Equals Money
Annual Report 2017

Plain-text annual report

FairFX Group Plc Annual Report and Consolidated Financial Statements For the year ended 31 December 2017 Contents Directors and advisors Strategic report Corporate governance report Directors’ report Audit committee report Directors’ remuneration report Directors’ responsibilities statement Independent auditor’s report Consolidated statement of comprehensive income Consolidated and Company statement of financial position 3 4 - 9 10 - 12 14 -15 17 - 19 20 - 21 22 24 -29 30 31 Consolidated and Company statement of changes in equity 32 -33 Consolidated statement of cash flows Company statement of cash flows 34 35 Notes to the consolidated financial statements 36 - 67 2 > Annual Report 2017 Directors & Advisors Directors: J Pearson (Chairman) I A I Strafford – Taylor (Chief Executive Officer) A Chowdhury R M Head Company Secretary: A Quirke Registered Number: 08922461 (England and Wales) Registered Office: Bankers: Auditor: Solicitors: Nominated Advisor and Broker: 3rd Floor Thames House Vintners’ Place 68 Upper Thames Street London EC4V 3BJ England Barclays Bank Plc 11th Floor, 1 Churchill Place Canary Wharf London E14 5HP England KPMG LLP One Snowhill Snow Hill Queensway Birmingham West Midlands B4 6GH England Bates Wells & Braithwaite London LLP 10 Queen Street Place London EC4R 1BE England Cenkos Securities Plc 6.7.8 Tokenhouse Yard London EC2R 7AS England Annual Report 2017 > 3 Strategic report – Chairman’s Statement About FairFX FairFX is a leading challenger brand in banking and payments that disintermediates the incumbent banks with a superior user experience and low-cost operating model. Our business enables personal and business customers to make easy, low-cost multi-currency payments in a broad range of currencies and across a range of products all via one integrated system. The FairFX platform facilitates payments either direct to Bank Accounts or at 32 million merchants and over 1 million ATM’s in a broad range of countries globally via Mobile apps, the Internet, SMS, wire transfer and MasterCard/VISA debit cards. FairFX provides banking and payment services to both personal and business customers through four channels: Currency Cards, Physical Currency, International Payments and Bank Accounts. The Currency Card and Physical Currency offerings facilitate multiple overseas payments at points of sale and ATM’s whereas the International Payments channel supports wire transfer foreign exchange transactions direct to Bank Accounts. For Corporates, FairFX has a market-leading business-expenses solution based around its corporate prepaid platform and card. This service can yield significant savings on a Corporate’s expenses and procurement through better controls and improved transparency, and streamline the downstream administrative processes, thus saving costs. Through the acquisition of CardOneBanking in August 2017, FairFX now has the capability to offer retail and business bank accounts with all the functionality you would expect from a bank, namely faster payments, BACs, direct debits, international payments and a debit card. Chairman’s statement 2017 was a transformational year for FairFX and marked a step-change in delivering on the Group’s strategy, with a major acquisition having been completed, over £1 billion of turnover generated and achieving profitability for the first time since its admission to AIM. As a Group, turnover is measured by the gross value of currency transactions sold (as reported in the statutory income statement) plus the gross value of customer funds deposited into banking services bank accounts. Having acquired Q Money Limited in January, which brought with it an e-money licence, FairFX has set a course to evolve its currency payments platform and develop its capabilities as a digital banking services provider, with an emphasis on the SME sector. The acquisition of CardOneBanking, in August 2017, has enabled the Group to fast-track its digital banking plans and the successful integration has seen CardOneBanking’s 4 > Annual Report 2017 The Group’s continual focus on improving its offering and user experience has been integral to its success to date. digital banking technology incorporated into the Group with planned synergies already being realised. In order to finance the acquisition of CardOneBanking and provide additional growth capital for the enlarged Group, we completed a placing and open offer to raise net proceeds of £26 million (after costs directly attributable to the share issuance). This was the Group’s largest fundraise to date and the high level of investor demand received is a major endorsement of FairFX’s success, its growth ambitions and the strength of the management team. We are pleased with the support of both new and existing shareholders during this process and we look forward to a long and successful relationship with them. The Group’s core businesses have continued to perform well, with Currency Card and International Payments turnover up 17.9% and 19.5% respectively. The Group has also made further investment in its technology and platform functionality to improve user experience and facilitate repeat business and cross-selling. Significant enhancements were made in the year to both Corporate and Retail offerings across all platforms, namely web, mobile-responsive web-usage and app. Further development of user experience will remain a key theme for 2018 as we extract more efficiency from our functionally- rich platform. As the business continues to scale and data protection issues increase in importance to the market and regulators, the Board believes that it is vital to continue to proactively insource more of its supply chain, thereby removing intermediaries, increasing the quality of services offered, optimising risk, and enabling greater control of processes and, in turn, improving gross margins. Our recent acquisition of City Forex in early 2018 demonstrates just one manifestation of this strategy, with City Forex being a partner to FairFX since 2007 and providing the Group’s Travel Currency service. While it is immediately earnings enhancing, the acquisition also increases economies of scale and adds product innovation through City Forex’s proprietary platform, which also adds functionality to the existing FairFX platform. The acquisition also brings an opportunity to cross-sell FairFX’s products to City Forex’s customers, particularly FairFX’s Corporate Expenses Card and Platform. The Group’s continual focus on improving its offering and user experience has been integral to its success to date. As a challenger brand in a rapidly evolving sector, FairFX recognises the importance of delivering a service which fits with the changing needs of consumers and businesses in order to stay ahead of the competition and retain its customers. As such the Directors believe the Group is in a strong position to execute its ongoing strategy to grow its customer base, broaden its customer offering and further establish itself in the digital banking sector. £1.1 billion turnover generated 17.9%increase in Currency Card turnover 19.5%increase in International Payments turnover £26 million net proceeds raised Acquisitions CardOneBanking and City Forex John Pearson Non-Executive Chairman 22 April 2018 Annual Report 2017 > 5 Strategic report – Chief Executive’s Statement Trading performance I am pleased to report on the Group’s significant achievements during its financial year ended 31 December 2017 (“FY 2017”). We had another successful year with strong turnover and revenue growth coupled with a move into full year profitability for the first time since the admission of the Group to AIM. The results demonstrate how the stated strategy of the Group, namely adding scale and efficiency coupled with product innovation focused on SME digital banking, are bearing fruit. The focus of the Group’s activity in the year and the significant achievements made all fit within these two key themes. FairFX Group completed the acquisitions of two businesses during the year; Q-Money and CardOneBanking. Q-Money, acquired in January, was the first step towards adding a digital banking capability to the Group and brought with it an existing e-money licence, as well as significant expertise in payments and banking. The Group then completed the acquisition of CardOneBanking in August, which transformed the digital- banking services the Group could offer. Accordingly, the Group’s 2017 results reflect both the performance of the core FairFX business lines, which performed strongly, plus the additional activity of Banking. Group turnover rose 40.5% to in excess of £1.1 billion (2016: £0.8 billion), generating an adjusted EBITDA of £1.0 million (2016: loss £1.5 million). Within the total turnover, like-for-like (excluding acquired business activity post acquisition) turnover from core foreign exchange services was £936.6 million, up 17.3% (2016: £798.3 million). Banking turnover, generated from the CardOneBanking acquisition, contributed £184.9 million representing trading for the period since the acquisition completed in August 2017. Within the non-banking turnover of £936.6 million, growth was evenly spread across our products with Prepaid Currency Cards and Travel Cash up 14.5% to £402.9 million (2016: £351.8 million) and International Payments, comprising Dealing and FairPay, up 19.5% to £533.7 million (2016: £446.5 million). Within Prepaid Currency Cards and Travel Cash, the Corporate Expenses Platform, which enables businesses to better control their expenses and procurement, continued its strong year- on-year growth trend, up 60.6% on the previous year to £130.3 million. On the Retail consumer side, the prepaid card showed modest growth, rising 2.2% to £224.9 million whilst Travel Cash fell by 5.8% to £47.7 million. The performance on cards within Retail is encouraging when measured against the high level of 6 > Annual Report 2017 We look forward to delivering further growth and increased profitability in the coming year and continuing to build shareholder value. competition in this space and we will be launching additional features in 2018 which should further boost growth. The performance in Travel Cash was partly due to reducing the amount we were prepared to pay to acquire a customer to fit within our policy, implemented in 2017, to cap cost per acquisition (CPA) for all of our products at less than or equal to the year 1 value of a customer. The acquisition of City Forex, in early 2018, will ensure that we can look at improving our margins in the cash space to drive growth. gross profit from core foreign exchange services was up 39% at £10.4 million (2016: £7.5 million). Gross profit from Banking was £1.5 million representing the result post the acquisition of CardOneBanking in late August. Group gross profit is stated after the deduction of direct costs which rose by 29.3% to £3.5 million (2016: £2.7 million). As direct costs increased proportionately less than revenues, gross profit margin improved to 77.2% (2016: 73.5%) showing that the focus on costs in the year is bearing fruit and this trend is expected to continue into 2018. The Group’s push into the corporate market can be demonstrated by the growth of corporate turnover as % of total turnover. For FY 2017, corporate turnover was 52.3% (2016: 45.5%) of total turnover, an increase of 15.1%. Revenue for the year rose 51.7% to £15.5 million (2016: £10.2 million) with revenue margin improving to 1.38% (2016: 1.28%), demonstrating that the Company can deliver sustainable top line growth whilst more than maintaining margins. Within the total revenue number, like-for-like revenue from core foreign exchange services was up 33% at £13.6 million (2016: £10.2 million) with growth driven by International Payments up 35.3% to £5.1 million and Currency Cards up 33.4% to £8.1 million. Revenue from Banking was £1.9 million representing the result post the acquisition of CardOneBanking in late August. Gross profit for FY 2017 was £11.9 million (2016: £7.5 million), up 59.8% on 2016. Within the total gross profit, like-for-like Group overheads increased to £11.4 million during FY 2017, an increase of 28.4%. Excluding £1.5 million of overheads incurred post-acquisition by CardOneBanking and Q-Money, overheads on a like-for-like basis grew by 11.1% as the Group continues to invest for growth, most notably in adding talent into design, product management and development. As illustrated in the table below, adjusted EBITDA (earnings before interest, tax, depreciation and amortisation charges, acquisition-related expenses, share-based payments and foreign exchange gains and losses) was £1.0 million (2016: £1.5 million loss). This significant improvement is a result of the top line growth whilst maintaining revenue margins and controlling direct costs and overheads. The Company is therefore optimally geared to take further advantage of top line growth by enjoying the economies of scale on payment processing that comes with higher transaction volume without significant increase in overheads. Adjusted EBITDA/PBT Calculation Statutory Net Profit / (Loss) Amortisation of acquisition intangibles Other amortisation charges Depreciation costs Tax Credit EBITDA Acquisition-related costs Share-based payments Foreign exchange loss / (gain) Adjusted EBITDA Other amortisation charges Depreciation costs Adjusted PBT 2017 £ 447,136 220,325 792 51,727 (217,687) 502,293 269,769 112,961 68,186 953,208 (792) (51,727) 900,690 2016 £ (1,440,190) – – 53,423 – (1,386,767) – 1,001 (119,507) (1,505,273) (53,423) (1,558,696) Annual Report 2017 > 7 Adjusted PBT (profit before tax, acquisition-related expenses, amortisation of acquisition intangibles, share-based payments and exchange rate gain or losses) for the Group was £0.9 million (2016: loss £1.6 million). Unadjusted PBT for 2017 was £0.2 million (2016: loss £1.4 million), an improvement of 116% and again illustrates the huge strides the Group has made over the year. The Group tax charge for the year was a credit of £217,687, comprising a £27,179 current tax credit for group tax relief and a deferred tax credit of £190,508 on share based payments. Profit after tax was £0.4 million (2016: loss £1.4 million) after adjusting for the current and deferred tax credits in 2017. The net cash position of the Group at 31st December 2017 was £52.0 million, comprising £34.2 million of client funds and £17.8 million of available cash. Accordingly, the Group has sufficient cash resources to continue implementing its growth strategy. People A key component for the success of the Group is to attract and retain talented people and this will continue to be a focus going forward. During the period, Ben Wynn was appointed as Chief Product and Marketing Officer, bringing with him over 18 years’ experience of building, promoting and scaling advanced products across mobile, digital and marketing landscapes. Ben’s appointment augments the already experienced Executive Committee of FairFX and he is driving positive change throughout the organisation. The acquisition of CardOneBanking in August of 2017 brought two major benefits to the Group in terms of people. Firstly, we acquired excellent new talent, from its Chief Executive Officer, Adam Rigler, his senior management team and the wider workforce. Both Adam and the CardOneBanking Chief Technology Officer, Andrew Phillips, are now part of the Group’s Executive Committee. Secondly, the acquisition allows the Group to widen its catchment area for recruitment as CardOneBanking is based in Chester and we are increasingly adding headcount where we can find the relevant talent, irrespective of the location between London and Chester. The net impact on Group average headcount from organic growth and the CardOneBanking acquisition was an increase from 66 to 101. The headcount total at the end of the year was 153, which comprised of 77 within FairFX and 76 within CardOneBanking. There were no changes to the Board of Directors in 2017. The Board remains committed to the success of the Group and continues to value high standards of corporate 8 > Annual Report 2017 governance. During the year, Bob Head, Non-Executive Director, was elected Chair of the Audit and Remuneration Committees. Bob brings an immense wealth of experience in corporate governance from his previous roles which will help the Board further elevate the Group’s corporate governance approach. Strategy As stated in our trading update released earlier this year, the strategic focus for the Group lies in two key areas. Firstly, to continue to achieve business efficiencies through a combination of increasing scale, selective internalisation of the supply chain and improved customer experience of our products. An example of this is our recent acquisition of City Forex which significantly increases the Group’s scale – see Quarter 1 update below for details. Secondly, to continue to roll out innovative new products with an emphasis on banking services for businesses, thereby building on the technology platform of CardOneBanking, which we acquired in August 2017. The business efficiency strategy has multiple strands to it: • • • • gaining full membership status of Mastercard in December 2017 meant that the Group can now issue its own cards and has selectively started to do so in 2018 as part of an overall card issuance strategy; increasing turnover of the Group means we can obtain better commercial terms from partners; selectively insourcing processes, reducing costs and improving speed of deploying new products; and investing in improving user experience across our platforms and products making it easier to become a customer and to transact. The innovation strategy is focused on the provision of digital banking services for the business consumer and thereby brings together the complementary strengths of FairFX and CardOneBanking. The first key step in this journey is the Fair Everywhere multi-currency bank account product, which is soon to launch in 2018. Fair Everywhere is targeted on the business sector and more specifically, SMEs, offering current accounts in multiple currencies. A pipeline of further innovations in this space is planned for 2018 and beyond. Finally, the Board will continue to evaluate accretive acquisition opportunities, as appropriate, in line with the Group’s strategy and in order to further strengthen the Group. Quarter 1 update The results for the first quarter 2018 are encouraging and support our expectations for the full year. Turnover for the first 3 months of 2018 (including CardOneBanking and City Forex) grew strongly and is up 125.9% on the prior year at £439.5 million (2017: £194.6 million). This growth has been driven by International Payments which is up 98.5% at £212.9 million (2017: £107.2 million) and Prepaid Currency Card turnover which increased 11.2% to £82.6 million (2017: £74.3 million), including corporate card volumes up 25.9% over prior year to £34.0 million (2016: £27.0 million). On a like-for-like basis, turnover from core foreign exchange services was up 31.6% to £256.1 million (2017: £194.6 million). Revenue (including CardOneBanking and City Forex) also grew strongly in the first quarter of 2018 with an 85.3% increase to £4.8 million (2017: £2.6 million). On a like-for-like basis, revenue from core foreign exchange services increased 18.7% to £3.1 million (2017: £2.6 million). Total customer numbers continue to expand rapidly with 26,909 new customers added in the first quarter, bringing the total to 755,894. Also during the period, the Group acquired City Forex for £6 million in cash, completing the transaction in February. City Forex has a substantial international payments and travel currency business that is serviced through an innovative proprietary system that processes both the Travel Currency and International Payments businesses with a high degree of automation. The system will be combined with FairFX’s existing platform to yield further efficiencies for the Group as well as increased capacity for growth. The opportunities for revenue enhancement for the Group from cross-selling FairFX products to City Forex customers are considerable, particularly for the FairFX Corporate Expense Platform. In addition, FairFX will utilise its existing infrastructure and marketing methodology to engage with the City Forex customer base. Outlook Based on the Q1 2018 performance, partnered with planned enhancements to further boost revenues and operational efficiency, myself and the Board remain confident that trading for the full year remains in line with market expectations. We look forward to delivering further growth and increased profitability in the coming year and continuing to build shareholder value. Ian Strafford - Taylor Chief Executive Officer 22 April 2018 40.5% turnover growth to £1.1 billion 51.7% revenue growth to £15.5 million 59.8% gross profit growth to £11.9 million (+39.1% on like for like basis) 163.3% increase in adjusted EBITDA to £1.0 million 157.8% increase in adjusted PBT to £0.9 million Milestone year of development with substantial growth in scale and diversification of operations 73,237 new customers added bringing the total to 728,985 Acquisition of Q Money Limited in January provided Group with e-money license to diversify business Oversubscribed fundraise of £26 million (net of expenses) to acquire digital banking provider, CardOneBanking Full MasterCard Membership granted, providing path to simplify supply chain Annual Report 2017 > 9 Corporate Governance report Statement of compliance The Directors recognise the value and importance of high standards of corporate governance. Accordingly, whilst the UK Corporate Governance Code does not apply to AIM companies, the Directors have regard to the requirements of the UK Corporate Governance Code to the extent they consider appropriate in light of the Group’s size, stage of development and resources. The Board will follow, so far as practicable, the recommendations set out in the corporate governance guidelines for smaller quoted companies published by the Quoted Companies Alliance. The corporate governance guidelines were devised by the Quoted Companies Alliance, in consultation with a number of significant institutional small company investors, as an alternative corporate governance code applicable to AIM companies. An alternative code was proposed because the Quoted Companies Alliance considers the UK Corporate Governance Code to be inapplicable for many AIM companies. The corporate governance guidelines state that: ‘‘The purpose of good corporate governance is to ensure that the company is managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the longer term’’. Board of Directors The Board is responsible for the overall management of the Group including the formulation and approval of the Group’s long-term objectives and strategy, the approval of budgets, the oversight of the Group’s operations, the maintenance of sound internal control and risk management systems and the implementation of Group strategy, policies and plans. Whilst the Board may delegate specific responsibilities, there is a formal schedule of matters specifically reserved for decision by the Board; such reserved matters include, amongst other things, approval of significant capital expenditure, material business contracts and major corporate transactions. The Board meets formally on a regular basis to review performance. Director biographies The FairFX Board is presently made up of the following Directors: John Pearson Non-Executive Chairman (date of appointment: 21 November 2014) Committees: Audit Committee, Remuneration Committee 10 > Annual Report 2017 John has considerable experience in the digital, media and broadcast industries. He was co-founder and CEO of Virgin Radio for 13 years. He was also Chairman of Shazam Entertainment, a smartphone-based music identification service; co-founder of World Architecture News.com; and a director of Ginger Media Group. John is also Chairman of Imagen Video Asset Management and a Board Director of Mirriad Advertising PLC. Ian Strafford-Taylor Chief Executive Officer (date of appointment: 4 March 2014) Ian is one of the Founders and has been a Director since 2007 and the Chief Executive Officer since 2012. He has held a number of senior banking roles, including Business Unit Controller and Head of International Securities Lending at Morgan Stanley, where he worked from 1985 to 1992. Following this, he moved to UBS where he worked for 13 years as Managing Director and Global Head of Securities Borrowing & Lending, Fixed Income Repo and Prime Brokerage. Ian is a Chartered Accountant, qualifying with Arthur Andersen in 1985. Robert Head Non-Executive Director (date of appointment: 20 July 2016) Committees: Audit Committee, Remuneration Committee Robert has held a variety of management roles including Regional Director for Old Mutual’s African interests, the joint founder of egg.com and the first CEO of smile.co.uk. His most recent roles were that of a Special Advisor to the Commissioner of SARS (South African Revenue Service) and prior to that CEO of Old Mutual’s Wealth Management Division. He is currently acting Chief Financial Officer of South African Airways. Robert is a qualified Chartered Accountant (ACA). Ajay Chowdhury Non-Executive Director (date of appointment: 28 July 2014) Committees: Audit Committee, Remuneration Committee Ajay is an experienced company director with expertise in digital media, digital retail, online and mobile industries. He is Partner and Managing Director of BCG Digital Ventures and was previously CEO of Seatwave Limited, an online ticket sales marketing company, Executive Chairman of a multi-channel marketing company, ComQi Group and Chairman of Shazam. Ajay is also currently a Trustee of Historic Royal Palaces. Role of the Board For the first time, reports relating to the activities of the audit committee and remuneration committee are included within the Annual Report. Effectiveness The Board has reviewed the independence of the Chairman and each of the Non-Executive Directors (“NEDs”) and considers them to be independent in character and judgement, with no relationships or circumstances that are likely to affect, or could appear to affect, their judgement. The Board paid particular attention to each of the NEDs having share options. These were granted at a time when the company was not profitable and needed to conserve cash flow. In the view of the Board the options are neither material to each of the NEDs nor the Company and each of the NEDs is very aware of their obligations to all stakeholders. The Company is committed to maintaining a healthy dialogue between the Board and all of its shareholders to enable shareholders to come to informed decisions about the Company. The Chairman is generally available to shareholders, and the AGM presents shareholders with an additional opportunity to communicate with the Board. The AGM is attended by the Board and is open to all the Group’s shareholders. At the Annual General Meeting held on June 6th 2017, the proposed resolutions received the following proportion of votes: Adoption of 2016 Annual Report and Consolidated Financial Statements Re-appointment of KPMG LLP as auditor to the Company and authority for the Directors to set the auditors’ remuneration Election and re-election of Directors Authority to allot shares Dis-application of pre-emption rights In Favour Opposed Withheld 100% 100% 100% 100% 0% 0% 0% 0% 99.99% 0.1% 0% 0% 0% 0% 0% The Board has established an audit committee and a remuneration committee and formally delegated duties and responsibilities as described below. The attendance record of each relevant Director at Board and committee meetings during 2017 is as follows: John Pearson Ian Strafford-Taylor Ajay Chowdhury Robert Head Board 9 Meetings 9 9 7 8 Audit Committee 3 Meetings Remuneration Committee 2 Meetings 3 N/A 3 3 2 N/A 2 2 Annual Report 2017 > 11 Audit committee Nomination committee The audit committee is responsible for monitoring the integrity of the Group’s financial statements, reviewing significant financial reporting issues, reviewing the effectiveness of the Group’s internal control and risk management systems and overseeing the relationship with the external auditor (including advising on their appointment, agreeing the scope of the audit and reviewing the audit findings). The audit committee comprises Robert Head, Ajay Chowdhury and John Pearson and is chaired by Robert Head. The audit committee will meet at least 3 times a year at appropriate times in the reporting and audit cycle and otherwise as required. The audit committee also meets regularly with the Group’s external auditor. Remuneration committee The remuneration committee is responsible for determining and agreeing with the Board the framework for the remuneration of the chairman, the executive Directors and other designated senior executives and, within the terms of the agreed framework, determining the total individual remuneration packages of such persons including, where appropriate, bonuses, incentive payments and share options or other share awards. The remuneration of non- executive Directors is a matter for the Board. No director is involved in any decision as to his or her own remuneration. The remuneration committee comprises Robert Head, John Pearson and Ajay Chowdhury and is chaired by Robert Head. The remuneration committee will meet at least twice a year and otherwise as required. The Board does not have a nomination committee. All matters that would normally be dealt with by a nomination committee are dealt with at the Board. The Board has agreed that a nomination committee will be formed in 2018. Share dealing code The Company has adopted, with effect from Admission, a share dealing code for Directors and applicable employees of the Group for the purpose of ensuring compliance by such persons with the provisions of the AIM Rules relating to dealings in the Company’s securities (including, in particular, dealing during close periods in accordance with Rule 21 of the AIM Rules). The Directors consider that this share dealing code is appropriate for a company whose shares are admitted to trading on AIM. The Company will take proper steps to ensure compliance by the Directors and applicable employees of the Group with the terms of the share dealing code and the relevant provisions of the AIM Rules (including Rule 21). The Corporate Governance Statement was approved and authorised for issue by the Board on 22 April 2018, and was signed on its behalf by: John Pearson Non-Executive Chairman 12 > Annual Report 2017 Annual Report 2017 > 13 Directors’ report The Directors present their annual report and consolidated financial statements for the year ended 31 December 2017. Financial reporting The consolidated financial statements for the year ended 31 December 2017 are set out on pages 30 to 67 for FairFX Group Plc. These have been prepared in accordance with the Group’s accounting policies under International Financial Reporting Standards (IFRS) as adopted by the European Union. Principal activities The principal activities of the Group during the year were to provide foreign exchange payment services and banking services to both private clients and corporations through prepaid currency cards, travel cash, international money transfers and current accounts. FairFX Plc and Spectrum Payment Services Limited are authorised by the Financial Conduct Authority under the Payment Services Regulations 2009 for the provision of payment services and Q Money One Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 for the provision of electronic money services. The principal activity of the parent Company is as an investment holding company of the FairFX companies. of reverse acquisition under IFRS 3 “Business Combinations” have been applied. The steps to restructure the Group had the effect of FairFX Group Plc being inserted above FairFX (UK) Limited. The holders of the share capital of FairFX (UK) Limited were issued fifty shares in FairFX Group Plc for one share held in FairFX (UK) Limited. The shares of the Company were admitted to trading on AIM on 5th August 2014. Post balance sheet event On 20th February 2018, the Group acquired the entire ordinary share capital of City Forex Limited. The initial consideration payable for the acquisition was £5,250,000, paid from existing cash. Further consideration of up to £750,000, payable from existing cash may be payable on 31 October 2018 subject to any completion accounts adjustment being applied and any claims under the warranties and indemnities. Dividends The Directors do not recommend the payment of a dividend for the year ended 31 December 2017 (2016: nil). Directors The following Directors have held office during the financial year and up to the date of approval of these financial statements. The Company was incorporated on 4 March 2014, and on 22 July 2014 acquired the entire shareholding of FairFX (UK) Limited (previously named FairFX Group Limited) through a share for share exchange. For the consolidated financial statements of the Group, prepared under IFRS, the principles I A I Strafford – Taylor A Chowdhury J Pearson R M Head 14 > Annual Report 2017 Directors’ interests The Directors who held office at 31 December 2017 held the following shares in the Company: I A I Strafford - Taylor Shareholding % 1.37% Ordinary 1p shares 2017 2,127,750 The Directors held the following unexercised share options in the Company: I A I Strafford - Taylor A Chowdhury J Pearson R M Head Auditor Option price (£) Number Granted Date Granted 0.22 0.36 0.36 0.30 0.36 0.30 0.58 1.16 1.74 0.30 0.30 192,950 1,789,300 1,535,750 750,000 88,889 50,000 120,000 120,000 120,000 250,000 133,333 28/07/2014 28/07/2014 28/07/2014 28/09/2016 28/07/2014 28/09/2016 01/11/2014 01/11/2014 01/11/2014 28/09/2016 28/09/2016 KPMG LLP have expressed their willingness to continue in office as auditors and a resolution seeking to reappoint them will be proposed at the forthcoming Annual General Meeting. Disclosure of information to auditor The directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditor is unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the company’s auditors is aware of that information. Going concern Based on the Group’s budgets and financial projections, the Directors are satisfied that the business is a going concern and therefore the financial statements have been prepared on a going concern basis. This assessment is based on whether there is sufficient liquidity and financing to support the business, the post balance sheet trading of the Group, the regulatory environment and the effectiveness of risk management policies. The Directors’ Report was approved by the Board on 22 April 2018 and signed on its behalf by: John Pearson Non-Executive Chairman Annual Report 2017 > 15 16 > Annual Report 2017 Audit Committee report During the year, the audit committee focused on the effectiveness of the controls across the Group, especially as the Group expanded with the acquisitions listed in the Chairman’s statement. Risk management is an area that the committee will continue to focus on over the coming year. Monitoring of the operational performance of the Group is an area of ongoing review. The focus is on a number of key areas; with the General Data Protection Regulation coming into effect and various recent scandals, increased focus on data governance within the Group is planned. The Group currently does not operate a “three lines of defence” model. Nor does it have a formal internal audit department. Given the scale of the Group, the audit committee believes this is acceptable now but needs to be kept under review. The audit committee appointed various third parties to give independent opinions on chosen topics that are regarded as potentially higher risk. Roles and responsibilities The committee is appointed by the Board; their primary duties are listed beneath the subheadings below, along with a brief description of sub-tasks: 1. Financial reporting a. b. c. d. e. consider the areas of risk and what is done to optimise these risks and ensure that these are communicated to the auditors; review significant financial reporting judgements and the application of accounting policies, including compliance with the accounting standards; ensure the integrity of the financial statements and their compliance with UK company law and accounting regulations; ensure the Annual Report and Accounts are fair, balanced and understandable and recommend their approval to the Board; monitor the integrity of announcements containing financial information 2. Internal controls a. b. monitor adequacy and effectiveness of the internal financial controls and processes, and ensuring any shortcomings are rectified at the earliest opportunity; where appropriate, ensure compliance with the UK Corporate Governance Code 3. Risk management a. review and provide oversight of the processes by which risks are managed and optimised 4. External audit a. b. c. d. e. manage the relationship with the Group’s external auditor; monitor and review the independence and performance of the external auditor and formally evaluate their effectiveness; review the policy on non-audit services carried out by the external auditor, taking account of relevant ethical guidance; negotiate and approve the external auditor’s fee, the scope of the audit and the terms of their engagement; make recommendations to the Board for the appointment or reappointment of the external auditor Annual Report 2017 > 17 Audit Committee report Committee composition The audit committee is currently comprised of the three Non-Executive Directors. The members that served on the committee during the year were John Pearson, Robert Head, and Ajay Chowdhury. Other meeting attendees included Andrew Walker and Dejan Randjelovic, both from KPMG, Ian Strafford-Taylor, FairFX Chief Executive Officer, Tony Quirke, FairFX Chief Financial Officer and company secretary, and John Zablocki, FairFX Financial Controller. The committee has given the opportunity for the various attendees to have closed meetings without the other attendees to debate any issues that may arise. This has not proved necessary. Committee activities during the year Financial statements and business reports • • Reviewed the 2016 Annual Report and Consolidated Financial Statements, and recommended that both be approved by the Board Reviewed the projected 2017 Cash Flow statement as prepared by the Chief Financial Officer; as a result, the Board concluded the business could be considered to be a going concern, and the financial statements could be prepared as such Risk management • Reviewed and debated the risk logs and the actions being taken to optimise risks • Considered what other risks should be considered by the business which may not have been captured by the risk logs • Informed external audit of risk areas the audit committee viewed as being material to their audit approach External audit • Debated and agreed the external audit strategy • Noted the adjusted and non-adjusted differences and asked for any comments on the highlights memo previously circulated to committee members • Acknowledged that the prepared financial statements represented a true and fair view of the Group’s affairs, were in accordance with IFRS and had been prepared in accordance with the Companies Act 2006. Their enquiries included regular management and KPI reporting, analytical review and sign off on key control accounts 18 > Annual Report 2017 • Reviewed progress in dealing with control issues raised by the external auditors in their management letter Other • Confirmation that the external auditor as part of its role as Group Auditor of the Group’s Consolidated Financial Statements would be appointed to audit Spectrum Financial Group Limited (“CardOneBanking”) • Compliance with laws and regulation including money laundering Governance The committee meets at least three times per year and routinely meets with the external auditor without the Executive Directors present. It is chaired by Robert Head, independent Non-Executive Director, who is a chartered accountant with recent and relevant financial experience. The Chairman has frequent meetings with the external auditors to ensure issues are being considered on a timely basis. The Group Chief Financial Officer and Group Financial Controller work closely with the committee Chairman to facilitate open communication and regular information flow. Each committee member brings a wealth of professional and practical knowledge and experience which is relevant to the Company’s industry. Such abilities ensure that the committee functions with competence and credibility. The committee receives regular updates on changes to financial accounting standards and reporting requirements, regulatory and governance changes and developments around risk management, fraud prevention and detection, and cyber security. In its advisory capacity, the committee confirmed to the Board, that based on its review of the Annual Report and Accounts and internal controls that support the disclosures, the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the necessary information for shareholders to assess the Company’s position and performance, its business model and strategy. Engagement of the external auditor and tenure KPMG was first appointed as external auditor in 2014. KPMG is required to rotate the audit partner responsible for the Group every five years and the current audit partner’s term will end after the 2018 audit, expected sometime around April 2019. The audit committee recommended that KPMG be re-appointed as the Company’s auditor at the 2017 Annual General Meeting, and this was approved with 100% of the votes cast in favour. As a matter of course, KPMG are not awarded any non-audit work; please refer to note 5 of the financial statements for more details regarding the breakdown of payments to the company auditor. Auditor independence At each meeting, the committee receives a summary of all fees, audit and non-audit, payable to the external auditor. A summary of fees paid to the external auditor is set out in note 5 to the Accounts. The external auditor confirmed its independence as auditor of the Company through written confirmation to the Company. thorough monitoring of the effectiveness of its internal controls and risk management; they maintain a good understanding of business performance, key areas of judgement and decision-making processes within the Group. Conflicts of interest An annual review is undertaken, facilitated by the Company Secretary, to identify any conflicts of interest that may impact upon Board members’ independence. All identified conflicts recorded on a register that is adopted by the Board. Conflicted Directors are not able to attend meetings where the conflicted matter is discussed and decisions are made. It has been determined that none of the Directors had or have an interest in any material contract relating to the business of the Company or any of its subsidiary undertakings. External audit effectiveness Significant issues The effectiveness of the external audit process is assessed by the committee, which meets regularly throughout the year with the audit partner and senior audit managers. The committee believes that sufficient and appropriate information is obtained to form an overall judgement of the effectiveness of the external audit process. The external audit effectiveness process findings from last year’s review were also incorporated into the audit processes this year. Risk management and internal controls Further details of risk management and internal controls are set out under note 19.2 of the consolidated financial statements. The committee is dedicated to the Significant issues and accounting judgements are identified by the committee, the finance team, or through the external audit process and are reviewed by the audit committee. R M Head Chair of the Audit Committee Annual Report 2017 > 19 remuneration for the 2017 financial year, together with their remuneration for the 2016 financial year, in each case before deductions for income tax and national insurance contributions (where relevant): Total Remuneration 2017 482,586 50,000 60,386 50,000 Total Remuneration 2016 433,742 30,000 60,186 7,919 30,000 Directors’ Remuneration report The Group has, for the first time, produced a report concerning the activities of the remuneration committee. The remuneration committee is currently comprised of the three Non-Executive Directors. The members that served on the committee during the year were John Pearson, Robert Head, and Ajay Chowdhury. Other meeting attendees included Ian Strafford-Taylor, FairFX Chief Executive Officer (except during discussions regarding the CEO’s remuneration, when he was excused from the proceedings of the meeting). Remuneration outcomes for 2017 Base salary The committee approved the increase of the Group Chief Executive Officer’s salary by £20,000; this was agreed to be appropriate due to performance, inflation and the increased scale of the business. Executive Directors I A I Strafford – Taylor Non-Executive Directors A Chowdhury J Pearson R M Head Annual bonus outcomes for the financial year The committee approved the bonus payment for 2016 to the Group Chief Executive Officer. Executive Directors I A I Strafford – Taylor Non-Executive Directors Total remuneration Single figure of total remuneration The following tables provide details of the Directors’ A Chowdhury J Pearson R M Head N Jeffery 20 > Annual Report 2017 Directors’ interest in long term incentive plan share options Director award date I A I Strafford – Taylor Option price (£) Number Granted Date Granted Earliest Exercise date Latest exercise date 28/07/2014 28/07/2014 28/07/2014 28/09/2016 28/09/2016 28/09/2016 A Chowdhury 28/07/2014 28/09/2016 28/09/2016 28/09/2016 J Pearson 01/11/2014 01/11/2014 01/11/2014 28/09/2016 28/09/2016 28/09/2016 R M Head 28/09/2016 28/09/2016 28/09/2016 0.22 0.36 0.36 0.30 0.30 0.30 0.36 0.30 0.30 0.30 0.58 1.16 1.74 0.30 0.30 0.30 0.30 0.30 0.30 192,950 1,789,300 1,535,750 250,000 250,000 250,000 88,889 16,667 16,667 16,667 120,000 120,000 120,000 83,333 83,333 83,333 44,444 44,444 44,444 Breakdown of executive bonus outcome as a percentage of maximum Total Remuneration Bonus outcome (% of max) 28/07/2014 28/07/2014 28/07/2014 28/09/2016 28/09/2016 28/09/2016 28/07/2014 28/09/2016 28/09/2016 28/09/2016 05/08/2016 03/11/2019 05/08/2016 03/11/2019 05/08/2016 03/11/2019 28/09/2017 27/09/2026 28/09/2018 27/09/2026 28/09/2019 27/09/2026 05/08/2016 03/11/2019 28/09/2017 27/09/2026 28/09/2018 27/09/2026 28/09/2019 27/09/2026 01/11/2014 01/11/2014 05/08/2016 03/11/2019 05/08/2016 03/11/2019 01/11/2014 05/08/2016 03/11/2019 28/09/2016 28/09/2016 28/09/2016 28/09/2016 28/09/2016 28/09/2016 2017 482,586 49 28/09/2017 27/09/2026 28/09/2018 27/09/2026 28/09/2019 27/09/2026 28/09/2017 27/09/2026 28/09/2018 27/09/2026 28/09/2019 27/09/2026 2016 433,742 47 R M Head Chair of the Remuneration Committee Annual Report 2017 > 21 Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations. them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Ian Strafford - Taylor Chief Executive Officer 22 April 2018 Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent Company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant and reliable; • • • state whether they have been prepared in accordance with IFRSs as adopted by the EU; assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to 22 > Annual Report 2017 Annual Report 2017 > 23 Overview Materiality: group fi nancial statements as a whole Coverage £116,000 (2016:£60,000) 0.75% of group revenue (2016: 4.2% of group loss before tax) 100% (2016: 100%) of Group revenue Risks of material misstatement vs 2016 Recurring risks Valuation of goodwill Income recognition Valuation of invest- ments in subsidiaries Event driven Acquisition accounting Independent Auditor’s report to the members of FairFX Group Plc 1. Our opinion is unmodifi ed We have audited the fi nancial statements of FairFX Group Plc (“the Company”) for the year ended 31 December 2017 which comprise the consolidated statement of comprehensive income, consolidated and Company statement of fi nancial position, consolidated and Company statement of changes in equity and consolidated and Company statement of cash fl ows, and the related notes, including the accounting policies in note 3. In our opinion: • the fi nancial statements give a true and fair view of the state of the Group’s and of the parent Company’s aff airs as at 31 December 2017 and of the Group’s profi t for the year then ended; • • • the Group fi nancial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); the parent Company fi nancial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and the fi nancial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfi lled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a suffi cient and appropriate basis for our opinion. 24 > Annual Report 2017 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most signifi cance in the audit of the fi nancial statements and include the most signifi cant assessed risks of material misstatement (whether or not due to fraud) identifi ed by us, including those which had the greatest eff ect on: the overall audit strategy; the allocation of resources in the audit; and directing the eff orts of the engagement team. These matters were addressed in the context of our audit of the fi nancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit signifi cance, were as follows: Acquisition accounting Accounting treatment: Our procedures included: The risk Our response Refer to page 17 (Audit Committee Report), page 39 (accounting policy) and page 54 (fi nancial disclosures). The consideration paid for the two acquisitions during the year comprised a mix of cash, shares and deferred/contingent consideration. The Directors were required to exercise judgement in the calculation of the contingent consideration, which was settled in own shares, and identifi cation and measurement of intangible assets. The contingent consideration is dependent on the achievement of certain performance obligations. Whilst the contingent consideration was not legally tied to employment, there was a risk that it may be linked to employment. The Directors prepared the acquisition balance sheets based on estimates of the fair value of assets and liabilities acquired. In particular the Group exercised judgment in selecting the most appropriate valuation method for the intangible assets acquired. The valuation methods included the use of forecast cash fl ows which required the directors to exercise judgment in determining the expected cash fl ows from the assets and the discount rates to be applied. Other intangibles were valued using the cost to recreate methodology, which also required estimation of cash fl ows. • Our sector experience: For each acquisition, with the involvement of valuation specialists, assessing and challenging the results of the purchase price allocation, including the identifi cation and measurement of intangible assets acquired and the fair value adjustments to assets and liabilities; • • • Test of details: Reading the acquisition agreements and assessing whether the assets and liabilities acquired and the form of the consideration paid/ payable refl ect the contractual terms; Test of details: Challenging whether some or all the contingent payments to the employee shareholder of one of the acquirees represented remuneration for their services as an employee rather than purchase consideration by investigating whether there was a direct relationship between the likelihood of the contingent consideration crystallising and the continued employment of the shareholder; Test of details: Testing the fair value of contingent consideration by challenging the expectation of achievement of performance obligations and the discount rate applied; • Our sector experience: Assessing the methodology and the assumptions used to value intangibles against our interpretation of the requirements of the relevant accounting standards and our knowledge of similar asset valuations; and • Assessing transparency: Assessing the adequacy of the Group’s disclosures in respect of the business combinations. Annual Report 2017 > 25 The risk Our response Goodwill Forecast-based valuation Our procedures included: (£13.0 million; 2016: £nil) Refer to page 17 (Audit Committee Report), page 42 (accounting policy) and page 53 (fi nancial disclosures). The calculation of the recoverable amount of goodwill is complex and subject to inherent uncertainty as it relies on key assumptions made by the Directors. As the goodwill is sensitive to changes in key assumptions, there is the risk that the goodwill will not be recoverable. • Our sector experience: Challenging the Directors’ identifi cation of and allocation of goodwill to CGUs; • Our sector experience: Evaluating, challenging, and testing the Group’s assumptions used in the annual impairment review of goodwill, in particular the forecast cash fl ows and the discount rate applied; • Historical comparison: Assessing the historical accuracy of forecasting by the Directors; • Sensitivity analysis: Performing sensitivity analysis on the key assumptions in the forecasts to assess if there are any reasonably foreseeable circumstances in which impairment could occur; and • Assessing transparency: Assessing the adequacy of the Group’s disclosures about the impairment assessment. Revenue Income recognition: Our procedures included: (£15.5 million; 2016: £10.2 million) Refer to page 17 (Audit Committee Report), page 40 (accounting policy) and page 47 (Revenue and segmental analysis disclosures). Revenue from the Currency Cards, FairPay, Dealing and Central segments is derived from the buying and selling of currency at spot rates, and is recognised as the diff erence between the rate off ered to clients and the rate the Group receives from its liquidity providers. The exchange rates used may be incorrect, leading to a material under and overstatements of revenue. Revenue is derived across 5 product segments and comprises a high volume of relatively low value individual transactions. Revenue may not be completely recorded or revenue may be recorded for transactions in the incorrect accounting period or that have been subsequently cancelled. Commercial arrangements with third party providers of Currency Cards, FairPay, Dealing, Banking and Central diff er across individual segments, such that the Group may be acting as principal or agent. An error in the assessment of these relationships may result in an incorrect presentation of the revenue. In the Currency Cards segment: • Data comparison: Reconciling system reports for the gross value of currency transactions sold to daily statements from the intermediary between the principal and the Group, and agreeing contracted exchange rates to statements from the currency provider for the gross value of currency transactions purchased; In the International Payments segments: • • • Test of details: Selecting a substantive statistical sample of FairPay and Dealing deals, and tracing the items to order details and bank statements and agreeing contracted exchange rates to statements from the currency providers for gross value of currency transactions purchased; Test of details: Reconciling payments per bank statements for December 2017 to FairPay deals reports; Test of details: Using computer assisted audit techniques to identify gaps in thesequential numbering of Dealing trades; In the Banking segment: • Expectation vs outcome: Developing an expectation of the current year balance based on our view of the number of accounts and relationships with revenue, including consideration of historical data; and In all segments: • Our sector experience: Assessing whether the Group is acting as an agent or principal by assessing the risks and responsibilities of the Group. 26 > Annual Report 2017 Investments in subsidiaries Low risk, high value Our procedures included: The risk Our response (£29.5 million; 2016: £11.2 million) Refer to page 17 (Audit Committee Report), page 43 (accounting policy) and page 54 (fi nancial disclosures). The carrying amount of the parent Company’s investments in subsidiaries represents 69% (2016: 100%) of the Company’s total assets. Their recoverability is not at a high risk of signifi cant misstatement or subject to signifi cant judgement. However, due to their materiality in the context of the parent Company fi nancial statements, this is considered to be the area that had the greatest eff ect on our overall parent Company audit. • Our sector experience: Critically assessing the existence of impairment indicators by examining the current level of trading, including identifying any indications of a downturn in activity, and by examining the post year end management accounts; • Test of details: Comparing the carrying amount of all investments with the relevant subsidiaries’ draft balance sheets, audited for Group reporting purposes, to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount, and for acquisitions made during the year assessing whether the goodwill recognised has been impaired; and • Our sector experience: Comparing the market capitalisation of the Group to the net assets of the Group, which may indicate an impairment in the carrying value of the Company’s subsidiaries. 3. Our application of materiality and an overview of the scope of our audit Materiality for the Group fi nancial statements as a whole was set at £116,000 (2016: £60,000), determined with reference to a benchmark of Group revenue (2016: Group loss before tax), of which it represents 0.75% (2016: 4.2%). We consider total revenue to be the most appropriate benchmark as it provides a more stable measure year on year than Group profi t before tax. Materiality for the parent Company fi nancial statements as a whole was set at £110,000 (2016: £60,000) by reference to component materiality. This is lower than the materiality we would otherwise have determined by reference to assets, and represents 0.3% of the Company’s total assets (2016: 0.5%). We agreed to report to the Audit Committee any corrected or uncorrected identifi ed misstatements exceeding £5,000, in addition to other identifi ed misstatements that warranted reporting on qualitative grounds. Of the Group’s two (2016: one) reporting components, we subjected two (2016: one) to full scope audits for Group purposes. The components within the scope of our work accounted for 100% (2016: 100%) of the Group revenue, Group profi t before tax and Group total assets. The work on both in-scope components (2016: one), including the audit of the parent Company, was performed by the Group team. The Group team allocated component materialities which ranged from £102,000 to £110,000 (2016: £60,000), having regard to the mix of size and risk profi le of the Group across the components. 4. We have nothing to report on going concern We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material Total revenue £15.5m (2016:£10.2m) Group Materiality £116k (2016:£60k) £116k Whole �nancial statements materiality (2016: £60k) £110k Range of materiality at 2 components (£102k to £110k) (2016: £60k) Total revenue Group materiality £5k Misstatements reported to the audit committee (2016: £3k) Annual Report 2017 > 27 uncertainty that may cast signifi cant doubt over the use of that basis for a period of at least twelve months from the date of approval of the fi nancial statements. We have nothing to report in these respects. • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 22, the directors are responsible for: the preparation of the fi nancial statements including being satisfi ed that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of fi nancial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and 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 they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the fi nancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not 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 aggregate, they could reasonably be expected to infl uence the economic decisions of users taken on the basis of the fi nancial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 5. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the fi nancial statements. Our opinion on the fi nancial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our fi nancial statements audit work, the information therein is materially misstated or inconsistent with the fi nancial statements or our audit knowledge. Based solely on that work we have not identifi ed material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: • we have not identifi ed material misstatements in the strategic report and the directors’ report; • • in our opinion the information given in those reports for the fi nancial year is consistent with the fi nancial statements; and in our opinion those reports have been prepared in accordance with the Companies Act 2006. 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • • • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the parent Company fi nancial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specifi ed by law are not made; or 28 > Annual Report 2017 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Andrew Walker (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants One Snowhill Snow Hill Queensway Birmingham B4 6GH 22 April 2018 Annual Report 2017 > 29 Consolidated Statement of Comprehensive Income For the year ended 31 December Gross value of currency transactions sold Gross value of currency transactions purchased Revenue on currency transactions Banking revenue Revenue Direct costs Gross profit Administrative expenses (excluding acquisition expenses) Acquisition expenses Profit / (loss) before tax Tax credit Profit / (loss) and total comprehensive income for the year Profit / (loss) per share Basic Diluted Note 3.4 3.4 2017 £ 2016 £ 936,593,130 798,300,641 (923,028,865) (788,105,667) 13,564,265 1,896,470 15,460,735 (3,525,676) 11,935,059 10,194,974 – 10,194,974 (2,725,788) 7,469,186 (11,435,841) (8,909,376) (269,769) 229,449 217,687 447,136 – (1,440,190) – (1,440,190) 0.37 0.36 (1.49p) (1.49p) 4 5 8 9 9 All income and expenses arise from continuing operations. There are no differences between the profit for the year and total comprehensive income for the year, hence no Statement of Other Comprehensive Income is presented. The notes on pages 36 to 67 form an integral part of these financial statements. 30 > Annual Report 2017 Consolidated and Company Statement of Financial Position As at 31 December ASSETS Non-current assets Property, plant and equipment Intangible assets and goodwill Deferred tax asset Investments Current assets Inventories Trade and other receivables Derivative financial assets Cash and cash equivalents Group 2017 £ 2016 £ 137,580 75,258 17,649,128 511,912 – – – – Company 2017 2016 £ – – – £ – – – 29,455,134 11,243,460 18,298,620 75,258 29,455,134 11,243,460 199,747 229,905 – 3,779,768 3,001,402 13,212,504 303,775 223,884 51,950,729 8,523,985 – – 56,234,019 11,979,176 13,212,504 – – – – – Note 10 11 8 12 13 14 18 15 TOTAL ASSETS 74,532,639 12,054,434 42,667,638 11,243,460 EQUITY AND LIABILITIES Equity attributable to equity holders Share capital Share premium Share based payment reserve Merger reserve Contingent consideration reserve Retained deficit Non-current liabilities Deferred tax liability Current liabilities Trade and other payables Deferred tax liability Derivative financial liabilities 16 1,553,682 1,031,160 1,553,682 1,031,160 35,858,770 10,174,273 35,858,770 10,174,273 1,144,832 668,422 781,383 668,422 8,395,521 5,416,083 2,979,438 543,172 – 543,172 – – (12,450,546) (12,897,682) (1,123,092) (883,933) 35,045,431 4,392,256 40,593,353 10,989,922 8 17 8 18 673,661 673,661 – – – – – – 38,550,504 7,514,221 2,074,285 253,538 117,838 145,205 – 147,957 – – – – 38,813,547 7,662,178 2,074,285 253,538 TOTAL EQUITY AND LIABILITIES 74,532,639 12,054,434 42,667,638 11,243,460 The notes on pages 36 to 67 form an integral part of these financial statements. The financial statements were approved and authorised for issue by the Board on 22 April 2018 and were signed on its behalf by: Ian Strafford - Taylor Director Company Registration number: 08922461 Annual Report 2017 > 31 Consolidated and Company Statement of Changes in Equity For the year ended 31 December Group Share capital Share premium Share based payment Retained deficit Merger reserve At 1 January 2016 768,660 5,313,780 667,421 (11,457,492) 5,416,083 £ £ £ £ £ Loss for the year – – Shares issued in year 262,500 4,860,493 – – Share based payment charge (note 20) – – 1,001 (1,440,190) – – – – – At 31 December 2016 1,031,160 10,174,273 668,422 (12,897,682) 5,416,083 Profit for the year – – Shares issued in year 522,522 25,684,497 – – Share based payment charge (note 20) Equity based acquisition consideration – – – – 476,410 – 447,136 – – – – 2,979,438 – – Contingent considera- tion reserve £ – – – – – – – – Total £ 708,452 (1,440,190) 5,122,993 1,001 4,392,256 447,136 29,186,457 476,410 543,172 543,172 At 31 December 2017 1,553,682 35,858,770 1,144,832 (12,450,546) 8,395,521 543,172 35,045,431 Company Share capital Share premium Share based payment Retained deficit Merger reserve Contingent considera- tion reserve At 1 January 2016 768,660 5,313,780 667,421 (883,933) £ £ £ £ Loss for the year Shares issued in period Share based payment charge (note 20) – – 262,500 4,860,493 – – – – 1,001 – – – At 31 December 2016 1,031,160 10,174,273 668,422 (883,933) Loss for the year Shares issued in period Share based payment charge (note 20) Equity based acquisition consideration – – 522,522 25,684,497 – – – – – – 112,961 – (239,159) – – – 2,979,438 – – At 31 December 2017 1,553,682 35,858,770 781,383 (1,123,092) 2,979,438 543,172 40,593,353 32 > Annual Report 2017 £ – – – – – – Total £ 5,865,928 – 5,122,993 1,001 10,989,922 (239,159) 29,186,457 112,961 £ – – – – – – – – 543,172 543,172 The following describes the nature and purpose of each reserve within owners’ equity: Share capital Share premium Share based payment Retained deficit Merger reserve Contingent consideration reserve Amount subscribed for shares at nominal value. Amount subscribed for shares in excess of nominal value less directly attributable costs. Fair value of share options granted to both Directors and employees. Cumulative profit and losses are attributable to equity shareholders. Arising on reverse acquisition from Group reorganisation. Arising on equity based contingent consideration on acquisition of subsidiaries. Under the principles of reverse acquisition accounting, the Group is presented as if FairFX Group Plc had always owned the FairFX (UK) Limited Group. The comparative and current period consolidated reserves of the Group are adjusted to reflect the statutory share capital and merger reserve of FairFX Group Plc as if it had always existed. The notes on pages 36 to 67 form an integral part of these financial statements. Annual Report 2017 > 33 Consolidated Statement of Cash Flows For the year ended 31 December Group Profit / (loss) for the year 447,136 (1,440,190) Note 2017 £ 2016 £ Cash flows from operating activities Adjustments for: Depreciation Amortisation Share based payment charge (Increase) in trade and other receivables (Increase) in derivative financial assets (Increase) in deferred tax asset Increase in trade and other payables Increase in deferred tax liabilities (Decrease) in derivative financial liabilities (Increase) / decrease in inventories Net cash inflow / (outflow) from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of intangibles Acquisition of subsidiary, net of cash acquired Investment in subsidiary undertaking Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Costs directly attributable to share issuance Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year 15 The notes on pages 36 to 67 form an integral part of these financial statements. 34 > Annual Report 2017 51,727 221,117 112,961 (697,755) (79,891) (511,912) 53,423 – 1,001 (1,036,399) (108,173) – 31,254,467 3,050,296 791,499 (2,752) 38,031 31,624,630 (83,266) (193,757) (12,827,261) (1,255,748) (14,360,032) 27,703,789 (1,541,641) 26,162,148 43,426,744 8,523,985 51,950,729 – (551,284) (134,811) (166,137) (47,927) – – – (47,927) 5,250,000 (127,007) 5,122,993 4,908,929 3,615,056 8,523,985 Company Statement of Cash Flows For the year ended 31 December Company Loss for the period Cash flows from operating activities Adjustments for: Share based payment charge Decrease / (Increase) in trade and other receivables Increase in trade and other payables Net cash inflow / (outflow) from operating activities Cash flows from investing activities Acquisition of subsidiary, net of cash acquired Investment in subsidiary undertaking Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Costs directly attributable to share issuance Net cash from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at end of the period Note 2017 £ (239,159) 112,961 (13,212,504) 2,615,276 (10,723,426) (12,827,261) (2,611,461) (15,438,722) 27,703,789 (1,541,641) 26,162,148 – – 2016 £ – 1,001 4,624,571 234,038 4,859,610 – (9,982,603) (9,982,603) 5,250,000 (127,007) 5,122,993 – – The notes on pages 36 to 67 form an integral part of these financial statements. Annual Report 2017 > 35 Notes to the Consolidated Financial Statements For the year ended 31 December 1. General information FairFX Group Plc (the “Company”) is a limited liability company incorporated and domiciled in England and Wales and whose shares are quoted on AIM, a market operated by The London Stock Exchange. These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the ‘Group’). The Group is primarily involved in providing foreign currency and banking services via technology platforms offered on the internet. The Company and Group’s consolidated financial statements for the year ended 31 December 2017 were authorised for issue on 22 April 2018 and the Company and Group’s statement of financial position signed by I A I Strafford - Taylor on behalf of the Board. 2. New standards, amendments and interpretations to published standards The Group applied all applicable IFRS standards and all applicable interpretations published by the International Accounting Standards Board (IASB) and its International Financial Reporting Interpretations Committee (IFRIC) for the year ended 31 December 2017. Adoption of new and revised accounting standards and interpretations: • • IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses (Amendments) IAS 7 Disclosure Initiative The adoption of the new applicable standards has not had a significant impact on the financial reporting of the Group. The following standards and interpretations (and amendments thereto) have been issued by the IASB and the IFRIC which are not yet effective and have not been adopted, many of which are either not relevant to the Group and Company or have no material effect on the financial statements of the Group and Company. A. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. It affects the timing of recognition of revenue items, but not generally the overall amount recognised. The standard will come into force with effect from the Group’s financial statements for the year ending 31 December 2018. A preliminary review exercise has taken place and the Group has concluded that the introduction of the new standard will not have a material impact on its results or financial position. B. IFRS 9 Financial Instruments IFRS 9 Financial Instruments sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The standard will come into force with effect from the Group’s financial statements for the year ending 31 December 2018. (i) Classification – Financial assets IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, at fair value through other comprehensive income (FVOCI), or at fair value through profit or loss. The changes from the classification under IAS 39 are not expected to be significant for the Group. 36 > Annual Report 2017 (ii) Impairment – Financial assets IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability- weighted basis. The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets. Under IFRS 9, loss allowances will be measured on either of the following bases: • • 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument. Lifetime ECL measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and 12-month ECL measurement applies if it has not. An entity may determine that a financial asset’s credit risk has not increased significantly if the asset has low credit risk at the reporting date. However, lifetime ECL measurement always applies for trade receivables and contract assets without a significant financing component. Overall, the introduction of IFRS 9 is likely to result in companies carrying a larger provision balance and recognising losses earlier. However, the profit and loss effect is broadly one of timing, with the same amount of provision per case ultimately charged to profit. The Group is in the process of assessing the impact of the new standard and does not believe that its financial assets are at risk of material impairment losses in the scope of the IFRS 9 impairment model. (iii) Classification – Financial liabilities IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as at FVTPL are recognised in profit or loss, whereas under IFRS 9 these fair value changes are generally presented as follows: • • the amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and the remaining amount of change in the fair value is presented in profit or loss. The changes from the classification under IAS 39 are not expected to be significant for the Group. C. IFRS 16 Leases IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted for entities that apply IFRS 15 at or before the date of initial application of IFRS 16. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. Annual Report 2017 > 37 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December The Group has not yet completed its assessment of the potential impact on its consolidated financial statements. The actual impact of applying IFRS 16 on the financial statements in the period of initial application will depend on future economic conditions, including the Group’s borrowing rate at 1 January 2019, the composition of the Group’s lease portfolio at that date, the Group’s latest assessment of whether it will exercise any lease renewal options and the extent to which the Group chooses to use practical expedients and recognition exemptions. So far, the most significant impact identified is that the Group will recognise new assets and liabilities for its operating leases on office buildings. In addition, the nature of expenses related to those leases will now change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. D. Other standards IFRS 2 Classification and Measurement of Share-based Payment Transactions (Amendments) IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts IAS 40 Transfers of Investment Property IFRIC 22 Foreign Currency Transactions and Advance Consideration IFRIC 23 Uncertainty over Income Tax Treatments IFRS 9 Prepayment Features with Negative Compensation IAS 28 Long-term Interests in Associates and Joint Ventures IFRS 17 Insurance Contracts Effective Dates * 01 January 2018 01 January 2018 01 January 2018 01 January 2018 01 January 2019 01 January 2019 01 January 2019 01 January 2021 * The effective dates stated above are those given in the original IASB/IFRIC standards and interpretations. As the Group and Company prepares its financial statements in accordance with IFRS as adopted by the European Union (EU), the application of new standards and interpretations will be subject to their having been endorsed for use in the EU via the EU Endorsement mechanism. In the majority of cases this will result in an effective date consistent with that given in the original standard of interpretation but the need for endorsement restricts the Group and Company’s discretion to early adopt standards. 3. Basis of presentation and significant accounting policies The principal accounting policies applied in the preparation of the Group and Company financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements have been prepared on a historical cost basis with the exception of derivative financial instruments which are measured at fair value through profit or loss. 3.1 Basis of presentation These financial statements are prepared in accordance with AIM Regulations, International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union (“adopted IFRSs”). The financial statements are presented in sterling, the Company and Group’s presentational currency. IFRS requires management to make certain accounting estimates and to exercise judgement in the process of applying the Company and Group’s accounting policies. These estimates are based on the Directors’ best knowledge and past experience and are explained further in note 3.25. In the opinion of the Directors, based on the Group’s budgets and financial projections, they have satisfied themselves that 38 > Annual Report 2017 the business is a going concern. The board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore the accounts are prepared on a going concern basis. 3.2 Basis of consolidation On 5th August 2014, FairFX Group Plc listed its shares on AIM, a market operated by the London Stock Exchange. In preparation for the Initial Public Offering (“IPO”) the Group was restructured. The effect of this reorganisation was to insert one new company into the Group, a new holding Company, FairFX Group Plc. FairFX Group Plc acquired the entire share capital of FairFX (UK) Limited (previously named FairFX Group Limited) on 22 July 2014 through a share for share exchange. For the consolidated financial statements of the Group, prepared under IFRS, the principles of reverse acquisition under IFRS 3 “Business Combinations” were applied. The steps to restructure the Group had the effect of FairFX Group Plc being inserted above FairFX (UK) Limited. The holders of the share capital of FairFX (UK) Limited were issued fifty shares in FairFX Group Plc for one share held in FairFX (UK) Limited. By applying the principles of reverse acquisition accounting the Group is presented as if FairFX Group Plc had always owned and controlled the FairFX Group Plc had always owned and controlled the FairFX Group. Comparatives have also been prepared on this basis. Accordingly, the assets and liabilities of FairFX Group Plc have been recognised at their historical carrying amounts, the results for the periods prior to the date the Company legally obtained control have been recognised and the financial information and cash flows reflect those of the “former” FairFX (UK) Limited Group. The comparative and current year consolidated revenue of the Group are adjusted to reflect the statutory share capital, share premium and merger reserve of FairFX Group Plc as if it had always existed. Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is no re-measured and settlement is accounted for within equity. Otherwise, other contingent consideration is re-measured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it 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. In assessing control, the Group takes into consideration potential voting rights. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. On publishing the Company financial statements here, together with the Group financial statements, the Company is taking advantage of exemption in section 408 of the Companies Act 2006 not to present the individual income statement and Annual Report 2017 > 39 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December related notes of the Company which form part of these approved financial statements. 3.3 Foreign currency In preparing these financial statements, transactions in currencies other than the Company and Group’s presentational currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transaction. At each statement of financial position date monetary items in foreign currencies are translated into the presentational currency at the exchange rate prevailing at statement of financial position date. Exchange differences arising on the settlements of monetary items and on the retranslation of monetary items are included in the consolidated statement of comprehensive income for the year. 3.4 Gross value of currency transactions sold and purchased The gross value of currency transactions sold and purchased represent the gross value of currency transactions undertaken with customers by the Group, where the net is reported as Revenue. These values are a non-GAAP measure and therefore disclosed as additional information in the consolidated statement of comprehensive income. 3.5 Income recognition (i) Deliverable FX trades (international payments) Revenue is recognised when a binding contract is entered into by a client and the margin is fixed and determined. The revenue, represented by the margin, is the difference between the rate offered to clients and the rate the Group receives from its liquidity providers. (ii) Currency cards There are two distinct revenue streams, FX card load orders and transaction-based charges. Revenue on FX card load orders onto non-GBP currency cards is recognised when a binding order is entered into by a customer, the margin is fixed and determined and the foreign currency has been loaded onto their currency card. The revenue, represented by the margin, is the difference between the rate offered to clients and the rate the Group receives from its liquidity providers. The transaction-based charges are recognised at the time the transaction is entered into by the customer and deducted from the customer’s account. (iii) Banking operations There are two distinct revenue streams, account residency charges and transaction-based charges. The account residency charge is due monthly and the revenue is recognised when the monthly service has been provided and it is probable that payment will be received. The transaction-based charges are recognised at the time the transaction is entered into by the customer and deducted from the customer’s account. For currency cards, international payments (fairpay and dealing) and banking segments, the Group is acting as principal and as such, customer cash is shown on the balance sheet, with a corresponding liability to the customer. For the remaining segments, the Group is acting in the capacity as an agent of a third party, and as such, customer cash is not recognised on the face of the balance sheet. Any cash held on behalf of customers is segregated from operational cash and safeguarded in accordance with our regulatory obligation. 3.6 Interest expense recognition Interest expense is recognised as interest accrues, using the effective interest method, on the net carrying amount of the financial liability. 3.7 Pension Costs The Group operates a defined contribution pension scheme and outsources the administration of the pension scheme to a third party. The Group contributes to the pension scheme in line with Auto-enrolment obligations as defined in the Pensions 40 > Annual Report 2017 Act 2008 and passes on the employer and employee contributions to the pension scheme administrator on a monthly basis. The employer contributions are recognised as they occur through the payroll. 3.8 Share-based payments Employees (including Directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured as the difference between fair value of the share-based payment and the fair value of any identifiable goods or services received at the grant date. The cost of equity-settled transactions with employees, is measured by reference to the fair value at the date on which they are granted. The fair value is determined using an appropriate pricing model, further details of which are given in note 20. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘the vesting date’). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied. Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described on the previous paragraph. The dilutive effect of outstanding options is reflected as additional share dilution on the computation of earnings per share. Where the Company grants options over its own shares to the employees of its subsidiaries it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equivalent to the equity settled share-based payment charge recognised. 3.9 Research and development Research costs are expensed as incurred. Expenditure on IT software and development is recognised as an intangible asset when the Group can demonstrate: the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the asset and the ability to measure reliably the expenditure during development. Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. During the period of development, the asset is tested for impairment annually. Annual Report 2017 > 41 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December 3.10 Treatment of Research and Development Tax Credits Research and development tax credits are treated as a government grant as defined under IAS20 – Accounting for Government Grants and Disclosure of Government Assistance. The tax credit claim is based on research and development activity carried on by staff and so any claim received is netted against administration expenses. The tax credit is recognised on receipt of funds from the Government. 3.11 Taxation The tax expense comprises current and deferred tax. 3.12 Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: – temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. – – The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 3.13 Intangible assets and goodwill (i) Recognition and measurement Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. Development expenditure is capitalised only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in profit or loss as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortisation and any accumulated impairment losses. Expenditure on research activities is recognised in profit or loss as incurred. Other intangible assets, including customer relationships, patents and trademarks that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. (ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. 42 > Annual Report 2017 (ii) Amortisation Amortisation is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Goodwill is not amortised. The estimated useful lives for current and comparative periods are as follows: Customer relationships Brands Trademarks, licences, patented and non-patented technology 6 years 5 years 3-10 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. 3.14 Property, plant and equipment Items of property, plant and equipment are stated at cost of acquisition or production cost less accumulated depreciation and impairment losses. Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss. Depreciation is charged so as to write off the cost or valuation of assets over their estimated useful lives, using the straight line method, on the following basis: Plant and equipment Fixtures and fittings Leasehold improvements 33-50% 20% 10% 3.15 Investments in subsidiaries Investment in subsidiary undertakings are stated at cost less impairment in value. 3.16 Inventories Inventories comprise of stock of prepaid currency cards not yet distributed to customers. Inventories are valued at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs in bringing them to their existing location and condition. There are no currency amounts loaded on stock of prepaid currency cards. 3.17 Trade and other receivables Trade receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade receivables include monies receivable from customers executing deliverable FX trades. Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method, less any provision for impairment losses. A provision for the impairment of trade receivables is recognised 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 financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or significant delinquency in payments are considered indicators that the trade receivable may be impaired. Impairment on trade receivables is written off to the statement of comprehensive income when it is recognised as being impaired. Other receivables are recognised at fair value. Annual Report 2017 > 43 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December 3.18 Derivative financial assets and liabilities Derivative financial assets and liabilities are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are included in the income statement. The Group’s derivative financial assets and liabilities at fair value through profit or loss comprise solely of forward foreign exchange contracts. 3.19 Offsetting of financial instruments Financial assets and financial liabilities are offset and the net account reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. 3.20 Cash and cash equivalents These include cash in hand and deposits held at call with banks. Any cash held on behalf of customers is segregated from operational cash and safeguarded in accordance with our regulatory obligations. 3.21 Trade and other payables These arise principally from monies held on behalf of customers from banking operations and deliverable FX trades to be settled in accordance with instructions from customers. These are initially recognised at fair value and then carried at amortised cost using the effective interest method. 3.22 Provisions A provision is recognised in the statement of financial position when the Company and 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. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects the current market assessment of the time value of money and, where appropriate, the risks specific to the liability. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the consolidated statement of financial position date. 3.23 Leases Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Company and Group (a “finance lease”), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. Where substantially all of the risks and rewards incidental to ownership are not transferred to the Company and Group (an “operating lease”), the total rentals payable under the lease are charged to the statement of comprehensive income on a straight-line basis over the lease term. Benefits received and receivable as an incentive to enter into an operating lease are spread on a straight line basis over the lease term. 3.24 Impairment Non-derivative financial assets Financial assets not classified as at FVTPL, including an interest in an equity-accounted investee, are assessed at each 44 > Annual Report 2017 reporting date to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes: • • • • • • default or delinquency by a debtor; restructuring of an amount due to the Group on terms that the Group would not consider otherwise; indications that a debtor or issuer will enter bankruptcy; adverse changes in the payment status of borrowers or issuers; the disappearance of an active market for a security because of financial difficulties; or observable data indicating that there is a measurable decrease in the expected cash flows from a Group of financial assets. Financial assets at amortised cost The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss. Non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. The Group’s CGU’s for impairment testing are defined in note 11. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, 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. Annual Report 2017 > 45 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December 3.25 Judgements and estimates In the process of applying the Group’s accounting policies, management makes various judgements which can significantly affect the amounts recognised in the financial statements. They are also required to use certain accounting estimates and assumptions regarding the future that may have a risk of giving rise to a material adjustment to the carrying values of assets and liabilities within the next financial year. The judgements, assumptions and estimates are considered to be the following: (i) Share based payments In order to calculate the charge for share-based compensation as required by IFRS 2, the Group makes estimates principally relating to the assumptions used in its option-pricing model as set out in note 20. The accounting estimates and assumptions relating to these share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity. The critical estimate is the term of the share option to vest. (ii) Measurement of fair values When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: • • • Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Measurement of fair values of derivative financial assets and liabilities The Group’s accounting policies and disclosures require measurement of fair values with regard to derivative financial assets and liabilities. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the reporting date. Measurement of contingent consideration Contingent consideration is measured at fair valued using probability weighted cash flows. The valuation model considers the present value of the expected future payments. The expected payment is determined by considering the possible scenarios, the amount to be paid under each scenario and the probability of each scenario. The Directors also made the following judgments in the treatment of contingent consideration: • • That the contingent consideration in connection with acquisitions is not linked with the continuing employment of the employee shareholders of the acquires and therefore not treated as remuneration That the conditions for contingent consideration are not linked and hence the contingent consideration is accounted for within equity at completion and is not re-measured thereafter. Measurement of fair values of subsidiaries acquired: The valuation techniques used for measuring the fair value of material assets acquired were as follows: (a) E-money licence - Q-Money acquisition The e-money licence was valued using the current cost to recreate approach. This approach values an intangible asset at the cost that would be incurred in re-creating the asset – either though restoration (creating an identical asset) or replacement (creating a similar asset). The valuation method used an estimate of the cost of staff members’ time to prepare, submit and manage an authorisation process, specialist regulatory consultancy costs, the cost of external contractors and a minimum initial capital required by Electronic Money Regulations 2011. The estimate was based on management’s experience. 46 > Annual Report 2017 (b) Banking platform and Brand names – Spectrum acquisition The banking platform and brand names were valued using the relief from royalty approach. The relief-from-royalty method considers the discounted estimated royalty payments that are expected to be avoided as a result of the patents or trademarks being owned. A royalty rate of 6.00% was used for the purpose of the valuation of the banking platform. The discount factor applied in the valuation of banking platform was 12.25%, comprising of the weighted average cost of capital (WACC). The most sensitive factor was the royalty rate used. A royalty rate of 1.00% was used for the purpose of the valuation of the brand names. The discount factor applied was 12.75% being the (WACC) together with a margin of 0.50%. The most sensitive factor was the royalty rate used. (c) Customer Relationships – Spectrum acquisition Customer relationships were valued using a multi-period excess earnings approach. The multi-period excess earnings method considers the present value of net cash flows expected to be generated by the customer relationships, by excluding any cash flows related to contributory assets. The life of the customer relationships was established through estimated attrition rates. The attrition rates used in the valuation of customer relationships were as follows: • Corporate customers Retail customers • 33% 31% The contributory assets charges were calculated on the basis of an aggregated rate of all contributory assets as an average percentage of revenue over the financial projection period covering the years ending 31 December 2017 to 2024. The discount factor applied in the customer relationships valuation was 13.25%, being the weighted average cost of capital (WACC) together with a margin of 1.00%. (d) Impairment of goodwill The assumptions used in the impairment test for goodwill are disclosed in note 11. 4. Revenue and segmental analysis Segment results are reported to the Board of Directors (being the chief operating decision maker) to assess both performance and strategic decisions. The Board of Directors reviews financial information on revenue the following segments: Currency cards, FairPay, Dealing, Banking and Central (which includes travel cash, overheads and corporate costs). The revenue is wholly derived from within the UK. The banking segment was added in the current year to manage the activity of the Q Money Limited (QML) and Spectrum Financial Group Limited (SFG) businesses acquired in 2017. The Group has changed its allocation of revenue between the Central and Currency Cards segments in the year ended 31 December 2017 to more accurately reflect the segment to which the revenue relates. For consistency, the prior year comparative balances have been restated below. This restatement did not result in any impact on the total prior year revenue or loss. Annual Report 2017 > 47 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December 2017 Group Segment revenue Direct costs Administrative expenses Acquisition costs Currency Cards International Payments Banking Central Total FairPay Dealing £ £ £ £ £ £ 8,124,165 786,828 4,321,612 1,896,470 331,660 15,460,735 – – – – – – – – – (347,886) (3,177,790) (3,525,676) (1,346,062) (10,089,779) (11,435,841) – (269,769) (269,769) Profit / (loss) before tax 8,124,165 786,828 4,321,612 202,522 (13,205,678) 229,449 – – – – – – – – – – – – 74,532,639 74,532,639 (39,487,208) (39,487,208) 35,045,431 35,045,431 Currency Cards International Payments Banking Central Total Total assets Total liabilities Total net assets 2016 Group Segment revenue Direct costs Administrative expenses FairPay Dealing £ £ £ 6,089,477 773,823 3,002,024 – – – – – – Profit / (loss) before tax 6,089,477 773,823 3,002,024 Total assets Total liabilities Total net assets – – – – – – – – – 5. Profit / (loss) before tax - Group Profit / (loss) before tax is stated after charging the following:- Operating lease – property Depreciation of plant and equipment and fixtures and fittings Amortisation of intangibles Net foreign currency differences Research and development costs Research and development tax credit 48 > Annual Report 2017 £ – – – – – – – £ £ 329,650 10,194,974 (2,725,788) (2,725,788) (8,909,376) (8,909,376) (11,305,514) (1,440,190) 12,054,434 12,054,434 (7,662,178) (7,662,178) 4,392,256 4,392,256 2017 £ 392,377 51,727 221,117 68,186 1,265,388 (301,032) 2016 £ 271,487 53,423 – (119,507) 902,643 (220,020) Amounts charged by the Group’s auditor are as follows:- Audit fees:- Fees payable for the audit of the annual report and financial statements Fees payable for the audit of subsidiaries Total audit fees Other services:- Taxation services Corporate finance services Other assurance services Total non-audit fees Total fees 2017 £ 70,000 40,000 110,000 – – – – 2016 £ 40,000 40,000 80,000 – – – – 110,000 80,000 The above audit fee is payable solely to the Group’s current auditor, KPMG LLP. These amounts are shown exclusive of VAT. 6. Staff costs Number of employees The average number of employees (including Directors) during the year was:- Administrative staff Employee costs Wages and salaries Social security costs Pension costs Further information regarding share options is given in note 20. 2017 Headcount 101 2017 £ 5,354,654 567,279 23,028 5,944,961 2016 Headcount 66 2016 £ 3,587,934 417,660 10,008 4,015,602 Annual Report 2017 > 49 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December 7. Directors’ remuneration 2017 £ 2016 £ Emoluments 642,973 571,871 The total amount payable to the highest paid director in respect of emoluments was £482,586 (2016: £433,742). The total amount payable to all Directors in the consolidated Group was £1,302,782 (2016: £682,057). There were pension payments of £773 (2016: £402) in the year. Further information regarding share options is given in note 20. 8. Taxation Group Current tax (credit) Release of DTL acquired on business combinations Recognition of previously unrecognised deductible temporary differences Deferred tax (credit) Total tax (credit) 2017 £ (27,179) (42,046) (148,462) (190,508) (217,687) 2016 £ – – – – – Factors affecting tax charge for the period The charge for the year can be reconciled to the profit / (loss) per the consolidated statement of comprehensive income as follows: 2017 £ 2016 £ Profit / (loss) before taxation: Continuing operations 229,449 (1,440,190) Taxation at the UK corporation rate tax of 19.25% (2016: 20%) 44,169 (288,038) Capital allowances in arrears / (advance) of depreciation Share based payments Net impact of R&D tax credit claim Expenses not deductible for tax purposes Tax losses for which no deferred tax asset utilised Effect of tax at marginal rate Deferred tax on equity settled share based payments Total tax credit for the year 50 > Annual Report 2017 – – (188,376) 47,986 6,211 (959) (126,718) (217,687) 672 200 66,344 8,447 212,375 – – – Movement in deferred tax balances Group 2017 Intangibles Equity settled share based payments Deferred tax assets (liabilities) Group 2016 Deferred tax assets (liabilities) Group Non-current deferred tax asset Current deferred tax liability Non-current deferred tax liability Total deferred tax liability Net balance at 1 January £ – – – Acquired in business combination £ (833,545) Recognised to equity Recognised to profit or loss Balance at 31 December Deferred tax asset Deferred tax liability £ – £ £ 42,046 (791,499) £ – £ (791,499) – 363,450 148,462 511,912 511,912 – (833,545) 363,450 190,508 (279,587) 511,912 (791,499) Net balance at 1 January Acquired in business combination Recognised to equity Recognised to profit or loss Balance at 31 December Deferred tax asset Deferred tax liability £ – £ – £ – £ – £ – £ – 2017 £ 511,912 (117,838) (673,661) (791,499) £ – 2016 £ – – – – Based on the valuation of acquisition intangibles and enacted UK corporation tax rates the Group has acquired deferred tax liabilities of £833,545 in relation to its acquisition of Spectrum Financial Group Limited and Q Money Limited (note 12). The deferred tax will be released to the income statement as the underlying intangible assets are amortised or otherwise recognised via impairment in profit or loss. The deferred tax liability released to the income statement in the year was £42,046. Future changes in the standard rate of corporation tax have been reflected in the carrying value of the deferred tax liability. During the year the Group recognised a £511,912 deferred tax asset in relation to unexercised share options. Of this amount £148,463 was recognised in the current year’s tax expense and £363,449 was recognised to equity. The Group has estimated losses of £9,271,636 (2016: £9,126,793) available for carry forward against future trading profits. Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is considered more likely than not. The decision to recognise any asset will be taken at such point recovery is reasonably certain. The Group has an unrecognised deferred tax asset of £1,761,611 (2016: £1,825,359) in respect of losses that can be carried forward against future taxable income for the period between one year and an indefinite period of time. Annual Report 2017 > 51 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December During the year ended 31 December 2015 the Government announced provisions further reducing the rate of corporation tax to 19.0% with effect from 1 April 2017 and to 18.0% from 1 April 2020 which were substantially enacted during the year. The tax rate applying from 1 April 2020 was further reduced to 17% during the year. Therefore the standard rate of corporation tax applicable to the Group for the year ended 31 December 2017 was 19.25%. The rate in the years ending 31 December 2018 and 31 December 2019 are expected to be 19.0%, the rate in the year ending 31 December 2020 is expected to be 17.5% and the rate in subsequent years is expected to be 17.0%. 9. Profit / loss per share Basic profit / loss per share The calculation of basic profit or loss per share has been based on the profit or loss attributable to ordinary shareholders and weighted average number of ordinary shares outstanding. The profit after tax attributable to ordinary shareholders is £447,136 (2016: £1,440,190 loss) and the weighted average number of shares in issue for the period is 121,876,571 (2016: 96,732,842). Diluted profit / loss per share The calculation of diluted earnings per share has been based on the profit or loss attributable to ordinary shareholders and weighted average number of ordinary shares outstanding, after adjustment for the effects of all dilutive potential ordinary shares. The profit after tax attributable to ordinary shareholders is £447,136 (2016: £1,440,190 loss) and the weighted average number of shares is 124,855,331 (2016: 96,732,842). 10. Property, plant and equipment Plant and machinery Fixtures and fittings Leasehold improvements £ 282,034 77,105 27,021 386,160 239,867 45,039 284,906 101,254 42,167 £ 16,721 6,161 3,762 26,644 11,457 2,723 14,180 12,464 5,264 £ 39,651 – – 39,651 11,824 3,965 15,789 23,862 27,827 Total £ 338,406 83,266 30,783 452,455 263,148 51,727 314,875 137,580 75,258 Group Cost At 1 January 2017 Additions Acquisitions through business combinations At 31 December 2017 Depreciation At 1 January 2017 Charge for the year At 31 December 2017 Net book value At 31 December 2017 At 31 December 2016 52 > Annual Report 2017 11. Intangible assets and goodwill Group Goodwill Cost At 1 January 2017 Additions Acquisitions through business combinations Trademarks, licences, patented and non-patented technology £ – 50,000 Customer relationships Brands Under construction Total £ – – £ – – £ – £ – 143,757 193,757 £ – – 12,962,509 2,626,979 1,794,000 293,000 – 17,676,488 At 31 December 2017 12,962,509 2,676,979 1,794,000 293,000 143,757 17,870,245 Amortisation At 1 January 2017 Charge for the year At 31 December 2017 Net book value – – – – 101,917 101,917 – 99,667 99,667 – 19,533 19,533 – – – – 221,117 221,117 At 31 December 2017 12,962,508 2,575,062 1,694,333 273,467 143,757 17,649,128 At 31 December 2016 – – – – – – The intangibles under construction balance consists of costs incurred on software development projects that were not completed before the end of the reporting period. Goodwill Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. Goodwill was acquired as part of the Q Money Limited (QML) and Spectrum Financial Group Limited (SFG) acquisitions in 2017. Following the respective acquisitions, the businesses of QML and SFG have operated as a single business. Accordingly, they have been treated as a single “banking CGU” for the purpose of impairment testing. This represent the lowest level at which goodwill is monitored for internal management purposes. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amount of the banking CGU is determined as the higher of fair value less cost of disposal and value in use. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to collections and direct costs during the forecast period. Management estimates discount rates using pre-tax rate that reflects the current market assessment of the time value of money and the specific risks associated with the asset for which the future cash flow estimates have not been adjusted. The rate used to discount the forecast cash flows for the banking CGU’s are based upon the CGU’s weighted average cost of capital (“WACC”) of 15.64%. Annual Report 2017 > 53 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December The Group prepared cash flow forecasts derived from the most recent detailed financial budgets approved by management for the next six years. For the purpose of the value in use calculation the management forecasts were extrapolated into perpetuity using a growth rate of 2.2%, representing the expected long-run rate of inflation in the UK. The forecasts assume growth rates in acquisitions which in turn drive the forecast collections and cost figures. The Group used budgets for the next six years (rather than five) as they believe the expected long-run rate of inflation in the UK does not reflect the expected growth rate. The Group has conducted a sensitivity analysis on the impairment test of the CGU’s carrying value. Based on the value in use a reduction of revenue each year of 25.6% would result in an impairment at 31 December 2017. An increase in the WACC to greater than 20% would result in an impairment at 31 December 2017. Based on the sensitivity analyses, the Group has determined that there are no reasonably possible changes to the key assumptions which would result in the carrying value of the CGU exceeding its carrying value at 31 December 2017. 12. Investments Company - Shares in subsidiary undertakings Cost Additions At 31 December Provisions for diminution in value At 31 December Net Book Value At 31 December 2017 £ 11,243,460 18,211,674 29,455,134 2016 £ 1,260,857 9,982,603 11,243,460 – – 29,455,134 11,243,460 In the opinion of the Directors the aggregate value of the Company’s investment in subsidiary undertakings is not less than the amount included in the statement of financial position. 54 > Annual Report 2017 Holdings of more than 20% The Company holds the share capital (both directly and indirectly) of the following companies: Country of registration or incorporation Class Shares Held Subsidiary Undertaking FairFX (UK) Limited FairFX Plc England and Wales England and Wales FairFX Corporate Limited * England and Wales FairFX Wholesale Limited * England and Wales FairFS Limited * England and Wales Fair Foreign Exchange Ireland Limited * Ireland Q Money Limited Q Technology Limited* Q Money One Limited* England and Wales England and Wales England and Wales Spectrum Financial Group Limited England and Wales Spectrum Card Services Limited* England and Wales Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Spectrum Payment Services Limited* England and Wales Ordinary Red 88 Limited Co* England and Wales Ordinary % 100 100 100 100 100 100 100 100 100 100 100 100 100 Dormant Trading Dormant Dormant Dormant Dormant Trading Dormant Trading Trading Trading Trading Dormant *Share capital held indirectly The registered office address of all subsidiary undertakings is 3rd Floor Thames House, Vintners’ Place, 68 Upper Thames Street, London, EC4V 3BJ, England. Acquisition of subsidiaries See accounting policy in note 3.2. (i) Q Money Limited (“Q Money Group”) On 19 January 2017, the Group acquired the entire ordinary share capital of Q Money Limited. Q Money Limited has two wholly owned subsidiaries (Q Money One Limited and Q Technology Limited). Acquiring the Q Money Group and its E-money licence allows the Group to launch a card via a MasterCard Prepaid Issuing Licence and to enhance the Group’s payment infrastructure through direct membership of other payment networks. Q Money gained a Mastercard Issuing Licence in December 2017 and so, where appropriate, Group prepaid card programmes will be bought in-house to deliver significant cost savings. The initial consideration payable for the acquisition was £425,000, satisfied by £110,000 payable from existing cash and by the issue of 724,136 new ordinary shares of 1p each in the Company (the “Initial Consideration Shares”) at an issue price of 43.5p. Further contingent consideration of up to £825,000 is subject to the achievement of certain performance milestones, and will be satisfied by the issue of new ordinary shares of 1p each in the Company at an issue price of 43.5p (fixed market share price at acquisition date). Should the share price increase, actual consideration paid would increase. In order to ensure that the contingent consideration was measured at fair value, adjustments in relation to probability factors and time value of money were made as appropriate. The contingent consideration performance milestones are split into three tranches. The probability used to fair value trance one and two of £250,000 each was 50% in 12 months, 20% in 18 Annual Report 2017 > 55 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December months and 30% not payable at all. The probability used to fair value tranche three of £325,000 was 50% in 30 months, 20% in 36 months and 30% not payable at all. The fair value of all the tranches was determined by discounting the consideration by an after tax cost of debt of 3.62%. The fair value of contingent consideration recognised was £543,172, which was made up of £168,036 for both tranche one and two and £207,100 for tranche three. For the period post acquisition to 31 December 2017, Q Money Group incurred a loss after tax of £20,522. This loss includes a £11,109 charge for intercompany loan interest payable to the parent Company, which eliminates on Group consolidation. If the acquisition occurred on the 1 January 2017 the loss after tax contributed to the Group would have been £18,975. The acquisition date fair value of consideration transferred was calculated as follows: Cash Share consideration Contingent consideration Total consideration transferred The recognised amounts of assets acquired and liabilities assumed at the date of acquisition were as follows: E-money licence Cash (ii) Spectrum Financial Group Limited (“CardOneBanking”) Trade and other receivables Trade and other payables Deferred tax liabilities Total identifiable new assets acquired £ 110,000 314,999 543,172 968,171 £ 233,000 335 350,000 (354,079) (41,105) 188,151 The valuation techniques used for measuring the fair value of the E-money licence are covered in note 3.25(ii)(a). Based on the valuation of the E-money licence and enacted UK corporation tax rates a deferred tax liability of £41,105 was recognised as a result of the identified intangible asset. Goodwill arising from the acquisition has been recognised as follows. Consideration transferred Fair value of identifiable net assets Goodwill £ 968,171 188,151 780,020 Goodwill comprises the value of expected synergies arising from the acquisition and additional value attributed by the acquirer in relation to the future expected cash flows, which is not separately recognised. None of the goodwill recognised is expected to be deductible for income tax purposes. 56 > Annual Report 2017 (ii) Spectrum Financial Group Limited (“CardOneBanking”) On 25 August 2017, the Group acquired the entire ordinary share capital of Spectrum Financial Group Limited. Spectrum Financial Group Limited has three wholly owned subsidiaries (Spectrum Card Services Limited, Spectrum Payment Services Limited and Red 88 Limited). Acquiring CardOneBanking provided the Group with access to key components of digital banking technology and payment infrastructure connectivity allowing the Group to fast track its push into offering digital banking services to the small to medium sized enterprise market. In addition, with the acquisition the Group will be able to achieve greater scale and turnover, buyer-specific synergies and cross selling opportunities. The initial consideration payable for the Acquisition was £15,000,000, satisfied by £12,817,501 payable in cash (raised during the 24 August 2017 share issue) and by the issue of 3,762,930 new ordinary shares of 1p each in the Company (the “Initial Consideration Shares”) at an issue price of 58p (fixed market share price at start of the share capital raise), equating to £2,182,499. As per the Companies Act 2006, section 612, for any shares issued as part of an acquisition merger relief is obtained with the difference between the market price of the shares and the nominal value of the shares taken to a merger reserve. The market price for the Group’s shares on the date of acquisition was 72p resulting in the Group recording additional share consideration of £526,810. Further consideration after working capital adjustments of £1,602,730 was paid in cash on the 10 November 2017 using the acquired cash available in CardOneBanking. For the period post acquisition to 31 December 2017, CardOneBanking contributed revenue of £1,896,470 and profit after tax of £250,223 to the Group’s results. If the acquisition occurred on the 1 January 2017 revenue of £5,415,114 and profit after tax of £725,872 would have been contributed to the Group’s results. The acquisition date fair value of consideration transferred was calculated as follows: Cash Share consideration Further cash consideration Total consideration transferred The recognised values of assets acquired and liabilities assumed at the date of acquisition were as follows: Intangibles Property, plant and equipment Inventories Trade and other receivables Cash Trade and other payables Deferred tax liability Total identifiable new assets acquired £ 12,817,501 2,709,310 1,602,730 17,129,541 £ 4,480,979 30,783 7,873 80,610 1,702,635 (563,388) (792,440) 4,947,052 The valuation techniques used for measuring the fair value of the intangibles are covered in note 3.25(ii). Based on the valuation of the intangibles and enacted UK corporation tax rates a deferred tax liability of £792,440 was recognised as a result of the identified intangible asset. Annual Report 2017 > 57 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December Goodwill arising from the acquisition has been recognised as follows. Consideration transferred Fair value of identifiable net assets Goodwill £ 17,129,541 4,947,052 12,182,489 Goodwill comprises the value of expected synergies arising from the acquisition and additional value attributed by the acquirer in relation to the future expected cash flows, which is not separately recognised. None of the goodwill recognised is expected to be deductible for income tax purposes. 13. Inventories Group Finished goods The Group’s inventories comprise stock of cards. 14. Trade and other receivables 2017 £ 199,747 2016 £ 229,905 Trade receivables Amounts due from Group undertakings Other receivables Prepayments and accrued income Group Company 2017 £ 2016 £ 2,419,594 1,922,977 2017 £ – – 515,063 845,111 – 13,212,504 768,285 310,140 – – 3,779,768 3,001,402 13,212,504 2016 £ – – – – – Information about the Group’s exposure to credit and market risks, and impairment losses for trade and other receivables is included in note 19.2. 15. Cash and cash equivalents Group Cash at bank 2017 £ 2016 £ 51,950,729 8,523,985 Included in cash and cash equivalents at 31 December 2017 was £34,147,666 of customer funds (2016: £5,022,092). 58 > Annual Report 2017 16. Share capital Group and Company Authorised, issued and fully paid up capital 155,368,259 ordinary shares of £0.01 each 2017 £ 2016 £ 1,553,682 1,031,160 Under the principles of reverse acquisition accounting, the Group is presented as if FairFX Group Plc had always owned the FairFX (UK) Limited Group. The comparative and current period consolidated reserves of the Group are adjusted to reflect the statutory share capital and merger reserve of FairFX Group Plc as if it had always existed. During the year, the Company made the following share issues: Date of Issue No Shares Issued Price per share Gross value of shares issued 19th January 2017 724,136 £0.435 £314,999 Nominal Value of shares issued £7,241 Costs of share issue Merger Reserve Share Premium – £307,758 – 24th August 2017 47,765,154 £0.580 £27,703,789 £477,652 £1,541,641 – £25,684,497 24th August 2017 3,762,930 £0.720 £2,709,310 £37,629 – £2,671,680 – Total 52,252,220 £30,728,098 £522,522 £1,541,641 £2,979,438 £25,684,497 All of the shares issued on the 19th January 2017 were issued as consideration for Q Money Limited (note 12(i)). Of the shares issued on 24th August 2017, 3,762,930 shares were issued as consideration for Spectrum Financial Group Limited (note 12(ii)). The remainder of shares were issued in cash. As per the Companies Act 2006, section 612, for any shares issued as part of an acquisition merger relief is obtained with the difference between the market price of the shares and the nominal value of the shares taken to a merger reserve. The market price for the Group’s shares on the date of acquisition was 72p resulting in the Group recording additional share consideration of £526,810. This amount was recognised in the movements in merger reserves in equity. In accordance with IAS 32 Financial Instruments: Presentation, costs incurred which are directly applicable to the raising of finance, are offset against the share premium created upon the share issue. The holders of the ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. Annual Report 2017 > 59 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December 17. Trade and other payables Trade payables Amounts owing to Group undertakings Taxation and social security Accruals and deferred income Group Company 2017 £ 2016 £ 36,988,512 6,803,255 2017 £ – – – 2,074,285 383,446 1,178,546 38,550,504 130,368 580,598 7,514,221 – – 2,074,285 Group Company 2017 £ 2016 £ 2017 £ Current 38,550,504 7,514,221 2,074,285 18. Derivative financial assets and financial liabilities 18.1 Derivative financial assets 2016 £ – 234,038 – 19,500 253,538 2016 £ 253,538 Group Fair Value Notional Principal Fair Value Notional Principal Foreign exchange forward contracts Total financial instruments at fair value 2017 £ 303,775 303,775 2017 £ 21,530,930 21,530,930 2016 £ 223,884 223,884 2016 £ 10,238,079 10,238,079 18.2 Derivative financial liabilities Financial liabilities at fair value through profit or loss Group Fair Value Notional Principal Fair Value Notional Principal Foreign exchange forward contracts Total financial instruments at fair value 19. Financial instruments 2017 £ 145,205 145,205 2017 £ 21,366,917 21,366,917 2016 £ 147,957 147,957 2016 £ 10,169,959 10,169,959 The Group’s financial instruments comprise cash, foreign exchange forward contracts and various items arising directly from its operations. The main purpose of these financial instruments is to provide working capital for the Group. In common with other businesses, the Group is exposed to the risk that arises from its use of financial instruments. The Group does not deal in any financial instrument contracts for its own benefit. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information is found throughout these consolidated financial statements. 60 > Annual Report 2017 19.1 Principal financial instruments The principal financial instruments of the Group, from which financial instrument risk arises, are as follows: Group Financial instruments held at amortised cost Cash and cash equivalents Trade and other payables Trade and other receivables Financial instruments held at fair value through profit or loss Derivative financial assets – Forward foreign exchange contracts Derivative financial liabilities – Forward foreign exchange contracts Trade and other payables generally have a maturity of less than one month. 2017 £ 51,950,729 (38,550,504) 3,779,768 2017 £ 303,775 (145,205) 2016 £ 8,523,985 (7,514,221) 3,001,402 2016 £ 223,884 (147,957) Forward foreign exchange contracts fall into level 2 of the fair value hierarchy as set out in note 3.25(ii) since Level 2 comprises those financial instruments which can be valued using inputs other than quoted prices that are observable for the asset or liability either directly (i.e. prices) or indirectly (i.e. derived from prices). 19.2 Financial risk management objectives and policies Credit risk The Group trades only with recognised, credit worthy customers. All customers who wish to trade on credit are subject to credit verification checks. Customer balances are checked daily to ensure that the risk of exposure to bad debts is minimised and margined accordingly. The Group’s risk is the risk that financial loss arises from the failure of a customer or counterparty to meet its obligations under a contract. The Group had no significant concentrations of risk with customers and counterparties at 31 December 2017. The Group’s exposure to credit related losses, in the event of non-performance by customers relates mostly to wholesale business. The risk on wholesale business is minimal as Group polices require new customers to be reviewed for creditworthiness before standard payment and delivery terms and conditions are entered into. Individual credit terms are set and monitored regularly. The Group’s cash balances are all held with major banking institutions. The majority of trade receivables are due from credit worthy customers and or financial institutions and are automatically settled within a few days of arising. The credit risks from other financial contractual relationships including other receivables are not considered material. Where forward contracts are not fully settled by the maturity date, appropriate action is agreed with the customer to roll forward the contract to a future date. Annual Report 2017 > 61 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December The ageing of financial assets at the statement of financial position date is as follows: 2017 Group Current and not impaired £ Trade and other receivables 3,779,768 Between 1 and 3 months Between 3 and 12 months £ – £ – Derivative financial assets 123,055 56,692 124,028 Over 1 year Individually impaired £ – – £ – – 2016 Group Trade and other receivables Derivative financial assets Current and not impaired £ 3,001,402 223,884 Between 1 and 3 months Between 3 and 12 months Over 1 year Individually impaired £ – – £ – – £ – – £ – – Total £ 3,779,768 303,775 Total £ 3,001,402 223,884 Liquidity risk Management of liquidity risk is achieved by monitoring budgets and forecasts and actual cash flows and available cash balances. The daily settlement flows in respect of financial asset and liability, spot and swap contracts require adequate liquidity which is provided through intra-day settlement facilities. Further details of the risk management objectives and policies are disclosed in the principal risks and uncertainties section of the Strategic Report. The table below analyses the Group’s gross undiscounted financial liabilities by their contractual maturity date. On demand and within 1 month £ 38,550,504 Between 1 and 3 months Between 3 and 12 months £ – £ – 76,330 22,178 46,697 On demand and within 1 month £ 7,514,221 Between 1 and 3 months Between 3 and 12 months £ – £ – 18,959 57,292 71,706 Over 1 year £ – – Over 1 year £ – – Total £ 38,550,504 145,205 Total £ 7,514,221 147,957 2017 Trade and other payables Derivative financial liabilities 2016 Trade and other payables Derivative financial liabilities 62 > Annual Report 2017 Market risk Market risk arises from the Group’s use of foreign currency. This is detailed below. Interest rate risk The Group is subject to interest rate risk as its bank balances are subject to interest at a floating rate. The Group has no of borrowings so is not materially affected by changes in interest rates. Foreign currency risk The Group’s balance sheet currency exposure is primarily managed by matching currency assets with currency liabilities. The largest currency liabilities are created on entering into forward foreign currency transactions. As at 31 December 2017, the Group is not sensitive to movements in the strength of Sterling as no material foreign currency balances are held (2016: £nil). Fair value risk The following table shows the carrying amount of financial assets and financial liabilities. It does not include a fair value as the carrying amount is a reasonable approximation of fair value. 31 December 2017 Loans and Receivables Other financial liabilities Financial assets not measured at fair value Cash and cash equivalents Trade and other receivables Financial liabilities not measured at fair value Trade and other payables £ 51,950,729 3,779,768 55,730,497 £ – – – – – 38,550,504 38,550,504 31 December 2016 Loans and Receivables Other financial liabilities Financial assets not measured at fair value Cash and cash equivalents Trade and other receivables Financial liabilities not measured at fair value Trade and other payables £ 8,523,985 3,001,402 11,525,387 £ – – – – – 7,514,221 7,514,221 Total £ 51,950,729 3,779,768 55,730,497 38,550,504 38,550,504 Total £ 8,523,985 3,001,402 11,525,387 7,514,221 7,514,221 All financial instruments are classified as level 3 financial instruments in the fair value hierarchy, with the exception of Derivative financial assets and liabilities which are level 2 financial instruments. Annual Report 2017 > 63 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December Capital management policy and procedures The Group’s capital management objectives are: – – to ensure that the Group and Company will be able to continue as a going concern; and to maximise the income and capital return to the Company’s shareholders. The parent company is subject to the following externally imposed capital requirements: – as a public limited company, the Company is required to have a minimum issued share capital of £50,000 FairFX PLC, a wholly owned subsidiary, is subject to the following externally imposed capital requirements: – as a company regulated by the Payment Service Regulations 2009, the Company is required to maintain a capital requirement of either 10% of fixed overheads for the preceding year or the initial capital requirement of €20,000, whichever is the higher. Other than below, since its incorporation, the parent Company has complied with these requirements. On 24th June 2016, FairFX notified the FCA pursuant to its duty under Regulation 32(1)(a)(i) of the Payment Services Regulations 2009 (“PSRs”) that it had been in breach of the FCA’s capital requirements under Regulation 18(1) of the PSRs for the period from August 2014 to 23rd June 2016. The breach arose as the net proceeds from share issues by FairFX Group Plc were used to make intra-group loans to FairFX Plc. FairFX Plc became aware in June 2016 that its understanding that capital held by FairFX Group Plc could properly be included in its calculation of “own funds” for those purposes, was open to question. Viewed on a consolidated basis (as FairFX Plc then believed it was entitled to do), there would have been ample capital within the Group to meet FairFX Plc’s capital requirements. FairFX Plc and FairFX Group Plc have taken prompt steps to capitalise inter-company loans from FairFX Group Plc to FairFX Plc in the amount of £9,982,603, with effect from 23rd June 2016 to remedy the breach and as a result has substantial surplus capital above the FCA’s capital requirement. 20. Share options The Group issues equity-settled share-based payments to certain Directors and employees. Equity-settled share based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value of options granted has been calculated with reference to the Black-Scholes option pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions. During the year ended 31 December 2017, there were a number of share based payment transactions within the Group. 64 > Annual Report 2017 These movements are disclosed within the tables below: Date Granted 22/07/2014 22/07/2014 22/07/2014 22/07/2014 22/07/2014 22/07/2014 28/09/2016 28/09/2016 28/09/2016 01/12/2016 01/12/2016 01/12/2016 18/01/2017 18/01/2017 18/01/2017 At 1 January 2017 Granted during year Exercised during year Lapsed during year At 31 December 2017 Number Number Number Number Number Exercise price (£) 0.07 0.22 0.36 0.58 1.16 1.74 0.30 0.30 0.30 0.27 0.27 0.27 0.44 0.44 0.44 200,000 447,750 4,113,939 120,000 120,000 120,000 461,111 461,111 461,111 100,000 100,000 100,000 – – – – – – – – – – – – – – – 16,667 16,667 16,667 50,001 – – – – – – – – – – – – – – – – – – 200,000 447,750 (50,000) 4,063,939 – – – – – – – – – – – – 120,000 120,000 120,000 461,111 461,111 461,111 100,000 100,000 100,000 16,667 16,667 16,667 (50,000) 6,805,023 Total number of options 6,805,022 The above share options issued in FairFX Plc have been granted to both Directors and employees of the Group. At 31 December 2017, there were unexercised share options amounting to 4.38% (2016: 6.60%) of the Company’s total issued shares. Of the above options 5,150,222 (2016: 5,150,222) have been granted to Directors of the Company, with an additional 1,504,800 (2016: 904,800) having been granted to an individual who is director of a wholly owned subsidiary within the Group. The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant. Details of the inputs made into that model are disclosed in the table below. Weighted average share price (£) Weighted average exercise price (£) Expected volatility Expected option life in years Risk-free rate Expected dividends Fair value of the options granted (£) At 1 January 2017 Granted during year 0.39 variable 36.4% 5.3 0.10% none variable 0.62 variable 38.6% 9.1 0.10% none 0.20 a b c a. The weighted average exercise price varies dependent upon the amount stipulated in the individual option deeds. The exercise price ranges from £0.07 - £1.74. No shares were exercised in the year ending 31 December 2017. Annual Report 2017 > 65 Notes to the Consolidated Financial Statements (continued) For the year ended 31 December b. Expected volatility has been determined on the share price from date of admission up to 31 December in the year the options were granted. c. A summary of the fair value of the options granted is summarised in the table to the right. If the fair value of the option was deemed to be nil it is marked accordingly. Exercise price (£) Fair Value (£) 22/07/2014 22/07/2014 22/07/2014 22/07/2014 22/07/2014 22/07/2014 28/09/2016 01/12/2016 18/01/2017 0.07 0.22 0.36 0.58 1.16 1.74 0.30 0.27 0.44 0.28 0.20 0.12 – – – 0.13 0.11 0.20 The total fair value of the options is £781,383 (2016: £668,422). The charge expensed to the statement of comprehensive income is £112,961 (2016: £1,001). During the year the Group recognised a £511,912 deferred tax asset in relation to unexercised share options. Of this amount £148,463 was recognised in the current year’s tax expense and £363,449 was recognised to equity. 21. Financial commitments As at 31 December 2017 the Group had the following annual commitments under non-cancellable operating leases. The total future value of the minimum lease payments is as follows: Not later than one year Later than one year and not later than five years Land and buildings 2017 £ 341,597 1,312,297 1,653,894 2016 £ 290,760 1,414,768 1,705,528 The Group signed a lease on its London office premises on 13th November 2016 at an annual rental of £290,760 (value added tax (VAT) inclusive). The lease runs until 12th November 2022. The Group’s lease on its Chester office premises expires on 17th April 2018. The Group is in the closing stages of negotiating a new lease agreement to include a larger area of the existing premises. The lease is expected to take effect from 18 April 2018 at an annual VAT inclusive rental of £64,068 increasing to £76,882 in the second year and £89,695 in the third year. The lease is expected to run until 17 April 2021. 66 > Annual Report 2017 22. Related party transactions Key management personnel Key management who are responsible for controlling and directing the activities of the Group comprise the executive Directors, the Non-Executive Directors and senior management. The key management compensation is as follows:- Salaries, fees and other short-term employee benefits 2017 £ 1,177,629 2016 £ 902,939 A former Q Money Limited and a former Spectrum Financial Group Limited shareholder joined the key management personnel when those businesses being respectively acquired. There are no other related party transactions which, as a single transaction or in their entirety, are or may be material to the Company and have been entered into by the Company or any other member of the Group during the year ended 31 December 2017. 23. Ultimate controlling party Since 25 August 2017 no party has held a controlling interest in FairFX Group Plc and as such the Directors consider FairFX Group Plc to be the ultimate controlling party. 24. Post balance sheet events On 20th February 2018, the Group acquired the entire ordinary share capital of City Forex Limited. The initial consideration payable for the acquisition was £5,250,000, paid from existing cash. Further consideration of up to £750,000, payable from existing cash may be payable on 31 October 2018 subject to any completion accounts adjustment being applied and any claims under the warranties and indemnities. The initial accounting for the business combination is incomplete and as such the Group has not disclosure the fair value of consideration transferred, the fair value of assets acquired and liabilities assumed or the goodwill arising from the acquisition. The valuation techniques used for measuring the fair value of material assets acquired are yet to be determined. Annual Report 2017 > 67 3rd Floor, Vintners’ Place 68, Upper Thames Street London, EC4V 3BJ www.fairfx.com 

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