBC’s UK executive team, leading digitally enabled, customer focused change. Natalie is a graduate of the University of Cambridge. Caleb joined the Group in May 2009 and was appointed as a director. He is a managing director and portfolio manager (Europe) at Oaktree Capital Management (UK) LLP. Prior to joining Oaktree in 2000, Caleb co-founded Seneca Capital Partners LLC, a private equity investment firm. From 1994 to 1996, Caleb was employed by Archon Capital Partners, an investment firm. Prior to 1994, Caleb was an associate in mergers and acquisitions at Dillon Read and Co. Inc. and an analyst at Merrill Lynch and Co. Inc. Caleb received a BA in economics from the University of Virginia. Key to Committee membership: A Audit and Risk Committee N Nomination Committee R Remuneration Committee Chair of Committee * Richard Adam to step down as independent non-executive director and chair of the Company’s Audit and Risk Committee at the conclusion of the Company’s 2018 AGM. Annual Report 2017 Countrywide plc 31 Financial statementsStrategic reportCorporate governance Chairman’s introduction to corporate governance Dear shareholder On behalf of the Board, I am pleased to present Countrywide’s corporate governance statement. Although it has been a year of considerable change and challenge the Board remains committed to maintaining high standards of corporate governance and recognises the value and importance of meeting the principles of good corporate governance as set out in the Code. The Board recognises that achieving high standards of corporate governance is a continual process and changes to the structure and operation of our governance processes continued to be embedded during the course of 2017 in order to ensure full alignment with our risk and internal audit capabilities. As a Group, we are committed to building a progressive framework of strong risk management in order to support the reshaping of the business for the future.” Key priorities include re-building a strong and resilient Sales and Lettings network across the UK, regaining market share and getting the business back to growth. As we reshape the business for the future our success is very much dependent on developing a culture across the Group that supports the implementation of plans and strategy. I recognise that the Board plays a vital role in embedding culture throughout the business and I am pleased to report that our boardroom has a healthy culture that is based on openness and accountability, underpinned by a mutual respect between all directors. Our boardroom culture both encourages and supports constructive challenge from our non-executive directors. This has been borne out of our 2017 Board and Committee evaluation, which has provided valuable insights. Further information is provided in my Nomination Committee Report on pages 35 to 37. There have been a number of changes to the Board over the past year. The Board was strengthened by the appointments of Natalie Ceeney as independent non-executive director and Himanshu Raja as executive director who, following the resignation of Jim Clarke, took up the chief financial officer post on 1 August 2017. I would like to thank Jim for his contribution during his ten-year service with the Countrywide Group. Richard Adam notified me of his intention to step down as independent non-executive director at the conclusion of the Company’s 2018 AGM. Further details of changes to the Board are contained in my Nomination Committee Report on pages 35 to 37. The Nomination Committee will continue to review the composition of the Board to ensure that we have the appropriate balance of skills, experience, diversity and independence to support building a sustainable business for the long term. The Board aims to present a fair, balanced and understandable assessment of the Group’s position and prospects. It understands the importance of effective reporting, risk management and internal control procedures which are incorporated within Countrywide’s normal management and governance processes. As chairman of the Board I am responsible for leading the Board and ensuring that we play a full and constructive part in the development and delivery of the Group’s strategy and overall commercial objectives. During the year and in January 2018 we saw two significant Board changes: the change of chief financial officer referred to above; and the resignation of the chief executive officer. Not withstanding these changes, and following the recent completion of the above-mentioned Board and Committee evaluation, no significant issues were raised. The review process is described in more detail in the Nomination Committee Report on page 36. Peter Long Executive chairman 8 March 2018 32 32 Countrywide plc Annual Report 2017 Corporate governance Corporate governance statement Introduction This corporate governance report intends to give shareholders a clear understanding of Countrywide’s corporate governance arrangements and their operation within the Group during the year, including an analysis of the level of compliance with the principles of the UK Corporate Governance Code (‘the Code’) issued by the Financial Reporting Council in April 2016. The Code can be viewed at www.frc.org.uk. Compliance with the 2016 Code The directors have considered the contents and requirements of the Code and I am delighted to confirm that the Company has complied in all respects with the provisions of the Code during this financial year. Following Alison Platt’s departure on 24 January 2018, Peter Long was appointed to the role of executive chairman on a temporary basis due to the exceptional need to fill the vacancy left by Alison. As a result, the Company is not, at the date of this report, in compliance with the Code to that extent. The corporate governance report comprises pages 33 to 43. Additional information in respect of the operation, and terms of reference, of the Remuneration Committee is included within the separate directors’ remuneration report. The role of the Board, decision making and division of responsibilities The Board provides leadership to the Group and is collectively responsible for the long term success of the Company. It sets the strategy and oversees its implementation, ensuring that acceptable risks are taken and appropriate governance structures and controls are in place. It ensures that the right people and resources are in place for the Group to meet its objectives, review management performance and deliver long term value to shareholders and other stakeholders. In pursuit of these leadership objectives, the Board retains control of key decisions and has in place a formal schedule of matters specifically reserved for its approval which can be found at www.countrywide.co.uk/investor-relations/corporate-governance. The Board retention of decision making and control of these key areas ensures effective stewardship and risk management by providing integrated reporting, e.g. in respect of strategic priorities and associated risk and mitigating governance controls. Specific decisions reserved for the Board are summarised as follows: Responsibility Specific actions during the year Strategy and direction Approval of strategy and annual budgets. Authorisation of acquisition and disposal activity. Review of internal control arrangements and affirmation of risk management strategies. Review of internal control and risk management, including health and safety. Risk management and internal controls Governance Approval of financial statements, other updates to the market and recommendations on dividends. Approval of authority levels and financial and treasury policies. Appointments to and removals from the Board. Membership of the Board and Committee structure. Review of governance arrangements. The roles of chairman and chief executive are designed to be separated, clearly defined and approved by the Board. A copy of the intended division of responsibilities between the roles of the chairman and the chief executive is available to view on the corporate governance section of the Company’s website. Once a new chief executive officer is appointed, the roles of chairman and chief executive will once again be separated. The Board delegates matters to the three Board Committees (Audit and Risk, Nomination and Remuneration), in line with their terms of reference and the formal schedule of matters reserved for Board approval. Further information on the work of these Committees during the year can be found in each of their separate reports following this corporate governance introduction and the specific terms of reference for each of the Committees can be found on the corporate governance section of our website. The Board delegates the detailed implementation of matters approved by the Board and the day to day operational aspects of the business to the executive directors. Effectiveness The Board and its Committees continue to benefit from an appropriate balance of expertise, experience, independence and knowledge of the Group and its business sectors. At 31 December 2017, the Board comprised two executive and eight non-executive directors. The Nomination Committee considers the skill set and sector experience of the Board, appointments to the Board, director development and succession planning. Details of these activities and the process of Board evaluation and development are discussed in the Nomination Committee report on pages 35 to 37. The Board has eight scheduled meetings during the year; additional meetings are arranged if required. The Board Committee meetings are scheduled around the regular Board meetings. The directors’ attendance at the scheduled Board meetings and Board Committee meetings is shown in the table on page 34. Attendance is expressed as the number of meetings that each director attended out of the number they were eligible to attend as chairs or Committee members (i.e. excluding attendance where this was by invitation only). Annual Report 2017 Countrywide plc 33 Financial statementsStrategic reportCorporate governance Corporate governance statement continued Board attendance Director Peter Long Alison Platt1 Himanshu Raja Jim Clarke2 Caleb Kramer3 David Watson Cathy Turner Richard Adam4 Jane Lighting Rupert Gavin3 Natalie Ceeney Date of appointment 11 February 2016 1 September 2014 12 June 2017 28 December 2012 19 February 2013 2 September 2013 31 July 2013 9 June 2014 9 June 2014 25 June 2014 28 April 2017 Board meetings Audit and Risk Committee meetings Nomination Committee meetings Remuneration Committee meetings 8/8 8/8 4/4 6/6 7/8 8/8 8/8 8/8 8/8 7/8 4/4 — — — — — 4/4 4/4 4/4 4/4 — — 3/3 — — — — 3/3 3/3 3/3 3/3 2/3 — — — — — — 4/4 4/4 4/4 4/4 4/4 3/3 1 Alison Platt resigned from the Board with effect from 24 January 2018. 2 Jim Clarke resigned from the Board with effect from 31 July 2017. 3 Caleb Kramer was engaged in overseas activities which meant he was unable to attend one Board meeting. Rupert Gavin was also absent from each of the specific meetings above due to unexpected, unavoidable personal commitments. 4 Richard Adam is to step down as independent non-executive director at the conclusion of the Company’s 2018 AGM. The Company maintains directors’ and officers’ liability insurance cover for its directors and officers. The Company has made qualifying third party indemnity provisions (as defined in the Companies Act 2006) for the benefit of its directors during the year; these provisions remain in force at the date of this report. Independence The Code notes that the Board should identify in the annual report each non-executive director that it considers to be independent. Each of the non-executive directors is considered to be independent, with the exception of Caleb Kramer as he holds the position of managing director at Oaktree Capital Management (UK) LLP, a substantial shareholder of the Company. The Code recommends that at least half the Board, excluding the chairman, should comprise non-executive directors determined by the Board to be independent. Excluding the chairman and including the appointment of Natalie Ceeney on 28 April 2017, there are six (of a possible seven) non-executive directors determined to be independent and an executive director, and therefore the Board complies with recommendation B.1.2 of the Code. Similarly, the composition of the three Board Committees complies in all respects with the independence provisions of the Code. Accountability The Board remains committed to presenting a fair, balanced and understandable assessment of the Group’s position and prospects and of the importance of effective reporting, risk management and internal control procedures. Both the Audit and Risk Committee and the Board received drafts of the annual report to facilitate review and provide an opportunity for challenge and discussion. The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. Principal risks associated with the Group’s business are summarised on pages 14 to 16 of the strategic report. The Board has an Audit and Risk Committee which monitors and reports on the Group’s risk management systems. The Audit and Risk Committee also considers how the Board should apply corporate reporting and internal control principles and is responsible for maintaining an appropriate relationship with the Group’s auditors, PricewaterhouseCoopers LLP. The report of the Audit and Risk Committee is set out on pages 38 to 43. Remuneration Details relating to the Company’s policy on remuneration together with the level and components of remuneration available to the Company’s directors are provided in the Remuneration Committee’s report on pages 44 to 57. 34 Countrywide plc Annual Report 2017 Dialogue with shareholders As chairman, I ensure that views of shareholders are communicated to the Board as a whole and offer non-executive directors the opportunity to attend discussions with major shareholders. We actively seek channels through which to engage with investors and during 2017 the Company undertook a wide variety of investor relations activities, including roadshows in the US and the UK. Institutional shareholders represent the largest group of shareholders and much of the activity is focused on this group. The chief executive officer and the chief financial officer hosted or attended the majority of the events held, whilst key senior executives also participated in meetings and activities with institutional shareholders. Shareholder relations are given high priority by the Board. The prime means of communication with the majority of our shareholders is via the interim and annual reports, supplemented by interim trading updates, which aim to provide shareholders with a clear understanding of the Group’s activities and results. General presentations are given to both shareholders and analysts following the publication of the interim and annual results and at other appropriate points to share the strategic plans and offer an opportunity to engage with the business unit managing directors and other senior executives. Constructive use of the AGM Shareholders have the opportunity to address questions to the chairman and the chairs of the Audit and Risk, Remuneration and Nomination Committees at the AGM, where all directors will be in attendance. All shareholders are encouraged to attend the AGM. Shareholders wishing to lodge questions in advance of the AGM, or to contact the Board at any other time, are invited to do so by writing to the company secretary at the registered office address given in note 1 to the financial statements. Peter Long Executive chairman 8 March 2018 Corporate governance Report of the Nomination Committee In 2017, one new executive director (the chief financial officer) and one non-executive director were appointed to the Board during the year. The process was led by the Nomination Committee.” The Committee’s terms of reference are available at: www.countrywide.co.uk/investor-relations/ corporate-governance Dear shareholder On behalf of the Board, I am pleased to present Countrywide’s report of the Nomination Committee. Role and responsibilities The Committee is responsible for ensuring that the composition of the Board and its Committees is appropriate and enables it to function effectively. This requires evaluation of the balance of skills, experience, knowledge and diversity and the resultant identification of any gaps, either in the short, medium or longer term, and recommendations to address these. Succession planning for key Board positions forms part of our wider remit and, as such, we have insight into the Group’s leadership and development programme. We are also responsible for agreeing the annual Board effectiveness review process and monitoring any actions arising. Committee composition The membership of the Committee during 2017, together with appointment date, is set out below: Member Peter Long Cathy Turner David Watson Richard Adam Rupert Gavin Jane Lighting Nomination Committee member since 27 April 2016 31 July 2013 2 September 2013 9 June 2014 25 June 2014 9 June 2014 The composition of the Committee did not change during the period and we remained in full compliance with the Code recommendation that a majority of members should be independent non-executive directors throughout the period. Attendance by members at the meetings is shown on page 34. The Committee’s work The Committee held three formal meetings during 2017. In 2017, one new executive director (the chief financial officer) and one non-executive director were appointed to the Board during the year. The process was led by the Nomination Committee who were assisted by the external search firm, Ridgeway Partners. Ridgeway has no connection with the Company. Natalie Ceeney was appointed to the Board on 28 April 2017, and brings significant experience in financial services, IT and digital transformation. Natalie was appointed taking account of the balance of skills, experience and diversity of the Board. On 22 February 2017, the Board initiated a succession planning process to search for a new chief financial officer. The chair of the Nomination Committee led the process, assisted by Ridgeway Partners, and the list of potential candidates was considered having regard to the balance, skills and diversity of the Board. Himanshu Raja was appointed to the Board on 12 June 2017, and to the chief financial officer role effective 1 August 2017, following interview by the chair of the Audit and Risk Committee, chair of the Nomination Committee and the senior independent non-executive director. A full transition plan was put in place for Himanshu, along with a substantial period for a smooth handover. Annual Report 2017 Countrywide plc 35 Financial statementsStrategic reportCorporate governance Report of the Nomination Committee continued Board and Committee composition As described above, the Board went through a period of change with the appointment of a new non-executive director and a new chief financial officer. The Company believes that diversity of experience and approach, including gender and race diversity, amongst Board members is of great importance and it is the Company’s policy to give careful consideration to issues of Board balance and diversity when making new appointments. The search for candidates and any subsequent appointments are, therefore, made purely on merit regardless of gender, race, religion, age or disability in order to secure an appropriate balance of skills and attributes that are needed to ensure effective stakeholder engagement and delivery of the business strategy. Given our commitment to appointing the best people and ensuring that all employees have an equal chance of developing their careers within the Group, we do not think it is appropriate to set targets for Board appointments. As gender diversity remains a topic of significant discussion, we note that currently three of the nine members of our Board are female. In addition to Board diversity, we believe in promoting diversity at all levels of the organisation and further details of our workforce gender diversity are set out on page 29. Induction and training Following Himanshu’s and Natalie’s appointments to the Board, as with all directors of the Company, they received a tailored induction programme which provided them with the opportunity to gain a good understanding of the Group business and organisation, operations and governance environment, in order to maximise their contribution to the Board as quickly as possible. Key stages of the induction programme were: provision of documents in relation to the Board, strategy, performance and corporate governance; meetings with the executive directors to gain an overview of the business and current trading and key commercial issues; meetings with other directors and senior executives to discuss commercial issues and projects; and site visits, as required, to key locations to gain an understanding of the business and operations. All directors are also offered subsequent training to suit their needs and continuous professional development requirements. All directors also have access to the advice and services of the company secretary in addition to access to independent professional advice at the Company’s expense where they judge it necessary to discharge their duties as directors. Board effectiveness Countrywide Board Review 2017 Countrywide retained the services of Lintstock Limited in 2017 to undertake an evaluation of the Board’s performance with director interviews. The first stage of the review involved Lintstock engaging with the chairman and the company secretary to set the context for the evaluation, and to tailor survey content to the Company’s specific circumstances. All Board members were then requested to complete an online questionnaire addressing the performance of the Board, its Committees and the chairman, as well as their own individual contribution to the Board. Lintstock subsequently conducted interviews with each of the Board members, enabling them to expand on their responses to the questionnaires. The anonymity of all respondents was ensured throughout the process in order to promote open and frank exchange of views. Lintstock then produced a report addressing the following areas: • The current composition of the Board was addressed, and the attributes to prioritise in new director appointments were considered. • The Board’s understanding of key stakeholders, the culture and behaviours within the organisation and the market in which the Company operates were addressed. • The dynamics between the Board members and the atmosphere at Board meetings was reviewed. • The management and focus of the Board meetings was considered, and the quality of the information and support provided to the Board members were addressed. • The Board’s oversight of strategy, risk and human resources was reviewed, and the Board members identified the top strategic issues facing the Company over the next three to five years. • The performance of each of the Committees of the Board was considered, as was the performance of the chairman and individual directors. 36 Countrywide plc Annual Report 2017 Corporate governance The table below summarises the key 2017 Board evaluation results and actions. Key 2017 Board Evaluation Results Continue to focus on shorter-term succession planning and recruitment processes for the chief executive officer and chairman of the Audit & Risk Committee roles. Review succession plan for non-executive directors. Nomination Committee to meet regularly. Arrange branch visits for non-executive directors, including on an individual basis. Encourage more interaction between non-executive directors and top management in order to enhance understanding of the business and culture. KPIs to be redesigned. Following the externally facilitated evaluation, I am pleased to confirm the effective performance of each non-executive director and the time commitment of each non-executive director. I am therefore confident that each of them is in a position to discharge their duties to the Company in the coming year and, accordingly, as detailed in the notice of the AGM, with the exception of Richard Adam, all directors will stand for re-election. Peter Long Chair of the Nomination Committee 8 March 2018 Annual Report 2017 Countrywide plc 37 Financial statementsStrategic reportCorporate governance Dear shareholder During the year, the Committee continued its key financial oversight role for the Board, outlined in its terms of reference, to reassure shareholders that their interests are properly protected in respect of the Group’s financial management and reporting. During 2017, the Committee has: • concluded the external audit tender process and subsequent reappointment of PricewaterhouseCoopers LLP (PwC), whose appointment was confirmed by the AGM in April 2017; • continued to scrutinise the activities, performance, independence and effectiveness of the external auditors; • supported the Board with its ongoing monitoring and evaluation of the effectiveness of the Group’s risk management and internal controls systems; • determined the focus of the Group’s internal audit activity, monitored its effectiveness, reviewed its findings and verified that recommendations were being appropriately implemented; • continued to monitor the integrity of the Group’s financial statements and satisfy itself that any significant financial judgements made by management are sound. Our report details the significant financial judgements; and • reviewed management’s assessments of going concern and our viability statement. The Committee also reviewed and noted the amendment to the Group’s revolving credit facility, signed on 2 February 2018, and noted the additional covenant headroom which this provided. The assurance framework required by the Committee is provided by complementary contributions from management reports, internal and external audit reports and risk management and compliance reports. However, as chairman of the Committee I have also held meetings with the Company’s internal (Deloitte) and external (PwC) auditors, the chief financial officer, the chief risk and compliance officer, senior members of the Group finance department, and other senior executives in which key issues relevant to the Committee’s work were discussed. I notified the Company of my intention to step down as independent non-executive director of the Company at the Company’s AGM for the year ending 2017, as stated in the Company’s announcement on 5 October 2017. The Board has commenced a formal search for my replacement and I will remain as chairman of the Audit and Risk Committee and member of both the Remuneration and Nomination Committees until the Company’s AGM. I will be available at the AGM to answer any questions about the work of the Committee. Richard Adam Chair of the Audit and Risk Committee 8 March 2018 Report of the Audit and Risk Committee In 2017, the Audit and Risk Committee focused on the impact of the deterioration in the Group’s trading position with respect to goodwill and other impairments and going concern and viability. The Audit and Risk Committee also oversaw the conclusion of the competitive external audit tender and reappointment of PricewaterhouseCoopers LLP. Their appointment was confirmed by shareholders at the AGM in April 2017.” The Committee’s terms of reference are available at: www.countrywide.co.uk/investor-relations/ corporate-governance 38 38 Countrywide plc Annual Report 2017 Corporate governance Committee composition The membership of the Committee, together with appointment date, is set out below: Member Audit and Risk Committee member since Richard Adam (chairman) Jane Lighting Cathy Turner David Watson 9 June 2014 9 June 2014 31 July 2013 2 September 2013 There have been no changes to the composition of the Committee during 2017 and therefore the Committee remained in full compliance with the UK Corporate Governance Code (‘the Code’) recommendation of a minimum of three independent non-executive directors throughout the period. The Committee members were selected for their range of financial and commercial expertise, necessary to fulfil the Committee’s duties. The Board considers that as chartered accountants both the Committee chair, Richard Adam, and the Group’s deputy chair, David Watson, have recent and relevant financial experience. The biography of each member of the Committee is set out on pages 30 to 31. Attendance by members at the Committee meetings is shown on page 34. Meetings are attended, by invitation, by the chief financial officer, the Group chief risk and compliance officer, the Group financial controller, the company secretary and the Group’s external auditors, PwC. In addition, the Group’s outsourced internal audit provider, Deloitte, is invited to attend appropriate sections of the meetings and the chairman of the Board also attends meetings in agreement with the chair of the Committee. At the end of each meeting, a private session is held by the Committee with representatives of both the external and internal auditors which are not attended by management. The Committee’s work The Committee works to a structured programme of activities, developed from its terms of reference, with agendas for the four scheduled meetings of the Committee during 2017 organised to coincide with key events in the annual reporting cycle. The chair of the Committee reports, at each subsequent Board meeting, on the business of the Committee meeting and recommendations made by the Committee. The main matters that the Committee considered during the year are described below. Financial reporting and significant judgements Financial reporting The Board and the Committee have reviewed this annual report, the half year financial statements, as well as the going concern basis of preparation of the Group’s consolidated financial statements at these points, in particular the underlying assumptions and sensitivities. We considered the presentation of the financial statements and, in particular, the compliance with financial reporting and disclosure requirements associated with the Group’s premium listing. In respect of each of these matters, the Committee reviewed papers presented by management and discussed critical judgements and estimates inherent within the conclusions, providing challenge where necessary. The Committee also reviewed the reporting from the external auditors, incorporating accounting and reporting matters, internal control findings and their management representation letter to ensure that these matters had been considered and consistent conclusions had been reached. The Committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements. The Committee also considered the Group’s tax strategy and concluded that management’s current approach remained appropriate and approved the publication of the Group’s tax strategy on our investor relations website during the year. The Committee also considered whether the 2017 annual report was fair, balanced and understandable and whether it provided the necessary information for the shareholders to assess the Group’s performance, business model and strategy. In reaching this view, the Committee took into account: its own knowledge of the Group, and its strategy and performance in the year; debates and discussions regarding principal risks and uncertainties; robust processes to ensure internal verification of the factual content within the document; and a detailed review, by senior management and the external auditors, to ensure consistency and overall balance. After careful review and consideration of all relevant information, the Committee was satisfied that, taken as a whole, the annual report is fair, balanced and understandable and affirmed that view to the Board. Prior to the publication of the 2017 annual report, the Committee undertook a detailed assessment of the viability statement and reviewed with management the appropriateness of the Group’s choice of a three-year assessment period, the Group’s current position and future plans and potential impact of risks to the business and recommended to the Board that the directors can believe that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. The viability statement, together with further details of the Group’s approach, appears within our risk section of our strategic report on page 17. During February 2018, the Financial Reporting Council’s (FRC’s) Corporate Reporting Review Team concluded its review, which opened in October 2017, of the Group’s 2015 and 2016 annual reports. The Committee monitored the dialogue between the Company and the FRC and discussed with the external auditor the matters raised and responses provided by the Company. The Committee noted that there were no significant findings. Pursuant to the review, the Company enhanced certain disclosures in its 2017 Annual Report and Accounts. Annual Report 2017 Countrywide plc 39 Financial statementsStrategic reportCorporate governance Report of the Audit and Risk Committee continued Financial reporting and significant judgements continued Financial reporting continued Significant issues considered in relation to the financial statements In the year under review, the Committee considered the following significant matters, which include an element of judgement, in relation to the financial statements. Matter and description Going concern The Group has net debt of £192 million. As explained in note 33 to the financial statements, the Group meets its day to day working capital requirements through a revolving credit facility, which was amended in February 2018. The Group currently has a £275 million facility which is committed for a period through to March 2020. Management forecasts show that this facility provides adequate liquidity for the Group. As at 31 December 2017, a total of £210 million was drawn down from these facilities. During the year, the Group has complied with the financial covenant requirements, being the leverage ratio (the ratio of net debt to adjusted EBITDA) and interest cover (the ratio of adjusted EBITDA to net interest payable). Consideration of the going concern risk is a fundamental responsibility of the Board and the Committee has given this matter its full attention. The going concern assertion has a significant impact on the financial statements in terms of both the valuation of assets and liabilities held and the presentation of assets and liabilities as non-current. Action the Committee has taken and conclusion In assessing the Company’s ability to continue as a going concern, the Board regularly reviews forecasts of the Group’s profit and cash flows forecasts. In assessing the forecasts, the Board also considers sensitivity analysis to these forecasts to assess the impact of potential risks and opportunities. The Group’s forecasts and projections, which have been prepared for the period to 31 December 2020 for going concern assessment purposes, show that it will be able to operate within the level of its current facilities and comply with its banking covenants, in particular the leverage ratio. The Committee reviewed a management paper detailing future profitability of the Group, forecast future cash flows, associated headroom under financing facilities and banking covenants. The Group’s performance is dependent on a number of market and macroeconomic factors including the impact on customer confidence and transactional volumes in the UK housing market from interest rate changes and government policies which are inherently difficult to predict. Specifically, a range of assumptions underpin the profit and cashflow forecasts, including: • Recovery of the pipeline to 2017 levels; • Achieving the volume of forecast exchanges per branch and associated productivity measures in other areas of the Group; • Mitigation of the potential impact of new government legislation banning lettings tenancy fees; and • Successful realisation of internal corporate cost saving initiatives currently underway. Failure to achieve one or more of the above would result in lower adjusted EBITDA with a consequent negative impact on headroom of the leverage and interest cover covenant ratios and higher projected net debt. 2017 has seen a deterioration of business performance and consequently a worsening of the Group’s leverage ratio. The Group benefits from a supportive lender group of six banks who have provided borrowing facilities since March 2013. With the support of the lender group, in February 2018, the Company agreed an amendment to its leverage covenant thresholds. The Committee reviewed and noted the amendment to the Group’s revolving credit facility and noted the additional leverage covenant headroom which this provided. The key judgements, assumptions and estimates underpinning this review, and the associated sensitivities, were discussed and considered. If the Group’s forecast is not achieved, there is a risk that the Group will not meet the net debt to EBITDA leverage covenant and should such a situation materialise, the banks reserve the right to withdraw the existing facilities. Without the support of the lender group, the Group and Parent Company would be unable to meet their liabilities as they fall due. Given the timing and execution risks associated with achieving the forecast and therefore remaining within the leverage ratio as stipulated by the banking covenants, the directors have concluded that it is necessary to draw attention to this as a material uncertainty which may cast significant doubt about the Group’s and the Parent Company’s ability to continue as a going concern in the basis of preparation to the financial statements. The Board has acknowledged the need to bring the leverage ratio back in to the Group’s medium term target of 1.5x-2.0x and has launched a number of initiatives to address this through 2018. Conclusion: The Committee was satisfied that it was appropriate for the Group to adopt the going concern basis of accounting in the financial statements, with enhanced disclosures as set out in note 2 to the financial statements on page 74, and recommended the same to the Board. Viability statement Consideration of the prospects and viability of the Group is a fundamental responsibility of the Board and the Committee has given this matter its full attention. Management provided the Committee with a paper on the viability of the Group, over a three-year period, which included a review of the principal risks and considered and modelled a number of severe but plausible scenarios. The key judgements, assumptions and scenario modelling were discussed. Conclusion: The Committee approved the viability statement and recommended its adoption by the Board. 40 Countrywide plc Annual Report 2017 Corporate governance Matter and description Action the Committee has taken and conclusion Impairment of goodwill and intangibles with an indefinite life The total values of the Group’s goodwill and brand names were £472 million and £191 million respectively as at 31 December 2017 and relate to a significant number of historical acquisitions. The estimation of the recoverable amount of goodwill and intangibles with an indefinite life supported by the Group’s cash generating units requires significant judgement, primarily in relation to: the achievability of the long term business plans and future cash flows which is dependent on circumstances both within and outside of management’s control; the discount rates applied; and the macroeconomic assumptions underlying the valuation process. As a result of the annual review of the carrying value of goodwill and intangibles with an indefinite life, the following impairments were recorded: £151 million of goodwill and £8 million of brand names in relation to the UK Sales and Lettings cash generating unit and £41 million of goodwill and £4 million of brand names in relation to the London Sales and Lettings cash generating unit. The balances remaining at the 2017 financial year end were £279 million and £178 million respectively in respect of goodwill and brand names (see note 14 to the consolidated financial statements). Details of the Group’s impairment, impairment tests and related disclosures are provided in notes 10 and 14a. Presentation and disclosure of exceptional items The Committee reviewed the treatment of items considered as exceptional items that are separately disclosed by virtue of their size, nature or incidence. Management prepared documentation to support these items and the disclosure proposed in the financial statements. For more detail in respect of exceptional items see note 10. Professional indemnity provisions The total value of the Group’s professional indemnity provisions as at 31 December 2017 was £15.5 million. The Committee receives quarterly updates on the status of the professional indemnity provision which includes the status of existing claims, including legal updates on those cases which are individually significant, and the number and nature of new claims arising. The Committee reviewed the methodology and challenged the results of the impairment test prepared by management. The Committee reviewed the assumptions used in relation to long term growth, resulting headroom and sensitivities applied by management. The Committee also considered the adequacy of the disclosures provided, particularly for the case of cash generating units where changes in key assumptions could give rise to an impairment. Conclusion: The Committee was satisfied with the carrying value of goodwill and intangibles with an indefinite life and the related disclosures as at 31 December 2017. The Committee reviewed and challenged the disclosures prepared by management in relation to exceptional items, considered that the nature of these items was within the Group’s accounting policies and with the guidance issued by the FRC, that they were being applied consistently from year to year and that these items included both debits and credits in a balanced manner. Conclusion: The Committee was satisfied that the Group’s accounting policies have been applied consistently and that the designation of exceptional items was subject to objective and balanced criteria and was appropriate to give an improved understanding of the continuing operations of the Group. The Committee reviewed the methodology and resultant professional indemnity provision prepared by management and provided robust challenge to any underlying assumptions adopted in respect of claim rates, claim liability rates, average loss per claim and provisions on discrete cases of significance based on current legal advice. The Committee concluded that the methodology and assumptions adopted were reasonable. The Committee notes that evaluating these potential liabilities is highly judgemental and in smaller populations of claims, estimates can be significantly affected by the outcome, good or bad, of a limited number of claims. Accordingly, sensitivity disclosures have been provided in note 3. Conclusion: The Committee was satisfied with the level of professional indemnity provisions and the related disclosures as at 31 December 2017. Impairment risk of investment in subsidiaries and intercompany receivables The total value of investments in subsidiaries and intercompany receivables in the parent company balance sheet are of £386m and £239m respectively. Linked to the impairment testing of indefinite life intangible assets noted above, the Committee had reviewed the discounted cash flow forecast also in the assessment to impairment assessment of the value in use of subsidiaries and the ability of the subsidiaries to repay intercompany receivables and deliver value in excess of investments held on the Company balance sheet. Conclusion: The Committee was satisfied with the carrying value of the investments in subsidiaries and intercompany receivables held by the Company. As a result of the impairment charges recorded in the UK and London CGUs noted above, the Committee have focused on this area due to the size of the investment and intercompany receivable balances and the risk of impairment arising due to the deterioration of business performance. Management performed an assessment of the carrying value of the investments and intercompany receivables and compared this to the recoverable value, using the same discounted cash flow forecast used in the impairment test of indefinite life intangible assets described above. The results showed there was sufficient headroom between the carrying value and the recoverable value, and therefore no impairment has been recognised in the Parent Company. For further information on the critical accounting estimates and assumptions refer to the notes to the consolidated financial statements on pages 83 to 85. For a discussion of the auditors’ key audit matters, refer to pages 64 to 65 of the independent auditors’ report. Annual Report 2017 Countrywide plc 41 Financial statementsStrategic reportCorporate governance Report of the Audit and Risk Committee continued Oversight of the external audit The Committee’s oversight of the external auditors includes reviewing and approving the annual audit plan. In reviewing the plan, the Committee discusses and challenges the auditors’ assessment of materiality and financial reporting risk areas most likely to give rise to material error. PwC reported to the Board and confirmed their independence in accordance with ethical standards and that they had maintained appropriate internal safeguards to ensure their independence and objectivity. Assignments awarded to PwC have been, and are, subject to controls by management that have been agreed by the Committee to monitor and maintain the objectivity and independence of the external auditors. To further safeguard the objectivity and independence of the external auditors, the Committee has a formal policy governing the engagement of the external auditors to provide non-audit services, providing details of prohibited, audit-related and permitted services. The policy requires approval by the chief financial officer of any work undertaken by PwC and mandates Committee approval, prior to the commencement of work, of all non-audit assignments with an individual fee above a de minimis threshold of £50,000, as assignments below this threshold have been deemed to be ‘clearly trivial’. The total of non-audit fees and audit fees paid to PwC during the year is set out in the table below: Matter Audit-related assurance services Tax advisory services Other non-audit services Non-audit fees Audit fees (excluding audit-related assurance services) 2017 £’000 50 2 49 101 542 2016 £’000 50 40 16 106 579 Amounts paid to PwC were reported to and considered by the Committee. Non-audit fees incurred in 2017 represent 19% of the recurring base audit fee, falling below the 70% cap set by the European Union, and will remain subject to scrutiny and approval by the Committee. The assessment of the effectiveness of our external auditors is based on a framework setting out the key areas of the audit process for the Committee to consider. The framework takes the form of an annual questionnaire covering all key aspects of the audit, including the contribution of management to an effective audit process, and is completed by each member of the Committee and by the chief financial officer. Feedback was also sought from other members of the Group finance team, divisional management and the Group chief risk and compliance officer. Based on responses to the questionnaires, management produced a report for detailed consideration by the Committee. The feedback from this process was considered by the Committee. Following robust debate and challenge, action plans were developed in relation to better communication during the audit cycle between PwC and the Group’s divisional teams. In its evaluation of the external audit function, the Committee concluded that it was satisfied with the work of PwC and that PwC continued to be effective, objective and independent. Risk management and internal control The Board recognises that the successful management of risk as part of our everyday activities is essential to support the achievement of our strategic objectives. Through delegation by the Board, the Committee is responsible for reviewing and monitoring the effectiveness of the Group’s risk management systems and internal control. Operation of the Group’s Risk Management Framework, which is designed to support consistent and effective management of risk throughout the Group, is overseen by an oversight structure, as detailed on pages 12 and 13, which includes the Committee. The Board has an ongoing process to identify, evaluate and manage the significant risks faced by the Group. This was in place throughout the year and up to the date of the approval of the annual report. This process is regularly reviewed by the Board and accords with UK Corporate Governance Code guidance. Management is responsible for the identification, evaluation and management of these risks together with the design, operation and monitoring of associated controls to manage risks in line with the Group’s risk appetite. The Committee considered, discussed and made decisions in relation to a range of risk and internal control-related matters during the course of the year, the most significant of which are outlined below: • reviewed, and recommended to the Board for approval, changes to the Committee’s terms of reference and calendar of duties; • reviewed the quarterly Group Risk Report on the ‘top risks’ facing the Group, the relative assessment of impact and likelihood and actions underway or taken to deliver target risk ratings over a six-month horizon; • reviewed the results of the annual Control Self Assessment, detailing results of an assessment of compliance with the Group’s policies’ minimum control standards within each business unit; • approved the Internal Audit charter, detailing the standards the function operate against in line with the Institute of Internal Auditors’ Professional Practices; • approved the annual internal audit plan, outlining those areas to be covered by the work of Internal Audit during 2018 and monitored the progress against the plan at each meeting. This included updates on progress to deliver management actions relating to internal audit recommendations. The Committee also received and approved changes to the plan during the year; • completed an annual review of the effectiveness of the Group’s internal audit function, and the effectiveness of the Group’s risk management and internal control systems, under the direction of the Group chief risk and compliance officer, using a questionnaire for key stakeholders as an underlying framework; • received updates from the Group chief risk and compliance officer in relation to the Group’s Financial Conduct Authority regulated operations, including regulatory relationship matters and outputs from the Financial Services business unit’s risk, audit and governance committee; • approved the 2018 Group risk function plan, outlining the objectives and activities of the Group risk function for the forthcoming year; • monitored the risks and associated controls over the financial reporting processes, including the process by which the Group’s financial statements are prepared for publication; • reviewed reports from the external auditors on any issues identified during the course of their work, including a report on control weaknesses identified; and • reviewed, and recommended for approval, the Group’s risk management disclosures for inclusion within the annual report and accounts, including the consideration of the Group’s viability statement as required under the Code. 42 Countrywide plc Annual Report 2017 Corporate governance Following access to a data room, the evaluation was undertaken by a process of meetings with the Committee chairman and management (at both head office and business unit level). In accordance with the RFP, the assessment of firms at these meetings, along with scoring of the proposal, by way of scorecards detailed in the RFP, formed part of the overall selection process and subsequent shortlisting for progression to presentation stage. Following the meeting stage and submission of proposal documents, the Committee invited two firms (KPMG and PwC) to present in January 2017 to a selection panel led by the Committee chairman but also incorporating the senior independent non-executive director (and Committee member), the chief executive officer, the chief financial officer, the chief risk officer and the group financial controller. Following its initiation and supervision of the process, the Committee concluded its deliberations at its meeting in February 2017, resulting in the recommendation to the Board to approve the reappointment of PwC, which was ratified by shareholder approval at the AGM on 27 April 2017. During the year, the Group can confirm that it has complied with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. Annual evaluation of Committee performance The Committee’s activities formed part of the evaluation of Board effectiveness performed in the year. Details of this process and the actions taken arising from the external evaluation undertaken by Lintstock can be found on page 36. External audit tender As noted in last year’s report of the Audit and Risk Committee, the Group decided to put its external audit contract out to tender in advance of its 2017 audit. This was because as a listed company, also in the FTSE 350 at the time of the decision, the Group would be obliged by the following regulations/legislation to tender its audit for the year ending 31 December 2017: • the UK Corporate Governance Code has recommended audit tendering every ten years (on a comply or explain basis) since 2012; • the Competition and Markets Authority (CMA) issued its final order (The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014), following investigation into the statutory audit market, which came into effect from 1 January 2015. This requires that FTSE 350 companies must have held a tender for the audit appointment within the last ten years; and • the new EU Audit Regulations, introduced in June 2014 and effective from 17 June 2016, require that EU public interest entities must rotate their audit firms after a maximum period of tenure. This requires mandatory rotation at the 20-year point if a competitive tender is held at the ten-year point. As a result, the Committee initiated the process for the tender of the external audit during the final quarter of 2016 in order to allow the process to conclude for consideration and recommendation to the Board in the February 2017 Committee meeting. There were no contractual obligations restricting our choice of external auditors and no auditor liability agreement had been entered into. However, Deloitte provides internal audit services to the Group and, to allow continued provision of services, was excluded from the tender process by mutual consent. Consistent with the new European regulations, invitations to tender were restricted to four firms based on decision making criteria of: industry expertise, FTSE 250 market segment expertise, breadth of sector experience and specialist expertise required to deliver an audit of the desired quality. Accordingly, the Committee issued a request for proposal (RFP) for audit services to four firms which identified the criteria of importance to the Committee and management in an audit relationship. Evaluation criteria were, in no particular order of importance: team competence and rapport; understanding our business (including our competitive position), industry and related risks; audit quality; transition planning; service approach; communication; and fees. Annual Report 2017 Countrywide plc 43 Financial statementsStrategic reportCorporate governance Directors’ remuneration report Annual statement Dear shareholder On behalf of the Board, I am pleased to present our directors’ remuneration report for the year ended 31 December 2017. It has been a year of great challenge and change at Countrywide, with disappointing financial performance highlighting the need for a review of long term strategy. A number of external headwinds have also continued to impact on business performance, with lower transactional volumes continuing to be experienced during 2017. As you would expect of the Committee in such circumstances the remuneration decisions for 2017 are appropriately severe. Whilst this clearly demonstrates the application of pay for performance, it is disappointing to be in this situation for a second year running. During the year Jim Clarke confirmed his desire to retire as chief financial officer having been with Countrywide for over ten years. Following a search and selection process Jim Clarke was succeeded by Himanshu Raja who joined the Board on 12 June 2017 and took up the chief financial officer post on 1 August 2017. From 24 January 2018, Alison Platt also stepped down as chief executive officer, with Peter Long taking on additional responsibilities in the role of executive chairman. The new executive team are fully focused on ensuring the Company is appropriately structured to deliver the revised long term strategy essential to the success of the business. The remuneration policy is subject to a binding vote every three years (sooner if changes are made to the policy). The Committee considers that the policy, approved by shareholders at the 2017 AGM, continues to be appropriate and therefore no changes have been made since shareholder approval. The annual report on remuneration is subject to an annual shareholder advisory vote and will be presented to shareholders at the AGM on 25 April 2018. 2017 performance and reward During 2017, against challenging market conditions, Group adjusted EBITDA of £64.7 million for the year ended 31 December 2017 was £18.8 million below the £83.5 million achieved in 2016. The Committee acknowledged and supported the business turnaround strategy being led by management but was disappointed with the absolute level of profitability. This outcome, coupled with our commitment to pay for performance, led to negative remuneration outcomes for the 2017 financial performance for a second year as follows: • annual bonus: no bonuses were payable to the executive directors for 2017; and • LTIP: there will be no vesting of 2015 LTIP awards, due to the non-achievement of the challenging adjusted EPS and relative TSR-based performance conditions attached to these awards. All other outstanding LTIP awards for Alison Platt will lapse on the date of leaving the Company. Other than considering the above matters and conducting the policy review, the Committee undertook no other material activities during the course of the year. Remuneration policy for 2018 The Committee regularly reviews the remuneration policy for the executive directors and senior managers to ensure it is transparent and aligned to the interests of shareholders, it is weighted to incentivise sustainable performance, it is structured to ensure higher awards are only achieved for exceptional performance against challenging targets, and it encourages an appropriate level of risk taking commensurate with the risk profile of the business. The Committee’s most recent conclusions are that the existing remuneration policy remains appropriate and should continue to operate for 2018. However, there are some important changes to how this policy will be applied, as outlined below. The key points to note are as follows: • there will be no increase to the chief financial officer’s salary in 2018; • benefits and pension provision are considered to be at appropriate levels; • the structure and quantum of the annual bonus, with one-third of any award deferred into shares, continues to be appropriate. As such, the 2018 annual bonus framework will be largely consistent with the 2017 annual bonus, with 70% of the award incorporating financial measures, with the remaining 30% now incorporating strategic/personal targets. The strategic/personal targets will align with the strategic objectives of the Group and represent both personal and customer outcomes; • the performance conditions that apply to the long term incentive grant policy, whereby nil-cost awards are granted annually, will be amended to align with the need to turn around the business; growth in adjusted earnings per share (37.5%) and total shareholder return (37.5%) remain unchanged from last year. However, the customer and strategic measures that applied in 2017 will be replaced by operating cash flow conversion (25%). Reflecting the Committee’s desire to incentivise delivery of the turnaround strategy, and the increased responsibilities that naturally fall on a chief financial officer where there is no chief executive officer in position, an LTIP award of 200% of salary, on an exceptional basis, will be granted to Himanshu Raja. This award is within the limits approved by shareholders; and • should the executive chairman be in this role for a significant portion of 2018, the Committee will consider, during its usual year end processes, whether any additional remuneration is warranted. The Committee believes that the current remuneration policy continues to incentivise the delivery of strong yet sustainable financial results and the creation of shareholder value. In line with good practice, the full policy has been included in this report. Further details of how the current policy will be applied in practice for the 2018 financial year are set out in the annual report on remuneration on pages 50 to 51. 44 Countrywide plc Annual Report 2017 Corporate governance Shareholder support The Committee was delighted to receive positive support from 99% of the shareholders who voted on our 2017 remuneration report (the annual statement and annual report on remuneration) and remuneration policy at the AGM on 27 April 2017. We remain committed to ongoing engagement with our shareholders and take an active interest in their views and voting on this remuneration report. Structure of this report and 2017 AGM resolutions This directors’ remuneration report is divided into the following three sections: • this annual statement: summarising and explaining the major decisions on, and any substantial changes to, the directors’ remuneration report in the year; • the remuneration policy report: setting out the basis of the remuneration that has applied since approval at the 2017 AGM; and • the annual report on remuneration: explaining the remuneration earned by the directors in the year ended 31 December 2017 and a statement as to how the remuneration policy will be implemented in 2018. This will be subject to an advisory vote at the 2018 AGM. I hope you find this report informative in respect of how we remunerate and incentivise our directors through a remuneration policy that is supportive of, and aligned to, the Company’s strategic aims and objectives. Cathy Turner Chair of the Remuneration Committee 8 March 2018 Remuneration policy report Introduction This report contains the material required to be set out in the directors’ remuneration report for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (‘the Regulations’). Part A of this report represents the directors’ remuneration policy. Part B constitutes the implementation sections of the report (‘Annual Report on Remuneration’). The auditors have reported on certain sections of Part B and stated whether, in their opinion, those parts have been properly prepared in accordance with the Companies Act 2006. Those sections of Part B which have been subject to audit are clearly indicated. PART A: directors’ remuneration policy With effect from its approval at the Company AGM on 27 April 2017, this policy report sets out the framework that shapes the Company’s remuneration strategy for an anticipated period of three years, ensuring that the structure and levels of executive remuneration remain appropriate to support the long-term success of the Company while ensuring that it does not promote inappropriate risk taking. We have chosen to repeat the remuneration policy report in line with good practice and to ensure transparency even though continued presentation is not required. The following section explains: • our remuneration strategy and policy; • how this strategy is reinforced by alignment of key components of our remuneration packages; • why we have selected the performance criteria for variable pay; and • other information required to provide the wider Group context for the directors’ service agreements. Remuneration strategy Our remuneration strategy is underpinned by remuneration packages that are designed to motivate high-performing people to deliver our strategy. These packages: • are transparent and aligned with the interests of our shareholders; • are weighted to incentivise performance over the short and long term; • are structured to ensure higher rewards are only achieved for exceptional performance against challenging targets; and • encourage management to adopt a level of risk commensurate with the risk profile of the business as approved by the Board. Statement of employment conditions elsewhere in the Company The remuneration policy described within this report provides an overview of the structure that operates for the most senior executives in the Group. The remuneration policy for the executive directors is more heavily weighted towards variable pay than for other employees to make a greater part of their pay conditional on the successful delivery of the business strategy. This aims to create a clear link between the value created for shareholders and the remuneration received by the executive directors. When setting the policy for remuneration for the executive directors the Committee takes into account the overall approach to reward for employees in the Group, including consideration of salary increases for the general employee population (disclosed in the annual report each year); overall spend on annual bonus; Group-wide benefits offerings; and any other relevant factors as determined by the Committee. Annual Report 2017 Countrywide plc 45 Financial statementsStrategic reportCorporate governance Directors’ remuneration report continued PART A: directors’ remuneration policy continued Statement of employment conditions elsewhere in the Company continued Although the Company has not carried out a formal employee consultation regarding Board remuneration (policy or implementation), in accordance with prevailing commercial practice, it does take due account of regulations and practices regarding employee consultation more broadly (with the Committee keeping abreast of developments in this area). The Group people director ensures that the Committee is made aware of any relevant employee feedback regarding the Company’s remuneration policy. The Committee is mindful of the requests from, amongst others, the Investment Association, for companies to publish ratios comparing chief executive officer to employee pay. The Remuneration Committee ensures that employee remuneration within the company is considered. We will disclose the ratio of the chief executive’s pay compared with average pay when we are required to do so and once the methodology has been confirmed. Further information about our engagement with employees across the Group is provided on page 29 of the annual report. Statement of consideration of shareholder views The Company welcomes dialogue with its significant shareholders and, in the event that material changes to the policy are proposed, will consult with major shareholders and representative bodies in advance of changes being made. Summary remuneration policy The Committee remains of the view that the remuneration policy, approved by shareholders at the 2017 AGM, continues to be appropriate and therefore there has been no change to the policy from the prior year. The key components of the remuneration packages offered to our directors are as follows: Future policy table Purpose/link to strategy Operation Opportunity Applicable performance measure Salary and fees To aid the recruitment, retention and motivation of high performing people Fixed annual sum normally payable monthly and reviewed annually To reflect their experience and importance to the business Review reflects changes in scope of role and responsibility, personal and Group performance and increases throughout the rest of business Salary of newly appointed directors may be phased to take account of experience During the life of this policy, no executive director’s base salary shall increase by an average of more than 10% p.a. (save following a recruitment – see below) n/a The Committee is guided by the general increase for the broader employee population but may decide to award a higher increase for executive directors to recognise, for example, an increase in the scale, scope or responsibility of the role, to apply salary progression for a newly appointed director and/or to take account of relevant market movements Benefits To provide support and protection and the ability to focus on effective delivery Benefits currently include company car allowance, private medical insurance and life assurance. Other benefits may be provided where appropriate No executive director will receive benefits of a total aggregate value exceeding £50,000 per annum n/a 46 Countrywide plc Annual Report 2017 Corporate governance Purpose/link to strategy Operation Opportunity 120% of salary per annum Annual bonuses To incentivise the delivery of stretching short term business targets and strategic and/or personal objectives To recognise performance through variable remuneration, allowing flexible control of the cost base and response to market conditions All measures and targets are reviewed and set by the Committee as soon as is practicable following the beginning of the year and payments are determined after the year end based on performance against targets One-third of any bonus payable will normally be deferred into options/awards over ordinary shares with a three-year vesting period Dividend equivalent payments (cash and/or shares) may be payable on awards to the extent they vest Non-pensionable Long Term Share Incentive Plans To incentivise value creation over the long term and reward execution of our strategy To align the long term interest of directors and shareholders To promote retention Annual grant of awards Structured as nil-cost options/conditional awards Non-pensionable Dividend equivalent payments (cash and/or shares) may be payable on awards to the extent they vest Awards made to executive directors from 2016 are subject to a two-year post-vesting holding period Normal grant limit Up to 150% of salary per annum Maximum limit 200% of salary per annum Exceptional limit 300% of salary per annum Applicable performance measure The performance measures applied may be financial or non-financial, corporate, divisional or individual and in such proportions as the Committee considers appropriate When determining the portion of bonus that is payable for achieving any threshold and target level of performance for any measure, the Committee will take account of a number of factors such as (i) the stretch inherent in the threshold/target performance level, (ii) how that threshold/target level compares with internal and external forecasts, (iii) bonus outturns and associated performance in the prior year and (iv) the general financial and market conditions that apply when the targets are set Malus and clawback provisions operate for deferred bonuses The Committee may set such performance conditions on awards as it considers appropriate, whether financial or non-financial and whether corporate, divisional or individual Performance periods may be over such periods as the Committee selects at grant, which will not be less than, but may be longer than, three years No more than 25% of awards vest for attaining the threshold level of performance conditions Malus and clawback provisions operate Pensions To help recruit and retain high performing executives To reward continued contribution to the business by enabling executive directors to build long term savings All Employee Share Plans To encourage all employees to make a long term investment in the Company’s shares in a tax-efficient manner Participation into a money purchase pension scheme and/or cash equivalent n/a Directors will receive a pension contribution appropriate to their role either as a formal pension and/or cash equivalent Pension contributions will not exceed 20% of salary per annum Share Incentive Plan and/or Save As You Earn Plan as per HMRC approved rules Consistent with prevailing HMRC limits n/a Annual Report 2017 Countrywide plc 47 Financial statementsStrategic reportCorporate governance Directors’ remuneration report continued PART A: directors’ remuneration policy continued Future policy table continued Purpose/link to strategy Operation Opportunity Applicable performance measure Share ownership guidelines To provide close alignment between the longer term interests of directors and shareholders in terms of the Company’s growth and performance Non-executive directors To provide fees reflecting time commitments and responsibilities of each role, in line with those provided by similarly sized companies Executive directors to retain no less than 50% of net of tax shares from vesting of share options/awards until such time as a shareholding equivalent in value to 200% of base salary has been achieved Cash fee paid on a monthly basis Fees are reviewed annually Non-executive directors do not participate in any cash or share incentive arrangements Non-executive directors may receive benefits (including travel and office support, together with any associated tax liability that may arise) n/a n/a The maximum aggregate fees payable to the non-executive directors is as set out in the Company’s Articles of Association (currently £2 million) n/a The Committee is guided by market rates, time commitments and responsibility levels No additional fees are payable for membership of Board Committees, though additional fees may be paid for specific additional responsibilities such as chair of Audit Committee, chair of Remuneration Committee and senior independent director or to reflect a substantially greater time commitment than normal in any year Notes to summary policy table 1 A description of how the Company intends to implement the remuneration policy for 2018 is set out in the Annual Report on Remuneration. 2 The performance-related elements of remuneration take into account the Group’s risk policies and systems, and are designed to align the senior executives’ interests with those of shareholders. The Committee reviews and sets the metrics and targets applying to awards to the executives every year, in order to ensure that they are aligned with the Group’s strategy. All financial targets will (where appropriate) be set on a sliding scale. Non-financial targets are set based on individual and management team responsibilities and strategic objectives. A summary of the targets to be used in 2018 under the annual bonus and LTIP can be found on page 51. Appropriate levels of reward are available for achieving threshold performance with maximum rewards requiring substantial out-performance of challenging strategic plans. The Committee retains discretion to set different targets and introduce additional metrics in line with the Company’s strategy for future awards providing that, in the opinion of the Committee, the new targets are no less challenging in light of the prevailing circumstances than those set previously. If substantially different targets to those used previously are proposed, major shareholders will be consulted. Furthermore, the Committee reserves the right to adjust any bonus outturn and/or LTIP vesting that is based on a formulaic assessment of performance against the targets if such outturn/vesting does not reflect shareholders’ experience and/or underlying performance. 3 The Committee operates incentive arrangements for executive directors in accordance with their respective rules and the Listing Rules and HMRC rules where relevant. The Committee, consistent with market practice, retains discretion over a number of areas relating to the operation and administration of the plan rules. These include (but are not limited to) the following: • who participates; • the timing of grant of award and/or payment; • the size of an award (up to plan/policy limits) and/or a payment; • the result indicated by the performance conditions; • discretion relating to the measurement of performance in the event of a change of control or reconstruction; • determination of a good leaver (in addition to any specified categories) for incentive plan purposes; • adjustments required in certain circumstances (e.g. rights issues, corporate restructuring and special dividends); and • the ability to adjust existing performance conditions for exceptional events so that they can still fulfil their original purpose. 4 For the avoidance of doubt, in approving this directors’ remuneration policy, authority is given to the Company to honour any commitments entered into with current or former directors (such as the payment of a pension or the vesting or exercise of past share awards). 5 The Committee may make minor amendments to the policy set out above for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation, without obtaining shareholder approval for that amendment. 6 The regulations and related investor guidance encourage companies to disclose a cap within which each element of the policy will operate. Where maximum amounts for elements of remuneration have been set within the policy, these will operate simply as caps and are not indicative of any aspiration. 48 Countrywide plc Annual Report 2017 Corporate governance 7 While the Committee does not consider it to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality, whether paid for by the Company or another, and business travel for directors and in exceptional circumstances their families may technically come within the applicable rules and so the Committee expressly reserves the right for the Committee to authorise such activities within its agreed policies. 8 While the appropriate benchmarks vary by role, the Company seeks to apply the philosophy behind this policy across the Company as a whole. Where the Group’s pay policy for directors differs from its pay policies for groups of staff, this reflects the appropriate market rate position and/or typical practice for the relevant roles. The Company takes into account pay levels, bonus opportunity and share awards applied across the Group as a whole when setting the executive directors’ policy. Illustration of the application of the remuneration policy Our aim is to ensure that superior rewards are only paid for exceptional performance, with a substantial proportion of executive directors’ remuneration payable in the form of variable, performance-related pay. The charts that follow illustrate the opportunity at different levels of performance for the remuneration policy*. 0 0 0 £ ’ £2,000 £1,800 £1,600 £1,400 £1,200 £1,000 £800 £600 £400 £200 £0 £1,409 36% 29% 35% £487 100% £1,799 46% 27% 27% Below target Target Maximum Chief financial officer Fixed pay Bonus LTIP 0 0 0 £ ’ £2,000 £1,800 £1,600 £1,400 £1,200 £1,000 £800 £600 £400 £200 £0 £360 50% 50% £360 50% 50% £360 50% 50% Below target Target Maximum Executive chairman Chairman’s Fees Executive Salary * Peter Long will receive a fee of £180,000 from 24th January 2018 in recognition of his role as executive chairman, while the chief executive officer position remains vacant. This is in addition to his existing fee of £180,000 as non-executive chairman. Should the executive chairman be in this role for a significant portion of 2018, the Committee will consider, during its usual year end processes, whether any additional remuneration is warranted. These scenarios adopt the following assumptions: • fixed pay consists of base salary as at 1 January 2018, benefits and pension allowances. The value of benefits and pension is as set out in the single figure table for 2017; • on-target performance is based on the value of fixed pay plus on-target incentive pay, based on 83% of the maximum bonus and 62.5% of the maximum long term incentive award values; • maximum performance is based on the value of fixed pay plus maximum incentive pay (i.e. a 120% of base salary annual bonus and, on an exceptional basis for 2018, an enhanced 200% of salary LTIP award); and • no assumptions have been made as to the share price growth and any dividend accrual has been excluded from the above. Recruitment of executive directors and promotions When setting the remuneration package for a new executive director, the Committee will apply the same principles and implement the policy as set out in the table on pages 46 to 48. Base salary will be set at a level appropriate to the role and experience of the director being appointed. This may include setting a below market salary with an agreement on future increases (subject to performance) up to market rate, in line with increased experience and/or responsibilities. Our policy on maximum annual bonus and LTIP awards would apply. In relation to external appointments, the Committee may structure an appointment package that it considers appropriate to recognise awards or benefits forfeited on resignation from a prior position, taking into account timing and valuation and other specific matters it considers relevant. This may take the form of cash and/or share awards. The maximum payment under any such arrangements (which may be in addition to normal variable remuneration) would be no more than the Committee considers is required to provide reasonable compensation to the incoming director and would not go beyond a like-for-like compensation. If a director is required to relocate in order to take up the position, the Company may consider reasonable relocation, travel, subsistence and any other incidental payments as appropriate. Any such payments will be at the discretion of the Committee. In the case of an employee who is promoted to the position of director, it is the Company’s policy to honour pre-existing commitments in accordance with their terms. Service agreements and letters of appointment Each of the executive directors’ service agreements is for a rolling term and may be terminated by the Company or the director by giving no more than twelve months’ notice. The non-executive directors of the Company (including the chairman) do not have service agreements. The independent non-executive directors are appointed by letters of appointment and have an initial two-year term. Caleb Kramer’s services are provided to the Company under an agreement between the Company and Oaktree Capital Management FIE LLC which ran for an initial period of three years. The initial terms of the non-executive directors’ positions are subject to their re-election by the Group’s shareholders at the AGM. Annual Report 2017 Countrywide plc 49 Financial statementsStrategic reportCorporate governance Directors’ remuneration report continued PART A: directors’ remuneration policy continued For the avoidance of doubt, the policy does not include an explicit cap on the cost of termination payments. Service agreements and letters of appointment continued The dates of appointments of the non-executive directors who served during the year are set out below: Non-executive director Commencement date of original term Peter Long 11 February 2016 David Watson 2 September 2013 Cathy Turner 31 July 2013 Richard Adam 9 June 2014 Rupert Gavin 25 June 2014 Jane Lighting 9 June 2014 Caleb Kramer 19 March 2013 Natalie Ceeney 28 April 2017 Unexpired term as at 25 April 2018 AGM 2 months n/a n/a n/a n/a n/a n/a 12 months All individuals (save for Richard Adam, who steps down from the Board on 25 April 2018) will be subject to re-election at the 2018 AGM. From 24 January 2018 Peter Long stepped into the role of executive chairman. The directors’ service agreements and letters of appointment are available for inspection at the Company’s registered office and will be available at the AGM. Policy on payment for loss of office If an executive director’s employment is terminated, in the absence of a breach of service agreement by the director, the Company may (although it is not obliged to) terminate the director’s employment immediately by payment of an amount equal to the basic salary and specified benefits (including pension scheme contribution or equivalent salary supplement payment) in lieu of the whole or the remaining part of the notice period. Discretionary bonus payments will not form part of any payments in lieu of notice. An annual bonus may be payable with respect to the period of the financial year served, although it would be paid in cash and pro-rated for time and paid at the normal payout date. Payments in lieu of notice may be paid in monthly instalments over the length of the notice period with such instalments to be reduced or to cease upon the director receiving payment from a new position. Any share-based entitlements granted to an executive director under the Company’s share plans will be determined based on the relevant plan rules. The default treatment under the LTIP is that any outstanding awards lapse on cessation of employment. However, in certain prescribed circumstances (such as ill health, injury or disability, retirement, transfer of the employing company outside of the Group or in other circumstances at the discretion of the Committee), ‘good leaver’ status may be applied. For good leavers, awards will normally vest on the normal vesting date, subject to the satisfaction of the relevant performance conditions and reduced pro-rata to reflect the proportion of the performance period actually served. However, the Committee has discretion to determine that awards for good leavers vest at cessation and/or to disapply time pro-rating. In the event of death, awards will normally vest on the date of death subject to performance conditions and time pro-rating, although the Committee has discretion to determine that awards vest at the normal vesting date and/or to disapply time pro-rating. The default treatment for deferred bonus awards is that any outstanding awards vest on cessation of employment unless cessation is as a result of dismissal for gross misconduct or a similar ‘bad leaver’ reason. The Company has the power to enter into settlement agreements with directors and to pay compensation to settle potential legal claims. In addition, and consistent with market practice, in the event of the termination of an executive director, the Company may pay a contribution towards that individual’s legal fees and fees for outplacement services as part of a negotiated settlement. Any such fees will be disclosed as part of the detail of termination arrangements. 50 Countrywide plc Annual Report 2017 External appointment of executive directors The Board allows executive directors to accept appropriate outside non-executive director appointments provided the aggregate commitment is compatible with their duties as executive directors. The executive directors concerned may retain fees paid for these services, which will be subject to approval by the Board. Details of such appointments and fees retained for 2017 are disclosed on page 52. PART B: annual report on remuneration Implementation of the remuneration policy for the year ending 31 December 2018 Details of how the Committee intends to operate the remuneration policy for directors for the year ending 31 December 2018 are set out below. Base salary Base salaries for the executive directors are reviewed annually by the Committee, taking account of the director’s performance, experience and responsibilities. When determining base salaries, the Committee also has regard to economic factors, remuneration trends and the general level of salary increases awarded throughout the Group. As can be seen in the table below, Himanshu Raja’s base salary will not be increased in 2018:* Himanshu Raja 1 January 2017 £’000 410 1 January 2018 £’000 410 * Alison Platt stepped down from the Board with Peter Long taking up the role of executive chairman from 24 January 2018 while the chief executive officer position remains vacant. Peter Long will receive an additional £180,000 fee in recognition of his role as executive chairman. Benefits in kind and pension Himanshu Raja will continue to receive benefits including a company car allowance, life assurance, private medical insurance, permanent health insurance and a salary supplement in lieu of pension entitlement of up to 15% of base salary. Annual bonus For 2018, maximum bonus potential will continue to be 120% of salary for Himanshu Raja, with one-third of any bonus payable to be deferred into Company shares for a period of three years. The metrics used in 2018 will be as follows: • 70% – Financial through: • 25% – Group adjusted EBITDA targets • 25% – Group income growth • 20% – Group cash flow targets • 30% – Personal/strategic metrics In addition, bonuses will only be payable under the non-adjusted EBITDA targets if the Committee is satisfied that the Company’s underlying performance warrants such payments. The Committee does not believe it to be in shareholders’ interests to disclose the performance targets in advance for 2018 as these include items which the Committee considers commercially sensitive. However, retrospective disclosure of the targets and performance against them will be presented in the 2018 annual report on remuneration. Malus and clawback provisions will continue to operate in respect of deferred bonus awards. Corporate governance Long term incentives The Remuneration Committee has, again working within the approved Directors’ remuneration policy, made some changes to the performance measures of the long term incentive plan in respect of the 2018 LTIP awards. We have retained earnings per share (EPS) growth and relative total shareholder return (TSR) and with the same weightings of 37.5% each. We have replaced the customer and strategic measures with operating cash flow conversion which is the product of adjusted operating cashflow divided by adjusted EBITDA. Adjusted operating cash flow is defined as the summation of adjusted EBITDA, change in working capital and net capital spend. The Committee believes these measures will focus participants on the key success factors for the Group – namely our financial performance and our ability to grow shareholder value. The targets have been set in light of the three-year plan and we are satisfied that they are demanding. The annual award of LTIPs to be granted in 2018 will be assessed over the three-year performance period from 1 January 2018 to 31 December 2020 and will be subject to the following targets*: • adjusted EPS (37.5% of awards) – 25% of this part of an award will vest for adjusted EPS compound growth of 5% per annum increasing pro-rata to 100% vesting for adjusted EPS compound growth of 15% per annum; • relative TSR (37.5% of awards) – the Company’s TSR measured against the constituents of the FTSE 250 (excluding financial services companies and investment trusts). 25% of this part of an award will vest for performance at median of the comparator group, increasing pro-rata to 100% vesting at upper quartile; and • operating cash flow conversion (25% of awards) – 25% of this part of an award will vest at a conversion rate of 80% increasing pro-rata to 100% vesting at a conversion rate of 100%. In addition, no element of this portion of the award will vest unless the Committee is satisfied that the Company’s underlying performance warrants such vesting. The Remuneration Committee thought carefully about increasing the face value of Himanshu Raja’s share award under the long term incentive plan in 2018 from 130% of salary to 200% of salary, particularly in light of Countrywide’s share price performance over the last year. In making the decision to do so, the Committee considered that Mr Himanshu Raja has a critical role to play in the turnaround of the business both in the short-term and in the longer-term and it is in shareholders’ interests for him to be highly motivated and for the Committee to reward him well for executing the new three-year business plan. An increased award also takes into account the automatic increase in responsibilities for Mr Raja as a result of the chief executive officer position being vacant. Shareholders last year approved our policy which allows us to make awards at this level and the award will be subject to demanding performance targets and, after vesting, to a two-year holding period. Mr Raja also bought shares in Countrywide and currently holds 222,841 shares. Mr Raja will only benefit from the enhanced award if he and Countrywide perform. Our malus and clawback provisions give the Committee wide powers, should they need them, to make unvested awards forfeit and to reclaim already vested and paid amounts in exceptional circumstances including but not limited to a material misstatement of the accounts, an error in assessing performance, misconduct, reckless, negligent or wilful actions or appropriate values or behaviours. In addition, awards made to executive directors from 2016 onwards are subject to a two-year post-vesting holding period. Shareholding guidelines will continue to operate. Executive directors will be required to retain no less than 50% of net of tax shares from vesting of share options or awards until such time as a shareholding equivalent in value to 200% of base salary (previously 100%) has been achieved. Non-executive directors Non-executive director fee levels for 2018 are as follows: Director Peter Long1 David Watson Cathy Turner Richard Adam2 Rupert Gavin Jane Lighting Caleb Kramer Natalie Ceeney3 Committee chairman role Chairman, Nomination Deputy chairman and senior independent director Remuneration Audit and risk — — — — 2018 £’000 360 95 55 55 45 45 40 55 2017 £’000 180 95 55 55 45 45 40 55 1 Peter Long will receive an increased fee of £360,000 from 24 January 2018 in recognition of his role as executive chairman of Countrywide. 2 Richard Adam steps down from the Board on 25 April 2018. 3 Natalie Ceeney receives a non-executive director fee of £45,000 and an additional £10,000 in recognition of her role on the Countrywide Principal Services Board within the Financial Services division. Annual Report 2017 Countrywide plc 51 Financial statementsStrategic reportCorporate governance Directors’ remuneration report continued PART B: annual report on remuneration continued Directors’ remuneration for the year ended 31 December 2017 (audited) The remuneration of the directors for the years 2017 and 2016 was as follows: Executive directors Alison Platt1 Himanshu Raja2 Jim Clarke2 Non-executive directors Grenville Turner3 Peter Long3 Caleb Kramer David Watson Cathy Turner Richard Adam Rupert Gavin Jane Lighting Natalie Ceeney4 Salary and fees Taxable benefits5 Annual bonuses Long term incentives Pension6 Total7 2017 £’000 2016 £’000 2017 £’000 2016 £’000 2017 £’000 2016 £’000 2017 £’000 2016 £’000 2017 £’000 2016 £’000 2017 £’000 2016 £’000 575 229 198 — 180 40 95 55 55 45 45 36 575 — 340 48 159 40 95 55 55 45 45 — 15 8 9 — — — — — — — — — 1,553 1,457 32 15 — 15 1 — — — — — — — — 31 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 86 34 30 — — — — — — — — — 86 — 51 — — — — — — — — — 676 271 237 — 180 40 95 55 55 45 45 36 676 — 406 49 159 40 95 55 55 45 45 — 150 137 1,735 1,625 1 Alison Platt acted as a non-executive director for Tesco plc and retained a fee of £84,500. 2 Jim Clarke stepped down from his role as chief financial officer on 1 August 2017, leaving the Company on 31 December 2017. The table above reflects remuneration for his period as a director only. Further details of remuneration after 1 August 2017 are noted in payments to past directors. Mr Clarke was succeeded by Himanshu Raja, who joined the Board on 12 June 2017 and took up the chief financial officer post on 1 August 2017. Mr Raja joined on a package consistent with the approved remuneration policy, comprising a base salary of £410,000, a 15% salary supplement in respect of pension, annual bonus potential of up to 120% of base salary (with a third deferment into shares) and a 130% of salary LTIP award. 3 Grenville Turner stepped down from his role as non-executive chairman on 27 April 2016, with Peter Long assuming this role on the same date (having been appointed as a non-executive director on 11 February 2016). 4 Natalie Ceeney received pro-rata fees during 2017 reflecting her start date of 28 April 2017. 5 Benefits consist of the provision of a car allowance, life assurance and private medical and health insurance. 6 Alison Platt, Jim Clarke and Himanshu Raja received a 15% of salary supplement in lieu of pension entitlements. 7 Matching shares are also issued to the eligible executive directors under the Share Incentive Plan, following the introduction of the employee-wide share incentive plan in 2013. The aggregate value of these in each year in respect of each executive director is disclosed within the SIP share awards below. 2017 annual bonus award (audited) Executive directors had the potential to receive an annual bonus of up to 120% of base salary. Group adjusted EBITDA, revenue and cost income targets (up to 70% of bonus) The primary driver of the award was based on Group adjusted EBITDA, Group revenue and Group cost income performance relative to a sliding scale of challenging targets set at the start of the financial year. More particularly, the table below sets out details of the adjusted EBITDA, revenue and cost income targets, performance against these targets and the resultant bonus outturn: Performance required Measure Weighting Threshold On-target Maximum Actual Payout Group adjusted EBITDA 40% (i.e. up to 48% of salary) Total revenue Cost income ratio 15% (i.e. up to 18% of salary) 15% (i.e. up to 18% of salary) £75m £705m 89% £90m £783m 87% £98m £64.7m 0% of salary £861m £671.9m 0% of salary 85% 90.4% 0% of salary 52 Countrywide plc Annual Report 2017 Corporate governance 2017 annual bonus award (audited) continued Customer satisfaction and personal/strategic targets (up to 30% of bonus) This part of the bonus was based on the Committee’s assessment of performance against customer satisfaction and personal/strategic targets. Details of the targets and the Committee’s assessment of performance against them is as follows: Target Weighting Customer satisfaction (i.e. Group net promoter score) 15% (i.e. up to 18% of salary) Personal/strategic targets 15% (i.e. up to 18% of salary) Committee’s assessment of whether target was met n/a due to overall financial result n/a due to overall financial result However, this element of the bonus was only payable to the extent that a threshold level of financial performance was delivered. As this threshold level of financial performance was not delivered, no portion of this element of bonus was payable. Total award Therefore, based on overall performance, and notwithstanding performance against the customer satisfaction and personal/strategic targets, the Committee determined that no bonuses are payable to the executive directors for 2017. Vesting of scheme interests in respect of the year ended 31 December 2017 (audited) Awards granted under the LTIP to Alison Platt and Jim Clarke on 16 March 2015 are due to vest on their third anniversaries of grant in 2018 based upon adjusted EPS and relative TSR performance as follows: Adjusted EPS for the three years ended 31 December 2017 Relative TSR (vs FTSE 250 ex financial services) for the three years ended 31 December 2017 Threshold target 0% vesting at or below Maximum target 100% vesting at or above 49p Median 72p Upper quartile Actual performance 8p Below median Vesting % 0% 0% Based on the above, none of the outstanding 2015 LTIP awards held by Alison Platt and Jim Clarke will vest. Scheme interests awarded during the year (audited) LTIP awards The following LTIP awards, structured as nil-cost options, were granted to executive directors during 2017: Executive Alison Platt Date of grant 02/05/2017 Himanshu Raja 14/06/2017 Jim Clarke 02/05/2017 Basis of award granted 150% of salary 130% of salary 130% of salary Share price at date of grant (pence) Number of shares Face value of award at grant * £’000 % of face value that would vest at threshold performance 169 508,100 862,500 25% 154 344,984 533,000 25% 169 260,383 442,000 25% Vesting determined by performance over Normal vesting (exercise) date Three-year period ending 31 December 2019 Three-year period ending 31 December 2019 Three-year period ending 31 December 2019 2 May 2020 (2 May 2027) 14 June 2020 (14 June 2027) 2 May 2020 (2 May 2027) * Based on the share price at grant multiplied by the number of shares awarded. Performance targets for these awards are as follows: • Adjusted EPS growth (37.5% of award) – 25% of this part of an award will vest for achieving a minimum of 5% compound growth per annum in adjusted EPS increasing pro-rata to 100% vesting for achieving 15% compound growth per annum in adjusted EPS for the three-year period ending 31 December 2019; • relative TSR (37.5% of award) – the Company’s TSR measured against the constituents of the FTSE 250 (excluding financial services companies and investment trusts). 25% of this part of an award will vest for performance at median of comparator group, increasing pro-rata to 100% vesting at upper quartile; and • strategic objectives (25% of award) – relating to three performance measures subject to an underlying performance underpin: people engagement (10%) - 25% of this part of an award will vest for achieving a minimum of a 5% point increase in Group engagement levels increasing pro-rata to 100% vesting for achieving a 10% point increase for the three-year period ending 31 December 2019; customer experience (10%) - 25% of this part of an award will vest for achieving a minimum 10 point increase in Group NPS increasing pro-rata to 100% vesting for achieving a 20 point increase for the three-year period ending 31 December 2019; market share (5%) - 25% of this part of an award will vest for achieving a minimum of a 5% point increase in combined market share for sales and financial services increasing pro-rata to 100% vesting for achieving a 10% point increase for the three-year period ending 31 December 2019. Annual Report 2017 Countrywide plc 53 Financial statementsStrategic reportCorporate governance Directors’ remuneration report continued PART B: annual report on remuneration continued LTIP 02/05/17 — 508,100 22/05/15 14,660 Outstanding share awards Alison Platt* LTIP LTIP LTIP Date of grant 08/09/14 16/03/15 22/03/16 Deferred bonus 05/05/16 Grenville Turner Deferred bonus Jim Clarke LTIP LTIP 21/03/14 16/03/15 Deferred bonus 22/05/15 LTIP 22/03/16 Deferred bonus 05/05/16 LTIP 02/05/17 Himanshu Raja LTIP 14/06/17 Interest at 1 January 2017 Options/awards granted during the year Options/awards lapsed during the year Options/awards exercised during the year Interest at 31 December 2017 Exercise price pence 246,305 163,507 279,960 27,010 — — — — — — — — — — 58,735 73,934 13,889 143,469 15,189 — — 260,383 344,984 (246,305) — — — — — (58,735) — — — — — — — — — — — — — — — — — — — — 163,507 279,960 27,010 508,100 14,660 — 73,934 13,889 143,469 15,189 260,383 344,984 — — — — — — — — — — — — — Expected exercise/vested to expiry date (if appropriate) n/a 16/03/18 (16/03/25) 22/03/19 (22/03/26) 05/05/19 02/05/20 (02/05/27) 22/05/18 n/a 16/03/18 (16/03/25) 22/05/18 22/03/19 (22/03/26) 05/05/19 02/05/20 (02/05/27) 14/06/20 (14/06/27) * Following her resignation all outstanding LTIP awards for Alison Platt will lapse in line with the plan rules. * Alison Platt’s 2016 deferred bonus award will vest in full on the date of her ceasing employment. The executive directors’ interests in ordinary shares of the Company under the SIP as at 31 December 2017 are shown in the table below. The shares are held under a SIP trust and will vest based on service conditions of continued employment and have a vesting date of a minimum holding period of three years from each rolling monthly award date. Alison Platt* Total SIP shares at 1 January 2017 845 Partnership shares purchased 1,201 Matching shares awarded 800 Dividend shares purchased Total SIP shares at 31 December 2017 — 2,846 * Ms Platt will be treated in line with the rules of the scheme following her resignation. Mr Raja will become eligible to join the SIP in 2018 once he has completed twelve months’ service. Matching shares are awarded each month in the ratio of two matching shares for every three partnership shares purchased at the prevailing market price on the date of the award. Statement of directors’ shareholding and share interests (audited) The interests of the directors who served during 2017 have been subject to audit and are set out in the table below: Alison Platt Himanshu Raja Jim Clarke Peter Long David Watson Cathy Turner Richard Adam Rupert Gavin Jane Lighting Caleb Kramer Natalie Ceeney Legally owned LTIP awards 31 December 2017 31 December 2016 43,412 222,8411 42,211 — 1,545,996 1 1,545,285 1 371,429 22,070 1 200,000 16,370 1 10,722 12,843 9,500 10,629 — 23,067 9,747 10,000 9,500 9,500 — — Unvested 951,567 344,984 477,786 — — — — — — — — SIP matching share awards (unvested) Vested — — — — — — — — — — — 1,134 — 887 — — — — — — — — DSBP options (unvested) Total 31 December 2017 27,010 1,023,123 — 567,825 29,078 2,053,747 — — — — — — — — 371,429 22,070 10,722 12,843 9,500 10,629 — 23,067 Shareholding guideline (200% of salary) 2 9% 65% n/a n/a n/a n/a n/a n/a n/a n/a n/a 1 Includes jointly controlled shares held by close family members. 2 For the purposes of the above table, compliance with the share ownership guidelines has been calculated by using the share price of 120 pence on 31 December 2017. In addition, as part of the policy review, the Committee has brought the share ownership guidelines into line with market/best practice by no longer counting unvested share awards for these purposes. 54 Countrywide plc Annual Report 2017 Corporate governance There have been the following changes in the interests of any director between 1 January 2018 and the date of this report: • purchase of SIP partnership shares by Alison Platt (112 shares); • issue of SIP matching share awards to Alison Platt (74 shares); and • purchase of ordinary shares by Peter Long (200,000 shares). Payments to past directors and payments for loss of office (audited) Jim Clarke announced on 6 June 2017 that he was retiring and would leave the Company on 31 December 2017. The main provisions relating to his departure (which comply with the Company’s remuneration policy) are as follows: • Base salary, benefits and pension will be paid up to the date of his departure on 31 December 2017. • No bonus payment will be received for 2017 (for the reasons given on pages 52 to 53). • SIP awards will be treated in accordance with the plan rules. • Outstanding 2015 and 2016 DSBP awards vested in full on cessation of employment and will remain exercisable until 31 December 2018. • Outstanding LTIP awards will be retained which will vest in accordance on the normal vesting date (subject to application of performance conditions and pro-rating). Any shares acquired on exercise of Mr Clarke’s LTIP awards will be subject to a two-year holding period. Performance graph and table 180 160 140 120 100 80 60 40 20 0 ) £ ( l e u a V Source: Thomson Reuters Datastream 20 March 2013 31 December 2013 31 December 2014 31 December 2015 31 December 2016 31 December 2017 Countrywide plc FTSE 250 (excluding investment trusts) Total shareholder return The graph shows the value, by 31 December 2017, of £100 invested in Countrywide plc in March 2013 (IPO) compared with the value of £100 invested in the FTSE 250 Index (excluding investment trusts). In the opinion of the directors, this index (excluding investment trusts) is the most appropriate peer group and also closely aligns with the comparator group used for the LTIPs, which comprises the FTSE 250 Index excluding investment trusts and financial services companies. The table below sets out the details for the director undertaking the role of chief executive officer: Year 2017 2016 2015 2014 2014 2013 2012 2011 2010 2009 Alison Platt Alison Platt Alison Platt Alison Platt1 Grenville Turner2 Grenville Turner Grenville Turner Grenville Turner Grenville Turner Grenville Turner 1 Alison Platt was appointed chief executive officer from 1 September 2014. 2 Grenville Turner stepped down as chief executive officer with effect from 1 September 2014. Chief executive officer single figure of total remuneration £’000 Annual bonus payout against maximum % Long term incentive vesting rates against maximum opportunity % 676 676 964 555 7,744 1,015 914 689 892 972 0 0 42 n/a 67 83 83 46 79 100 0 0 n/a n/a 83 n/a n/a n/a n/a n/a Annual Report 2017 Countrywide plc 55 Financial statementsStrategic reportCorporate governance Directors’ remuneration report continued PART B: annual report on remuneration continued Percentage change in remuneration of director undertaking the role of chief executive officer The table below shows the percentage change in remuneration of the director undertaking the role of chief executive officer and the Company’s employees as a whole between the years 2016 and 2017: Salary and fees All taxable benefits Annual bonuses/variable pay Percentage increase in remuneration in 2017 compared with remuneration in 2016 Chief executive officer Average pay based on all Countrywide employees 0 0 0 6 20 5 Relative importance of spend on pay The following table shows the Company’s actual spend on pay (for all employees) relative to dividends, tax and retained profits: Employee costs Dividends Tax (credit)/charge Retained losses 2017 £’000 389,694 0 (3,987) 208,072 2016 £’000 425,156 32,780 1,955 15,376 Change % (8) n/a (304) (1,253) The Remuneration Committee and its composition The Committee’s composition, responsibilities and operation comply with the principles of good governance (as set out in the UK Corporate Governance Code). The full terms of reference of the Committee are available on request to shareholders and on the Company’s website at www.countrywide.co.uk. The terms of reference are reviewed annually by the Board and, if necessary, updated. The membership of the Committee, together with appointment date, is set out below: Member Cathy Turner (chairman) Richard Adam Rupert Gavin Jane Lighting David Watson Natalie Ceeney Remuneration Committee member since 31 July 2013 9 June 2014 25 June 2014 9 June 2014 2 September 2013 28 April 2017 The composition of the Committee changed during the period with the appointment of Natalie Ceeney in April 2017. Attendance by members at the meetings is shown on page 34. All members of the Committee are considered independent non-executive directors. The chairman of the Committee reports on the Committee’s activities to the Board at the meeting immediately following the Committee meeting. 56 Countrywide plc Annual Report 2017 Corporate governance Consideration by the directors of matters relating to directors’ remuneration Membership of Board Committees that considered remuneration (both the Remuneration Committee and the Nomination Committee (when directors are appointed)) are disclosed within the corporate governance section of the annual report. Invitations to attend are also extended to executive management where appropriate. During the year the Committee received advice on remuneration from FIT Remuneration Consultants LLP (FIT). FIT is not connected to the Group, is a member of the Remuneration Consultants Group and is a signatory to its Code of Conduct, and is therefore considered to be objective and independent. In 2017 FIT received fees of £50,672 (2016: £50,136) in connection with its work for the Committee, which it provided pursuant to its standard terms of business. Shareholder voting and engagement At the Company’s Annual General Meeting held on 27 April 2017, voting in respect of the resolution relating to the remuneration report was as follows: Resolution 2 Directors' remuneration report 3 Directors' remuneration policy For Votes Against 202,605,393 202,605,093 99.71% 99.71% 580,400 580,400 0.29% 0.29% Withheld Total 0 203,185,793 300 203,185,793 The Committee was pleased with the level of support at the 2017 AGM which followed extensive consultation with our largest shareholders and voting guidance services. The Committee will continue to listen to and engage with shareholders with regards to all aspects of the Company’s remuneration report and related policy. Approval This report was approved by the Board of directors on 8 March 2018 and signed on its behalf by: Cathy Turner Chair of the Remuneration Committee Annual Report 2017 Countrywide plc 57 Financial statementsStrategic reportCorporate governance Directors’ report Group directors’ report for the year ended 31 December 2017 The directors present their report and the audited consolidated financial statements for the year ended 31 December 2017. The review of the business, future developments and outlook, as well as specific disclosures in relation to employee policies, are contained within the strategic report and are incorporated into the directors’ report by cross-reference. Information about the use of financial instruments by the Company and its subsidiaries and financial risk management policies are given in notes 32 and 33 to the financial statements. In accordance with the UK Financial Conduct Authority’s Listing Rules (LR 9.8.4C), the information to be included in the annual report and accounts, where applicable, under LR 9.8.4, is set out in this directors’ report, with the exception of the information set out in the table below, which can be found at the location specified. Listing Rule Information Location LR 9.8.4(4) LR 9.8.4(11) Details of long term incentive schemes as required by LR 9.4.3, regarding information about the recruitment of a director Details of contracts for the provision of services to the Company by a controlling shareholder Pages 53 to 54 of the directors’ remuneration report Page 49 of the directors’ remuneration report LR 9.8.4(14) Details of transactions with controlling shareholders Page 117 (note 34 to the accounts) Authority for the Company to purchase its own shares At the end of the year, the directors had authority, under a shareholder resolution approved at the AGM on 27 April 2017, to make one or more market purchases of its ordinary shares, limited to: a maximum number of 23,793,146 ordinary shares; a minimum price (exclusive of expenses) of the nominal value; and a maximum price of 5% above the average market value for the preceding five business days or the higher of the price of the last independent trade and highest current independent bid on the trading venues where the purchase is carried out at the relevant time. This authority expires at the conclusion of the forthcoming AGM. As a routine matter, the Company will be seeking to have this authority renewed at the 2018 AGM. Substantial shareholdings At 7 March 2018, being the latest practicable date prior to the publication of this annual report, the Company had been notified of the following interests amounting to 3% or more of the voting rights in the issued share capital of the Company. Shareholder Number of shares % holding Oaktree Capital Management Brandes Investment Partners, LP Harris Associates LP Jupiter Asset Management Investec Asset Management Fidelity Management & Research Company J O Hambro Capital Management 71,696,855 46,498,442 18,207,800 15,923,401 14,289,825 9,301,454 7,284,681 30.13 19.54 7.65 6.69 6.01 3.91 3.06 General information Countrywide plc is a public limited company, listed on the London Stock Exchange, incorporated and domiciled in the UK. The registered address of the Company is included in note 1 to the financial statements. Directors The names of the directors who held office during the year are set out on pages 30 and 31, with the exception of Jim Clarke and Alison Platt, who retired from the Board on 31 July 2017 and 24 January 2018 respectively. Dividends The directors do not recommend the payment of a final dividend and no interim dividend was paid (2016: 5.0 pence (net) per share). Capital structure Details of the issued share capital are shown in note 26 to the Group financial statements on page 108 of this annual report. The Company has one class of ordinary shares which carries the right to one vote at a general meeting of the Company and has no right to fixed income. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of shares or on voting rights. Details of employee share schemes are provided in note 27 to the Group financial statements. Shares held by the Group Employee Benefit Trust abstain from voting. Placing of share capital On 9 March 2017 the Company announced a non-pre-emptive placing of 21,610,467 new ordinary shares of 1 pence each in the Company (the ‘Placing Shares’) representing approximately 9.99% of the Company’s existing issued ordinary share capital (excluding treasury shares) were placed at a price of 175 pence per Placing Share raising net proceeds of £36.85 million. The proceeds were used to unlock the Group’s further cost savings initiatives and to strengthen the Company’s balance sheet. 58 Countrywide plc Annual Report 2017 Corporate governance Relationship agreement with controlling shareholders Any person who exercises or controls on their own, or together with any person with whom they are acting in concert, 30% or more of the votes able to be cast on all or substantially all matters at general meetings of a company is known as a ‘controlling shareholder’. The Financial Conduct Authority’s Listing Rules require companies with controlling shareholders to enter into a written and legally binding agreement which is intended to ensure that the controlling shareholder complies with certain independence provisions. The agreement must contain undertakings that: (a) (b) (c) transactions and arrangements with the controlling shareholder (and/or any of its associates) will be conducted at arm’s length and on normal commercial terms; neither the controlling shareholder nor any of its associates will take any action that would have the effect of preventing the listed company from complying with its obligations under the Listing Rules; and neither the controlling shareholder nor any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules. The Board confirms that, in accordance with the Listing Rules, on 19 March 2013, the Company entered into such an agreement (‘the Relationship Agreement’) with, among others, OCM Luxembourg Castle Holdings S.Á R.L. and OCM Luxembourg EPF III Castle Holdings S.Á R.L. (together, ‘the Oaktree Shareholders’) which currently have a combined total holding of approximately 30.13% of the Company’s voting rights. Under the terms of the Relationship Agreement, the Oaktree Shareholders have agreed to the independence obligations contained in the Relationship Agreement. The Board confirms that, since the entry into the Relationship Agreement on 19 March 2013 until 7 March 2018, being the latest practicable date prior to the publication of this annual report: (i) (ii) the Company has complied with the independence provisions included in the Relationship Agreement; and so far as the Company is aware, the independence provisions included in the Relationship Agreement have been complied with by Oaktree and its associates. As there are no controlling shareholders of the Company other than the Oaktree Shareholders there is no need for the Relationship Agreement to require the Oaktree Shareholders to procure compliance by any third parties with the independence provisions of the Relationship Agreement. Appointment and removal of directors Directors may be appointed by the Company by ordinary resolution or by the Board. The Company may, by special resolution, remove any director before the expiration of their period of office. Powers of the directors Subject to the Articles, the Companies Act and any directions given by the Company by special resolution, the business of the Company will be managed by the Board which may exercise all the powers of the Company. Amendment of Articles The Articles may be altered by special resolution, in accordance with the Companies Act. Directors and directors’ interests The directors of the Company who were in office during the year and up to the date of signing the financial statements are disclosed on pages 30 to 31 and their interests in the shares of the Company are disclosed on page 54. Directors’ conflicts of interest All directors have a duty under the Companies Act 2006 to avoid a situation in which they have, or could have, a direct or indirect conflict of interest or possible conflict with the Company. The Articles provide a general power for the Board to authorise such conflicts. Directors are not counted in the quorum for the authorisation of their own actual or potential conflicts. On an ongoing basis, the directors are responsible for informing the company secretary of any new, actual or potential conflicts that may arise or if there are any changes in circumstances that may affect an authorisation previously given. Even when provided with authorisation, a director is not absolved from his or her statutory duty to promote the success of the Company. If an actual conflict arises post-authorisation, the Board may choose to exclude the director from receipt of the relevant information and participation in the debate, or suspend the director. Directors’ indemnities The Company has made qualifying third party indemnity provisions (as defined in the Companies Act 2006) for the benefit of its directors during the year; these provisions were in force during the financial year and remain in force at the date of this report. Annual Report 2017 Countrywide plc 59 Financial statementsStrategic reportCorporate governance Directors’ report continued Change of control We do not have contracts or other arrangements which individually are fundamental to the ability of the business to operate effectively, nor is the Company party to any material agreements that would take effect, be altered, or terminate upon a change of control following a takeover bid. We do not have agreements with any director that would provide compensation for loss of office or employment resulting from a takeover, except that provisions of the Company’s share plans may cause options and awards granted under such plans to vest on a takeover. We have reported on all of the emission sources required under The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended in August 2013. We have used the operational control consolidation method. These sources fall within our consolidated financial statements, but exclude non-wholly owned subsidiaries and joint ventures. We have used the GHG Protocol Corporate Accounting and Reporting Standard (revised edition) and emission factors from the UK Government’s GHG Conversion Factors for Company Reporting 2016 to calculate the above disclosures. Post-balance sheet events On 2 February 2018 the Company agreed an amendment letter relating to its terms and revolving credit facility with its lender partners. Particulars of important post-balance sheet events of the Company are set out in note 35 to the Group financial statements on page 117 of this annual report and are incorporated into this directors’ report by cross-reference. AGM notice Accompanying this report is the notice of the AGM which sets out the resolutions for the meeting, together with an explanation of them. The financial statements on pages 69 to 130 were approved by the Board of directors on 8 March 2018 and signed on its behalf. By order of the Board Gareth Williams Company secretary 8 March 2018 Auditors and disclosure of information to auditors All directors at the date of approval of this annual report confirm that: • so far as the directors are aware, there is no relevant information of which the Company’s auditors are unaware; and • the directors have taken all reasonable steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of any such information. The auditors, PricewaterhouseCoopers LLP, have expressed their willingness to continue in office as auditors and a resolution to reappoint PricewaterhouseCoopers LLP will be proposed at the forthcoming AGM. Corporate governance The Company’s statement on corporate governance can be found in the corporate governance statement on pages 33 to 34 of this annual report. The corporate governance statement forms part of this directors’ report and is incorporated into it by cross-reference. Political donations No political donations or contributions were made or expenditure incurred by the Company or its subsidiaries during the year and there is no intention to make or incur any in the current year. Greenhouse gas (GHG) emissions GHG emissions data for the period 1 January to 31 December 2017 Scope 1 Controlled vehicle fleet Scope 2 Electricity and heat purchased for own use Tonnes of CO2e*/£m revenue Tonnes of CO2e* 2017 2016 3,767 5,194 10,427 21.1 11,541 22.7 * CO2e is a universal unit of measurement used to indicate the global warming of GHG expressed in terms of the global warming potential of one unit of carbon dioxide. 60 Countrywide plc Annual Report 2017 Corporate governance Statement of directors’ responsibilities in respect of the financial statements The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulation. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements; • make judgements and accounting estimates that are reasonable and prudent; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. The directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company’s performance, business model and strategy. Each of the directors, whose names and functions are listed in the corporate governance statement confirm that, to the best of their knowledge: • the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law), give a true and fair view of the assets, liabilities, financial position and loss of the Company; • the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and • the Directors’ report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces. In the case of each director in office at the date the Directors’ report is approved: • so far as the director is aware, there is no relevant audit information of which the Group and Company’s auditors are unaware; and • they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group and Company’s auditors are aware of that information. Annual Report 2017 Countrywide plc 61 Financial statementsStrategic reportCorporate governance Independent auditors’ report To the members of Countrywide plc Report on the audit of the financial statements Opinion In our opinion: • Countrywide plc’s Group financial statements and Parent Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2017 and of the Group’s loss and cash flows for the year 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 (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated and Company balance sheets as at 31 December 2017; the Consolidated income statement and Consolidated statement of comprehensive income, the Consolidated cash flow statement, and the Consolidated and Company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Our opinion is consistent with our reporting to the Audit and Risk Committee. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company. Other than those disclosed in note 7 to the financial statements, we have provided no non-audit services to the Group or the Parent Company in the period from 1 January 2017 to 31 December 2017. Material uncertainty relating to going concern – Group and Parent Company In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 2 to the Group financial statements concerning the Group’s and Parent Company’s ability to continue as a going concern. The Group’s forecast for the 12 months from approval of these financial statements contains assumptions over the productivity and growth of existing businesses, and the achievement of cost saving measures. Each of these items is subject to a level of uncertainty. As noted on page 74, management maintain that the Group benefits from a supportive lender group of six banks who have provided borrowing facilities since March 2013. These facilities, which are held by the Parent Company, are subject to covenants in respect of interest cover and net debt to EBITDA leverage. These covenants are subject to testing at 30 June 2018, 30 September 2018 and 31 December 2018 within the 12 months from the approval of these financial statements. If the Group’s forecast is not achieved, there is a risk that the Group will not meet the net debt to EBITDA leverage covenant and should such a situation materialise, the banks reserve the right to withdraw the existing facilities. Without these facilities, and without alternative finance being obtained, the Group and Parent Company will be unable to meet their liabilities as they fall due. These conditions, along with the other matters explained in note 2 to the Group financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group’s and Parent Company’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group and Parent Company were unable to continue as a going concern. Explanation of material uncertainty Note 2 to the Group financial statements details the Directors’ disclosures of the material uncertainties relating to going concern in respect of compliance with the covenant of net debt to EBITDA leverage attached to bank borrowings. In forming their conclusions regarding going concern of the Group and Parent Company, and as described in Note 2, the Directors have considered various matters including, but not limited to, a range of scenarios modelling the key assumptions within the forecast including: • recovery of the sales pipeline to 2017 levels; • volume of exchanges per branch and associated productivity measures in other areas of the Group; • corporate cost saving initiatives; and • mitigation of the potential impact of the tenancy fee ban. Given the timing and execution risks associated with achieving the forecast and therefore remaining within the leverage ratio as stipulated by the banking covenants, the Directors have drawn attention to this as a material uncertainty relating to going concern in the basis of preparation to the Annual Report. 62 Countrywide plc Annual Report 2017 Financial statements Report on the audit of the financial statements continued Material uncertainty relating to going concern – Group and Parent Company continued What audit procedures we performed In concluding there is a material uncertainty, our audit procedures included: • obtaining the Directors’ financial forecast for the next 12 months and future periods, challenging the assumptions used in building the forecasts by considering the latest information available and latest market trends; • verifying the relationship between management’s cash flow model and the financial forecasts through analytical procedures and agreeing forecast cash flows back to supporting information, where possible; • re-calculating the Directors’ calculations of forecast compliance with banking covenants; and • in the event of under-performance against the forecast, considering the potential mitigating actions available to manage covenant compliance. Having performed the above procedures, we concluded there is a reasonably possible scenario where the leverage covenant may be breached within 12 months of this report. On this basis we agree with management’s assessment that a material uncertainty exists on the Group’s and Parent Company’s ability to continue as a going concern. Our audit approach Overview • Overall Group materiality: £1.8 million (2016: £2.7 million), based on 5% of three year average of the Group’s profit before tax adjusted for exceptional items (“Adjusted PBT”). Materiality • Overall Parent Company materiality: £1.6 million (2016: £869,000), based on 1% of total assets, restricted to a threshold lower than Group materiality. Audit scope Areas of focus • The Group has four operating segments alongside a head office function. Each of the operating segments is broken down into a number of legal entities which are consolidated into the Group financial statements along with head office legal entities. • In some of the operating segments we audited complete financial information and in others we focused on the larger legal entities to obtain appropriate audit coverage. • Impairment of indefinite life intangible assets (Group). • Presentation and disclosure of exceptional items (Group). • Accounting estimates and judgements in relation to professional indemnity and related litigation costs (Group). • Impairment risk of investment in subsidiaries and intercompany receivables (Parent). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We gained an understanding of the legal and regulatory framework applicable to the Group and the industries in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group and significant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the Group and Parent Company financial statements, including, but not limited to, Companies Act 2006, the Listing Rules, Pensions legislation, UK tax legislation, relevant aspects of the Financial Conduct Authority’s Handbook, Royal Institute of Chartered Surveyors and the Association of Residential Lettings Agents. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with the regulators, review of correspondence with legal advisors, enquiries of management and review of internal audit reports in so far as they related to the financial statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. Annual Report 2017 Countrywide plc 63 Financial statementsStrategic reportCorporate governance Independent auditors’ report continued To the members of Countrywide plc Report on the audit of the financial statements continued Our audit approach continued Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Key audit matter How our audit addressed the key audit matter Impairment of indefinite life intangible assets Group We focused on this area due to the size of the goodwill balance (£279.5 million) across the Group and the value of the other intangible assets, principally brand names (£177.8 million) which are assumed to have indefinite useful economic lives. We consider this to have heightened risk this year due to reduced trading performance and the impact of continued political and economic uncertainty on market confidence. Management’s annual impairment testing concluded that the adverse trading conditions have triggered an impairment in the UK and London Cash Generating Units (CGUs), where an aggregate impairment charge of £192.3 million against goodwill has been recorded. This impairment was recorded after impairment charges of £12.9 million in respect of brands within the UK and London business units. For the remaining CGU’s, management concluded that sufficient headroom between the recoverable value of the Group’s CGU’s and their carrying value existed and no impairment charge was recognised. The key judgements involved in assessing impairment were forecast volumes, cost reduction arising from cost saving initiatives and the weighted average pre-tax cost of capital (WACC) calculation. This is an area of focus for us because the assessment of the recoverable value of the CGUs and brand names involves judgements about the future results of the business and the appropriate discount rates to apply to the future cash flows. Presentation and disclosure of exceptional items Group The Group recognised net exceptional expenses of £225.9 million comprising the following: • People-related restructuring costs (£4.4 million); • Property closure costs (£1.9 million); • Transformation project and consultancy costs (£1.7 million); • Professional indemnity provisions (£1.8 million); • Impairment of goodwill and other intangible assets (£210.4 million); • Impairment of software and tangible assets (£4.1 million); and • Impairment of trade receivables (£1.6 million). Separately identifying and disclosing items as exceptional on the face of the income statement requires judgement as such presentation could be misleading to investors. We focused on this judgement, the potential for management bias, as well as the consistency and accuracy of the amounts disclosed within exceptional items. We assessed management’s impairment methodology, as required under IAS 36 – Impairment of Assets. We evaluated management’s cash flow forecasts, and the process by which they were drawn up, comparing them to the latest Board approved budget and forecasts for consistency. We also tested the underlying spreadsheet model. We challenged the Directors’ key assumptions and calculation of the discount rates and compared them to a comparator group to confirm they are in line with other industry competitors. We performed sensitivity analysis around the key drivers of the cash flow forecasts. Our tests included applying: • probability based reductions on EBITDA growth forecasts; • sensitivities to forecast cost reductions; and • an increase in the WACC rate. Having ascertained the extent of change in those assumptions that either individually or collectively lead to an impairment of the goodwill and other indefinite life intangible assets, we concluded that the impairment charge booked against goodwill associated with the UK and London CGUs was reasonable and supported by the available evidence. We concluded that no impairment was required in the other CGUs. We considered the related disclosures in note 14 to the financial statements by checking they were compliant with IFRS. The disclosure appropriately describes the inherent degree of subjectivity in the estimates, including specific disclosures on the key assumptions most sensitive to change. In addition, with respect to brand names, having reviewed the discounted cash flows prepared, we agree with the impairment charge recognised of £12.9 million. On an overall basis, we agree with management’s view of the impairment charges arising and that no further impairment is required. We assessed the rationale behind management’s classification and the appropriateness of the transactions recognised as exceptional items using our knowledge of the business, inquiries of management, examination of documents supporting the reorganisation of the Group and rationalisation of branches, and through consideration of expenses that are typically connected with restructuring activities. We also assessed the completeness of exceptional items through identifying other large or unusual items in underlying profit, considering their potential disclosure where significant. We agreed a sample of expenses to calculations and invoices, and verified payments made to bank statements to conclude on the consistency and accuracy of classification. Through our review we identified some items, which were judgemental as to whether they were exceptional to the underlying trading of the Group. Management have prepared enhanced disclosures to explain the nature of such expenses. We are therefore satisfied that the classification, judgements and disclosures made by management are appropriate and in line with the Group accounting policy on exceptional items. 64 Countrywide plc Annual Report 2017 Financial statements Report on the audit of the financial statements continued Our audit approach continued Key audit matters continued Key audit matter How our audit addressed the key audit matter Accounting estimates and judgements in relation to professional indemnity and related litigation costs Group Professional indemnity (PI) provisions principally relate to the Surveyors and Lambert Smith Hampton businesses within the Business to Business operating segment. In common with other valuers, the Group is subject to significant claims in relation to incorrect mortgage valuation reports primarily carried out between 2004 and 2007. The Group holds professional indemnity insurance for such matters, but management uses judgement to estimate the net costs that will be incurred by the Group. All the claims received are listed and analysed through the Bordereaux report and the provisions held are based on experience of settling past claims, discussions with the Group’s insurers and advice from legal counsel. The provisions are for both claims already received and claims yet to be received. The second category requires significant management judgement given the need to estimate the incidence and amount of future claims. We focused on this area because the determination of the size of the provisions held and the likely settlements arising are inherently judgemental. Claims already received We checked that the amounts in the Bordereaux report were appropriately reflected in the books and records, and tested the mathematical accuracy of the report and the input data. With respect to the input data, we agreed a sample of claims received and provisions made to the advice from lawyers and correspondence with claimants. We also agreed a sample of settlements on closed claims to supporting information and bank payments. Open large legal claims were discussed with Group Legal, and appropriate documentation considered to understand the legal position and the basis of material risk positions. For large claims, we also compared a sample of historical provisions to the actual amounts settled, determining that management’s estimation techniques were satisfactory. Management hold a provision above that suggested in the Bordereaux report to reflect the latest observed trends in claims received and settled, the number of claims with losses, and the average loss on each claim. We evaluated the model and approach used by management by testing the mathematical accuracy of the underlying calculations and satisfied ourselves that the input data used reflected the latest observed trend of claims of losses and average loss incurred. Claims yet to be received For claims not yet received but incurred, we evaluated the model and approach used by management by testing the mathematical accuracy of the underlying calculations and satisfied ourselves that the input data used reflected the latest observed trend of claims of losses and average loss incurred. From the evidence obtained, we consider the level of provisioning at the balance sheet date is reasonable. Impairment risk of investment in subsidiaries and intercompany receivables Parent Company The Parent Company holds investments in its subsidiaries of £386 million and intercompany receivables of £239 million. Following the impairment charges recorded in the UK and London CGUs noted above, we have focused on this area due to the size of the investment and intercompany receivable balances and the risk of impairment arising due to the deterioration of business performance. Management have performed an assessment of the carrying value of the investments and intercompany receivables and compared this to the recoverable value, using the same cash flow forecast used in the impairment test of indefinite life intangible assets described above. The results showed there was sufficient headroom between the carrying value and the recoverable value, and therefore no impairment has been recognised in the Parent Company. How we tailored the audit scope We obtained management’s assessment of the carrying value of the investments and intercompany receivables and agreed the cash flow forecast used in the assessment to the forecast used in the assessment of impairment of indefinite lived intangible assets. We considered the impact of the impairment of indefinite lived intangible assets on the value in use of subsidiaries and the ability of the subsidiaries to repay intercompany receivables and deliver value in excess of the investment carrying value held on the Parent Company balance sheet. Following the conclusion of our procedures above, we did not identify any impairment in the carrying value of the investments in subsidiaries or intercompany receivables held by the Parent Company. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Parent Company, the accounting processes and controls, and the industry in which they operate. The Group has four operating segments, as set out in the Annual Report (refer to pages 18 to 23). Each of the operating segments is broken down into a number of legal entities which are consolidated into the Group financial statements along with head office legal entities. In some of the operating segments we audited complete financial information and in others we focused on the larger legal entities to obtain appropriate audit coverage. We performed audit work over the complete financial information of legal entities which accounted for approximately 92% (2016: 88%) of the Group’s revenues and 89% (2016: 88%) of the Group’s absolute profit before tax and exceptional items (i.e. the sum of the numerical values without regard to whether they were profits or losses for each of the legal entities within the Group). Included in the coverage above are central reporting entities and Group functions together with the Parent Company, which were subject to a full scope audit. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Annual Report 2017 Countrywide plc 65 Financial statementsStrategic reportCorporate governance Independent auditors’ report continued To the members of Countrywide plc Report on the audit of the financial statements continued Our audit approach continued Materiality continued Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Overall materiality £1.8 million (2016: £2.7 million). Parent Company financial statements £1.6 million (2016: £869,000). How we determined it 5% of 3 year average of the Group’s profit before tax adjusted for exceptional items (“Adjusted PBT”). 1% of total assets, restricted to a threshold lower than Group materiality. Rationale for benchmark applied We believe that profit before tax is the primary measure used by the shareholders in assessing the performance of the Group, and is a generally accepted auditing benchmark. We have excluded the effect of exceptional items to eliminate their disproportionate effect and provide a consistent year-on-year basis for our work. We do not exclude the adjusted measures of share-based payment charges, amortisation and employment linked consideration expenses on the basis that these items recur annually. Further, a 3-year average adjusted PBT was used in calculating the overall materiality to eliminate the volatility in trading profitability. We believe total assets to be the key performance benchmark of the Parent Company as it is a holding company for the Group and does not trade. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £30,000 and £1.6 million. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £150,000 (Group audit) (2016: £150,000) and £150,000 (Parent Company audit) (2016: £150,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome We are required to report if we have anything material to add or draw attention to in respect of the Directors’ statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group’s and the Parent Company’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. We have nothing material to add or to draw attention to other than the material uncertainty we have described in the ‘Material uncertainty relating to going concern’ section above. Because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Parent Company’s ability to continue as a going concern. We are required to report if the directors’ statement relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. We have nothing to report. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated). 66 Countrywide plc Annual Report 2017 Financial statements Report on the audit of the financial statements continued Our audit approach continued Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06) The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: • The Directors’ confirmation on page 14 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. • The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. • The directors’ explanation on page 17 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Other than the material uncertainty we have described in the going concern section above, we have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and statement in relation to the longer term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit. (Listing Rules). Other Code Provisions We have nothing to report in respect of our responsibility to report when: • The statement given by the Directors, on page 61, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and Parent Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Parent Company obtained in the course of performing our audit. • The section of the Annual Report on pages 40 to 41 describing the work of the Audit and Risk Committee does not appropriately address matters communicated by us to the Audit and Risk Committee. • The Directors’ statement relating to the Parent Company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. Directors’ Remuneration • In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06) Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Directors’ Responsibilities Report set out on page 61, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Annual Report 2017 Countrywide plc 67 Financial statementsStrategic reportCorporate governance Independent auditors’ report continued To the members of Countrywide plc Report on the audit of the financial statements continued Responsibilities for the financial statements and the audit continued Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the Parent Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of Directors’ remuneration specified by law are not made; or • the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the Audit and Risk Committee, we were appointed by the Directors on 25 March 2013 to audit the financial statements for the year ended 31 December 2013 and subsequent financial periods. The period of total uninterrupted engagement is 5 years, covering the years ended 31 December 2013 to 31 December 2017. Christopher Burns (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 8 March 2018 68 Countrywide plc Annual Report 2017 Financial statements Consolidated income statement For the year ended 31 December 2017 Pre-exceptional items, amortisation, contingent consideration and share-based payments £’000 661,049 10,829 671,878 (384,142) (223,049) 64,687 (27,683) 690 Note 5 4 6 7 4 14, 15 16(b) 2017 Exceptional items, amortisation, contingent consideration and share-based payments £’000 — — — Total £’000 661,049 10,829 671,878 (5,552) (389,694) — (223,049) (5,807) (33,490) — 690 2016 Pre-exceptional items, amortisation, contingent consideration and share-based payments £’000 Exceptional items, amortisation, contingent consideration and share-based payments £’000 723,970 12,985 736,955 (415,845) (237,562) 83,548 (21,445) (13) Total £’000 723,970 12,985 736,955 — — — (9,311) (425,156) — (237,562) (11,427) (32,872) — (13) 37,694 (11,359) 26,335 62,090 (20,738) 41,352 — — — — — — (4,405) (6,978) — (4,405) (6,978) (214,486) (214,486) (225,869) (225,869) 37,694 (237,228) (199,534) (12,607) 82 (12,525) — — — (12,607) 82 (12,525) 25,169 (237,228) (212,059) (5,692) 9,679 3,987 19,477 (227,549) (208,072) — — — — — 62,090 (9,672) 304 (9,368) 52,722 (10,686) 42,036 32,804 (8,109) (16,262) (20,922) (12,489) (33,227) — — — (33,227) 8,731 (24,496) 10 4 8 9 11 19,477 (227,549) (208,072) 41,900 (24,496) — — — 136 — 19,477 (227,549) (208,072) 42,036 (24,496) 32,804 (8,109) (16,262) (20,922) (12,489) 28,863 (9,672) 304 (9,368) 19,495 (1,955) 17,540 17,404 136 17,540 8.03p Revenue Other income Employee benefit costs Other operating costs Adjusted EBITDA1 Depreciation and amortisation Share of profit/(loss) from joint venture Group operating profit/(loss) before exceptional items Profit on disposal of available for sale assets Employee benefit costs Other operating costs Impairment of non-current assets Exceptional Items (net): Operating profit/(loss) Finance costs Finance income Net finance costs Profit/(loss) before taxation Taxation (charge)/credit Profit/(loss) for the year Attributable to: Owners of the parent Non-controlling interests Profit/(loss) attributable for the year (Loss)/earnings per share attributable to owners of the parent Basic (loss)/earnings per share 13 (89.56)p The notes on pages 74 to 117 form an integral part of these consolidated financial statements. 1 Adjusted EBITDA is a non-GAAP measure of earnings before interest, tax, depreciation, amortisation, exceptional items, contingent consideration, share-based payments and share of profits/(losses) from joint venture. 2 As there is a loss in 2017, the diluted EPS is not presented on the basis that this is equal to the bsasic loss per share. The comparative diluted EPS is presented. Annual Report 2017 Countrywide plc 69 Strategic reportCorporate governanceFinancial statements Consolidated statement of comprehensive income For the year ended 31 December 2017 (Loss)/profit for the year Other comprehensive (expense)/income Items that will not be reclassified to profit or loss Actuarial loss arising in the pension scheme Deferred tax arising on the pension scheme Items that may be subsequently reclassified to profit or loss Foreign exchange rate (loss)/gain Cash flow hedge gain/(loss) Deferred tax arising on cash flow hedge Available-for-sale financial assets: – Gains arising during the year – Less reclassification adjustments for gains included in the profit and loss Other comprehensive income/(expense) for the year Total comprehensive expense for the year Attributable to: Owners of the parent Non-controlling interests Total comprehensive expense for the year The notes on pages 74 to 117 form an integral part of these consolidated financial statements. Note 2017 £’000 (208,072) 2016 £’000 17,540 25 25 21 16(c) (3,633) 690 (2,943) (30) 2,030 (410) 1,627 — 3,217 274 (207,798) (4,783) 909 (3,874) 136 (2,367) 473 2,132 (29,943) (29,569) (33,443) (15,903) (207,798) (16,039) — 136 (207,798) (15,903) 70 Countrywide plc Annual Report 2017 Financial statements Consolidated statement of changes in equity For the year ended 31 December 2017 Attributable to owners of the parent Share capital £’000 Share premium £’000 Other reserves £’000 Retained earnings £’000 Note Non- controlling interests £’000 Total £’000 Total equity £’000 Balance at 1 January 2016 Profit for the year Other comprehensive income/(expense) Currency translation differences Movement in fair value of available-for-sale financial assets 16(c) Reclassification of gains on disposal of available-for-sale financial assets Cash flow hedge: fair value losses Cash flow hedge: deferred tax on losses Actuarial loss on the pension fund Deferred tax movement relating to pension Total other comprehensive expense Total comprehensive (expense)/income Transactions with owners Issue of share capital Share-based payment transactions Deferred tax on share-based payments Acquisition of non-controlling interest in subsidiary Purchase of treasury shares Utilisation of treasury shares for IPO options Dividends paid Transactions with owners Balance at 1 January 2017 Loss for the year Other comprehensive income/(expense) Currency translation differences Movement in fair value of available-for-sale financial assets Cash flow hedge: fair value gain Cash flow hedge: deferred tax on gain Actuarial loss on the pension fund Deferred tax movement relating to pension Total other comprehensive income/(expense) Total comprehensive income/(expense) Transactions with owners Issue of share capital Transfer of reserves Share-based payment transactions Deferred tax on share-based payments Purchase of treasury shares Transactions with owners Balance at 31 December 2017 21 25 25 27 28 28 12 16(c) 21 25 25 26 28 27 28 2,196 211,839 25,482 304,959 544,476 — 17,404 17,404 103 544,579 136 17,540 — — — — — — — — — — 1 — — — — — — 1 — — — — — 136 2,132 — — 136 2,132 — — 136 2,132 — (29,943) — (29,943) — (29,943) — — — — (2,367) 473 — — — — (2,367) 473 (4,783) (4,783) 909 909 — — — — (2,367) 473 (4,783) 909 — (29,569) (3,874) (33,443) — (33,443) — (29,569) 13,530 (16,039) 136 (15,903) (1) — — — — — — — — (18,100) — 2,261 (299) 29 — — 2,261 (299) 29 (18,100) 4,246 (4,246) — — — — (29) — 2,261 (299) — — (18,100) — — — (32,780) (32,780) (210) (32,990) (1) (13,854) (35,035) (48,889) (239) (49,128) 2,197 211,838 (17,941) 283,454 479,548 — (208,072) (208,072) — — — — — — — — — — — — — — — — — — — — — — (30) 1,627 2,030 (410) (3,633) (3,633) (30) 1,627 2,030 (410) — — 690 3,217 (2,943) 690 274 — 479,548 — (208,072) — — — — — — — (30) 1,627 2,030 (410) (3,633) 690 274 3,217 (211,015) (207,798) — (207,798) 216 — 36,634 — 36,850 — 36,850 — — — — 216 — (36,634) 36,634 — — — — — — — (1,397) 1,944 1,944 (10) — (10) (1,397) (1,397) 38,568 37,387 2,413 211,838 (16,121) 111,007 309,137 — — — — — 1,944 (10) (1,397) — 37,387 — 309,137 The notes on pages 74 to 117 form an integral part of these consolidated financial statements. Annual Report 2017 Countrywide plc 71 Strategic reportCorporate governanceFinancial statements Consolidated balance sheet As at 31 December 2017 Assets Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method: Investments in joint venture Available-for-sale financial assets Deferred tax assets Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity attributable to the owners of the parent Share capital Share premium Other reserves Retained earnings Total equity Liabilities Non-current liabilities Borrowings Derivative financial instruments Net defined benefit scheme liabilities Provisions Deferred income Trade and other payables Deferred tax liability Total non-current liabilities Current liabilities Borrowings Trade and other payables Deferred income Provisions Total current liabilities Total liabilities Total equity and liabilities Note 14(a) 14(b) 15 16(b) 16(c) 24 17 18 26 28 20 21 25 23 22 19 24 20 19 22 23 2017 £’000 2016 £’000 279,496 220,658 41,798 2,982 17,085 9,676 471,749 250,310 49,445 2,292 16,058 9,250 571,695 799,104 103,111 22,533 125,644 697,339 120,355 45,326 165,681 964,785 2,413 211,838 (16,121) 111,007 309,137 2,197 211,838 (17,941) 283,454 479,548 213,489 292,505 337 5,626 11,985 663 8,295 33,522 273,917 1,011 94,779 1,379 17,116 114,285 388,202 697,339 2,367 3,663 12,503 2,563 13,659 38,694 365,954 721 95,072 3,890 19,600 119,283 485,237 964,785 The notes on pages 74 to 117 form an integral part of these consolidated financial statements. The financial statements on pages 69 to 117 were approved by the Board of directors and signed on its behalf by: Himanshu Raja Chief financial officer 8 March 2018 72 Countrywide plc Annual Report 2017 Financial statements Consolidated cash flow statement For the year ended 31 December 2017 Cash flows from operating activities (Loss)/profit before taxation Adjustments for: Depreciation Amortisation of intangible assets Share-based payments Impairment of intangible assets Impairment of tangible assets Impairment of available-for-sale financial asset Profit on disposal of available-for-sale financial assets (Profit)/loss on disposal of fixed assets (Profit)/loss from joint venture Finance costs Finance income Changes in working capital (excluding effects of acquisitions and disposals of Group undertakings): Decrease in trade and other receivables Decrease in trade and other payables Decrease in provisions Net cash generated from operating activities2 Pension paid Interest paid Income tax paid Net cash inflow from operating activities Cash flows from investing activities Acquisitions net of cash acquired Deferred consideration paid in relation to current and prior year acquisitions Purchase of property, plant and equipment Purchase of intangible assets Proceeds from sale of property, plant and equipment Proceeds from disposal of available-for-sale financial assets Purchase of available-for-sale financial assets Interest received Net cash outflow from investing activities Cash flows from financing activities Term and revolving facility loan (repaid)/drawn Financing fees paid Capital repayment of finance lease liabilities Purchase of non-controlling interest Purchase of own shares Share placing Dividends paid to owners of the parent Dividends paid to non-controlling interests Net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Note 2017 £’000 2016 1 £’000 (212,059) 19,495 15 14 27 17,180 16,310 1,944 14(a), 14(b) 213,071 13,893 18,979 2,261 20,928 120 — (32,804) 2,750 13 9,672 (304) 55,003 7,595 (27,300) (7,406) 27,892 (1,900) (8,475) (8,737) 8,780 850 565 — (22) (690) 12,607 (82) 49,674 19,500 (8,050) (3,002) 58,122 (2,000) (9,834) (2,980) 43,308 — (29,402) (3,354) (6,940) (7,577) 657 — — 82 (17,132) (4,212) (17,939) (11,071) 171 48,165 (1,504) 304 (15,488) (80,000) 90,000 (724) (3,698) — (1,397) 36,850 — — (48,969) (22,793) 45,326 22,533 (2,587) (5,925) (2,700) (18,100) — (32,780) (210) 27,698 20,990 24,336 45,326 15 16(c) 10 16(b) 8 9 15 14(b) 16(c) 20 20 20 28 26 12 18 1 2016 restated for the reclassification of: purchase of non-controlling interest from investing to financing activities; and contingent consideration paid from investing to operating activities as this relates to contingent consideration arrangements that are deemed remuneration. 2 Included within net cash generated from operating activities is £6,060,000 of cash expended on exceptional strategic and restructuring costs (excluding property closure costs which have been provided but not yet incurred) as discussed in note 10 in relation to 2017 (2016: £12.6 million). The notes on pages 74 to 117 form an integral part of these consolidated financial statements. Annual Report 2017 Countrywide plc 73 Strategic reportCorporate governanceFinancial statements Notes to the financial statements 1. General information Countrywide plc (‘the Company’), and its subsidiaries (together, ‘the Group’), is the leading integrated, full service residential estate agency and property services group in the UK, measured by both revenue and transaction volumes in 2017. It offers estate agency and lettings services, together with a range of complementary services, and has a significant presence in key areas and property types which are promoted through locally respected brands. The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK (registered number: 08340090). The address of its registered office is County House, Ground Floor, 100 New London Road, Chelmsford, Essex CM2 0RG. 2. Accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented. (a) Basis of preparation The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial liabilities at fair value through profit or loss, and in accordance with International Financial Reporting Standards (IFRSs) and IFRS Interpretations Committee (IFRS IC) interpretations as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of the consolidated financial information in conformity with IFRS requires the use of certain critical accounting estimates and requires management to exercise judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3. (b) Going concern These financial statements have been prepared on a going concern basis, which assumes that the Group will be able to meet its liabilities when they fall due. As at 31 December 2017, a total of £210 million was drawn down from the £340 million RCF (amended to £275 million in February 2018). During the year, the Group has complied with the financial covenant requirements, being the leverage ratio (the ratio of net debt to adjusted EBITDA) and interest cover (the ratio of adjusted EBITDA to net interest payable), which are subject to testing dates at 30 June 2018, 30 September 2018 and 31 December 2018. However, 2017 has seen a deterioration in business performance and consequently a worsening of the headroom on covenants, in particular the leverage ratio. The Group benefits from a supportive lender group of six banks who have provided borrowing facilities since March 2013. The lender group agreed an amendment to its leverage covenant thresholds in February 2018. In assessing the Group’s ability to continue as a going concern, the Board has reviewed the Group’s cash flow and profit forecasts against these covenants. The impact of potential risks and related sensitivities to the forecasts were considered in assessing the likelihood of a breach of the covenants, whilst identifying what mitigating actions are available to the Group to avoid a potential breach. The Group’s performance is dependent on a number of market and macroeconomic factors including the impact on customer confidence and transactional volumes in the UK housing market from interest rate changes and government policies which are inherently difficult to predict. Specifically, a range of assumptions underpin the profit and cash flow forecasts for the period to 31 December 2019, including: • Recovery of the pipeline to 2017 levels; • Achieving the volume of forecast exchanges per branch and associated productivity measures in other areas of the Group; • Mitigation of the potential impact of new government legislation banning lettings tenancy fees; and • Successful realisation of internal Corporate cost saving initiatives currently underway. Failure to achieve one or more of the above would result in lower adjusted EBITDA with a consequent negative impact on headroom of the leverage and interest cover covenant ratios and higher projected net debt. If the Group’s forecast is not achieved, there is a risk that the Group will not meet the net debt to EBITDA leverage covenant and should such a situation materialise, the banks reserve the right to withdraw the existing facilities. Without the support of the lender group, the Group and Parent Company would be unable to meet their liabilities as they fall due. Given the timing and execution risks associated with achieving the forecast and therefore remaining within the leverage ratio as stipulated by the banking covenants, the directors have concluded that it is necessary to draw attention to this as a material uncertainty which may cast significant doubt about the Group’s and the Parent Company’s ability to continue as a going concern in the basis of preparation to the financial statements. The directors have confirmed that, after due consideration, they have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. (c) New standards, amendments and interpretations Standards, amendments and interpretations effective and adopted by the Group No new standards, amendments or interpretations effective for the first time for the financial year beginning on or after 1 January 2017 have had a material impact on the Group. 74 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements 2. Accounting policies continued (c) New standards, amendments and interpretations continued New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2017 reporting periods and have not been early adopted by the Group. None of these new standards or interpretations are expected to have a material impact on the consolidated financial statements of the Group, with the exception of the following: IFRS 9 IFRS 9 ‘Financial instruments’ addresses the classification, measurement and recognition of financial assets and financial liabilities. The Group will apply IFRS 9 from 1 January 2018. The Group has elected not to restate comparatives on initial application of IFRS 9. The full impact of adopting IFRS 9 on the Group’s consolidated financial statements will depend on the financial instruments that the Group has during 2018 as well as on economic conditions and judgements made at the year end. The Group has performed a preliminary assessment of the potential impact of adopting IFRS 9 based on the financial instruments and hedging relationships as at the date of initial application of IFRS 9 (1 January 2018). Classification and measurement As at the date of initial application of IFRS 9, the Group has elected to apply the fair value through other comprehensive income option for all of its non-controlling equity interests that were classified as available-for-sale under IAS 39. There will be no impact on the classification and measurement of the other financial assets, and no change in the accounting for financial liabilities, held by the Group. Impairment The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IFRS 9. Under the impairment approach under IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses, which will be updated at each reporting date. The Group expects to apply the simplified approach to recognise lifetime expected credit losses for its trade receivables as permitted by IFRS 9. The Group’s preliminary calculation of the loss allowance for these assets as at 1 January 2018 is ongoing as we conclude analysis of the most appropriate grouping of accounts receivable to take into account drivers of credit risk. The Group has concluded that the most appropriate approach would be a to adopt a partially decentralised approach to impairment provisioning of accounts receivable. Business units will calculate an impairment charge using a provision matrix approach, and then apply judgemental overlays to take into account their future expectations of credit risk. These will then be aggregated and reviewed at a Group level and presented in the half year results. Hedge accounting As detailed in note 21, the interest rate swap held by the Group became ineffective at the end of 2017, as forecast drawdowns will no longer be met as we seek to deleverage the business. IFRS 15 IFRS 15 ‘Revenue from contracts with customers’ establishes principles for determining when and how revenue arising from contracts with customers should be recognised. An entity should recognise revenue when it transfers goods or services to a customer based on the amount of consideration to which the entity expects to be entitled from a customer in exchange for fulfilling its performance obligations. Management has undertaken a detailed assessment of all contracts and revenue streams across all business units using the five-step approach specified by IFRS 15: • identify the contract(s) with the customer • identify the performance obligations in the contract • determine the transaction price • allocate the transaction price to the performance obligations in the contract • recognise revenue when (or as) a performance obligation is satisfied A high level impact assessment was undertaken during the first half of the 2017 followed by a detailed assessment and documentation exercise of all separate contracts and performance obligations with each of the business units during the latter half of the year. The transition project was steered by the Group Finance function, using the expertise of the business unit operational and finance teams, to ensure consistency with both judgements and approach. The Group generates revenue and other income from external customers mainly in the UK from four main types of business: UK Sales and Lettings, London Sales and Lettings, Financial Services and Business to Business (B2B). Management is required to take all relevant factors and circumstances into account when determining the revenue recognition methods that appropriately depict the transfer of control of goods or services to the customer for each performance obligation. This requires Management to make certain judgements, including: the determination of the performance obligations in the contract; whether the Group is acting as principal or agent; the estimation of any variable consideration in determining the contract price; the allocation of the price to the performance obligations inherent in the contract; and an appropriate method of recognising revenue. Other key considerations comprise the appropriate accounting treatment of any costs incurred to obtain the contract and the treatment of any costs incurred to fulfil a contract. In determining the appropriate method of recognising revenue, Management is required to make judgements as to whether performance obligations are satisfied over a period of time or at a point in time. For performance obligations that are satisfied over a period of time, judgements are made as to whether the output method or the input method is more appropriate to measure progress towards complete satisfaction of the performance obligation. If performance obligations are not satisfied over time, the Group recognises revenue at a point in time. Annual Report 2017 Countrywide plc 75 Strategic reportCorporate governanceFinancial statements 2. Accounting policies continued (c) New standards, amendments and interpretations continued IFRS 15 continued Management has identified that the adoption of IFRS 15 will impact the financial statements as follows: • B2B: Within the B2B business unit, Lambert Smith Hampton generates revenue from commercial property consultancy and advisory services, property management and valuation services. Work-in-progress (WIP) is currently recognised on specific types of contracts. Under IFRS 15, the performance obligations of certain contracts are deemed to be satisfied at a point in time. As a result, the Group will no longer recognise WIP against these contracts. We will continue to recognise WIP against other contracts where the performance obligations are satisfied over a period of time. Under IFRS 15 we estimate that, based on 2017 revenue, revenue and receivables of approximately £1 million would have been recognised in the following year. This amount will be confirmed in the interim results for the six months ended 30 June 2018. There is no impact on cash flow. • London: A small proportion of revenue from lettings rent collection is currently recognised at the outset of the rent collection agreement, together with an appropriate clawback provision, based on historical experience. Under IFRS 15, revenue will be recognised over the life of the rent collection agreement in accordance with the satisfaction of the performance obligations. Based on 2017 revenue, we estimate that approximately £0.8 million of revenue would have been recognised in the following year. Operating costs would have conversely been approximately £0.7 million lower. There is no impact on cash flow. The detailed assessment of all other contracts with customers has not identified any other material change in the timing or quantum of revenue recognition, but management will continue to evaluate judgements to ensure that they remain appropriate. The initial date of application for the Group is 1 January 2018. The Group will adopt the standard as a change in accounting policy in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ in accordance with the transition requirements set out in IFRS 15. The Group will apply the full retrospective method with expedients. The adoption of IFRS 15 requires increased disclosures in the financial statements, including details of: disaggregated revenue by category; opening and closing contract balances and their relationship to revenue reported during the period; performance obligations with customers; transaction prices allocated to remaining performance obligations; significant judgements used for determining the timing of satisfaction of performance obligations and the transaction price; and any assets recognised from the costs to obtain or fulfil a contract. These disclosures will be adopted within the financial statements for the year ended 31 December 2018. IFRS 16 IFRS 16 ‘Leases’ deals with the definition of a lease and recognition and measurement of leases and establishes principles for disclosures. The standard is effective for accounting periods beginning on or after 1 January 2019. The Group currently expects to adopt IFRS 16 for the year ending 31 December 2019. No decision has been made about whether to use any of the transitional options in IFRS 16. IFRS 16 distinguishes leases and service contracts on the basis of whether an asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right of use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all are on balance sheet), except for short term leases and leases of low value assets. The right of use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. The classification of cash flows will also be impacted as operating lease payments under IAS 17 are presented in operating cash flows; whereas under the IFRS 16 model, the lease payments are split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. In addition, extensive disclosures are required by IFRS 16. As at 31 December 2017, the Group has non-cancellable operating lease commitments of £114,602,000. IAS 17 does not require the recognition of any right of use asset or liability for future payments for these leases; instead, certain information is disclosed as operating lease commitments in note 31. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right of use asset and a corresponding liability in respect of these leases unless they qualify for low value or short term leases upon the application of IFRS 16. The new requirement to recognise a right of use asset and a related lease liability is expected to have a significant impact on the amounts recognised in the Group’s consolidated financial statements and the directors are currently assessing its potential impact. It is not practicable to provide a reasonable estimate of the financial effect until the directors complete the review. In contrast, for finance leases where the Group is a lessee, as the Group has already recognised an asset and a related finance lease liability, and in cases where the Group is a lessor (for the sub-let of properties), the directors do not anticipate that the application of IFRS 16 will have a significant impact on the amounts recognised in the Group’s consolidated financial statements. (d) Basis of consolidation Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for acquisitions and the cost of acquisition is measured as the fair value of assets given, equity instruments issued and liabilities incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair value at the acquisition date. Acquisition costs are written off to the income statement. The accounting policies of subsidiaries acquired are changed, where necessary, to ensure consistency with policies operated by the Group. 76 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 2. Accounting policies continued (d) Basis of consolidation continued Subsidiaries continued The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. Goodwill is recorded as the excess of the aggregate of the consideration transferred and fair value of non-controlling interest over the fair value of the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of net assets of the subsidiary acquired, the difference is recognised in profit or loss. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Joint ventures Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint venture, the Group does not recognise further losses except to the extent that it has incurred obligations or made payments on behalf of the joint venture. Accounting policies of the joint venture are aligned where applicable. Transactions eliminated on consolidation Intra-group balances, and any gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial information. Gains arising from transactions with jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. Losses are eliminated in the same way as gains, but only to the extent that there is no evidence of impairment. (e) Foreign currency translation The functional currency of the Company is Pounds Sterling because that is the currency of the primary economic environment in which the Group operates. The Group’s presentational currency is Pounds Sterling. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within ‘finance income or costs’. All other foreign exchange gains and losses are presented in the income statement within ‘other income’ or ‘other operating costs’. Group companies The results and financial position of all the Group entities (none of which have the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement presented are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and • all resulting exchange differences are recognised in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in equity. The following exchange rates were applied for £1 Sterling at 31 December: Euros (f) Property, plant and equipment Owned assets 2017 1.13 2016 1.17 Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the income statement. Annual Report 2017 Countrywide plc 77 Strategic reportCorporate governanceFinancial statements 2. Accounting policies continued (f) Property, plant and equipment continued Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership of an asset are classified as finance leases. Property, plant and equipment acquired under finance leases is recorded at fair value or, if lower, the present value of minimum lease payments at inception of the lease, less accumulated depreciation and any impairment losses. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included within borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment under finance leases is depreciated over the shorter of the useful life of the asset and the lease term. Depreciation Depreciation is charged to profit or loss on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term. Freehold land and assets in the course of construction are not depreciated. The estimated useful lives are as follows: • freehold buildings – 50 years • leasehold improvements – over the period of the lease • furniture and equipment – three to five years • motor vehicles – three to five years The residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. (g) Intangible assets Goodwill Goodwill has been recognised on acquisitions of subsidiaries and joint ventures. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquiree at the date of acquisition and the value of the non-controlling interest in the acquiree. Acquisition costs are written off to the income statement. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is not amortised but is tested annually for impairment or more frequently if events or changes in circumstances indicate potential impairment. The allocation is made to those cash generating units or groups of units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes. In respect of joint ventures, the carrying amount of goodwill is included in the carrying amount of the investment in the joint venture. Excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost arising on an acquisition is recognised in the income statement. Intangible assets other than goodwill that are acquired by the Group, principally acquired brand names, customer contracts and relationships, computer software, pipeline and other intangibles, are stated at cost less accumulated amortisation, where charged, and impairment losses. Brand names are considered to have indefinite lives. Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation Amortisation is charged to profit or loss on a straight line basis over the estimated useful lives of intangible assets unless such lives are indefinite. The estimated useful lives are as follows: • computer software – one to five years • brand names – indefinite life Brand names are not amortised as the directors are of the opinion that they each have indefinite useful life. This is based on the expectation that there is no foreseeable limit to the period over which each of the assets are expected to generate net cash inflows to the business and sufficient investment will be made in terms of marketing and communication to maintain the value inherent in the brands, without incurring significant cost. All brands recognised have been in existence for a number of years, and are not considered to be at risk of obsolescence from technical, technological or commercial change. Whilst operating in competitive markets they have demonstrated that they can continue to operate in the face of such competition and that there is expected to remain an underlying market demand for the services offered. The lives of these brand names are not dependent on the useful lives of other assets of the entity. Assets are tested annually for impairment or more frequently if events or changes in circumstances indicate potential impairment. Assets are tested annually for impairment or more frequently if events or changes in circumstances indicate potential impairment. • Customer contracts and relationships – five to ten years • Pipeline (agreed but unexchanged house sales at date of acquisition) – three months • Other intangibles – six to 20 years 78 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 2. Accounting policies continued (h) Impairment of non-financial assets The carrying amounts of the Group’s non-current assets are reviewed for impairment annually or whenever events and changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, the asset’s recoverable amount is estimated. In respect of goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. The recoverable amount is the higher of fair value less costs to sell and value in use. Impairment losses represent the amount by which the carrying value exceeds the recoverable amount; they are recognised in profit or loss. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) Financial assets Classification The Group classifies its financial assets as loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that arise principally through the provision of services to customers. They are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method. They are included in current assets, except for maturities greater than twelve months after the end of the reporting period. Loans and receivables comprise mainly cash and cash equivalents and trade and other receivables. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within twelve months of the end of the reporting period. Available-for-sale (AFS) financial assets are non-derivatives valued on the following bases as detailed in note 16. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the AFS revaluation reserve with the exception of impairment losses which are recognised directly in profit and loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the AFS revaluation reserve is reclassified to profit or loss. Dividends on AFS equity instruments are recognised in profit or loss when the Group’s right to receive the dividends is established. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade date: the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Loans and receivables and available-for-sale financial assets are initially recognised at fair value. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognised in other comprehensive income. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as ‘gains and losses from investment securities’. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Group’s right to receive payments is established. Impairment of financial assets Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net of provisions, such provisions are recorded in a separate provision account with the loss being recognised within other operating costs in the income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. In the case of assets classified as available-for-sale, impairment losses are recognised in the consolidated income statement and arise from objective evidence that these assets have declined in value such as a significant or prolonged decline in the fair value of the security below its cost. Annual Report 2017 Countrywide plc 79 Strategic reportCorporate governanceFinancial statements 2. Accounting policies continued (j) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost less an impairment provision. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant trade receivables are reviewed for impairment if they are past due. Trade receivables past due beyond 90 days for individual customers or 180 days for commercial contracts that are not assessed to be impaired individually are, in addition, assessed for impairment on a collective basis. (k) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows and are presented in current liabilities. (l) Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost. (m) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and premiums payable on redemption, as well as any interest payable while the liability is outstanding. (n) Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The Group has designated certain derivatives as a cash flow hedge and documented at inception of the transaction the relationship between the hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in note 21. The fair value of derivatives has been calculated by discounting all future cash flows by the market yield curve at the balance sheet date. Movements in the hedging reserve in other comprehensive income are shown in note 28. The full fair value of a hedging derivative is classified as a non-current liability when the remaining hedged item is more than twelve months from maturity. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to profit or loss in the period when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within ‘Finance costs’. (o) Pensions The Group operates various post-employment schemes, including both defined benefit and defined contribution pension plans. Defined contribution plans The Group pays fixed contributions to separately administered pension insurance plans. The Group has no further obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past service costs are recognised immediately in income. (p) Share-based payments The Group operates a number of equity-settled share-based schemes under which the Group receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. Where the share awards have non-market-related performance criteria the Group has used the Binomial Lattice and Black Scholes option valuation models to establish the relevant fair values. Where the share awards have TSR market-related performance criteria the Group has used the Monte Carlo simulation valuation model to establish the relevant fair values (see note 27). The resulting values are amortised through the income statement over the vesting period of the options and other grants. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market conditions and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The social security contributions payable in connection with the grant of the share options are considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction. 80 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 2. Accounting policies continued (q) Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. The increase in the provision due to passage of time is recognised in finance costs. (r) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in share premium as a deduction from the proceeds. Where the employee benefit trust purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. (s) Revenue Services rendered Revenue comprises mainly commission and fees receivable. Commission earned on sales of residential and commercial property is accounted for on the exchange of contracts for such sales. Survey, valuation and conveyancing fees are accounted for on completion of the service being provided. Commission earned on sales of insurance policies, mortgages and related products is accounted for when the policies go on risk or the mortgage is exchanged. The Group offers the following residential lettings services to customers: Tenant Introduction, Tenant Renewal, Standard Lettings (often referred to as Rent Collection), or a Full Property Management service, plus a Leasehold Property Management service. Commissions and fees earned for Tenant Introduction (or Tenant Renewal) in respect of securing (or extending) the letting are recognised in full at the point of delivery of the service, which is considered to be when the underlying tenancy agreement commences. A revenue clawback provision, based on historical experience, is recognised for those contracts containing a break clause and which may require a refund if broken early. Fees for standard lettings and property management services, including leasehold property management services, are recognised on a straight line basis over the life of the agreement. Revenue generated by Surveying Services from panel management contracts is reported net of any fees paid on behalf of panel valuers, reflecting the fact that the Group does not act as the principal in these contracts. Revenue in respect of consultancy services performed by our commercial business, Lambert Smith Hampton, is recognised either: at a point in time on performance of the service; or over a period of time as activity progresses, reflecting the Group’s partial performance of its contractual obligations. When revenue is recognised as activity progresses, this is determined according to the nature of the transaction, generally by reference to the cost of services performed to date as a proportion of total costs, services performed to date as a proportion of total services, or milestones reached. Activity performance in excess of invoices raised is included within ‘amounts due from customers for contract work’. Where amounts have been invoiced in excess of work performed, the excess is included within ‘amounts due to customers for contract work’. If the right to consideration is conditional or contingent on a specified future event or outcome, the outcome of which is outside the control of the Group, revenue is not recognised until that critical event occurs. Under certain service contracts, the Group manages client expenditure and is obliged to purchase goods and services from suppliers and recharge them on to the customer at cost. The amounts charged by suppliers and recharged to clients are excluded from revenue and administrative expenses. Receivables, payables and cash relating to these transactions are included in the balance sheet. Deferred income Where the Group receives an amount upfront in respect of future income streams, the value of the receipt is amortised over the period of the contract as the services are delivered and the unexpired element is disclosed in liabilities as deferred income. (t) Other income Other income is recognised when its receipt is assured and the Group has no further obligations to any other party in respect of that income. Rental income from sub-let properties is recognised in profit or loss on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income. Dividend income is recognised when the right to receive payment is established. (u) Operating lease payments Payments under operating leases are recognised in profit or loss on a straight line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense. (v) Net finance costs Finance costs Finance costs comprise interest payable on borrowings (including finance lease commitments), net interest costs on the pension scheme liabilities, the unwinding of the discount rates in respect of financial liabilities and provisions, premiums payable on settlement or redemption and direct issue costs. Interest costs accrue using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan and amortised over the period to which the facility relates. Finance income Finance income comprises interest receivable on funds invested. Interest income is recognised in profit or loss as it accrues using the effective interest method. Annual Report 2017 Countrywide plc 81 Strategic reportCorporate governanceFinancial statements 2. Accounting policies continued (w) Adjusting items As permitted by IAS 1 ‘Presentation and disclosure’ certain items are presented separately in the income statement as exceptional where, in the judgement of the directors, they need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group’s underlying business performance. Examples of material and non-recurring items which may give rise to disclosure as exceptional items include costs of restructuring existing businesses, integration of newly acquired businesses, asset impairments, costs associated with acquiring new businesses and profit on sale of available-for-sale financial assets. The columnar presentation of our income statement separates exceptional items as well as adjusting items, specifically amortisation of intangibles arising on business acquisitions, contingent consideration and share-based payments, to illustrate consistently the Group’s underlying business performance. The Board believes that excluding each of the adjusted items, considered to be exceptional or non-operational in nature, in arriving at adjusted EBITDA is necessary to provide a more consistent indication of the trading performance of the Group. This alternative performance measure provides additional useful information to shareholders on the underlying trends and comparable performance of the Group over time. We seek to present a consistent measure of trading performance which is not impacted by the volatility in profile of: • exceptional items (costs or income): these are specific items which are material by their nature, size or incidence and are highlighted, with further descriptions, in note 10 to the financial statements; • amortisation of intangibles arising on acquisitions (excluding software): charges can vary significantly dependent on the level and size of acquisitions undertaken in each period, and the related customer relationships and contracts recognised (brands not being subject to amortisation). In addition, we do not believe the amortisation charge provides insight into the costs of running our business as these assets are supported and maintained by marketing costs which are reflected within our operating costs. The directors note that the intangibles acquired in business combinations are used in the business to generate revenue, but that there is no equivalent adjustment made to eliminate this revenue; • contingent consideration: charges can vary significantly dependent on the level and size of acquisitions undertaken and the associated performance criteria linked to the ongoing service requirement. We reassess the fair value of the resulting liabilities across these arrangements at each reporting period end, reflecting our best estimates of future performance. However, these estimates are inherently judgemental as we are required to look beyond our normal three-year budgeting and planning cycle for the five-year agreements in place. Remeasurement could cause material volatility in our reported results over the earn out periods which would not be reflective of the business’ performance in the period; and • share-based payments: The income statement has been subject to significant charges in respect of the IPO options up to and including 2016. As the Group is now in a turnaround situation, it is anticipated that the incentivisation of performance will be driven by award of future LTIPs which, provided Group performance meets these targets, will see the share-based payment charge continue to increase and reintroduce material volatility into the income statement and distortion to underlying trading results. The use of an adjusted EBITDA profit measure, as a consistent measure of underlying performance, is also aligned with management’s internal financial reporting (including monthly management information reports reviewed by the Board, and the Executive Committee as the chief operating decision maker) and executive director remuneration (being a factor of both the LTIP scheme and annual bonus disclosed in the Remuneration Committee report) and senior management incentive targets. Reconciliation of adjusted EBITDA to statutory profit measures is provided in note 4 of the financial statements. (x) Income tax Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or directly in equity respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of other assets or liabilities that affect neither accounting nor taxable profit; and differences relating to investments in subsidiaries to the extent that they are unlikely to reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and joint ventures, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. 82 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 2. Accounting policies continued (y) Segment reporting Operating segments are reported in a manner consistent with the internal reporting to the Executive Committee which has been identified as the chief operating decision maker. (z) Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognised when paid. 3. Critical accounting judgements and key sources of estimation uncertainty In application of the Group’s accounting policies, which are described in note 2, the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities and the disclosure of contingent assets and liabilities. These estimates and associated assumptions are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, given the uncertainty surrounding the assumptions and conditions upon which the estimates are based. The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both the current and future periods. Critical judgements in applying the Group’s accounting policies The following are critical judgements, apart from those involving estimations (which are dealt with separately below), that the directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Going concern As at 31 December 2017, a total of £210 million was drawn down from the £340 million RCF (amended to £275 million in February 2018). During the year, the Group has complied with the financial covenant requirements, being the leverage ratio (the ratio of net debt to adjusted EBITDA) and interest cover (the ratio of adjusted EBITDA to net interest payable), which are subject to testing dates at 30 June 2018, 30 September 2018 and 31 December 2018. However, 2017 has seen a deterioration in business performance and consequently a worsening of the headroom on covenants, in particular the leverage ratio. The Group benefits from a supportive lender group of six banks who have provided borrowing facilities since March 2013. The lender group agreed an amendment to its leverage covenant thresholds in February 2018. In assessing the Group’s ability to continue as a going concern, the Board has reviewed the Group’s cash flow and profit forecasts against these covenants. The impact of potential risks and related sensitivities to the forecasts were considered in assessing the likelihood of a breach of the covenants, whilst identifying what mitigating actions are available to the Group to avoid a potential breach. The Group’s performance is dependent on a number of market and macroeconomic factors including the impact on customer confidence and transactional volumes in the UK housing market from interest rate changes and government policies which are inherently difficult to predict. Specifically, a range of assumptions underpin the profit and cash flow forecasts for the period to 31 December 2019, including: • recovery of the pipeline to 2017 levels • achieving the volume of forecast exchanges per branch and associated productivity measures in other areas of the Group • mitigation of the potential impact of new government legislation banning lettings tenancy fees • successful realisation of internal Corporate cost saving initiatives currently underway Failure to achieve one or more of the above would result in lower adjusted EBITDA with a consequent negative impact on headroom of the leverage and interest cover covenant ratios and higher projected net debt. If the Group’s forecast is not achieved, there is a risk that the Group will not meet the net debt to EBITDA leverage covenant and should such a situation materialise, the banks reserve the right to withdraw the existing facilities. Without the support of the lender group, the Group and Parent Company will be unable to meet their liabilities as they fall due. Given the timing and execution risks associated with achieving the forecast and therefore remaining within the leverage ratio as stipulated by the banking covenants, the directors have concluded that it is necessary to draw attention to this as a material uncertainty which may cast significant doubt about the Group’s and the Parent Company’s ability to continue as a going concern in the basis of preparation to the financial statements. Exceptional items Certain items are presented separately in the income statement as exceptional where, in the judgement of the directors, they need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group’s underlying business performance. Further details of material, non-recurring items the directors have disclosed as exceptional items, including the costs of restructuring the business, are provided in note 10. Key sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Annual Report 2017 Countrywide plc 83 Strategic reportCorporate governanceFinancial statements 3. Critical accounting judgements and estimates continued Impairment of goodwill and indefinite life intangible assets Determining whether goodwill and indefinite life intangible assets are impaired requires an estimation of the value in use of the cash generating units to which the assets have been allocated. Calculating the cash flows requires the use of judgements and estimates that have been included in our strategic plans and long range forecasts. In addition, judgement is required to estimate the appropriate interest rate to be used to discount the future cash flows. The data necessary for the execution of the impairment tests is based on management estimates of future cash flows, which require estimating revenue growth rates and profit margins. Further details of impairment reviews are set out in note 14. Certain items are presented separately in the income statement as exceptional where, in the judgement of the directors, they need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group’s underlying business performance. Further details of material, non-recurring items the directors have disclosed as exceptional items, including the costs of restructuring the business, are provided in note 10. Professional indemnity provisions When evaluating the impact of potential liabilities arising from claims against the Group, the Group takes legal and professional advice to assist it in arriving at its estimation of the liability taking into account the probability of the success of any claims and also the likely development of claims based on recent trends. The Group has made provision for claims received under its professional indemnity insurance arrangements. The provision can be broken down into three categories: • Reserves for known claims: These losses are recommended by our professional claims handlers and approved panel law firms who take into account all the information available on the claims and recorded on our insurance bordereaux. Where there is insufficient information on which to assess the potential losses, initial reserves may be set at an initial level to cover investigative costs or nil. Further provisions are also made for specific large claims which may be subject to litigation and the directors assess the level of these provisions based on legal advice and the likelihood of success. • Provision for the losses on known claims to increase: It can take one to two years for claims to develop after they are initially notified to the Group. For this reason, the Group creates a provision based on historical loss rates for closed claims and average losses for closed claims. • Provision for incurred but not reported (IBNR): The Group also provides for future liabilities arising from claims IBNR for mortgage valuation reports and home buyer reports performed by Surveying Services. This provision is estimated on a future projection of historical data for all claims received based on the number of surveys undertaken to date. This projection takes into account the historic claim rate, the claim liability rate and the average loss per claim. In view of the significant events in the financial markets and the UK property market in recent years, the directors have identified a separate sub-population of claims received which is tracked separately from the normal level of claims. This sub-population has been defined as claims received since 2009 for surveys carried out between 2004 and 2008. The estimate of these provisions by their nature is judgemental. The three key inputs, claim rate, claim liability rate and average loss, are very sensitive to any change in trends. Claim rate – the number of claims received compared to the number of surveys performed. The number of valuation claims continued to decline significantly throughout 2017 to historically low levels. There is a possible risk that a significant rise in mortgage interest rates could lead to an increase in repossessions and potential losses being incurred by the lenders. While there is uncertainty around the future of the UK economy as the Government deals with Brexit, there are no macroeconomic indicators that this is a reasonable likelihood in the short term and the directors do not consider it appropriate to provide for additional claims due to macroeconomic changes. It should be noted that a 5% increase in the valuation claim rate applied to all surveys performed between 2004 and 2008 could lead to a £3.5 million increase in the provision for future claims. Claim liability rate – the number of claims closed with a loss compared to the number of closed claims. Our claim handlers and panel lawyers robustly defend all our claims and as a result they have achieved a number of successes in 2017 where clients have withdrawn their claim. Consequently, we have not experienced any increase to the claim liability rate. The liability rate is sensitive to changes in experience and therefore we have used the average liability rate for claims closed over two years as the most appropriate claim liability rate to estimate the provision for those claims already received. A 10% increase in the average liability rate applied to open claims at the end of the year and unreported claims anticipated would impact the provision for claims already received by £0.4 million. Average loss – the average of total incurred losses for closed claims. Average losses on claims settled have reduced by 5% in 2017 versus prior year (based on weighted average across the various claim populations). Applying a 10% increase in the average loss to the open claims received would increase the total provision required for this population (the IBNER) by £0.1 million. 84 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 3. Critical accounting judgements and estimates continued Accounting for acquisitions The Group accounts for all business combinations under the purchase method. Under the purchase method, the identifiable assets acquired and liabilities and contingent liabilities assumed are measured at their fair value at the acquisition date. Estimates are made in respect of the measurement of the fair values of assets and liabilities acquired and consideration transferred. Where necessary, the Group engages external valuation experts to advise on fair value estimates, or otherwise performs estimates internally. A number of historic acquisitions have related contingent consideration, set out in note 33, which is remeasured at each reporting date in line with estimates and assumptions in relation to the forecast performance of the acquired business. 4. Segmental reporting Management has determined the operating segments based on the operating reports reviewed by the Executive Committee that are used to assess both performance and strategic decisions. Management has identified that the Executive Committee is the chief operating decision maker in accordance with the requirements of IFRS 8 ‘Operating segments’. The Executive Committee considers the business to be split into four main types of business generating revenue: UK Sales and Lettings, London Sales and Lettings, Financial Services and Business to Business (B2B), and ‘all other segments’ comprising central head office functions. The UK network combines estate agency and lettings operations. Estate agency generates commission earned on sales of residential property and Lettings earns fees from the letting and management of residential properties and fees for the management of leasehold properties. The London division revenue is earned from both estate agency commissions and lettings and management fees. The Financial Services division receives commission from the sale of insurance policies, mortgages and related products under contracts with financial service providers. Business to Business (B2B) services comprise all lines of business which are delivered to corporate clients, including Surveying Services, Conveyancing Services and revenue from Lambert Smith Hampton. Surveying Services generates surveying and valuation fees which are received primarily under contracts with financial institutions with some survey fees being earned from home buyers. Conveyancing Services generates revenue from conveyancing work undertaken from customers buying or selling houses through our network. Lambert Smith Hampton’s revenue is earned from commercial property consultancy and advisory services, property management and valuation services. Other income generated by head office functions relates primarily to sub-let rental income or other sundry fees. The Executive Committee assesses the performance of the operating segments based on a measure of adjusted EBITDA. This measurement basis excludes the effects of exceptional items, share-based payment charges and related National Insurance contributions, contingent consideration and income from joint ventures. Finance income and costs are not allocated to the segments, as this type of activity is driven by the central treasury activities as part of managing the cash position of the Group. The revenue from external parties reported to the Executive Committee is measured in a manner consistent with that in the income statement. Revenue and other income from external customers arising from activities in the UK was £669,507,000 (2016: £734,561,000) and that arising from activities overseas was £2,371,000 (2016: £2,394,000). The assets and liabilities for each operating segment represent those assets and liabilities arising directly from the operating activities of each business unit. Pension assets and liabilities, and liabilities arising from the revolving credit facility and related derivative financial instrument, are not allocated to operating segments but allocated in full to ‘All other segments’ within the segmental analysis as they are managed by central Group functions. Non-current assets attributable to the UK of £570,773,000 (2016: £798,266,000) are included in the total assets in the tables on the following pages. Non-current assets of £922,000 (2016: £838,000) are attributable to the overseas operations. The equity investment in joint venture is disclosed within ‘All other segments’ and is £2,982,000 (2016: £2,292,000). The available-for-sale financial assets are disclosed within ‘All other segments’ (£17,085,000 (2016: £16,058,000)). Annual Report 2017 Countrywide plc 85 Strategic reportCorporate governanceFinancial statements 4. Segmental reporting continued Revenue Other income Total income Inter-segment revenue Total income from external customers Adjusted EBITDA Contingent consideration Share-based payments Depreciation and amortisation Share of profit from joint venture Exceptional costs Segment operating (loss)/profit Finance costs Finance income Loss before tax Total assets Total liabilities Additions in the year Intangible assets Property, plant and equipment Revenue Other income Total income Inter-segment revenue Total income from external customers Adjusted EBITDA Contingent consideration Share-based payments Depreciation and amortisation Share of loss from joint venture Exceptional income Exceptional costs Segment operating (loss)/profit Finance costs Finance income Profit before tax Total assets Total liabilities Additions in the year Goodwill Intangible assets Property, plant and equipment UK £’000 London £’000 188, 715 150,998 4,129 1,082 192,844 152,080 12,342 3,224 205,186 155,304 14,888 11,547 — (336) (397) (316) 2017 Financial Services £’000 82,124 1,947 84,071 3,253 87,324 19,660 (969) (271) B2B £’000 238,606 958 239,564 (18,819) 220,745 35,576 (62) (457) All other segments £’000 606 2,713 3,319 — 3,319 (16,984) (2,501) (243) Total £’000 661,049 10,829 671,878 — 671,878 64,687 (3,929) (1,623) (14,881) (5,249) (2,770) (7,583) (3,007) (33,490) — (168,477) (168,806) — (48,586) (43,001) — (1,304) 14,346 — 690 690 (3,844) 23,630 (3,658) (225,869) (25,703) (199,534) (12,607) 82 (212,059) 160,788 439,375 121,580 94,045 120,575 204,793 234,897 59,499 697,339 219,711 (569,722) 388,202 1,919 1,762 372 2,568 1,786 371 2,916 1,270 584 5,047 7,577 11,018 UK * £’000 London * £’000 226,444 165,622 3,427 229,871 17,949 247,820 27,846 — (303) (14,943) — 2,530 (19,918) (4,788) 3,178 168,800 3,753 172,553 20,551 (397) (200) (5,159) — — (20,552) (5,757) 2016 Financial Services £’000 82,667 1,629 B2B * £’000 248,859 1,506 84,296 250,365 3,878 88,174 22,682 (867) (220) (6,132) — — (47) 15,416 (25,580) 224,785 31,498 (4,692) (397) (7,550) — 2,910 (4,697) 17,072 All other segments * £’000 378 3,245 3,623 — 3,623 (19,029) (878) (1,357) 912 (13) 30,274 (2,989) 6,920 Total £’000 723,970 12,985 736,955 — 736,955 83,548 (6,834) (2,477) (32,872) (13) 35,714 (48,203) 28,863 (9,672) 304 19,495 336,327 433,247 189,138 127,733 116,619 211,455 247,586 260,165 75,115 (547,363) 964,785 485,237 2,472 5,849 11,623 13,239 5,935 1,057 2,308 9,064 1,405 1,668 4,027 1,144 — 2,048 5,449 19,687 26,923 20,678 * Restated from prior year following internal restructuring of operations between UK, London and B2B. 86 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 5. Other income Rent receivable Dividend income on available-for-sale financial assets Other operating income Other operating income comprises a number of individually immaterial items aggregated across the Group. 6. Employees and directors (a) Employee costs for the Group during the year Wages and salaries Contingent consideration deemed remuneration (note 33)* Share options granted to directors and employees (note 27)* Defined contribution pension costs (note 25) Defined benefit scheme costs (note 25) Social security costs 2017 £’000 582 — 10,247 10,829 2016 £’000 799 491 11,695 12,985 2017 £’000 2016 £’000 337,727 366,513 3,929 1,828 8,182 257 37,771 389,694 6,834 2,465 8,633 377 40,334 425,156 * The columnar approach of our income statement separates £5,552,000 in respect of employee benefit costs comprising: £3,929,000 contingent consideration from the table above; and £1,623,000 of share-based payment costs (see note 4). The share-based payment costs are detailed in note 27 and comprise: £1,828,000 of charges (as detailed above) net of £205,000 credit in relation to national insurance (reported within social security costs in the table above). Average monthly number of people (including executive directors) employed: By business segment UK London Financial Services B2B Head office 2017 Number 3,710 1,848 1,000 2,573 332 9,463 2016* Number 4,710 2,147 997 2,784 271 10,909 * Restated following restructuring of operations between UK, London and B2B. (b) Key management compensation The following table details the aggregate compensation paid in respect of the members of the Executive Committee including the executive directors, and all non-executive directors. Wages and salaries Short term non-monetary benefits Share-based payments Termination costs * Restated to include non-executive directors. 2017 £’000 3,442 17 364 202 4,025 2016* £’000 3,296 18 1,099 218 4,631 Details of the highest paid director’s aggregate emoluments, amounts receivable under long term incentive schemes and payments in lieu of pension entitlements are disclosed within the directors’ remuneration report on page 52. Annual Report 2017 Countrywide plc 87 Strategic reportCorporate governanceFinancial statements 7. Other operating costs Rent Advertising and marketing expenditure Vehicles, plant and equipment hire Other motoring costs Repairs and maintenance Trade receivables impairment (excluding exceptional charge in 2017 (note 10)) Other Total operating costs 2017 £’000 26,783 19,590 14,754 16,050 15,651 38 130,183 223,049 2016 £’000 29,534 21,171 16,574 17,085 12,761 2,446 137,991 237,562 Services provided by the Company’s external auditors and network firms During the year the Company (including its overseas subsidiaries) obtained the following services from the Company’s external auditors at costs as detailed below: 2017 £’000 135 407 50 49 2 643 2017 £’000 10,359 257 240 10,856 1,525 73 153 1,751 12,607 2017 £’000 82 — 82 2016 £’000 135 444 50 16 40 685 2016 £’000 7,839 269 318 8,426 1,236 — 10 1,246 9,672 2016 £’000 292 12 304 Fees payable to the Company’s external auditors and its associates for the audit of the consolidated financial statements Fees payable to the Company’s external auditors and its associates for other services: – the audit of the Company’s subsidiaries – audit-related assurance services – other non-audit services – tax advisory services 8. Finance costs Interest costs: Interest payable on revolving credit facility Interest arising from finance leases Other interest paid Cash payable interest Amortisation of loan facility fee Net interest costs arising on the pension scheme (note 25) Other finance costs Non-cash payable interest Finance costs 9. Finance income Interest income Net interest income arising on the pension scheme (note 25) Finance income 88 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 10. Exceptional items The following items have been included in arriving at (loss)/profit before taxation: Exceptional income Profit on disposal of available-for-sale financial assets Release of professional indemnity provisions Exceptional costs Strategic and restructuring costs: People-related restructuring costs Transformation project consultancy costs Property closure costs Marketing review and channel optimisation Other costs Total strategic and restructuring costs, excluding impairment Impairment of goodwill (note 14(a)) Impairment of brands (note 14(b)) Impairment of customer contracts (note 14(b)) Impairment of non-current assets (note 14(b), 15, 16(c)) Impairment of trade receivables (note 17) Total impairment charge Professional indemnity provisions Acquisition expenses Total exceptional costs Net exceptional costs 2017 £’000 2016 £’000 — — — 32,804 2,910 35,714 (4,405) (1,655) (1,861) — — (7,921) (192,253) (12,871) (5,278) (4,084) (1,641) (8,109) — (15,813) (2,032) (400) (26,354) (19,564) (1,358) — — — (216,127) (20,922) (1,821) — (225,869) (225,869) — (927) (48,203) (12,489) 2017 Exceptional costs Strategic and restructuring costs During 2017 the Group commenced a strategic transformation agenda for the fundamental turnaround of the business, which is expected to take place over a period of three years, resulting in a number of exceptional costs in relation to the project and related restructuring costs. The principal elements are: • £4,405,000 relating to redundancy costs and changes to the leadership structure that occurred during the year to progress the achievement of the appropriate organisational structure; • £1,655,000 in respect of third party consultancy costs, for a number of different projects scoped to tackle cost optimisation targets and related strategic initiatives which are being project managed centrally and routinely reporting progress to the Group Executive Committee; • £1,861,000 of property closure costs, comprising: £1,515,000 of property provisions costs, in respect of dilapidations and onerous contract costs in respect of additional premises identified and closed during the period arising from further review, along with £346,000 of associated property closure costs; Impairment charges In addition, the Group incurred the following impairment charges, deemed to be exceptional given their size, arising from the annual impairment review of goodwill and indefinite life intangible assets, and the associated review of other intangible and tangible fixed assets impacted by the impairment review: • £192,253,000 in respect of goodwill associated with: the UK cash generating unit of £151,295,000 and the London cash generating unit of £40,958,000 following an assessment of the recoverable value against the carrying value (see note 14(a)); • £12,871,000 in respect of brand names associated with: the UK cash generating unit of £8,425,000 (reflecting partial impairments of Slater Hogg & Howison and Blundell Property Services) and the London cash generating unit of £4,446,000 following an assessment of the recoverable value against the carrying value (see note 14(b)); • £5,278,000 in respect of customer contracts associated with: the UK cash generating unit of £4,075,000; the London cash generating unit of £1,103,000; and the Professional Services (B2B) cash generating unit of £100,000 following an assessment of the recoverable value against the carrying value (see note 14(b)); and • £4,084,000 in respect of other non-current assets: £2,669,000 intangible fixed assets (computer software) and £116,000 tangible fixed assets (related computer hardware) associated with the UK cash generating unit, and £734,000 tangible fixed assets associated with the London cash generating unit following an assessment of the recoverable value against the carrying value (the London write-down arising as a result of impairments identified exceeding the intangible asset carrying values); and £565,000 write-off of an available-for-sale investment following the commencement of administration proceedings against the available-for-sale investment (see notes 14(b), 15 and 16(c)). Annual Report 2017 Countrywide plc 89 Strategic reportCorporate governanceFinancial statements 10. Exceptional items continued Impairment charges continued In addition, impairment charges of £1,641,000 have been made against the carrying value of trade receivables. These impairments relate to assets recognised in prior periods, dating back as far as 2013, where circumstances in relation to collectability have changed during the year and principally relate to a portfolio of debts within a business acquired during 2015, now operating as part of Countrywide Residential Development Solutions (B2B). This cost has been treated as exceptional due to the age of the debt and materiality of the impairment. Professional indemnity provisions During 2017 the Group received reduced numbers of professional indemnity valuation claims, in line with expectations, and achieved closure of a number of challenging cases. Estimating the liability for PI claims is highly judgemental and we updated our financial models to reflect the latest inputs and trends and took advice from our panel of lawyers in respect of open claims. The judgemental nature of the provision, and progress made during the year on some individually significant claims, aligned with the low level of claims made, would have provided progress on unwinding the provision. However, an individually significant claim has resulted in the need to increase the provision by £1,821,000. This has been treated as an exceptional cost due to the materiality of the item. 2016 Exceptional income The £32,804,000 profit on disposal of available-for-sale financial assets relates entirely to the sale of the Group’s residual interest in ZPG Plc. During 2016 the Group received reduced numbers of professional indemnity valuation claims, in line with expectations, and achieved closure of a number of challenging cases. Estimating the liability for PI claims is highly judgemental and we updated our financial models to reflect the latest inputs and trends and took advice from our panel of lawyers in respect of open claims. Despite the judgemental nature of the provision, the progress made during the year on individually significant claims, aligned with the low level of claims made, resulted in the assessment of a £2,910,000 release in the provision. Exceptional costs Restructuring costs During 2016 the Group undertook a significant branch restructuring, accelerating our transformation agenda and resizing the UK and London estate, resulting in a number of exceptional, non-recurring costs in relation to the project and related restructuring costs. The principal elements are: • £8,109,000 in respect of associated redundancy costs to achieve the appropriate organisational structure; • £15,813,000 of property provisions, comprising: £4,162,000 dilapidation costs; £7,430,000 onerous contract costs in respect of closed premises; £3,084,000 associated asset write downs arising from rationalisation of our branch footprint; and £1,137,000 of other property closure costs; • £19,564,000 of impairment charges from writing down goodwill associated with conveyancing operations (£1,083,000), and £5,016,000 and £13,465,000 respectively in relation to the UK and London cash generating units following an assessment of the recoverable value against the carrying value of the goodwill (see note 14); • £1,358,000 of impairment charges from writing down four brands which have been abandoned as part of our review of the UK marketplace; and • £2,032,000 in respect of costs expensed during the year as part of the organisational redesign of our marketing function and revisions to our channels to market aligned with the launch of our digital offering. Acquisition expenses The Group incurred acquisition expenses of £927,000 across a number of transactions undertaken during the year. 11. Taxation Analysis of (credit)/charge in year Current tax on profits for the year Adjustments in respect of prior years Total current tax Deferred tax on profits for the year Origination and reversal of temporary differences Impact of change in tax rate Adjustments in respect of prior years Total deferred tax (note 24) Income tax (credit)/charge 90 Countrywide plc Annual Report 2017 2017 £’000 1,371 (30) 1,341 (6,229) — 901 (5,328) (3,987) 2016 £’000 5,200 (623) 4,577 (154) (2,308) (160) (2,622) 1,955 Financial statementsNotes to the financial statements continued 11. Taxation continued Tax on items charged to equity Deferred tax adjustment arising on share-based payments Tax on items credited/(charged) to other comprehensive income Deferred tax adjustment arising on pension scheme assets and liabilities Deferred tax adjustment arising on cash flow hedge 2017 £’000 2016 £’000 (10) (299) 690 (410) 909 473 The tax charge for the year differs (2016: differs) from the standard rate of corporation tax in the UK of 19.26% (2016: 20.0%). The differences are explained below: (Loss)/profit on ordinary activities before tax Profit on ordinary activities multiplied by the rate of corporation tax in the UK of 19.26% (2016: 20.0%) Effects of: Profits/(losses) from joint venture Tax relief on contingent consideration Other expenses not deductible Permanent difference relating to depreciation not deductible Tax relief on purchased goodwill Tax relief on share-based payments charged to equity Rate change on deferred tax provision Income not subject to tax due to availability of unprovided losses Adjustments in respect of prior years Overseas losses Total taxation charge 2017 £’000 (212,059) (40,843) (133) 1,028 282 218 34,839 168 — (430) 871 13 (3,987) 2016 £’000 19,495 3,899 3 1,367 1,351 858 3,741 (32) (2,308) (6,294) (783) 153 1,955 The tax rate for the current year is lower than the prior year due to changes in the UK corporation tax rate, which decreased from 20% to 19% from 1 April 2017. Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2016 (on 6 September 2016). These include reductions to the main rate, to reduce the rate to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using these enacted rates and reflected in these financial statements. The relevant deferred tax balances have been remeasured using rates applicable to when the balances are expected to unwind. There are no material uncertain tax positions. 12. Dividends Amounts recognised as distributions to equity holders in the year: – final dividend for the year ended 31 December 2016 of nil pence (net) per share (2015: 10.0 pence (net) per share) – interim dividend for the year ended 31 December 2017 of nil pence (net) per share (2016: 5.0 pence (net) per share) Total The directors do not recommend the payment of a final dividend in respect of the year ended 31 December 2017. 2017 £’000 2016 £’000 — — — 21,963 10,817 32,780 Annual Report 2017 Countrywide plc 91 Strategic reportCorporate governanceFinancial statements 13. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares of Countrywide plc. (Loss)/profit for the year attributable to owners of the parent Weighted average number of ordinary shares in issue Basic (loss)/earnings per share (in pence per share) 2017 £’000 (208,072) 2016 £’000 17,404 232,317,964 216,683,218 (89.56)p 8.03p For diluted earnings per share, the weighted average number of ordinary shares in existence is adjusted to include all dilutive potential ordinary shares arising from share options. (Loss)/profit for the year attributable to owners of the parent Weighted average number of ordinary shares in issue Adjustment for weighted average number of contingently issuable share options Weighted average number of ordinary shares for diluted earnings per share Diluted (loss)/earnings per share (in pence per share)* Adjusted earnings (Loss)/profit for the year attributable to owners of the parent Adjusted for the following items, net of taxation: Amortisation arising on intangibles recognised through business combinations Contingent consideration Share-based payments charge Exceptional income Exceptional costs Adjusted earnings, net of taxation Adjusted basic earnings per share (in pence per share) Adjusted diluted earnings per share (in pence per share) 2017 £’000 (208,072) 2016 £’000 17,404 232,317,964 216,683,218 111,460 12,824 232,429,424 216,696,042 8.03p (208,072) 17,404 4,127 4,202 1,465 — 217,755 19,477 8.38p 8.38p 6,365 6,834 2,145 (35,133) 44,285 41,900 19.34p 19.34p * As there is a loss in 2017, the diluted EPS is not presented on the basis that this is equal to the basic loss per share. The comparative diluted EPS is presented. 14. Intangible assets (a) Goodwill Cost At 1 January Arising on acquisitions At 31 December Accumulated impairment (note 14(c)) At 1 January Impairment (note 10) At 31 December Net book amount At 31 December 2017 £’000 2016 £’000 908,669 888,982 — 19,687 908,669 908,669 436,920 192,253 629,173 417,356 19,564 436,920 279,496 471,749 Goodwill impairment charges of £151.3 million and £41.0 million respectively have been made in relation to the UK and London cash generating units following an assessment of the recoverable value against the carrying value. These charges have been included within exceptional items (note 10). 92 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 14. Intangible assets continued (b) Other intangible assets Cost At 1 January Additions Disposals At 31 December Accumulated amortisation and impairment losses (note 14(c)) At 1 January Charge for the year Impairment (note 10) On disposals At 31 December Net book amount At 31 December 2017 Computer software £’000 Brand names £’000 Customer contracts and relationships £’000 Pipeline £’000 Other intangibles £’000 Total £’000 66,860 232,015 131,232 6,206 403 436,716 7,577 (1,473) — — — — — — — — 7,577 (1,473) 72,964 232,015 131,232 6,206 403 442,820 44,724 10,503 2,669 (1,372) 41,328 94,108 6,206 — 12,871 — 5,756* 5,278 — — — — 56,524 54,199 105,142 6,206 40 51* — — 91 186,406 16,310 20,818 (1,372) 222,162 16,440 177,816 26,090 — 312 220,658 * The columnar approach of our income statement separates £5,807,000 from total depreciation and amortisation. This is in respect of amortisation of acquired intangibles as detailed in the table above. Computer software includes the following amounts where the Group is a lessee under a finance lease: Cost – capitalised finance lease Accumulated depreciation Net book amount Cost At 1 January Acquisitions through business combinations Additions Disposals Transfers At 31 December Accumulated amortisation and impairment losses (note 14(c)) At 1 January Charge for the year Impairment (note 10) On disposals At 31 December Net book amount At 31 December 2016 Brand names £’000 Customer contracts and relationships £’000 223,185 8,830 125,545 5,687 — — — — — — Pipeline £’000 5,693 513 — — — Computer software £’000 52,661 419 11,071 (1,564) 4,273 2017 £’000 6,381 (4,360) 2,021 Other intangibles £’000 — 403 — — — 66,860 232,015 131,232 6,206 403 38,730 7,552 6 (1,564) 44,724 39,970 — 1,358 — 83,300 10,808 — — 5,627 579 — — 41,328 94,108 6,206 — 40 — — 40 2016 £’000 6,381 (3,084) 3,297 Total £’000 407,084 15,852 11,071 (1,564) 4,273* 436,716 167,627 18,979 1,364 (1,564) 186,406 22,136 190,687 37,124 — 363 250,310 * Transfers from assets in the course of construction (note 15). All amortisation and impairment charges are treated as an expense in the income statement. Brand names are treated as having an indefinite-life, as a result of the fact that the Group will continue to operate these brands into perpetuity, and are therefore subject to annual, or more frequent, impairment reviews if events or changes in circumstances indicate potential impairment. Following the assessment of recoverable value against carrying value, impairments of £12.9 million were charged against brand names associated with the UK (£8.4 million) and London (£4.5 million) cash generating units, and impairments of £5.3 million were charged against customer contracts and relationships associated with the UK (£4.1 million), London (£1.1 million) and Professional Services (B2B) (£0.1 million) cash generating units. These charges have been included within exceptional items (note 10). In light of the impairment charges triggered against brand names in the past two years, as part of the wider turn around plan, we will undertake an assessment in 2018 to reassess our brand strategy and the related impact on the useful economic life of our brands currently held as indefinite. Annual Report 2017 Countrywide plc 93 Strategic reportCorporate governanceFinancial statements 14. Intangible assets continued (b) Other intangible assets continued The carrying amounts of various brand names owned by the Group are disclosed below: Brand names Bairstow Eves John D Wood Mann & Co Slater Hogg & Howison Taylors Estate Agents Hamptons International Blundell Property Services Lambert Smith Hampton Other brands Net book value 2017 £’000 2016 £’000 17,173 14,464 5,462 3,652 10,071 58,774 4,654 28,377 142,627 35,189 177,816 17,173 14,464 5,462 9,709 10,071 58,774 6,494 28,377 150,524 40,163 190,687 (c) Impairment Cash generating units (CGUs) represent the smallest identifiable group of assets that generate cash flows that are largely independent of cash flows from other groups of assets. In accordance with internal management structures, the group of CGUs against which goodwill is monitored comprise UK, London and Financial Services, with the B2B business unit being split further into Professional Services, Countrywide Residential Development Solutions and Commercial. In many cases the operations of the acquired businesses have been fully integrated with existing business and consequently the economic flows are not monitored at a lower level than the CGUs identified for goodwill impairment review. Management further considers each group of branches operating under the same brand name to constitute a CGU. These brand name CGUs are therefore the level at which brand names are assessed for impairment. Where necessary, assets have been reallocated to the goodwill-level CGUs that are expected to benefit from the business combination in which the goodwill or intangible asset arose as follows: 2017 Goodwill Indefinite life intangible assets UK £’000 14,045 58,270 72,315 London £’000 30,770 85,815 116,585 Financial Services £’000 89,885 4,343 94,228 Professional Services £’000 132,890 — 132,890 2016 Goodwill Indefinite life intangible assets UK * £’000 London * £’000 165,340 66,695 232,035 71,728 90,261 161,989 Financial Services £’000 89,885 4,343 94,228 Professional Services £’000 132,890 — 132,890 B2B CGUs Countrywide Residential Development Solutions £’000 2,111 1,011 3,122 B2B CGUs Countrywide Residential Development Solutions £’000 2,111 1,011 3,122 Commercial £’000 9,795 28,377 38,172 Total £’000 279,496 177,816 457,312 Commercial £’000 9,795 28,377 38,172 Total £’000 471,749 190,687 662,436 * Restated from prior year following internal restructuring of operations between UK, London and B2B. Under IAS 36 ‘Impairment of assets’, the Group is required to: • review its intangible assets in the event of a significant change in circumstances that would indicate potential impairment; and • review and test its goodwill and indefinite life intangible assets annually or in the event of a significant change in circumstances. The 2017 impairment review was performed in accordance with IAS 36 ‘Impairment of assets’ by comparing the carrying amount of each CGU against its recoverable amount. Recoverable amount The recoverable amount of each CGU is based on its value in use which is calculated by discounting pre-tax cash flow projections derived from formally approved strategic budgets and forecasts. For each of the CGUs with significant amounts of goodwill, the key assumptions used in the value in use calculation are set out below. Cash flows Cash flow projections for each CGU are based on the formally approved strategic budget covering the period from 2018 to 2020. For details of the key assumptions please refer to the sensitivity analysis below. Growth rates applied within the strategic plan are based on past experience, market data and expectation of future market outlook and development. Cash flows assume that UK housing market volumes remain flat over the period from 2018 to 2020. Mortgage approval volumes are assumed to grow by 2% per annum in each of 2018, 2019 and 2020. Cash flows include the impact of cost saving initiatives that have been endorsed by the Executive Committee. The 2016 impairment review was based on cash flows from the strategic budget covering the period from 2017 to 2020. 94 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 14. Intangible assets continued (c) Impairment continued Growth rate For the purpose of the impairment review, nil growth is assumed for 2021 and 2022. Cash flows beyond the five-year period ending 2022 are extrapolated using a terminal value which includes a growth rate of 0% into perpetuity. The 2016 impairment review assumed nil growth for 2021, with cash flows extending beyond the initial five-year period extrapolated using a terminal value that included a growth rate of 0% into perpetuity. Discount rate Cash flows have been discounted using a pre-tax discount rate of between 10.3% and 10.5%, reflecting the weighted average cost of capital assigned to each CGU. The 2016 impairment review used discount rates of between 8.7% and 10.5%. Outcome of impairment review Goodwill The 2017 goodwill impairment review concluded that impairment charges of £151.3 million (2016: £5.0 million) and £41.0 million (2016: £13.5 million) were appropriate against goodwill held by the UK and London CGUs respectively (see note 10). The 2017 goodwill impairment review concluded that the recoverable amount for all other CGUs to which goodwill is allocated exceeded their respective carrying values, resulting in no further indication of impairment (2016: £Nil). Indefinite life intangible assets A similar impairment review was performed on indefinite life intangible assets at 31 December 2017 using assumptions that were consistent with the goodwill impairment review. The review identified an impairment of £8.4 million (2016: £1.4 million) against brand names held within the UK business unit (reflecting partial impairments of Slater Hogg & Howison and Blundell Property Services) and an impairment of £4.5 million (2016: £Nil) against the Greene & Co brand name held within the London business unit (see note 10). Other intangible assets A further impairment review of the remaining intangible assets, using assumptions consistent with the goodwill and indefinite life asset reviews, concluded that impairment charges of £4.1 million, £1.1 million and £0.1 million were appropriate against customer contracts and relationships held against the UK, London and B2B business units respectively. In addition, an impairment charge of £2.7 million was made against computer software associated with the UK business unit. There was no impairment charge against customer contracts and relationships in 2016, but an impairment charge of £6,000 was booked against computer software. Cumulative impairments, including the goodwill, brand names, customer contracts and relationships, and computer software impairments identified during the current year, combined with previous impairments including those that resulted from the severe financial crisis that originated in 2008, amount to the following: Cash generating unit UK* London* Financial Services B2B – Professional Services Goodwill £’000 374,396 100,390 114,387 40,000 629,173 Brand names £’000 Customer contracts & relationships £’000 43,627 10,572 — — 54,199 4,075 1,103 — 100 5,278 Computer software £’000 2,674 1 — 10,500 13,175 Total £’000 424,772 112,066 114,387 50,600 701,825 * Allocation between UK and London restated from prior year following restructuring between the business units. Sensitivity analysis A range of assumptions with varying significance drive the 2017 value in use models used for the impairment reviews. Recoverable amounts for the UK and London CGUs are most sensitive to the following key assumptions: • recovery of the pipeline to 2017 levels; • volume of forecast exchanges per branch and associated productivity measures in other parts of the Group: • potential impact of the new government legislation banning letting tenancy fees; and • successful realisation of internal corporate cost saving initiatives currently underway. A change in the above assumptions, for example, lower exchanges per branch, higher impact of the tenancy fee ban, or lower savings achieved through corporate cost saving plans, would result in lower adjusted EBITDA for the UK and London CGUs. Growth rates applied within the strategic plan are based on past experience, market data and expectation of future market outlook and development. Cash flows assume that UK housing market volumes remain flat over the period from 2018 to 2020. Mortgage approval volumes are assumed to grow by 2% per annum in each of 2018, 2019 and 2020. Cash flows include the impact of cost saving initiatives that have been endorsed by the Executive Committee. Annual Report 2017 Countrywide plc 95 Strategic reportCorporate governanceFinancial statements 14. Intangible assets continued Sensitivity analysis continued In order to quantify the impact of the above risks on the goodwill, indefinite-life intangible assets, and other intangible assets impairment reviews, management modelled three separate scenarios: • 10% reduction to adjusted EBITDA from operating cash flows, but keeping all other cash flows such as capital investment in line with the strategic plan; • 10% increase in discount factor; and • terminal growth rate of 1% into perpetuity. The following table sets out the sensitivity of the UK and London CGUs to possible changes in key and current assumptions: Goodwill 10% reduction to adjusted EBITDA 10% increase in discount factor Terminal growth rate of 1% into perpetuity Brand names 10% reduction to adjusted EBITDA 10% increase in discount factor Terminal growth rate of 1% into perpetuity Customer contracts and relationships 10% reduction to adjusted EBITDA 10% increase in discount factor Terminal growth rate of 1% into perpetuity (Increase)/decrease in impairment charge UK CGU £’000 London CGU £’000 (14,045) (13,526) 13,186 (18,611) (12,001) 12,313 (570) (928) 886 — — — — — — (10) (11) 2 Mitigating actions are available should either of the first two scenarios, which we believe to be a reasonable downside as they are reflective of macroeconomic risk associated with the underlying forecast, arise. Applying the most aggressive of the above sensitivity scenarios to the remaining cash generating units decreases headroom between the recoverable value and carrying value of each CGU as follows: Financial Services: £24.9 million; B2B – Professional Services: £27.8 million; B2B – CRDS: £5.9 million; and B2B – LSH: £11.6 million. In 2016 management modelled similar sensitivity analyses, including a 10% reduction to adjusted EBITDA from operating cash flows and an increase of 10% in the discount factor of 8.7%. The sensitivity analyses concluded that goodwill allocated to the UK CGU would have been impaired by an additional £47 million in the first scenario or an additional £28 million in the latter scenario. For the London CGU, the additional impairment charges indicated under the scenario modelling totalled £24 million and £14 million respectively. 15. Property, plant and equipment Cost At 1 January Additions at cost Disposals Reclassification* Transfers At 31 December Accumulated depreciation At 1 January Charge for the year Impairment (note 10) Disposals Reclassification* At 31 December Net book amount At 31 December 2017 Freehold Land and buildings £’000 Leasehold improvements £’000 Motor vehicles £’000 Furniture and equipment £’000 Assets in the course of construction £’000 1,922 34,251 — — — — 962 (210) (4,271) 4,006 1,922 34,738 351 16 — — — 367 14,652 6,186 18 (27) (4,271) 16,558 937 6 (746) — — 197 330 150 — (478) — 2 43,792 7,859 (256) 4,271 139 55,805 18,078 10,828 832 (72) 4,271 33,937 1,555 18,180 195 21,868 1,954 2,191 — — (4,145) — — — — — — — — Total £’000 82,856 11,018 (1,212) — — 92,662 33,411 17,180 850 (577) — 50,864 41,798 * Assets with a £nil net book value have been reclassified during the year following a review of the fixed asset registers of legacy acquisitions to align with the accounting policy classifications within the Group. 96 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 15. Property, plant and equipment continued Cost At 1 January Acquisition of subsidiaries Additions at cost Disposals Transfers At 31 December Accumulated depreciation At 1 January Charge for the year Impairment Disposals At 31 December Net book amount At 31 December 2016 Land and buildings £’000 Leasehold improvements £’000 Motor vehicles £’000 Furniture and equipment £’000 Assets in the course of construction £’000 1,926 — — (4) — 1,922 334 21 — (4) 351 41,464 228 2,627 (15,980) 5,912 34,251 22,326 5,634 83 (13,391) 14,652 799 140 80 (82) — 937 176 236 — (82) 330 65,073 234 8,765 (32,776) 2,496 43,792 42,483 8,002 37 (32,444) 18,078 6,031 — 8,604 — (12,681) 1,954 — — — — — Total £’000 115,293 602 20,076 (48,842) (4,273)* 82,856 65,319 13,893 120 (45,921) 33,411 1,571 19,599 607 25,714 1,954 49,445 * Transfers to computer software (note 14b). Assets in the course of construction with a value of £Nil (2016: £1,954,000) relate principally to branch refurbishments in progress for which no depreciation has been charged. Depreciation commences when the asset enters operational use and the asset is transferred to the operational asset category. An assessment of the recoverable values of cash generating units (CGUs) against their carrying values resulted in an impairment of £116,000 against tangible fixed assets held within the UK CGU and an impairment of £734,000 against tangible fixed assets held within the London CGU (see note 10). Furniture and equipment includes the following amounts in respect of computer hardware where the Group is a lessee under a finance lease: Cost – capitalised finance lease Accumulated depreciation Net book amount 2017 £’000 16,497 (11,176) 5,321 2016 £’000 12,737 (6,953) 5,784 The Group leases various assets, principally computer hardware and related costs, under finance lease agreements whose terms are between two and three years. Capital commitments Capital expenditure contracted for at the end of the reporting period but not yet incurred, relating to 2017 and the subsequent year, is as follows: Property, plant and equipment 2017 £’000 1,962 2016 £’000 2,590 Annual Report 2017 Countrywide plc 97 Strategic reportCorporate governanceFinancial statements 16. Investments (a) Principal subsidiary undertakings of the Group The Company substantially owns directly or indirectly the whole of the issued and fully paid ordinary share capital of its subsidiary undertakings, most of which are incorporated in Great Britain, and whose operations are conducted in the United Kingdom. Principal subsidiary undertakings of the Group at 31 December 2017 are presented below: Subsidiary Countrywide Group plc Balanus Limited UK Countrywide Estate Agents London Hamptons Group Limited B2B Lambert Smith Hampton Limited Lambert Smith Hampton Limited (N Ireland) Lambert Smith Hampton Limited (Ireland) Lambert Smith Hampton Group Limited Countrywide Surveyors Limited Countrywide Property Lawyers Limited TitleAbsolute Limited Financial Services Countrywide Principal Services Limited The Buy To Let Business Limited Mortgage Bureau Limited Slater Hogg Mortgages Limited Mortgage Intelligence Limited Mortgage Next Limited Capital Private Finance Limited Life and Easy Limited Nature of business Holding company Holding company Estate Agency and Lettings Holding company Holding company Property consultancy Property consultancy Property consultancy Surveying Services Conveyancing Services Conveyancing Services Financial Services Financial Services Financial Services Financial Services Financial Services Financial Services Financial Services Financial Services Proportion of ordinary shares held by parent % Proportion of ordinary shares held by the Group % Country of incorporation UK UK UK UK UK UK Ireland UK UK UK UK UK UK UK UK UK UK UK UK — — — — — — — — — — — — — — — — — — — 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 100 A full list of subsidiary undertakings and their registered addresses at 31 December 2017 is included within the appendix. The appendix on pages 125 to 130 forms part of these financial statements. (b) Interests in joint venture TM Group (UK) Limited At 31 December 2017 the Group had a 33% (2016: 33%) interest in the ordinary share capital of TM Group (UK) Limited (TMG), a UK company. TMG has share capital consisting solely of ordinary shares and is a private company with no quoted market price available for its shares. TMG is one of the largest companies in the provision of searches to the property companies sector (measured by completed searches). It delivers a range of property searches and data to land and property professionals in the UK, arranges for property searches directly with specific suppliers on behalf of its own customers, and supplies IT applications and products to UK mortgage lenders. 98 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 16. Investments continued (b) Interests in joint venture continued There are no outstanding commitments or contingent liabilities relating to the Group’s interest in the joint venture. During the year, TMG was a joint venture company. At 1 January: Net assets excluding goodwill Goodwill Share of profits/(losses) retained At 31 December: Net assets excluding goodwill Goodwill 2017 £’000 812 1,480 2,292 690 1,502 1,480 2,982 The summarised financial information of TM Group (UK) Limited, which is accounted for using the equity method, is presented below: Cash and cash equivalents Other current assets (excluding cash) Total current assets Non-current assets Current liabilities Net assets Net assets adjusted for the percentage of ownership Income Depreciation Expenses (excluding depreciation) Interest income Post-tax results Share of post-tax results There is no other comprehensive income arising in the joint venture in either year. (c) Available-for-sale financial assets At 1 January Disposal of ZPG shares Acquisition of shares in unlisted equity and debentures Movement in fair value Impairment of unlisted equity Amortisation At 31 December Available-for-sale financial assets, which are all Sterling denominated, include the following: Unlisted residential property fund units Unlisted equity Wimbledon debentures (acquired and amortised over the life of the debenture) At 31 December 2016 £’000 825 1,480 2,305 (13) 812 1,480 2,292 2016 £’000 4,620 3,227 7,847 816 (6,202) 2,461 812 59,735 (395) 2017 £’000 4,176 2,692 6,868 1,088 (3,450) 4,506 1,502 60,645 (372) (58,219) (59,423) 16 2,070 690 2017 £’000 16,058 — — 1,627 (565) (35) 44 (39) (13) 2016 £’000 57,760 (45,304) 1,504 2,132 — (34) 17,085 16,058 2017 £’000 15,766 1,232 87 17,085 2016 £’000 14,139 1,797 122 16,058 The fair value hierarchy of the holding within the investment property fund has remained at Level 2, and is based on receipt of a net asset valuation statement from the trustees on a quarterly basis (see note 33). Annual Report 2017 Countrywide plc 99 Strategic reportCorporate governanceFinancial statements 17. Trade and other receivables Amounts falling due within one year Trade receivables not past due Trade receivables past due but not impaired Trade receivables past due but impaired Trade receivables Less: provision for impairment of receivables Trade receivables – net Amounts due from customers for contract work Other receivables Prepayments Accrued income Corporation tax asset 2017 £’000 2016 £’000 43,018 25,900 4,211 73,129 (4,211) 68,918 3,356 5,311 19,540 4,202 1,784 103,111 44,964 35,090 3,421 83,475 (3,421) 80,054 3,368 7,569 25,373 3,843 148 120,355 Trade and other receivables are all current and any fair value difference is not material. Trade receivables are considered past due once they have passed their contracted due date. Significant trade receivables are reviewed for impairment if they are past due. All trade receivables are reviewed for impairment if they are past due beyond 90 days for individual customers or 180 days for commercial contracts. Further information in respect of financial assets, including credit risk, is provided in note 32. As at 31 December 2017, trade receivables of £25,900,000 (2016: £35,090,000) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Less than three months Over three months 2017 £’000 12,579 13,321 25,900 2016 £’000 17,229 17,861 35,090 Trade and other receivables are denominated in Pounds Sterling with the exception of £944,000 (2016: £673,000) which is receivable in Euros (2016: Euros). A summary of the movement in the provision for impairment of receivables is detailed below: At 1 January Additional provisions (notes 7 and 10) Amounts utilised At 31 December 2017 £’000 3,421 1,679 (889) 4,211 2016 £’000 3,124 2,446 (2,149) 3,421 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security. 18. Cash and cash equivalents Cash and cash equivalents Cash at bank and in hand Short term bank deposits Of the short term bank deposits held in 2016, a number were interest bearing within the following range: 0.35%–0.55%. The following amounts were held in foreign currencies: Hong Kong Dollars Euros 100 Countrywide plc Annual Report 2017 2017 £’000 2016 £’000 22,533 — 22,533 5,299 40,027 45,326 2017 £’000 102 125 227 2016 £’000 152 463 615 Financial statementsNotes to the financial statements continued 19. Trade and other payables Trade payables Deferred consideration Other tax and social security payable Accruals and other payables Trade and other payables due within one year Trade and other payables due after one year 2017 £’000 20,461 3,550 24,011 25,065 53,998 103,074 94,779 8,295 103,074 2016 £’000 16,333 6,164 22,497 26,253 59,981 108,731 95,072 13,659 108,731 The principal components of trade and other payables due after one year are: deferred and contingent consideration payments of £7,921,000 (2016: £12,964,000); and accrued National Insurance share-based payment charges of £374,000 (2016: £695,000). Deferred consideration falls due: £1,264,000 within one year; and £2,286,000 after one year. Contingent consideration accrued falls due: £7,528,000 within one year; and £5,634,000 after one year. The fair value of financial liabilities approximates their carrying value due to short maturities. Financial liabilities are denominated in Pounds Sterling with the exception of £24,000 (2016: £26,000) which is receivable in Hong Kong Dollars and Euros. 20. Borrowings Non-current Bank borrowings Other loans Capitalised banking fees Finance lease liabilities Current Finance lease liabilities Total borrowings Analysis of net debt Cash and cash equivalents Capitalised banking fees Other loans Revolving credit facility due after one year Finance leases due after one year Finance leases due within one year Total 2017 £’000 2016 £’000 210,000 290,000 2,840 (1,700) 2,349 2,699 (3,223) 3,029 213,489 292,505 1,011 1,011 721 721 214,500 293,226 At 1 January 2017 £’000 45,326 3,223 (2,699) Cash flow £’000 (22,793) 724 — (290,000) 80,000 (3,029) (721) (247,900) — 3,698 61,629 Non-cash changes £’000 — (2,247) (141) — 680 (3,988) (5,696) At 31 December 2017 £’000 22,533 1,700 (2,840) (210,000) (2,349) (1,011) (191,967) Net debt excludes derivative financial instruments. Details of the interest rate swap liability are disclosed in note 21. Borrowings and other loans At the year end, the facility was a £340 million RCF, with no term loan elements, and an additional £60 million accordion facility, with any outstanding balance repayable in full on 20 March 2020. Interest was payable based on LIBOR plus a margin of 3.0%. The margin is linked to the leverage ratio of the Group and the margin rate is reviewed twice a year (and can vary between 1.75% and 3.0%). The RCF is available for utilisation subject to satisfying fixed charge, interest cover and leverage covenants and £80 million was repaid during the period. On 2 February 2018 the Company agreed an amendment relating to the RCF, originally dated 20 March 2013, which is due to expire in March 2020. The RCF is now £275 million, with an additional £60 million accordian facility, with a margin of 3.25%. Capitalised banking fees are being amortised over the duration of the RCF, until March 2020. ‘Other loans’ disclosed above comprise: £1 million of unsecured loan notes which are non-interest bearing, repayable in 2029, which arose on the purchase of Mortgage Intelligence Holdings Limited; and loan notes payable to The Buy to Let Group Limited joint shareholder (49%) and director of £1,590,000 capital and associated interest charges accruing at a rate of 8% per annum. Annual Report 2017 Countrywide plc 101 Strategic reportCorporate governanceFinancial statements 20. Borrowings continued Finance lease liabilities Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default. Gross finance lease liabilities – minimum lease payments: No later than one year Later than one year and no later than five years Greater than five years Future finance charges on finance lease liabilities Present value of finance lease liabilities The present value of finance lease liabilities is as follows: No later than one year Later than one year and no later than five years 21. Derivative financial instruments Liabilities due after one year Interest rate swaps – cash flow hedge 2017 £’000 1,363 2,507 1 3,871 (511) 3,360 2017 £’000 1,011 2,349 3,360 2017 £’000 337 2016 £’000 953 3,163 45 4,161 (411) 3,750 2016 £’000 721 3,029 3,750 2016 £’000 2,367 The full fair value of a hedging derivative is classified as a non-current liability when the remaining hedged item is more than twelve months from maturity. On 1 June 2016 the Group entered into an interest rate swap to hedge the interest cash flows on the first proportion of the revolving credit facility in alignment with forecast drawdowns. The notional principal amount of the outstanding interest rate swap contract at 31 December 2017 was £240,000,000. At 31 December 2017, the fixed interest rate was 0.799% and the main floating rate was 0.498%. There was no ineffectiveness to be recorded in the income statement. The gain of £2,030,000 on the interest rate swap contract has been recognised in the hedging reserve in equity (note 28) and will be continuously released to the income statement within ‘Finance cost’ in line with monthly interest settlements. The maximum exposure to credit risk at the reporting date is the fair value of the derivative liability in the balance sheet. Future interest charges will increase as the interest rate swap became ineffective at the end of 2017, as forecast drawdowns will no longer be met as we seek to deleverage the business. As a result of this prospective ineffectiveness, future revaluations of the interest rate swap forming the cash flow hedge will be charged to the income statement and not through reserves. 22. Deferred income Deferred income will unwind as follows: Within one year After one year: Between one and two years Between two and three years Between three and four years Between four and five years 2017 Total £’000 1,379 575 78 7 3 663 2,042 2016 Total £’000 3,890 1,920 567 76 — 2,563 6,453 The Group recognises deferred income as a result of cash received in advance in relation to certain sales distribution contracts and lease incentives relating to the Group’s operating leases. The cash received is amortised over the life of the contracts to which they relate. 102 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 23. Provisions At 1 January Utilised in the year Charged to income statement Credited to income statement At 31 December Due within one year or less Due after more than one year At 1 January Acquired in acquisition Utilised in the year Charged to income statement Credited to income statement Unwind of discount rate At 31 December Due within one year or less Due after more than one year * See exceptional charges in note 10 Onerous contracts * £’000 5,865 (3,177) 1,090 — 3,778 248 3,530 3,778 Onerous contracts £’000 1,262 — (1,762) 6,359 — 6 5,865 1,254 4,611 5,865 Property repairs * £’000 6,342 (1,440) 377 (35) 5,244 4,445 799 5,244 Property repairs £’000 3,477 — (784) 4,252 (603) — 6,342 3,991 2,351 6,342 2017 Clawback £’000 3,581 (3,980) 3,839 — 3,440 2,287 1,153 3,440 2016 Clawback £’000 3,735 274 (3,592) 3,164 — — 3,581 2,121 1,460 3,581 Claims and litigation * £’000 14,401 (3,677) 6,326 (1,530) 15,520 9,107 6,413 15,520 Claims and litigation £’000 28,909 — (13,820) 1,612 (2,300) — 14,401 10,711 3,690 14,401 Other £’000 1,914 (1,012) 491 (274) 1,119 1,029 90 1,119 Other £’000 1,852 — — 62 — — 1,914 1,523 391 1,914 Total £’000 32,103 (13,286) 12,123 (1,839) 29,101 17,116 11,985 29,101 Total £’000 39,235 274 (19,958) 15,449 (2,903) 6 32,103 19,600 12,503 32,103 The provision for onerous contracts relates to property leases and represents the estimated unavoidable costs of leasehold properties which have become surplus to the Group’s requirements following the closure or relocation of operations. The provision is based on the present value of rentals and other unavoidable costs payable during the remaining lease period after taking into account rents receivable or expected to be receivable from sub-lessees, on a case-by-case basis, typically over an average of a two-year period. Provisions are released when properties are assigned or sub-let. The provision for property repairs represents estimates of the cost to repair existing dilapidations under leasehold covenants, in accordance with IAS 37 ‘Provisions, contingent liabilities and contingent assets’. The average unexpired lease length of properties against which a provision has been made is two years. Clawback represents the provision required to meet the estimated cost of repaying indemnity commission income received on life assurance policies that may lapse in the two years following issue. Claims and litigation provisions comprise the amounts set aside to meet claims by customers below the level of any professional indemnity insurance excess, the estimation of IBNR claims and any amounts that might be payable as a result of any legal disputes. The provisions represent the directors’ best estimate of the Group’s liability having taken professional advice. In addition to the claims provisions recognised, the Group also provides for future liabilities arising from claims (IBNR) for mortgage valuation reports and home buyer reports provided by the Surveying Services division. The basis for calculating this provision is outlined further in note 3. While there are many factors which determine the settlement date of any claims, the expected cash flows are estimated based on the average length of time it takes to settle claims in the past, which is around two years. Other provisions mainly comprise items relating to operational reorganisation including some business closure costs and some IT transition expenses which are expected to be utilised over the next two years. Annual Report 2017 Countrywide plc 103 Strategic reportCorporate governanceFinancial statements 24. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17%–19% (2016: 17%–20%). The movement on the deferred tax account is shown below: Net deferred tax liability at 1 January Credited to income statement Acquired on acquisition of subsidiary Credited to other comprehensive income Charged to equity Net deferred tax liability at 31 December Deferred tax asset Deferred tax liability Net deferred tax liability at 31 December Deferred tax asset expected to unwind within one year Deferred tax asset expected to unwind after one year Deferred tax liability expected to unwind within one year Deferred tax liability expected to unwind after one year 2017 £’000 2016 £’000 (29,444) (30,024) 5,328 — 280 (10) (23,846) 9,676 (33,522) (23,846) 1,530 8,146 9,676 (986) (32,536) (33,522) 2,622 (3,125) 1,382 (299) (29,444) 9,250 (38,694) (29,444) 1,839 7,411 9,250 (1,975) (36,719) (38,694) Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets to the extent that it is probable that these assets will be recovered through future taxable profits. The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. 2017 Credited/ (charged) to income £’000 Credited/ (charged) to other comprehensive income/equity £’000 Asset/ (liability) £’000 6,615 1,069 299 925 (317) (26) (32,438) 5,368 63 (887) 1,433 (23,846) — — (622) 5,328 — 690 (10) — (410) — — 270 Origination and reversal of temporary differences Capital allowances Employee pension liabilities Share-based payments Intangible assets Cash flow hedge Gain deferred by roll-over relief Other temporary and deductible differences 104 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 24. Deferred tax continued Origination and reversal of temporary differences Capital allowances Employee pension liabilities Share-based payments Trading losses Intangible assets Cash flow hedge Gain deferred by roll-over relief Other temporary and deductible differences 2016 (Charged)/ credited to income £’000 Credited/ (charged) to other comprehensive income/equity £’000 Asset/ (liability) £’000 5,690 696 335 — (986) (296) (881) (116) (37,806) 5,062 473 (887) 2,055 (29,444) — — (161) 2,622 — 909 (299) — — 473 — — 1,083 Deferred tax assets have not been recognised in respect of unused capital losses of £9,374,000 (2016: £9,366,000), non-trading loan relationships of £217,000 (2016: £217,000) or trading losses of £42,000 (2016: £42,000). There is no expiry date attributable to these unrecognised deferred tax assets, but no assets have been recognised as there are currently no expectations of offsetting income streams arising. 25. Post-employment benefits The Group offers membership of the Countrywide plc Pension Scheme (‘the Scheme’) to eligible employees, the only pension arrangements operated by the Group. The Scheme has two sections of membership: defined contribution and defined benefit. Defined contribution pension arrangements The pensions cost for the defined contribution scheme in the year was £8,182,000 (2016: £8,633,000). Defined benefit pension arrangements In the past the Group offered a defined benefit pension arrangement; however, this was closed to new entrants in 1988 and subsequently closed to further service accrual at the end of 2003. Members of the defined benefit arrangements earned benefits linked to final pensionable salary and service at the date of retirement or date of leaving the Scheme if earlier. The weighted average duration of the defined benefit pension scheme is 15 years. The defined benefit pension arrangements provide pension benefits to members based on earnings at the date of leaving the Scheme. Pensions in payment are updated in line with the minimum of 4% or UK Retail Price Index (RPI) inflation. The Scheme is established and administered in the UK and ultimately overseen by the Pensions Ombudsman. The regulatory framework requires the Group to fund the Scheme every three years and for the Group to agree the valuation with the trustees. As such, the funding arrangements were reviewed as part of the recent valuation (as at 5 April 2015). The Group is responsible for ensuring that pension arrangements are adequately funded and the directors have agreed a funding programme to bring down the deficit in the defined benefit scheme over the next three years. During the year, the Group paid £2.0 million (2016: £1.9 million) to the defined benefit scheme. During the year which commenced on 1 January 2018, the employer is expected to pay contributions of £2.0 million (2017: £2.0 million). Further contributions of £2.0 million will be made in each of the next three years. A pensioner buy-in of all remaining non-insured pensioners was concluded during December 2017 which allowed transformation of the Scheme’s risk profile, without requiring any additional funding from the Company, thus maintaining the current payment profile for company contributions. The Group’s obligations under the pension arrangements are subject to inherent estimation uncertainty. While the trustees and actuary assess the value of the Scheme assets, and the extent of the liabilities, they are obliged to make a number of assumptions, sensitivities to which are detailed later on. Furthermore, the Scheme assets under defined benefit pension arrangements are exposed to risks in the equities and bond markets and similarly the liabilities can fluctuate according to gilt or corporate bond rate. The Scheme assets under defined benefit pension arrangements are held in a separate trustee-administered fund to meet long term pension liabilities to past and present employees. The trustees are required to act in the best interests of the Scheme’s beneficiaries and they take independent advice when deliberating matters relating to the Scheme. The liabilities of the Scheme under defined pension arrangements are measured by discounting the best estimate of future cash flows to be paid out by the Scheme using the projected unit method, which is an accrued benefits valuation method. The defined benefit liabilities set out in this note have been calculated by an independent actuary based on the results of the most recent full actuarial valuation at 5 April 2015, updated to 31 December 2017. The results of the calculations and the assumptions adopted are shown overleaf. Annual Report 2017 Countrywide plc 105 Strategic reportCorporate governanceFinancial statements 25. Post-employment benefits continued Defined benefit pension arrangements continued The Group immediately recognises the actuarial gains and losses directly in other comprehensive income as shown in the consolidated statement of comprehensive income. The amounts recognised in the balance sheet are as follows: Present value of funded obligations Fair value of plan assets Net liability recognised in the balance sheet The movement in the defined benefit obligation over the year is as follows: At 1 January 2017 Expected return on Scheme assets Actuarial loss Employer contributions Service cost Interest cost Actuarial gain from changes in financial assumptions Benefits paid Expenses At 31 December 2017 At 1 January 2016 Expected return on Scheme assets Actuarial gain Employer contributions Service cost Interest cost Actuarial loss from changes in financial assumptions Benefits paid Expenses At 31 December 2016 The major categories of scheme assets as a percentage of total scheme assets are: Cash UK equities Overseas equities UK fixed interest gilts Corporate bonds Other – GARS Other – insured pensioners 2017 £’000 (52,905) 47,279 (5,626) 2016 £’000 (57,203) 53,540 (3,663) Present value of obligation £’000 Fair value of plan assets £’000 (57,203) 53,540 — — — (257) (1,428) 1,114 4,612 257 1,355 (4,747) 2,000 — — — (4,612) (257) Total £’000 (3,663) 1,355 (4,747) 2,000 (257) (1,428) 1,114 — — (52,905) 47,279 (5,626) Present value of obligation £’000 Fair value of plan assets £’000 (47,850) 47,435 — — — (377) (1,735) (9,565) 1,947 377 1,747 4,782 1,900 — — — (1,947) (377) Total £’000 (415) 1,747 4,782 1,900 (377) (1,735) (9,565) — — (57,203) 53,540 (3,663) 2017 % 3 7 7 — — 1 82 100 2016 % 1 6 6 11 47 10 19 100 Insured pensioners and cash constitute unquoted investments. All other investments are managed funds either quoted directly or comprising quoted investments. The Group does not have any of its own transferable instruments, property occupied or other assets used held as plan assets. 106 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 25. Post-employment benefits continued Defined benefit pension arrangements continued The amounts recognised in the income statement are: Current service cost Net interest cost/(income) on pension scheme liabilities (within net finance costs) Total charge to the income statement The amounts recognised in the statement of comprehensive income are: Actuarial (loss)/gain on scheme assets Actuarial (loss)/gain on scheme liabilities: Actuarial loss from changes in financial assumptions Actuarial gain from changes in demographic assumptions Changes due to experience adjustments Other comprehensive expense Deferred tax adjustment arising on the pension scheme assets and liabilities Cumulative actuarial loss recognised in the statement of comprehensive income (after tax) The principal assumptions made by the actuaries were: Rate of increase in pensions in payment and deferred pensions: – on benefits earned prior to 1 December 1999 – on benefits earned after 1 December 1999 Discount rate RPI inflation CPI inflation Expected net return on plan assets Cash commutation Life expectancy at age 65 (years): – male pensioner member – female pensioner member – male pensioner non-member (age 45 now) – female pensioner non-member (age 45 now) 2017 £’000 257 73 330 2017 £’000 (4,747) (1,384) 900 1,598 (3,633) 690 (2,943) (11,346) 2016 £’000 377 (12) 365 2016 £’000 4,782 (9,565) — — (4,783) 909 (3,874) (8,403) 2017 2016 4.25% 3.35% 2.40% 2.90% 1.90% 2.40% 20% 22.5 24.3 23.9 25.8 4.30% 3.40% 2.60% 3.00% 2.00% 2.60% 20% 22.6 24.6 24.3 26.5 To develop the expected long term rate of return on assets assumption, the Group considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target assets allocation to develop the expected long term rate of return on assets assumption for the portfolio. Sensitivity analysis The results of the calculations are sensitive to the assumptions used. The defined benefit obligation position revealed by IAS 19 calculations must be expected to be volatile, principally because the market value of the assets (with a significant exposure to equities) is being compared with a liability assessment derived from corporate bond yields. However, the Group has taken steps to mitigate these risks of asset volatility, including insuring some of the pensioners (as illustrated by the asset portfolio). The Trustees of the Scheme invest the assets in line with the statement of investment principles, which has been established taking into consideration the liabilities of the Scheme and the investment risk that the Trustees are willing to take after consideration of the strength of the employer covenant. There is no direct use of derivative strategies, although this may be employed by the GARS Fund. The Scheme also has a number of annuity policies with insurance companies written in the name of the Trustees that provide pension payments to some of the pensioner membership. The Scheme also invests in gilt and corporate bond funds which provide some protection for the Scheme with regards to interest and inflation risk. Annual Report 2017 Countrywide plc 107 Strategic reportCorporate governanceFinancial statements 25. Post-employment benefits continued Sensitivity analysis continued The sensitivity analyses (below) are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. Defined benefit obligation Discount rate less 0.25% RPI and linked assumptions plus 0.25% Members living one year longer than assumed Defined benefit obligation trends: Scheme assets Scheme liabilities Scheme deficit Experience gain/(loss) on scheme liabilities Gain from changes in the demographic assumptions for value of scheme liabilities (Loss)/gain from changes in the assumptions for value of scheme liabilities Experience (loss)/gain adjustments on assets Defined benefit obligation £’000 (52,905) (54,798) (53,070) (55,354) 2016 £’000 53,540 (57,203) (3,663) — — (9,565) 4,782 2017 £’000 47,279 (52,905) (5,626) 1,598 900 (1,384) (4,747) Fair value of assets £’000 47,279 48,493 47,341 49,167 2015 £’000 47,435 (47,850) (415) (602) 1,029 1,700 1,121 Deficit £’000 (5,626) (6,305) (5,729) (6,187) 2014 £’000 45,524 (50,740) (5,216) — — (6,667) 4,252 Change from disclosed deficit £’000 — (679) (103) (561) 2013 £’000 39,143 (43,581) (4,438) 84 1,015 28 (474) Expected maturity analysis of undiscounted pension benefits at 31 December 2017: Undiscounted pension benefits 26. Share capital Called up issued and fully paid ordinary shares of 1 pence each At 1 January 2017 Share capital issued At 31 December 2017 Less than one year £’000 2,012 Between one and two years £’000 Between two and five years £’000 2,106 6,759 Over five years £’000 65,557 Total £’000 76,433 Number 219,692,972 21,610,467 241,303,439 £’000 2,197 216 2,413 On 9 March 2017, the Company placed 21,610,467 ordinary shares in the capital of the Company, raising gross proceeds of £37.8 million. The proceeds, net of £968,000 transaction costs, are shown in the statement of changes in equity. At 31 December 2017, 3,371,972 (2016: 3,371,972) of the shares disclosed above have been subject to share buy-back and were held in treasury. Where the Employee Benefit Trust purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. At the year end, 1,811,951 shares (2016: 908,886 shares), costing £5,102,590 (2016: £3,723,609), were held in relation to matching shares of the SIP scheme. 108 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 27. Share-based payments The Group operates a number of share-based payment schemes for executive directors and other employees. The Group has no legal or constructive obligation to repurchase or settle any of the options in cash. The total cost recognised in the income statement was £1,828,000 in the year ended 31 December 2017 (2016: £2,465,000), comprising £1,944,000 (2016: £2,261,000) of equity-settled share-based payments, and a credit of £116,000 (2016: charge of £204,000) in respect of cash-settled share-based payments for the dividend accrual associated with those options. Employer’s NI is being accrued, where applicable, at the rate of 13.8%, which management expects to be the prevailing rate at the time the options are exercised, based on the share price at the reporting date. The total NI credit for the year was £205,000 (2016: charge of £12,000). The following table analyses the total cost between each of the relevant schemes, together with the number of options outstanding: IPO plan Long term incentive plan Deferred share bonus plan Share incentive plan Outstanding at 31 December 2017 2016 Charge £’000 — 753 119 956 1,828 Number of options (thousands) — 4,027 103 1,812 5,942 Charge £’000 322 1,252 128 763 2,465 Number of options (thousands) — 3,225 123 909 4,257 A summary of the main features of each scheme is given below. The schemes have been split into two categories: executive schemes and other schemes. For further details on executive schemes, see the remuneration report on pages 44 to 57. Executive schemes Long term incentive plan (LTIP) The LTIP is open to executive directors and designated senior management, and awards are made at the discretion of the Remuneration Committee. Awards are subject to market and non-market performance criteria and generally vest over a three-year period. Deferred share bonus plan (DSBP) The Group operates a DSBP for executive directors and other senior employees whose bonus awards are settled partly in cash and partly in nil-cost share options at the discretion of the Remuneration Committee. The number of options that will vest is subject to market performance criteria over a three-year period and continued service. Other schemes Share incentive plan (SIP) An HMRC approved share incentive plan was introduced in October 2013. Under the SIP, eligible employees are invited to make regular monthly contributions into a scheme operated by Capita. Ordinary shares in the Company are purchased at the current market price and since May 2016 an award of two matching shares is made for every three shares acquired by an employee, subject to a vesting period of three years from the date of each monthly grant. Prior to May 2016, the award comprised one matching share for every two shares acquired by an employee. The aggregate number of share awards outstanding for the Group is shown below: 2017 2016 Executive schemes* LTIP Number of options (thousands) 3,225 2,700 — (1,898) 4,027 Other schemes Executive schemes* Other schemes DSBP Number of options (thousands) SIP * Number of options (thousands) IPO Number of options (thousands) LTIP Number of options (thousands) DSBP Number of options (thousands) SIP * Number of options (thousands) 123 — — (20) 103 909 1,062 (36) (123) 1,812 1,221 — (1,221) — — 2,033 2,455 — (1,263) 3,225 59 90 — (26) 123 449 604 — (144) 909 At 1 January Granted Exercised Lapsed At 31 December * Executive schemes are granted at £Nil consideration and SIP matching shares are granted at £Nil consideration. The LTIP awards that were granted on 21 March 2014 and on 8 September 2014 lapsed during the year, as minimum threshold levels set out in the performance conditions were not met. Annual Report 2017 Countrywide plc 109 Strategic reportCorporate governanceFinancial statements 27. Share-based payments continued Share options outstanding at the end of the year have the following expiry date (and all have £Nil exercise prices): Grant – vest LTIP grants 21 March 2014–21 March 2017 8 September 2014–8 September 2017 16 March 2015–16 March 2018 31 March 2015–31 March 2018 21 September 2015–21 September 2018 22 March 2016–22 March 2019 26 September 2016–22 March 2019 Expiry date 21 March 2024 8 September 2024 16 March 2025 31 March 2025 21 September 2025 22 March 2026 22 March 2026 26 September 2016–26 September 2019 26 September 2026 2 May 2017 – 2 May 2020 14 June 2017 – 14 June 2020 29 September 2017 – 2 May 2020 DSBP 22 May 2015–22 May 2018 5 May 2016–5 May 2019 SIP Monthly rolling grants and vesting three years later 2 May 2027 14 June 2027 2 May 2027 22 May 2025 5 May 2026 Exercise price pence Share options (thousands) 2017 2016 — — — — — — — — — — — — — — — — 491 — 77 1,171 138 23 1,751 345 31 41 62 288 246 598 24 100 1,666 222 81 — — — 43 80 1,812 5,942 909 4,257 The following information is relevant to the determination of the fair value of the awards granted during the year under the schemes: Option pricing model Share price at grant date Weighted average fair value of options granted during the year Exercise price Weighted average share price at date of exercise Weighted average contractual life Expected dividend yield Risk-free interest rate Volatility LTIP (TSR condition) LTIP (EPS condition) DSBP Share incentive plan Monte Carlo/ Stochastic Black Scholes Fair value at grant date Fair value at grant date 108p–527p 108p–527p 352p–576p 114p–579p 66p 0p n/a 144p 0p n/a n/a 0p n/a 151p 0p 151p 2.98 years 2.98 years 3 years 3 years 1.56–6.94% 1.56–6.94% 2.6–4.26% 0.07–0.85% 19.96–41.9% n/a n/a 0.43–0.8% n/a n/a n/a n/a 110 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 28. Other reserves The following table provides a breakdown of ‘other reserves’ shown on the consolidated statement of changes in equity: Merger reserve £’000 Hedging reserve £’000 Foreign exchange reserve £’000 Available-for-sale financial assets reserve £’000 Balance at 1 January 2016 Currency translation differences Disposal of fair value of available-for-sale financial assets Movement in fair value of available-for-sale financial assets Cash flow hedge: fair value losses Cash flow hedge: deferred tax on losses Utilisation of treasury shares for IPO options Purchase of treasury shares Balance at 1 January 2017 Currency translation differences Share placing Transfer of reserves Movement in fair value of available-for-sale financial assets Cash flow hedge: fair value gain Cash flow hedge: deferred tax on gain Purchase of treasury shares Balance at 31 December 2017 — — — — — — — — — — 36,634 (36,634) — — — — — — — — — (2,367) 473 — — (1,894) — — — — 2,030 (410) — (274) (428) 136 — — — — — — (292) (30) — — — — — — 28,151 — (29,943) 2,132 — — — — 340 — — — 1,627 — — — (322) 1,967 Treasury share reserve £’000 (2,241) — — — — — 4,246 (18,100) (16,095) — — — — — — (1,397) (17,492) Total £’000 25,482 136 (29,943) 2,132 (2,367) 473 4,246 (18,100) (17,941) (30) 36,634 (36,634) 1,627 2,030 (410) (1,397) (16,121) The following describes the nature and purpose of each reserve within shareholders’ equity: Merger reserve Placing of ordinary shares, referred to in note 26, was concluded through a cashbox structure. The distributable merger reserve created on 9 March 2017 has subsequently been transferred to retained earnings. Hedging reserve The hedging reserve represents the fair value movements on the interest swap to hedge the interest cash flows on the first proportion of the revolving credit facility in alignment with forecast drawdowns. Foreign exchange reserve The foreign exchange reserve represents the difference arising from the changes to foreign exchange rates upon assets and liabilities of overseas subsidiaries. Available-for-sale financial assets reserve The available-for-sale financial assets reserve represents the unrealised gain arising on the revaluation of these assets. Treasury share reserve The treasury share reserve represents the consideration paid when the Company acquires its own shares and holds them as treasury shares, as well as when the Employee Benefit Trust purchases the Company’s equity share capital, until the shares are reissued. See note 26 for full details of treasury shares held. Retained earnings Cumulative net gains and losses recognised in the Group income statement and pension scheme gains and losses, movement in fair value of available-for-sale financial assets and deferred tax on share-based payments recognised in the statement of comprehensive income. 29. Acquisitions during the prior year During the prior year the Group acquired ten businesses. The total consideration paid was £39.8 million and goodwill recognised was £19.7 million. The proforma revenue and adjusted EBITDA generated by these businesses in 2016 was £24.7 million and £5.1 million respectively. Annual Report 2017 Countrywide plc 111 Strategic reportCorporate governanceFinancial statements 30. Operating lease commitments – minimum lease payments Commitments under non-cancellable operating leases due are as follows: Within one year Later than one year and less than five years After five years 2017 2016 Property £’000 24,310 51,192 16,367 91,869 Vehicles, plant and equipment £’000 12,215 10,465 53 22,733 Property £’000 23,417 48,658 18,371 90,446 Vehicles, plant and equipment £’000 14,763 20,753 — 35,516 At 31 December 2017, the Group had sub-leased a number of surplus premises and was entitled to receive rents under non-cancellable leases as follows: 2017 £’000 472 743 21 1,236 2016 £’000 385 755 150 1,290 31 December 2017 Loans and receivables £’000 — 81,787 22,533 104,320 Available for sale £’000 17,085 — — 17,085 31 December 2017 Derivatives used for hedging £’000 Other financial liabilities at amortised cost £’000 — — 337 — 337 211,140 3,360 — 76,882 291,382 31 December 2016 Loans and receivables* £’000 — 94,834 45,326 140,160 Available for sale £’000 16,058 — — 16,058 Total £’000 17,085 81,787 22,533 121,405 Total £’000 211,140 3,360 337 76,882 291,719 Total £’000 16,058 94,834 45,326 156,218 Sub-leases Within one year Later than one year and less than five years After five years 31. Financial instruments Financial instruments by category Assets as per balance sheet Available-for-sale financial assets Trade and other receivables excluding prepayments Cash and cash equivalents Liabilities as per balance sheet Borrowings (excluding finance lease liabilities) Finance lease liabilities Derivative financial instruments Trade and other payables excluding non-financial liabilities Liabilities as per balance sheet Available-for-sale financial assets Trade and other receivables excluding prepayments Cash and cash equivalents * Restated following further disaggregation of other receivables for 2016 (see note 17). 112 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 31. Financial instruments continued Financial instruments by category continued Liabilities as per balance sheet Borrowings (excluding finance lease liabilities) Finance lease liabilities Derivative financial instruments Trade and other payables excluding non-financial liabilities 31 December 2016 Derivatives used for hedging £’000 Other financial liabilities at amortised cost £’000 Total £’000 — — 2,367 — 2,367 289,476 289,476 3,750 — 80,953 374,179 3,750 2,367 80,953 376,546 32. Financial risk management Financial risk factors The Group is exposed through its operations to one or more of the following financial risks: • cash flow and fair value interest rate risk; • liquidity risk; • counterparty credit risk; and • price risk. The policy for managing these risks is set by the Board following recommendations from the chief financial officer. Certain risks are managed centrally, while others are managed locally following guidelines communicated from the centre. The policy for each of the above risks is described in more detail below. Cash flow and fair value interest rate risk The Group’s interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by cash held at variable rates. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group manages its cash flow interest rate risk on the first proportion of the revolving credit facility by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Under the interest rate swaps the Group agrees with other parties to exchange, monthly, the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional amounts. The RCF has therefore been classified as a fixed rate liability in the table below as it is underpinned by the fixed interest rate swap. The interest profile of the Group’s financial assets and liabilities are as follows: Floating rate assets Fixed rate assets Interest-free assets Total financial assets Floating rate liabilities Fixed rate liabilities Interest-free liabilities Total financial liabilities 2017 £’000 22,564 609 98,232 121,405 337 213,500 77,882 291,719 2016* £’000 5,313 40,408 110,497 156,218 71,644 222,949 81,953 376,546 * Restated following further disaggregation of other receivables for 2016 (see note 17). The average rate at which the fixed rate liabilities were fixed in 2017 was 3.56% (2016: 3.58%) and the average period for which the liabilities were fixed was 365 days (2016: 365 days). There is no material difference between the book and the fair values of the financial assets and liabilities. The interest payable on the revolving credit facility is at variable rates but is subject to an interest rate swap to hedge the interest cash flows (see note 21). The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s liabilities secured on a floating basis which are managed centrally. The following table demonstrates the sensitivity to a reasonably possible change in interest rates on the portion of liabilities exposed to the floating rates. Annual Report 2017 Countrywide plc 113 Strategic reportCorporate governanceFinancial statements 32. Financial risk management continued Cash flow and fair value interest rate risk continued Increase in basis points Effect on profit before tax (£’000) Decrease in basis points Effect on profit before tax (£’000) 2017 £’000 100 (3) (50) 2 2016 £’000 100 (749) (50) 374 Liquidity risk The liquidity risk of each Group entity is managed centrally by the Group treasury function which monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs whilst maintaining sufficient headroom on its undrawn committed borrowing facilities. The Group aims to mitigate liquidity risk by managing cash generation of its operations and investment strategy. Investment decisions are carefully selected with authorisation limits operating up to Group Board level and cash payback periods as applied as part of the investment appraisal process. The Group is also cash generative as demonstrated by the cash from operations. The requirement to pay creditors is managed through future cash generation and, if required, the revolving credit facility. The Group monitors its risk of a shortage of funds by daily cash reporting. This reporting considers maturity of both its financial investments and financial assets (e.g. trade receivables and other financial assets) and projected cash flows from operations. The Group’s objective is to maintain a balance between continuity of funding and flexibility for investment. All surplus cash held by the operating entities is transferred to Group treasury and managed centrally to maximise the returns on deposits through economies of scale. The type of cash instrument used and its maturity date will depend on the Group’s forecast cash requirements. The Group maintains an overdraft facility with a major banking corporation to manage any unexpected short term cash shortfalls. The Group has a £275 million revolving credit facility which incurs interest payments on defined one, three or six-month periods. The Group’s discounted financial liabilities (excluding available-for-sale financial assets) at the year end were as follows: Trade payables Deferred consideration Borrowings Finance lease liabilities Derivative financial instruments Accruals and other payables 2017 £’000 20,461 3,550 211,140 3,360 337 52,871 291,719 2016 £’000 16,333 6,164 289,476 3,750 2,367 58,456 376,546 The table below analyses the Group’s financial 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 contractual undiscounted cash flows. In less than one year In more than one year but not more than two years In more than two years but less than three years In more than three years but not more than four years In more than four years but less than five years Over five years 2017 £’000 68,624 7,573 210,959 4,280 — 1,001 2016 £’000 65,718 11,968 4,163 293,076 988 1,045 292,437 376,958 114 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 32. Financial risk management continued Counterparty credit risk The Group’s financial assets (excluding available-for-sale financial assets) at the year end were as follows: Cash and cash equivalents Trade receivables Amounts due from customers for contract work Other receivables 2017 £’000 22,533 68,918 3,356 9,513 104,320 2016* £’000 45,326 80,054 3,368 11,412 140,160 * Restated following further disaggregation of other receivables for 2016 (see note 17). As stated in note 17, trade and other receivables are current assets and are expected to convert to cash over the next twelve months. There are no significant concentrations of credit risk within the Group. The Group is exposed to credit risk from sales. It is Group policy, implemented locally, to assess the credit risk of major new customers before entering contracts. The majority of customers use the Group’s services as part of a housing transaction and consequently the sales are paid from the proceeds of the house sale. The majority of the commercial customers, and the major lenders and customers of the Surveying and Asset Management businesses, are large financial institutions and as such the credit risk is not significant. The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the balance sheet date. The following table presents a breakdown of the gross trade receivables between the three main types of customer: Individual customers Major lenders Other commercial customers 2017 £’000 15,130 10,607 47,392 73,129 2016 £’000 31,797 10,346 41,332 83,475 The Group treasury function manages the Group’s cash balances and seeks to achieve reasonable rates of interest, but preservation of the capital is the overriding priority. A list of accepted deposit institutions is maintained and their credit ratings are kept under review. The following table presents a breakdown of cash at bank and short term deposits: Aa3 Aa2 A1 A3 Other 2017 £’000 1,668 — 2,927 17,698 240 22,533 2016 £’000 — 10,445 32,780 1,975 126 45,326 Price risk The Group is exposed to price risk because of investments held by the Group and classified on the consolidated balance sheet as available- for-sale amounting to £17,085,000 (2016: £16,058,000). If the price used in the 2017 year-end valuation had decreased by 5% the carrying value of the investment and the unrealised gain recorded within the statement of comprehensive income would have reduced by £0.8 million. 33. Capital management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of debt (subject to certain restrictions under the revolving credit facility), adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Please note the change in revolving credit facility items and related covenants, and the suspension of dividend payments for 2017 in the chief financial officer’s review on pages 26 to 27. The Group defines capital as the total of equity shareholders’ funds and long term borrowings net of available cash balances: Borrowings (note 20) Cash and cash equivalents (note 18) Net debt Shareholders’ equity Total capital Gearing ratio 2017 £’000 214,500 (22,533) 191,967 309,137 501,104 38% 2016 £’000 293,226 (45,326) 247,900 479,548 727,448 34% Annual Report 2017 Countrywide plc 115 Strategic reportCorporate governanceFinancial statements 33. Capital management continued During the year, the Group has complied with any capital restrictions and covenant requirements in respect of leverage and interest cover ratios associated with the revolving credit facility. Net debt excludes derivative financial instruments. Details of the interest rate swap liability are disclosed in note 21. Fair value estimation The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined, in accordance with IFRS 13 ‘Fair value measurement’, as follows: • inputs other than quoted prices (included in Level 1) that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and • inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2017: Assets Available-for-sale financial assets Liabilities Derivative financial instrument – interest rate swap Contingent consideration Level 2 £’000 Level 3 £’000 Total £’000 15,766 1,319 17,085 337 — — 13,162 337 13,162 The following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2016: Assets Available-for-sale financial assets Liabilities Derivative financial instrument – interest rate swap Contingent consideration Level 2 £’000 Level 3 £’000 Total £’000 14,139 1,919 16,058 2,367 — — 13,163 2,367 13,163 There was no change in valuation technique from that applied at 31 December 2016 to the investment property fund (within available-for-sale financial assets), which is based on the receipt of a net asset valuation statement from the trustees on a quarterly basis, and the fair value hierarchy of the investment within the fund has remained at Level 2. The fair value of the investment property fund at 31 December 2017 has been arrived at on the basis of a valuation carried out at that date by CBRE Limited, independent valuers not connected with the Group. The valuation conforms to International Valuation Standards. The fair value was determined based on comparable market transactions on arm’s length terms and has been based on the Market Rent valuation technique. The fair values of Level 2 derivatives are estimated by discounting the future contractual cash flows using appropriate yield curves based on quoted market rates at the current period end. Fair value measurements using significant unobservable inputs (Level 3) and valuation processes The following changes were made in Level 3 instruments for the years under review: Opening balance at 1 January Acquisitions Amortisation Impairment Contingent consideration paid Gains and losses recognised in profit or loss Closing balance at 31 December 2017 Available-for-sale financial assets £’000 1,919 — (35) (565) — — 1,319 Contingent consideration in a business combination 13,163 — — — (3,930) 3,929 13,162 Available-for-sale financial assets £’000 449 1,504 (34) — — — 1,919 2016 Contingent consideration in a business combination 8,072 — — — (1,743) 6,834 13,163 Put options £’000 2,700 (2,700) — — — — — The fair value of contingent consideration is undertaken using a discounted cash flow based on management’s expectation of performance of the underlying entities, consistent with operating plans approved. This method continues to be based on unobservable data, and therefore there have been no changes in valuation techniques adopted in the year and no changes in fair value hierarchies in respect of these liabilities. 116 Countrywide plc Annual Report 2017 Financial statementsNotes to the financial statements continued 33. Capital management continued The contingent consideration relates to amounts payable in the future on eight acquisitions undertaken in prior years require the Group to pay in cash a potential undiscounted maximum aggregate amount of £26.1 million. The amounts payable are based on the amounts agreed in the contracts and based on the future profitability of each entity acquired. In valuing each liability, estimates have been made as to the future profitability of each entity based on management’s expectation of performance, consistent with operating plans approved. Each of these contingent consideration arrangements require the vendors to remain in employment and as such have been treated as a post-combination employment expense and are being accrued over the relevant periods of one to five years specific to each of the agreements with remaining periods of up to three years. £24.8 million of this contingent consideration is also subject to performance conditions being satisfied. There are target EBITDA levels which must be achieved in order to realise the full payment, with a reduced payment made if targets are not fully met. Accruals for contingent consideration will be reviewed at each period end as future earn-out assumptions are revisited and any credits to the income statement in respect of downward revisions to estimates will be treated in the same way. £7.5 million of this potential contingent consideration is payable in less than one year and there is no material difference in out-turn anticipated. £17.9 million of the potential contingent consideration is payable, on two material acquisitions, between one to three and at five years after the acquisition dates (with residual periods of one and three years remaining) depending on the profitability of those subsidiaries in the relevant years and the former owners being continuously employed over the earn-out period. The fair value of the related contingent consideration liability, estimated by applying the income approach, was revisited at the year end and accrued at £5.2 million, are based on assumed profitability. If the future profitability of the entities was to decline, with a reduction in EBITDA by 10%, the size of the contingent consideration would decrease by approximately £4.2 million. The Group’s finance department performs the valuations of financial instruments measured at fair value required for financial reporting purposes, including Level 3 fair values. This team reports directly to the chief financial officer and the Audit and Risk Committee. The fair value of all other financial assets and liabilities approximates to their carrying value. 34. Related party transactions Key management compensation is given in note 6(b). Other related party transactions are as follows: Trading transactions Related party relationship Joint venture Joint venture Transaction type Purchases by Group Rebate received/receivable The Buy To Let Group – Subsidiary Loan payable Oaktree Capital Management Director’s fee paid Transaction amount Balance (owing)/owed 2017 £’000 (2,057) 918 141 40 2016 £’000 (2,415) 2,165 109 40 2017 £’000 (156) 42 1,840 10 2016 £’000 (169) 1,134 1,699 10 These transactions are trading relationships which are made at market value. There is a loan payable within The Buy To Let Group Limited of £1,590,000 (and associated interest) that is payable to the joint shareholder and director in February 2019 with interest payable at 8% per annum. The Company has not made any provision for bad or doubtful debts in respect of related party debtors nor has any guarantee been given during 2017 regarding related party transactions. 35. Events after the balance sheet date On 2 February 2018 the Company agreed an amendment letter relating to its term and revolving credit facility with its lender partners which provides the Company with the financial flexibility to invest in the business as it takes action to restore the sales and lettings business back to profitable growth. Annual Report 2017 Countrywide plc 117 Strategic reportCorporate governanceFinancial statements Company balance sheet As at 31 December 2017 Fixed assets Investments in subsidiaries Current assets Trade and other receivables Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Share capital Share premium Hedging reserve Treasury share reserve Profit and loss account Total shareholders’ funds Note 2017 £’000 2016 £’000 5 6 7 8 10 386,372 386,372 241,922 52 241,974 (634) 241,340 627,712 254,476 40,063 294,539 (338) 294,201 680,573 (208,637) (289,380) 419,075 391,193 2,413 211,838 (274) (17,492) 222,590 419,075 2,197 211,838 (1,894) (16,095) 195,147 391,193 The notes on pages 120 to 124 form an integral part of the Company (registration number: 08340090) financial statements. As disclosed in note 1, the Company’s loss for the financial year was £11,139,000 (2016: £8,646,000). These financial statements on pages 118 to 124 were approved by the Board of directors and signed on its behalf by: Himanshu Raja Chief financial officer 8 March 2018 118 Countrywide plc Annual Report 2017 Financial statements Company statement of changes in equity For the year ended 31 December 2017 Balance at 1 January 2016 Loss for the year Other comprehensive (expense)/income Cash flow hedge: fair value losses Cash flow hedge: deferred tax on losses Total other comprehensive expense Total comprehensive expense Transactions with owners Issue of shares for IPO options Share-based payment transactions Purchase of treasury shares Utilisation of treasury shares for IPO options Dividends paid Transactions with owners Balance at 1 January 2017 Loss for the year Other comprehensive income/(expense) Cash flow hedge: fair value gain Cash flow hedge: deferred tax on gain Total other comprehensive income Total comprehensive income/(expense) Transactions with owners Issue of share capital Transfer of reserves Share-based payment transactions Purchase of treasury shares Transactions with owners Balance at 31 December 2017 Note Share capital £’000 Share premium £’000 2,196 211,839 — — — — — 1 — — — — 1 — — — — — (1) — — — — (1) 2,197 211,838 — — — — — — — — — — 9 4 9 10 216 — — — 216 — 36,634 — (36,634) — — — 2,413 211,838 Merger reserve £’000 Hedging reserve £’000 Treasury share reserve £’000 Profit and loss account £’000 Total £’000 — — — — — — — — — — — — — — — — — — — — — — — — (2,241) 238,577 450,371 — (8,646) (8,646) (2,367) 473 (1,894) (1,894) — — — — — — — — — — — (2,367) 473 (1,894) (8,646) (10,540) — — 2,242 2,242 — (18,100) — (18,100) — — 4,246 (4,246) — — (32,780) (32,780) — (13,854) (34,784) (48,638) (1,894) (16,095) 195,147 391,193 — 2,030 (410) 1,620 1,620 — — — — — — — — — — — (11,139) (11,139) — — — 2,030 (410) 1,620 (11,139) (9,519) — 36,850 — 36,634 — — 1,948 1,948 (1,397) — (1,397) (1,397) 38,582 37,401 (274) (17,492) 222,590 419,075 Annual Report 2017 Countrywide plc 119 Strategic reportCorporate governanceFinancial statements Notes to the Company financial statements 1. General information and accounting policies (a) Basis of preparation The separate financial statements of Countrywide plc (‘the Company’) have been prepared in accordance with The Companies Act 2006 as applicable to companies using Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of derivative financial assets and liabilities measured at fair value through profit or loss, and in accordance with the Companies Act 2006 (‘the Act’). The preparation of the financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. The principal accounting policies are set out below and have been applied consistently throughout the year. As permitted under section 408 of the Act, the Company has elected not to present its own income statement for the year. The loss for the financial year was £11,139,000 (2016: £8,646,000). The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with FRS 101: • paragraphs 45(b) and 46 to 52 of IFRS 2 ‘Share-based payment’ (details of the number and weighted average exercise prices of share options, and how the fair value of goods and services received was determined); • IFRS 7 ‘Financial instruments: Disclosures’; • paragraphs 91 to 99 of IFRS 13 ‘Fair value measurement’ (disclosure of valuation techniques and inputs used for fair value measurement of assets and liabilities); • The following paragraphs of IAS 1 ‘Presentation of financial statements’: • 10(d) (statement of cash flows); • 16 (statement of compliance with all IFRS); • 38A (requirement for minimum of two primary statements, including cash flow statements); • 38B-D (additional comparative information); • 111 (cash flow statement information); and • 134-136 (capital management disclosures); • IAS 7 ‘Statement of cash flows’; • paragraph 30 and 31 of IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ (requirement for the disclosure of information when an entity has not applied a new IFRS that has been issued but is not yet effective); • paragraph 17 of IAS 24 ‘Related party disclosures’ (key management compensation); and • the requirements in IAS 24 ‘Related party disclosures’ to disclose related party transactions entered into between two or more members of a group. (b) Going concern Please refer to note 2 of the consolidated financial statements. (c) Investments Investments in subsidiaries are held at historical cost less provision for impairment. The carrying values of investments are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. (d) Income tax Income tax on the profit or loss for the year presented comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 120 Countrywide plc Annual Report 2017 Financial statements 1. General information and accounting policies continued (e) Share-based payments The cost of granting share options and other share-based remuneration to employees and directors is recognised through the income statement. These are equity settled and therefore the fair value is measured at the grant date. Where the share awards have non-market-related performance criteria the Company has used the Binomial Lattice and Black Scholes option valuation models to establish the relevant fair values. Where the share awards have TSR market-related performance criteria the Company has used the Monte Carlo simulation valuation model to establish the relevant fair values. The resulting values are amortised through the income statement over the vesting period of the options and other grants. For awards with non-market-related criteria, the charge is reversed if it appears probable that the performance criteria will not be met. The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction. (f) Dividend income Dividend income from subsidiary undertakings is recognised at the point the dividend has been declared. (g) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. (h) Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The Company has designated certain derivatives as a cash flow hedge and documented at inception of the transaction the relationship between the hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in note 21 to the consolidated financial statements. The fair value of derivatives has been calculated by discounting all future cash flows by the market yield curve at the balance sheet date. Movements in the hedging reserve in other comprehensive income are shown within the statement of changes in equity. The full fair value of a hedging derivative is classified as a non-current liability when the remaining hedged item is more than twelve months from maturity. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to profit or loss in the period when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within ‘Finance costs’. (i) Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognised when paid. (j) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in share premium as a deduction from the proceeds. Where the Employee Benefit Trust purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. 2. Critical accounting judgements and estimates The preparation of the financial statements requires the directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectation of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, given the uncertainty surrounding the assumptions and conditions upon which the estimates are based. The directors consider that the following estimates and judgements are likely to have the most significant effect on the amounts recognised in the Company’s financial statements. Going concern Please refer to note 3 of the consolidated financial statements. Investments in subsidiaries and intercompany receivables The directors periodically review investments in subsidiaries and intercompany receivables for possible impairment when events or changes in circumstances indicate, in management’s judgement, that the carrying value of an asset may not be recoverable. Such indicating events would include a significant change in market conditions or future operating cash flows. The Company did not record any impairment charges during the year ended 31 December 2017. Fair value of derivative financial instruments The fair values of the Company’s derivative financial instruments are determined by discounting future cash flows by the market yield curve at the balance sheet date. Valuations at the balance sheet date are received from each of the counterparties to the Company’s interest rate swap and are determined using the individual valuation models of each counterparty. Annual Report 2017 Countrywide plc 121 Strategic reportCorporate governanceFinancial statements 3. Employee costs The only employees of Countrywide plc are the executive and non-executive directors. Details of the employee costs associated with the directors are included in the directors’ remuneration report on page 52 and are summarised below. Wages and salaries Share-based payments Social security costs Post-employment benefits – salary supplement 2017 £’000 1,694 236 240 150 2016 £’000 1,489 763 219 137 2,320 2,608 The information disclosed in the Group’s consolidated financial statements under IFRS 2 ‘Share-based payment’ is within note 27, providing further information regarding the Company’s equity-settled share-based payment arrangements. Details of the highest paid director’s aggregate emoluments, amounts receivable under long term incentive schemes and payments in lieu of pension entitlements are disclosed within the directors’ remuneration report on page 52. 4. Dividends Amounts recognised as distributions to equity holders in the year: – final dividend for the year ended 31 December 2016 of nil pence (net) per share (2015: 10.0 pence (net) per share) – interim dividend for the year ended 31 December 2017 of nil pence (net) per share (2016: 5.0 pence (net) per share) Total The directors do not recommend the payment of a final dividend in respect of the year ended 31 December 2017. 5. Investments in subsidiaries Cost At 1 January 2017 and 31 December 2017 Accumulated impairment At 1 January 2017 and 31 December 2017 Net book amount 2017 £’000 2016 £’000 — — — 21,963 10,817 32,780 2017 £’000 386,372 — 386,372 At 31 December 2017, the Company owned directly the whole of the issued and fully paid ordinary share capital of its subsidiary undertaking, Countrywide Group plc, a company registered in the UK whose principal activity was that of investment holding company. Interests in Group undertakings, held indirectly by the Company, are detailed within the appendix of the consolidated financial statements, which form part of these financial statements. 6. Trade and other receivables Amounts falling due within one year Amounts owed by Group undertakings Group relief receivable Deferred tax asset (note 9) Prepayments and accrued income Other debtors 2017 £’000 2016 £’000 238,729 250,308 2,892 220 66 15 3,372 698 84 14 241,922 254,476 Amounts owed by subsidiary undertakings are unsecured and payable on demand. Interest is received at base rate per annum. 7. Creditors: amounts falling due within one year Trade creditors Other creditors 122 Countrywide plc Annual Report 2017 2017 £’000 67 567 634 2016 £’000 55 283 338 Financial statementsNotes to the Company financial statements continued 8. Creditors: amounts falling due after more than one year Bank borrowings Derivative financial instruments Capitalised banking fees Other creditors 2017 £’000 2016 £’000 210,000 290,000 337 (1,700) — 2,367 (3,223) 236 208,637 289,380 At the year end, the facility was a £340 million RCF, with no term loan elements, and an additional £60 million accordion facility, with any outstanding balance repayable in full on 20 March 2020. Interest was payable based on LIBOR plus a margin of 3.0%. The margin is linked to the leverage ratio of the Group and the margin rate is reviewed twice a year (and can vary between 1.75% and 3.0%). The RCF is available for utilisation subject to satisfying fixed charge, interest cover and leverage covenants and £80 million was repaid during the period (see note 20 of the consolidated financial statements). On 2 February 2018 the Company agreed an amendment relating to the RCF, originally dated 20 March 2013, which was due to expire in March 2020 (see note 12). The RCF is now £275 million, with additional £60 million accordian facility, with a margin of 3.25%. Capitalised banking fees are being amortised over the duration of the RCF, until March 2020. On 1 June 2016 the Group entered into an interest rate swap to hedge the interest cash flows on the first proportion of the RCF in alignment with forecast drawdowns. Details of the derivative financial instrument are disclosed in note 21 to the consolidated financial statements. 9. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 17%–19% (2016: 17%–20%). The movement on the deferred tax account is shown below: Deferred tax asset at 1 January Charged to income statement Credited to other comprehensive income Deferred tax asset at 31 December Deferred tax asset expected to unwind within one year Deferred tax asset expected to unwind after one year 2017 £’000 698 (68) (410) 220 60 160 220 2016 £’000 1,138 (913) 473 698 84 614 698 Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax assets to the extent that it is probable that these assets will be recovered through future taxable profits. The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12) during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. Origination and reversal of temporary differences Share-based payments Cash flow hedge Origination and reversal of temporary differences Share-based payments Cash flow hedge There are no unused tax losses. 2017 Charged to income £’000 Credited to other comprehensive income/equity £’000 (68) — (68) 2016 — (410) (410) Charged to income £’000 Credited to other comprehensive income/equity £’000 (913) — (913) — 473 473 Asset £’000 157 63 220 Asset £’000 225 473 698 Annual Report 2017 Countrywide plc 123 Strategic reportCorporate governanceFinancial statements 10. Called up share capital Called up issued and fully paid ordinary shares of 1 pence each At 1 January 2017 Share capital issued At 31 December 2017 Number 219,692,972 21,610,467 241,303,439 £’000 2,197 216 2,413 On 9 March 2017, the Company placed 21,610,467 ordinary shares in the capital of the Company, raising gross proceeds of £37.8 million. The proceeds, net of £968,000 transaction costs, are shown in the statement of changes in equity. At 31 December 2017, 3,371,972 (2016: 3,371,1972) of the shares disclosed above have been subject to share buy-back and were held in treasury. Where the Employee Benefit Trust purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. At the year end, 1,811,951 shares (2016: 908,886 shares), costing £5,102,590 (2016: £3,723,609), were held in relation to matching shares of the SIP scheme. 11. Auditors’ remuneration The auditors’ remuneration for the audit of the Company is disclosed in note 7 to the consolidated financial statements. Fees paid to the auditors for non-audit services to the Company are not required to be disclosed in the Company’s financial statements because consolidated financial statements are prepared which disclose such fees. 12. Events after the balance sheet date On 2 February 2018 the Company agreed an amendment letter relating to its term and revolving credit facility with its lender partners which provides the Company with the financial flexibility to invest in the business as it takes action to restore the sales and lettings business back to profitable growth. 124 Countrywide plc Annual Report 2017 Financial statementsNotes to the Company financial statements continued Appendix Related undertakings of the Group as at 31 December 2017 Company name Countrywide Group plc A3 Countrywide Limited Abbotts Estate Agents Ltd Accord Properties Limited Acornsrl Limited Advanced Lettings (Ashford) Limited Aeromind Limited AgencyPro Limited Alan de Maid Limited Alan Harvey Property Services Limited Anderson Estate Agents Limited APW Holdings Limited APW Management (Cobham) Limited APW Management (Esher) Limited APW Management (Sunninghill) Limited APW Management (Weybridge) Limited APW Management Services Limited Ashton Burkinshaw (Franchising) Limited Ashton Burkinshaw Limited Associated Employers Limited Austin & Wyatt Limited Avon Property (Wilts) Limited Bairstow Eves Countrywide Limited Bairstow Eves Limited Baker Harris Saunders Group Limited Balanus Limited Barrys (Surrey) Limited Beresford Adams Limited Berkeley Private Capital Ltd Berry Bros & Legge Limited Blundells Property Services Limited Bridgfords Countrywide Limited Bridgfords Limited Buckell & Ballard Limited Bullock and Lees (Christchurch) Limited Bureau Properties Limited Buy to Let Club Limited CAG Overseas Investments Limited Capital Fine Homes Limited Capital Private Finance Limited Cardinal Mortgage Service Limited (The) Carol Whyte Property Management Limited Carson & Company Estate Agents Limited Castle Moat at Taunton Limited Cathedral Lettings and Management Limited CEA Holdings Limited Chamberlains Lettings Limited Chamberlains SGS Holdings Limited Chappell & Matthews Limited Chattings Limited CHK (Cobham) Ltd CHK (Esher) Limited Cliftons International Ltd Registered address (refer to note) Country of incorporation % owned 1 2 2 2 2 2 3 4 2 2 2 2 2 2 2 2 2 2 2 3 2 2 2 2 2 1 2 2 5 2 2 2 2 2 2 1 5 2 2 5 2 6 2 2 2 2 2 2 2 2 2 2 2 UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ indirect (Group interest) Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Annual Report 2017 Countrywide plc 125 Strategic reportCorporate governanceFinancial statements Company name Connell Wilson Limited Copleys of York Limited Cosec Management Services Limited Countrywide Conveyancing Limited Countrywide Corporate Property Services Limited Countrywide Estate Agents Countrywide Estate Agents (South) Limited Countrywide Estate Agents FS Limited Countrywide Estate Agents Nominees Limited Countrywide Financial Services (South) Limited Countrywide Home Movers Services Limited Countrywide Mortgage Services Limited Countrywide North Limited Countrywide Part Exchange Solutions Limited Countrywide Principal Services Limited Countrywide Property Auctions Limited Countrywide Property Care Solutions Limited Countrywide Property Lawyers Limited Countrywide Relocation Solutions Limited Countrywide Repossession Solutions Limited Countrywide Residential Investments Limited Countrywide Residential Lettings Limited Countrywide Surveyors Limited Countrywide UK Limited CRL Company Directors Limited CRL Company Secretaries Limited Curtis and Bains Limited Dickinson Harrison Limited Duck & Hedges Group Ltd Duck & Hedges Limited Edinburgh Property Letting Limited Elite Property (Berks) Ltd Entwistle Green Limited Executive Property Services Residential Ltd Faron Sutaria & Company Limited Finders Keepers Limited Fitz-Gibbon Limited Ford Property Services Limited Frank Innes Countrywide Limited Freeman Forman Letting Limited Freeman Forman Limited Fulfords Estate Agents Limited Gascoigne Pees Estate Agents Limited Gatlink Limited Geering & Colyer (Kent) Limited Gertingpet Limited Gilpro Management Limited GR2 Limited Greene & Co Maintenance Limited Griffiths & Charles Limited Grosvenor Private Clients Limited Hamptons Estates Limited Hamptons Franchising Limited Hamptons Group Limited 126 Countrywide plc Annual Report 2017 Registered address (refer to note) Country of incorporation % owned 2 2 7 2 8 5 1 2 2 2 2 2 2 2 5 1 2 9 2 2 2 1 5 2 7 7 2 2 2 2 6 2 2 2 3 2 2 2 2 2 2 2 2 2 2 2 6 2 2 2 2 3 2 3 UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ indirect (Group interest) Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Financial statementsAppendix continued Company name Hamptons International (Hong Kong) Limited Hamptons International (India) Private Limited Hamptons International Mortgages Limited Hamptons Professional Limited Hamptons Property Consultancy Limited Harecastle Limited Harrisons Estate Agents Limited Harvey Donaldson & Gibson Limited HCW Estate Agents Limited HCW Group Limited HCW Insurance Services Limited Herring Baker Harris East Anglia Ltd Herring Baker Harris Europe Ltd Herring Baker Harris Nominees Limited Hetheringtons Hetheringtons Countrywide Hetheringtons Estate Agents Limited Holland Mitchell Limited Holmes Pearman Limited Home From Home Limited Housemans Management Company Limited Housemans Management Secretarial Limited Howunalis Limited Howuncea Howunsay Hurst Independent Financial Services Limited Ian Peat Property Management Limited Ikon Consultancy Limited Interlet Property Management Limited IPCS Group Services Limited Isite.UK.Com Limited J M Property Lettings Limited JP & Brimelow (Lettings and Property Management) Limited JAM Advisors Limited JK Lettings Limited John Curtis Lettings & Management Limited John Curtis Limited John D Wood & Co. (Residential & Agricultural) Limited John D Wood & Co. Plc John Frances Limited John Francis (Wales) Limited Joustroute Limited Kean Kennedy Ltd Kilroy Estate Agents Limited King & Chasemore Limited Knights of Bath Limited Knightsbridge Estate Agents and Valuers Limited Labyrinth Management Limited Lambert Smith Hampton (City) Limited Lambert Smith Hampton (NIreland) Limited Lambert Smith Hampton Group (Overseas) Limited Lambert Smith Hampton Group Limited Lambert Smith Hampton Limited Lambert Smith Hampton Limited (Ireland) Registered address (refer to note) Country of incorporation 10 Hong Kong 11 3 2 20 7 2 12 2 2 2 2 2 2 2 2 1 2 2 2 7 7 2 2 2 2 2 3 2 2 2 2 2 13 2 2 2 3 2 2 2 2 12 2 2 2 2 7 2 3 2 3 3 India UK UK Barbados UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK 19 Ireland Direct/ indirect (Group interest) % owned 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Annual Report 2017 Countrywide plc 127 Strategic reportCorporate governanceFinancial statements Company name Lampons Residential Limited Land and New Homes Countrywide Limited Lanes Land Limited Lanes Property Agents (Cheshunt) Limited Leasehold Legal Services Limited Leasemanco Limited Let Lucas Rental Specialists Limited Let Verde Limited Letmore Group Ltd Letmore Lettings Ltd Letmore Management Ltd Lets – Cover Limited Letters of Distinction Limited Life and Easy Limited Lifestyle Management (York) Co. Limited Lighthouse Property Services Ltd London & Country Property Auctions Limited Loyalstone Limited LS1 Limited Maitland Lettings Limited Mann & Co. (Kent) Limited Mann & Co. Limited Mann Countrywide Limited Merchant Executive Properties Limited Merchant Lettings (Ayrshire) Limited Merchant Lettings (Edinburgh) Limited Merchant Lettings (Paisley) Limited Merchant Lettings Limited Merchant Maintenance Limited Michael Rhodes Property Management Limited Mid Cornwall Letting Limited Miller Estate Agents Limited Milton Ashbury (Property Agents) Limited Modernmode Limited Morris Dibben Limited Mortgage Intelligence Holdings Limited Mortgage Intelligence Limited Mortgage Next Limited Mortgage Next Network Limited Mortgage Next Packaging Limited Mountford Limited Nest Lettings & Management Limited New Homes Mortgage Solutions Limited New Space (Derby) Limited New Space Margate Ltd Ohmes Limited Palmer Snell Limited Patterson Bowe Ltd Pebble Property Management and Lettings Limited Personal Homefinders Limited Phillips Brown Limited PKL Group Limited PKL Limited PKL Management Limited 128 Countrywide plc Annual Report 2017 Registered address (refer to note) Country of incorporation % owned 2 5 5 5 2 7 2 2 2 2 2 2 2 14 2 2 1 2 2 2 2 2 2 6 6 6 6 6 6 2 2 2 2 2 2 14 14 14 14 2 2 2 5 2 2 2 2 3 2 2 2 2 2 2 UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ indirect (Group interest) Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Financial statementsAppendix continued Company name Plaza Letting Agents Limited Poolman Harlow Limited Portfolio Letting Agents & Consultants Ltd Potteries Property Services Limited Preston Bennett Holdings Limited Preston Bennett Limited Project Second JG Limited Property Management (North East) Limited Propertywide Limited PSP Lettings Ltd R.A. Bennett & Partners Ltd Realty Property Solutions Limited Regal Lettings and Property Management Kent Limited Relocation Solutions Countrywide Limited Rentons Estate Agents Limited Resi Capital Limited Resi Capital Member Limited Richard Dolton Limited Richard Trowbridge Estate & Lettings Limited RPT Management Services Plc Russells Lettings Limited Saville Home Management Limited Securemove Property Services 2005 Limited Securemove Property Services Limited ServPro Limited Slater Hogg & Howison Limited Slater Hogg Mortgages Limited Snape Lettings Ltd Spencers Estate Agents Limited Spencers Surveyors Limited Sprint Property Acquisitions Ltd Statehold Limited Stoberry Lettings Ltd Stratton Creber Limited Sundale Properties Limited SurveyingPro.co.uk Limited Sutton Kersh Auctions & Sales Ltd Sutton Kersh Holdings Ltd Tablesign Limited Taylors Estate Agents Ltd The Butler Club Limited The Buy To Let Business Limited The Buy To Let Group Limited The Flat Managers Limited The Good Mortgage Company Ltd The Greene Corporation Limited The Letting Store Limited The London Residential Agency Limited The Property Sales & Rentals Company Limited Thomas James Lettings Limited Thomson & Moulton Limited Tingleys Lettings Limited TitleAbsolute Limited TLS Wilts. Limited Registered address (refer to note) Country of incorporation % owned 2 2 6 2 2 2 2 2 1 2 2 2 2 2 1 1 1 2 2 2 2 2 2 2 1 2 5 2 2 2 2 3 2 2 2 2 2 2 2 2 2 5 5 2 5 3 2 2 2 2 2 2 15 2 UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 51% 51% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ indirect (Group interest) Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Annual Report 2017 Countrywide plc 129 Strategic reportCorporate governanceFinancial statements Company name TM Group (UK) Limited Town & County Residential Limited Tucker Gardner Residential Limited Umberman Limited United Surveyors Limited Vanet Property Asset Management Limited Vista UK Residential Investment 1 (GP) LLP Vista UK Residential Investment 1 Limited Partnership Vista UK Residential Real Estate (GP) LLP Vista UK Residential Real Estate Limited Partnership Waferprime Limited Wallhead Gray & Coates Watson Bull & Porter Limited Watts Regeneration Limited Westcountry Property Auctions Limited Wildabout Properties Limited Wilson Peacock Estate Agents Limited Woods Block Management Limited WSB Property Management Limited Wyse Lettings Limited Young & Butt Limited Young Lettings Limited Registered address (refer to note) Country of incorporation % owned 16 2 2 2 5 2 17 17 18 18 2 2 2 2 1 2 2 2 2 2 2 2 UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK 33% 100% 100% 100% 100% 100% 50% 50% 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct/ indirect (Group interest) Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Registered offices: 1. County House, Ground Floor, 100 New London Road, Chelmsford, Essex, CM2 0RG, United Kingdom 2. 3. 4. 5. 6. 7. 8. 9. 3rd Floor, 1 Ashley Road, Altrincham, Cheshire, WA14 2DT, United Kingdom 7th Floor, United Kingdom House, 180 Oxford Street, London, W1D 1NN, United Kingdom 17 Duke Street, Chelmsford, Essex, CM1 1HP, United Kingdom 88-103 Caldecotte Lake Drive, Caldecotte, Milton Keynes, Buckinghamshire, MK7 8JT, United Kingdom c/o Countrywide Lettings Ltd, 71 Candleriggs, Glasgow, Lanarkshire, G1 1NP, United Kingdom North Point, Stafford Drive, Battlefield Enterprise Park, Shrewsbury, SY1 3BF, United Kingdom Tamar House, Brants Bridge, Bracknell, RG12 9BQ, United Kingdom Lee House, 90 Great Bridgewater Street, Manchester, M1 5RR, United Kingdom 10. Unit 1001B, 10th Floor, Kinwick Center, 32 Hollywood Road, Central, Hong Kong 11. F-509, 5th Floor, Ashish Corporate Tower, Plot No. 18, Karkardooma Community Centre, New Delhi, India 12. Suite 3.7, 3rd Floor, Standard Buildings, 94 Hope Street, Glasgow, G2 6PH, United Kingdom 13. Suite 2A, St Davids Court, Union Street, Wolverhampton, WV1 3JE, United Kingdom 14. Roddis House, 4th Floor, 4-12 Old Christchurch Road, Bournemouth, Dorset, BH1 1LG, United Kingdom 15. Churchgate House, 2nd Floor, 56 Oxford Street, Manchester, M1 6EU, United Kingdom 16. 1200 Delta Business Park, Swindon, Wiltshire, SN5 7XZ 17. Lloyds Chambers, 1 Portsoken Street, London, E1 8HZ, United Kingdom 18. 15 Atholl Crescent, Edinburgh, EH3 8HA, United Kingdom 19. 86-88 Leeson Street Lower, Dublin 2, DO 2 A668, Ireland 20. Heritage House, Pinfold Street, Bridgetown, Barbados 130 Countrywide plc Annual Report 2017 Financial statementsAppendix continued Corporate headquarters Countrywide House 88–103 Caldecotte Lake Drive Caldecotte Milton Keynes MK7 8JT Registrar Link Asset Services* The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Corporate advisors Independent auditors PricewaterhouseCoopers LLP Bankers Royal Bank of Scotland plc Lloyds Bank plc HSBC Bank plc Abbey National Treasury Services plc Barclays Bank Plc AIB Group (UK) plc Brokers Jefferies Hoare Govett Barclays Bank plc, acting through its investment bank Solicitors Slaughter and May Company Information Contacts Executive chairman Peter Long Chief financial officer Himanshu Raja Company secretary Gareth Williams Website www.countrywide.co.uk Registered office County House Ground Floor 100 New London Road Chelmsford Essex CM2 0RG Registered in England 08340090 Financial calendar AGM Interim results 25 April 2018 July 2018 *Shareholder enquiries The Company’s registrar is Link Asset Services. They will be pleased to deal with any questions regarding your shareholding or dividends. Please notify them of your change of address or other personal information. Their address details are above. Link Asset Services is a trading name of Link Market Services Limited. Link shareholder helpline: 0871 664 0300 (calls cost 12 pence per minute plus network extras) (Overseas: +44 371 664 0300) Email: enquiries@linkgroup.co.uk Share portal: www.countrywide-shares.co.uk Shareholders are able to manage their shareholding online and facilities include electronic communications, account enquiries, amendment of address and dividend mandate instructions. Annual Report 2017 Countrywide plc 131 Strategic reportCorporate governanceFinancial statements This report includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ‘believes’, ‘estimates’, ‘anticipates’, ‘expects’, ‘intends’, ‘may’, ‘will’ or ‘should’ or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, the industry in which we operate and potential acquisitions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, the development of the industry in which we operate and the effect of acquisitions on us may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause those differences include, but are not limited to: • a decline in the number of transactions, prices or commission levels in the UK residential property market, whether due to the impact of macroeconomic factors or otherwise; • increased or reduced competition in the industry in which we operate; • changes in, or our failure or inability to comply with, Government laws or regulations; • the loss of any of our important commercial relationships; and • any increase in our professional liabilities or any adverse development in the litigation or other disputes to which we are a party. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. We urge you to read the operating and financial review for a more complete discussion of the factors that could affect our future performance and the industry in which we operate. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur. We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this report. 132 Countrywide plc Annual Report 2017 Financial statementsForward-looking statements Printed by Park Communications on FSC® certified paper. Park is an EMAS certified company and its Environmental Management System is certified to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled. This document is printed on Core Silk, a paper containing 100% virgin fibre sourced from well managed, responsible, FSC® certified forests. The pulp used in this product is bleached using an elemental chlorine free (ECF) process. C o u n t r y w i d e p l c A n n u a l R e p o r t 2 0 1 7 Countrywide plc Countrywide House 88–103 Caldecotte Lake Drive Caldecotte Milton Keynes MK7 8JT +44 (0)1908 961000 investor@countrywide.co.uk www.countrywide.co.uk
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