A N N U A L R E P O R T 2 0 1 6 ANNUAL REPORT CHAIRMAN RESULTS NEW BUSINESS Strategic report CHIEF EXECUTIVE FINANCE DIRECTOR BOARD DIRECTORS’ REPORT REMUNERATION REPORT FINANCIAL STATEMENTS AND NOTES ADDITIONAL INFORMATION 2 5 7 9 10 12 16 18 24 26 91 1 The impossible must be attempted, as frequently as possible. 2 CHAIRMAN Revenues up, profits up, dividend up. 2016 was M&C Saatchi’s best year ever and also our 21st. Let’s hope we don’t grow up. Let’s hope we don’t lose the boundless optimism which started the company. Graph One shows the number of new start-up companies created in each year since we started. Each start-up means a new partner for us. Our aim is to be the eternal entrepreneurs, constantly attracting the world’s creative thinkers, people who won’t be anybody’s wage-slave, in the belief that a free spirit can satisfy a client’s demands better than a fettered one. An unrestricted mind will fly higher, see further and see more. Graph Two shows where our record 2016 headline profits come from. Had we not opened new offices, started new disciplines, we would be forced down the road of endless acquisition. Graph One is the cause of the record revenues, profits and dividends that David and Jamie comment on. Graph Two shows that it works. If over time, we outperform our peers, it is because our growth is organic and as everyone knows, organic growth is sustainable, tastes better and is more satisfying for all. For 2017, the plan is to do more of the same but in different areas and different locations, with the best possible people. Jeremy Sinclair Chairman 15 March 2017 3 4 RESULTS REVENUE +26% PROFIT +18% EARNINGS +17% EPS +13% All on a headline basis as defined in note 4. 5 6 NEW BUSINESS BBQ Galore Bridgestone Civil Aviation Authority Codorniu Com Hem Department of Work and Pensions E.ON eBay Fox Google Home Office Huawei KLIA NN Investment Partners Pr1ma PHE (Antimicrobial Resistance) Rail Delivery Group Reebok Shell Strongbow Sun International Tabcorp Virgin Red Woolworths YouTube 7 STRATEGIC REPORT 8 CHIEF EXECUTIVE Summary of results 2016 saw excellent revenue momentum and earnings growth. Actual revenues grew by 26%, with constant currency revenues increasing 19%, whilst we increased like-for-like revenues 9%. We returned a headline operating margin of 10.2%, down from 10.4% in 2015, with the previously announced UK restructuring costs causing the drag. If these are excluded then the 2016 headline operating margin increased to 10.9%. The headline profit before tax advanced 18% to £23.7m and headline net earnings rose 17%. UK Like-for-like revenue in the UK was up 5%, with CRM, Sport & Entertainment, PR and Mobile continuing to perform particularly positively. We experienced a commendable run of account wins across our group of businesses in the year, including Virgin Red, the Home Office, NN Investment Partners, E.ON, PHE (Antimicrobial Resistance), the Rail Delivery Group, the Civil Aviation Authority and the Department of Work and Pensions. M&C Saatchi Mobile was awarded Digital Agency of the Year and Most Effective Media Agency of the Year, whilst M&C Saatchi Sport & Entertainment won Agency of the Year (for the fifth time). We are launching Re, our successful Australian brand identity unit, in the UK in the first quarter of 2017. The UK headline operating profit was 12% down on 2015 but included previously announced restructuring costs of £1.6m in the advertising agency unit, which if excluded, meant operating profit actually grew 2% on 2015. The headline operating margin decreased to 11.7% compared with 2015’s 14.0% but if the restructuring costs are excluded then the margin came in at 13.6%. These margins exclude the impact of Group recharges. The restructure is complete and the new management team is in place and making good progress. Europe European like-for-like revenues increased 5% year on year. Headline operating profit was up 10%, with a headline operating margin of 15.1% (2015: 16.1%). Our Stockholm office kept up its strong new business record and won the TV and broadband supplier Com Hem. Both Germany and Italy continue to shine, with Italy winning E.ON. In France, advertising was still slow but our agency was appointed by YouTube and Google for some projects and continues to grow through diversification. Our office in Spain is much improved, winning Codorniu and Huawei, and as a consequence we are increasing our shareholding from 24% to 51%. We are starting a sponsorship company in Madrid as well as opening Clear in Berlin. 9 CHIEF EXECUTIVE Continued Middle East and Africa Like-for-like revenues in the Middle East and Africa were up 23%. South Africa finished strongly, having lost their Edgars client mid-year but subsequently picked up the Sun International and Strongbow accounts. We are making a small acquisition in Johannesburg of 51% of Levergy, a sport and entertainment company, which will capitalise on the large South African sports market. Our Abu Dhabi lost Etihad and has subsequently been rebuilding revenues. Our Dubai office is growing steadily, as is Tel Aviv office. Operating profit in the region was up 4% and the headline operating margin dipped to 9.3% from 12.3% in 2015. Asia and Australia In Asia and Australia, like-for-like revenue was up 13% year on year. Australia had another good year, winning Woolworths (without a pitch), BBQ Galore, eBay and Tabcorp. They were awarded ‘Most Innovative Communications Company in Australia’, reflecting some of their ground breaking and pioneering work for their clients. In February 2017, we acquired 51% of Bohemia, a media buying and planning operation. This add on positions us well for satisfying the needs of our clients, who are increasingly seeking a closer relationship between their media agency and the content and creative providers. We also are launching The Source, our successful UK research operation, in Melbourne. Our associate in China, aeiou, had a good second half. Malaysia is still excelling and won the KLIA and Pr1ma accounts. Singapore is developing positively and won Shell and Bridgestone. Our Mobile operation continues to thrive in the region and we added new offices in New Delhi and Bangalore to work alongside our mobile offices in Singapore and Sydney. The headline regional operating margin was 11.0% (2015: 9.9%), with the headline operating profit ahead an impressive 37% on 2015. 10 Americas Constant currency revenues increased 97%, with like-for-like up 18%. With the acquisitions’ contribution, there was a very good 118% increase in operating profit to £7.0m and a headline operating margin of 15.4% (2015: 15.2%). Mobile are performing exceptionally well and building a formidable client base across the US. The SS+K relationship in New York is thriving. In the light of this outstanding growth, we increased our shareholding in SS+K from 33% to 51% in March 2016 and then to 67% in February of this. Also in March 2016, we acquired 51% of MCD Partners in New York and Chicago, who specialise in customer digital experience. This business is progressing well. Our office in Los Angeles lost the UGG account in the first quarter but later in the year won some projects for Reebok and Fox. Brazil’s macro-economic factors and trading remained tough, and appropriately we made an impairment charge of £3.7m for our Santa Clara associate. Both Clear and Sport & Entertainment are planning to open in Los Angeles in the first half and we are looking to open an office in Mexico, where the management of our Madrid office has a strong network of clients and contacts. Outlook 2016 was an outstanding year for M&C Saatchi. We continue to roll out our proven strategy of winning new business and starting new businesses and see positive momentum across our global network and business channels. The year has started well and we are confident that we will continue to make good progress in 2017 and beyond. David Kershaw Chief Executive 15 March 2017 11 FINANCE DIRECTOR Objectives and strategic priorities Key performance indicators The Group manages its operational performance through a number of key performance indicators: • revenue growth, both regionally and within marketing disciplines; • continual improvement of operating margins; • earnings per share growth; • enhancement of net cash from operating activities; and • improvement of the talent levels within the Group, in particular our creative capabilities, as well as the reputation and integrity of all our businesses. Revenue Our focus is on revenue growth and margin improvement, leaving our local CEOs to manage their cost base to their local currency revenues. Group revenues increased 26.0%, however excluding currency movement, the main influence being the positive effect of a weakening of sterling against most currencies following the Brexit vote, the constant currency revenue growth was 19.1% (constant currency basis). Excluding the impact of foreign currency movements and corporate transactions, then the like-for-like revenue rise was 9.2%. Operating profit and margin At a Group level, we monitor results on a headline basis. Our headline operating margin decreased to 10.2% (2015: 10.4%), however this margin includes £1.6m of restructuring costs within the UK advertising agency, which when excluded meant a headline operating margin of 10.9% and an improvement of 0.5%. Revenues advanced 25.9% in 2016 to £225.4m (2015: £178.9m). This resulted in headline operating profit increasing 24% to £23.0m (2015: £18.6m). Statutory operating profit declined to £6.7m (2015: £14.7m) with a charge of £16.3m (2015: £3.9m) non-headline items (note 1). Headline results The Group has used a headline basis to describe its results; this is not a defined term in IFRS. The headline results reflect the underlying profitability of our business units by excluding all effects of buying and selling equity by the Group; and the accounting effects our entrepreneurs holding equity in the business they run (business model). Such business model accounting effects, charge the income statement for the Group's fair value liability of its local entrepreneurs' equity conversion rights, but do not account for the value enhancement they make to our local holdings. In addition to headline, we describe our results on a constant currency basis, and on a like-for-like basis (constant currency excluding businesses acquired in the year). 12 The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations, changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investment in associates and investments; profit and loss on disposal of associates; and the income statement impact of put option accounting and share based payment charges. Such exclusions are consistent with our industry peer group. The key movements between statutory to headline results. £’m Headline profit before taxation Put option accounting Impairment charge Provision against investments Other non-headline charges Statutory profit before taxation 2016 23.8 (8.6) (3.7) (0.7) (4.0) 6.8 2015 20.1 (4.8) (0.9) – (1.8) 12.6 Movement 3.7 (3.8) % 18% (2.8) (0.7) (2.2) (5.8) (46)% For a full reconciliation of statutory to headline results see note 1. For constant currency, and like-for-like headline results see note 2. Statutory results The Group’s operations achieved revenue of £225.4m (2015: £178.9m) a growth of 26.0%. The Group’s operations statutory profit before tax reduced to £6.8m (2015: £12.5m) and basic EPS was 0.20p (2015: 9.08p). The reduction in year-on-year statutory profit before tax of £5.7m and the basic earnings per share decline, despite the underlying trading operations increasing their profit by £3.7m was caused by a number of accounting adjustments. The differences can be seen in note 1, and have been caused by an impairment of a Brazilian associate due to the local economic climate; an accounting revaluation of an associate when we took control and due to the increased IFRS2, share based payment charged in part caused by new businesses and growth shares issued in the year. Financial income and expense The Group’s headline net interest payable was £790k (2015: £472k). The upsurge in interest payable arose mainly from enhanced Group borrowing to fund acquisitions during 2016. Minority put option revaluations are excluded from the headline results as the charge can vary significantly each year and does not reflect the business’s underlying performance. The accounting for this produces counterintuitive effects with a rise in our share price and upturns in the actual or expected performance of our subsidiaries with put options, creating a finance expense charge to our accounts and reducing our profits. The charge for non-headline fair value adjustment to minority put option liabilities of £0.6m arose from two movements in our share price in 2016, which rose from 326.5p as at 1 January to 380.0p as at 31 December, offset by reductions in estimates of minority put liabilities. Further details can be seen in note 27. 13 FINANCE DIRECTOR Continued Tax The effective tax rate on headline profit before tax was 17.3% (2015: 19.2%). The Group does not recognise a deferred tax asset on any losses until the future profits of these businesses are probable (note 14). The Group benefitted from improved profitability from some of the newer offices utilising tax losses brought forward. The tax rate on statutory profit before tax was 50.78% (2015: 27.0%). The rise in statutory tax rate was predominantly caused by the new non-deductible for tax purposes IFRS2 charges in 2016, the level of which significantly reduced operating profit. Non-controlling interest The proportion of headline profits attributable to non-controlling shareholders grew to £4.2m (2015: £3.0m), with the uplift coming from the New York additions of MCD and SS+K as subsidiaries in March 2016. Dividend As part of a progressive dividend policy, the Board is proposing to pay a final dividend of 6.44p per share (2015: 5.60p), giving a total dividend of 8.29p compared to 7.21p in 2015. The final dividend will be paid, subject to shareholder approval at the 7 June 2017 AGM, on 7 July 2017 to shareholders on the register at 9 June 2017. Cash flow, banking arrangements and net assets Cash net of bank borrowings at 31 December 2016 was £3.6m compared to £8.5m at 31 December 2015. The Group continued to generate cash which it used to make small tactical acquisitions and fund new offices. The Group spent £12.8m on acquisitions, being primarily investments in New York; in March 2016, we acquired 51% of MCD, a customer digital experience agency and in the same month raised our shareholding in SS+K from 33% to 51%. To manage these and to fund acquisitions going forward, the Group augmented its banking facilities with RBS on 6 January 2016. These comprise a revolving credit facility totalling £40.0m, which reduces by £2.0m annually and has been agreed to 30 April 2020. On top of the above to fund working capital in the UK, the Group has a £5m debt factoring arrangement, of which £3.6m was drawn down at the year end. Net assets advanced to £49.4m (2015: £42.0m); the main movements being intangible assets up £22.7m, the net cash balance decreased to £3.6m (2015: £8.5m) and the minority put option liabilities increasing £8.8m. Capital expenditure Total capital expenditure for 2016 went up to £4.0m (2015: £2.0m). This was a function of refurbishment costs, with investment in fit out costs to improve the working environment of network office space. 14 Associates The return from our associates was a profit of £1,530k (2015: £2,017k). There was no share of profits from M&C Saatchi SAL, our associate that covers the Middle East and North Africa region, as there was in 2015. In Asia and Australia, our share of profits from associates of £290k (2015: £325k) came mainly from aeiou, our associate in China, whilst our share of our European associates based in Russia, Spain and Turkey was a small loss of £3k (2015: £25k profit). The profit share of our UK associates, being Blue 449 (formerly Walker Media) was £1,323k (2015: £809k) and the share from the Americas, was a loss of £80k (2015: £858k), reducing with our New York associate SS+K becoming a subsidiary in March 2016. Principal activity, trading review and future developments See Directors’ Report on page 18. Principal risks and uncertainties Client losses can be damaging, although some turnover over time is normal and to be expected. Losses can happen for a variety of reasons. Our client profile is in line with those of our major competitors, and we continue to convert new clients on the basis of our creative excellence, our strategic wisdom, the commitment and brilliance of our staff and our diverse portfolio of services. There is also the risk, as a result of client cash shortages (caused both by economic and political factors), that budgets and fees are reduced or clients stop trading or run out of funding after work has been commissioned. Furthermore, as our offerings develop to reflect clients’ changing marketing mix and cross selling opportunities, there is less visibility of future income. The other risks the Group faces are financial (details of which can be seen in note 6 of the financial statements), the risk that valued staff leave, and the risk that regulatory and legal changes affect our trading or ownership structures Strategic report approval By order of the Board Jamie Hewitt Finance Director 15 March 2017 15 BOARD JEREMY SINCLAIR Chairman DAVID KERSHAW Chief Executive MAURICE SAATCHI Executive Director BILL MUIRHEAD Executive Director JAMIE HEWITT Finance Director 16 JONATHAN GOLDSTEIN INDEPENDENT NON Executive Director MICHEAL PEAT INDEPENDENT NON Executive Director* MICHAEL DOBBS INDEPENDENT NON Executive Director** * Michael Peat was appointed as Non-Executive Director 8 June 2016. ** Michael Dobbs was appointed as Non-Executive Director on 1 January 2016. 17 DIRECTORS’ REPORT The Directors submit their report together with the audited financial statements of the Group and Company for the year ended 31 December 2016. Results and dividends The consolidated income statement on page 26 shows the results for the year. The Directors approved an interim dividend of 1.85p totalling £1,373,629 (2015: £1,158,000) and recommend a final dividend of 6.44p totalling £4,876,000 (2015: £4,033,000). Principal activity, trading review and future developments The principal activity of the Group during the year was the provision of advertising and marketing services. The review of trading, future developments and key performance indicators (being revenue growth, headline operating margin, headline earnings per share, and cash generation) is on pages 9 to 15. Other risks and uncertainties The Strategic Report deals with the principal risks and uncertainties. The Group trades internationally both through its local offices and via direct contracts in countries where we do not have offices. This trade exposes the Group to foreign exchange risk, political risk and in some locations physical risk. Other risks the Group is exposed to include client credit risk; the risk that the financial markets cause liquidity risk in addition to this client risk (given we have financial services clients); and cash flow risks. The Group mitigates such risks through monitoring, reviewing the available information and management’s negotiation of contractual terms. Further details of our risks and risk management can be seen in note 6. Going concern Given the strength of the Group’s balance sheet, its net cash, its bank covenants, the risks the Group faces (note 6), the expected trading performance and the two-year cash flow projections, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors continually review the Group's profit forecasts, and review monthly its balance sheet and cash flow forecasts. Annually, or earlier if needed, we review the long term (greater than one year) cash flow projections for the Group based on anticipated scenarios and acquisitions. If additional funding is required, it is secured before expenditure is made, as we have done during the year by extending our bank facility on 4 January 2016 (note 25). Based on this the Directors believe the Group will continue as a going concern for the foreseeable future. Financial instruments Details of the use of financial instruments by the Group are contained in notes 23 to 25 of the financial statements. 18 Political contributions and effect of European Union referendum The Group worked on an arm’s-length basis for the campaign to keep the UK part of the European Union, as well as providing £5,000 of staff time for free. The risks the Group faces with the UK departure from the EU include the following: • We receive dividend flows from our EU operations, which are presently not subject to unrecoverable withholding tax, that many non-EU resident Groups suffer. • The Group is dependent on high quality and flexible labour, to allow us to trade in the UK and export from the UK. The unknown changes to immigration rules are creating uncertainty with our EU staff working in our UK offices. • Increased exchange volatility, with our contracts exporting from the UK creates extra risks to the Group, In the short term this has created a benefit to the Group, but such a benefit can quickly reverse. During the year, the Group made no other political donations (2015: nil). Directors The names of the Directors are given on pages 16 and 17, biographies can be found on our website (www.mcsaatchiplc.com). The Board reviews the independence of the Non-Executive Directors on an annual basis and considers them independent. All three Non-Executive Directors sit on our remuneration committee and audit committee, with Jonathan Goldstein serving as Chair of our remuneration committee and as Senior Independent Director and Michael Peat serving as Chair of our audit committee. The Board met six times during the year. The Board governs in the spirit of the QCA corporate governance code for small and mid-size quoted companies. Audit committee The Audit committee meets formally twice a year with the Group’s Auditor (KPMG LLP), planning and reviewing the audit, and considering the Group Auditor’s independence. The committee’s Chairman has regular direct contact with the Group’s Auditor. At the end of 2014, the Group appointed BDO LLP as an internal auditor. The internal auditor has direct contact with the Audit committee Chairman. Remuneration committee Meets on an ad hoc basis, when there is a need to review Executive Directors’ pay and rewards. Nominations committee Meets on an ad hoc basis, when there is a need to appoint new Directors. 19 DIRECTORS’ REPORT Continued Social responsibility The Group follows the guidance in the International (Social Responsibility) Standard ISO 26000 and is accredited for BS OHSAS 18001 and ISO 14001. We are in the process of registering with CIPS Sustainability Index. On top of which, the Group is involved with many campaigns (including paid, low bono and pro bono) that help create a socially responsible world. Employees and equal opportunities The Group’s equal opportunities policy is not to discriminate on any grounds other than someone’s ability to work effectively. We will make reasonable adjustments to working arrangements or to a physical aspect of the workplace. The Group recognises that its principal asset is its employees and their commitment to the Group’s service, standards and customers. Decisions are made wherever possible in consultation with local management, with succession planning performed on a regular basis at all levels. Communication methods to employees vary according to need and local business size and can include all methods of communication. Slavery and human trafficking statement The Group continually monitors its supply chains and operates a zero-tolerance policy to slavery and human trafficking as will be reflected in its Modern Slavery Statement. Insurance The Company purchases insurance to cover its Directors and Officers against costs they may incur in defending themselves in legal proceedings instigated against them as a direct result of duties carried out on behalf of the Company. 20 Substantial shareholdings As at 2 March 2016, the Company had been notified by shareholders representing 3% or more of issued share capital of the following interests: Paradice Investment Management Octopus Investments Aviva plc and its subsidiaries David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Herald Investment Trust plc Hargreave Hale Invesco Perpetual Number of shares 9,249,099 7,179,682 5,423,841 4,127,060 4,127,060 4,127,060 4,127,060 3,836,433 3,700,000 3,079,354 % 12.2% 9.5% 7.2% 5.5% 5.5% 5.5% 5.5% 5.1% 4.9% 4.1% Regularly updated details of the Directors and substantial shareholders can be found on our corporate website www.mcsaatchiplc.com. Events since the end of the financial year During February 2017, the Group made the following small acquisitions: • A controlling interest in our Spanish associate; • Increased our holding in Shepardson Stern & Kaminsky LLP from 50.1% to 66.7% by issuing Group equity; and • Acquired Bohemia an Australian media planning and buying operation. The Directors are not aware of any other events since the end of the financial year that have had, or may have, a significant impact on the Group’s operations, the results of those operations, or the state of affairs of the Group in future years. Treasury shares At the Annual General Meeting (AGM) in 2016, the Directors were given the authority to purchase up to 7,210,500 of its ordinary shares. The Directors will seek to renew this authority at the next AGM. During the year, the Company held 700,000 of its ordinary shares (“treasury shares”). The Directors will use them to fulfil option obligations at a later date. Directors’ power to issue shares At the AGM in 2016, the Directors were given the authority to issue up to 48,005,000 of its ordinary shares of which 7,210,500 were approved to be issued for cash. During the year, the Company issued 2,235,177 shares to fulfil options and to acquire equity (note 29). The Company did not issue any shares for cash. Agreements that vest on change of control Depending on the circumstance some of our put option agreements vest on change of control. 21 DIRECTORS’ REPORT Continued Directors’ responsibilities The Directors are responsible for preparing the Annual Report, the Strategic Report, the Directors’ Report and the Group and parent company financial statements in accordance with applicable law and regulations. 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 consolidated financial statements in accordance with IFRSs as adopted by the EU and applicable law, and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. 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 and prudent; • for the Group consolidated financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the European Union; • for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the group and parent company will continue in business. 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 have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. 22 Website publication The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website (www.mcsaatchiplc.com). Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditors All the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company’s Auditors for the purposes of their audit and to establish that the Auditors are aware of that information. The Directors are not aware of any relevant audit information of which the Auditors are unaware. KPMG LLP will be seeking re-appointment as Auditor of the Company and a resolution proposing this will be put to the 2017 AGM. By order of the Board Andy Blackstone Company Secretary 15 March 2017 23 REMUNERATION REPORT Policy on Directors’ remuneration Attracting and retaining high calibre executives is a key Company objective. We seek to reward them in a way that encourages the creation of value for shareholders. Directors’ pension arrangements The pension contributions, if made, are to the Directors’ money purchase pension schemes. Directors’ contracts All Executive Directors listed in the Remuneration Report have service contracts with 12-month notice periods. All Non- Executive Directors have contracts with a nil to 30-day notice period dependent on the circumstances. Directors’ options At 31 December 2015, no Director held any options. During the year, the following options were issued: Conditional share awards In 2016, four participants paid (by way of a combination of payroll taxes and subscription price) £100,727 each for the award. This amount is not refundable if the vesting conditions are not met. In addition, one participant paid (by way of a combination of subscription price and deferred payment) £51,266.75 for the award. This amount is not refundable and will be paid in full if the vesting conditions are not met. Vesting of the awards is subject to: • the achievement of certain earnings and total shareholder return (TSR) targets (the “Performance Conditions”) measured over the period from 1 January 2015 to 31 December 2018 (the “Performance Period”); and • the Company's share price being above £5.00 per share at a point during the period between 1 January 2019 and 31 December 2022 (the “Share Price Target”). Performance Conditions: • 20% of the award will be earned if average diluted EPS growth over the Performance Period is above 10%. This 20% level will increase to 100% of the award on a straight-line basis if diluted EPS growth over the Performance Period is between 10% and 20% (with 100% of the award being earned if diluted EPS growth of 20% or more is achieved). Below 10% diluted EPS growth, no award will be earned. • Earned awards will be adjusted by the TSR condition. If TSR over the Performance Period is above 50% an earned award will be increased by a half; if TSR over the Performance Period is between 0% and 50% no adjustment will be made to an earned award; if TSR over the Performance Period is below 0% then earned awards will be reduced by 25%. The base share price used for TSR is 297p being the share price at the time the award was valued. Subject to the Share Price Target being achieved, an earned award, representing shares in M&C Saatchi Worldwide, may be exchanged for M&C Saatchi shares. The maximum number of M&C Saatchi shares that may be required to be issued under the LTIP arrangements is 3,383,605. The award caused an accounting charge of £231k in the year (2015: nil). Other benefits No Director of the Company has received or become entitled to receive a benefit (other than a fixed salary as an employee/ consultant of the Company, the options indicated in this report, or a benefit included in the aggregate amount of remuneration shown in the financial statements) by reason of a contract made by the Company or a related corporation of which he is a member or with a company in which he has a substantial financial interest. By order of the Board Andy Blackstone Company Secretary 15 March 2017 24 2016 Directors David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Jamie Hewitt Total Non-Executive Directors Jonathan Goldstein Michael Dobbs Michael Peat Adrian Martin Total Basic salary £000 Bonus1 £000 Benefits in kind2 £000 Pension £000 374 374 374 374 250 1,746 40 40 22 18 120 50 50 50 50 – 200 – – – – – 48 49 45 46 4 192 – – – – – 1 – – – 15 16 – – – – – Total £000 473 473 469 470 269 2,154 40 40 22 18 120 TOTAL REWARDS 1,866 200 192 16 2,274 Basic salary £000 Bonus £000 Benefits in kind1 £000 Pension £000 Total £000 2015 Directors David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Jamie Hewitt Total Non-Executive Directors Lloyd Dorfman Jonathan Goldstein Adrian Martin Total TOTAL REWARDS 374 374 374 374 250 1,746 40 40 40 120 1,866 – – – – – – – – – – – 49 55 50 49 6 209 – – – – 209 2 – – – 15 17 – – – – 17 1 These paper bonuses were given as part of the issue conditional share award. 2 Benefits in kind include car allowances and permanent health insurance benefit. 425 429 424 423 271 1,972 40 40 40 120 2,092 25 CONSOLIDATED INCOME STATEMENT Year ended 31 December Billings Revenue Operating costs Operating profit Share of results of associates and joint ventures Finance income Finance costs Profit before taxation Taxation Profit for the year Attributable to: Equity shareholders of the Group Non-controlling interests Profit for the year Earnings per share Basic (pence) Diluted (pence) Headline results* Operating profit Profit before tax Profit after tax attributable to equity shareholders of the Group Basic earnings per share (pence) Diluted earnings per share (pence) * The reconciliation of headline to statutory results above can be found in note 1. The notes on pages 34 to 81 form part of these consolidated financial statements. Note 1 1 7 1 10 11 12 1 14 1 1 1 1 1 2016 £000 458,180 225,387 (218,738) 6,649 1,530 440 (1,828) 6,791 (3,451) 3,340 144 3,196 3,340 0.20p 0.19p 23,037 23,776 15,423 21.07p 20.55p Total 2015 £000 375,107 178,928 (164,221) 14,707 2,017 299 (4,477) 12,546 (3,386) 9,160 6,474 2,686 9,160 9.08p 9.04p 18,578 20,123 13,241 18.57p 18.49p 26 CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME Year ended 31 December Profit for the year Other comprehensive income* Exchange differences on translating foreign operations before tax Other comprehensive income for the year net of tax Total comprehensive income for the year Total comprehensive income attributable to: Equity shareholders of the Group Non-controlling interests Total comprehensive income for the year * All items in consolidated statement of comprehensive income will be reclassified to the income statement. The notes on pages 34 to 81 form part of these consolidated financial statements. Total 2016 £000 3,340 6,754 6,754 10,094 6,898 3,196 10,094 Total 2015 £000 9,160 (1,316) (1,316) 7,844 5,158 2,686 7,844 27 CONSOLIDATED BALANCE SHEET At 31 December Non-current assets Intangible assets Investments in associates Plant and equipment Deferred tax assets Other non-current assets Current assets Trade and other receivables Current tax assets Cash and cash equivalents Current liabilities Bank overdraft Trade and other payables Current tax liabilities Other financial liabilities Deferred and contingent consideration Minority shareholder put option liabilities Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities Other financial liabilities Minority shareholder put option liabilities Other non-current liabilities Total net assets The notes on pages 34 to 81 form part of these consolidated financial statements. Note 17 20 21 15 22 23 24 25 26 27 15 25 27 28 2016 £000 51,004 19,277 10,619 3,112 7,455 91,467 109,824 1,057 32,222 143,103 2015 £000 28,286 24,811 8,197 1,476 8,349 71,119 87,692 844 32,344 120,880 - (98) (115,886) (94,533) (1,186) (3,670) - (20,216) (140,958) 2,145 93,612 (380) (28,277) (12,950) (2,608) (44,215) 49,397 (1,204) (3,155) (1,792) (16,738) (117,520) 3,360 74,479 (30) (23,594) (7,626) (1,208) (32,458) 42,021 28 At 31 December Equity Share capital Share premium Merger reserve Treasury reserve Minority interest put option reserve Non-controlling interest acquired Foreign exchange reserve Retained earnings Equity attributable to shareholders of the Group Non-controlling interest Total equity Note 29 2016 £000 749 24,099 31,592 (792) (20,598) (13,122) 4,770 15,871 42,569 6,828 49,397 2015 £000 727 17,338 31,592 (792) (12,595) (9,233) (1,984) 12,673 37,726 4,295 42,021 These consolidated financial statements were approved and authorised for issue by the Board on 15 March 2017 and signed on its behalf by: Jamie Hewitt Finance Director M&C Saatchi plc Company Number 05114893 The notes on pages 34 to 81 form part of these consolidated financial statements. 29 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY At 1 January 2015 Acquisitions Exercise of put options Office closure Exchange rate movements Issue of shares to minorities Issue of minority put options Reclassification of minority put Option exercise Share option charge Dividends Total transactions with owners Total comprehensive income for the year At 1 January 2016 Acquisitions Acquisitions of minority interest Exercise of put options Disposals Exchange rate movements Issue of shares to minorities Issue of options Share option charge Dividends Total transactions with owners Total comprehensive income for the year At 31 December 2016 Note 18 27 30 30 16 18 27 30 30 16 Share capital £000 683 Share premium £000 16,807 – 13 – – – – – 31 – – 44 – 727 – 4 18 – – – – – – 22 – 749 – 224 – – – – – 307 – – 531 – 17,338 – 1,364 5,397 – – – – – – 6,761 – 24,099 Merger reserve £000 27,689 – 3,903 – – – – – – – – 3,903 – 31,592 – – – – – – – – – – – Treasury reserve £000 (792) – – – – – – – – – – – – (792) – – – – – – – – – – – 31,592 (792) The definitions of the reserves reported in the above can be found in note 5. The notes on pages 34 to 81 form part of these consolidated financial statements. 30 MI put option reserve £000 (13,070) Non-controlling interest acquired £000 (7,882) Foreign exchange reserves £000 (668) – 1,274 – 39 – (2,190) 1,352 – – – 475 – (12,595) (10,249) – 2,366 – (120) – – – – (8,003) – (20,598) – (1,274) – (77) – – – – – – (1,351) – (9,233) – (1,222) (2,366) – (301) – – – – (3,889) – (13,122) – – – – – – – – – – – (1,316) (1,984) – – – – – – – – – – 6,754 4,770 Retained earnings £000 9,639 – Subtotal £000 32,406 – (48) (158) – – – 306 (3) 1,125 (4,662) (3,440) 6,474 12,673 – – – – – – 515 7,997 (5,458) 3,054 144 15,871 4,092 (158) (38) – (2,190) 1,658 335 1,125 (4,662) 162 5,158 37,726 (10,249) 146 5,415 – (421) – 515 7,997 (5,458) (2,055) 6,898 42,569 Non-controlling interest in equity £000 3,466 161 24 158 (121) 1,850 – – (338) – (3,591) (1,857) 2,686 4,295 1,919 – (47) (10) 627 14 – – (3,166) (663) 3,196 6,828 Total £000 35,872 161 4,116 – (159) 1,850 (2,190) 1,658 (3) 1,125 (8,253) (1,695) 7,844 42,021 (8,330) 146 5,368 (10) 206 14 515 7,997 (8,624) (2,718) 10,094 49,397 31 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December Revenue Operating expenses Operating profit Adjustments for: Depreciation of plant and equipment Loss on sale of plant and equipment Loss on sale of software intangibles Profit on disposal associate Fair value revaluation of associate on step acquisition Impairment and amortisation of acquired intangible assets Impairment of associate and investments Impairment of goodwill Amortisation of capitalised software intangible assets Equity settled share based payment expenses Operating cash before movements in working capital Increase in trade and other receivables increases in trade and other payables Cash generated from operations Tax paid Net cash from operating activities Investing activities Acquisitions of subsidiaries net of cash acquired Disposal of subsidiaries net of cash divested Acquisitions of associates Disposal of associates Acquisitions of investments Proceeds from sale of plant and equipment Purchase of intangibles Purchase of plant and equipment Purchase of capitalised software Dividends received from associates Interest received Net cash consumed investing activities Net cash from operating and investing activities The notes on pages 34 to 81 form part of these consolidated financial statements. Note 2016 £000 225,387 2015 £000 178,928 7 (218,738) (164,221) 6,649 14,707 21 20 17 20,22 17 17 30 19 19 22 17 21 20 2,668 542 10 – 859 2,324 4,389 – 354 7,997 25,792 2,128 36 12 (217) – 1,940 – 889 98 1,125 20,718 (22,334) (17,192) 19,342 22,800 (4,073) 18,727 (12,822) (263) – – (1,056) 32 – (3,873) (34) 177 440 (17,399) 1,328 18,018 21,544 (5,326) 16,218 (79) – (3,765) 325 (1,366) 7 (327) (1,970) (158) 1,173 299 (5,861) 10,357 32 Year ended 31 December Net cash from operating and investing activities Financing activities Dividends paid to equity holders of the Company Dividends paid to non-controlling interest Issue of shares to minorities Repayment of finance leases Inception of invoice discounting Repayment of invoice discounting Inception of bank loans Repayment of bank loans Interest paid Net cash consumed by financing activities Net (decrease)/increase in cash and cash equivalents Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Bank loans and borrowings* NET CASH** CAPITAL TOTAL MARKET CAPITALISATION (at 31 December: 380.0p; 326.50p) GEARING RATIO* * Bank loans and borrowings excludes £3,645k (2015: £3,130k) of invoice discounting. ** Gearing ratio and net cash are not defined under IFRS; see note 5. Note 16 2016 £000 1,328 (5,458) (3,166) 514 (36) 4,455 (3,943) 11,433 (7,191) (1,230) (4,622) (3,294) 3,270 32,246 32,222 2015 £000 10,357 (4,662) (3,591) 15 (31) 3,130 - 6,349 (968) (771) (529) 9,828 (903) 23,321 32,246 25 (28,582) (23,800) 3,640 8,446 284,811 237,414 nil nil 33 NOTES 1. Headline results and earnings per share The analysis below provides a reconciliation between the Group’s statutory results and the headline results. Amortisation of acquired intangibles Impairment of associate Provision against investments Revaluation of an associate on acquisition Acquisition related remuneration* Put option accounting** (note 30 & (note 17) £000 – (note 20) £000 – (note 22) £000 – (note 20) £000 – (note 8) note 27) £000 – Headline results £000 458,180 2016 £000 458,180 225,387 6,649 1,530 440 (1,828) – – 2,324 3,738 – – – – – – 6,791 2,324 3,738 (3,451) (659) – 3,340 1,665 3,738 (3,196) (256) – Note 2 2 7 10 11 12 2 14 Year ended 31 December 2016 Billings Revenue Operating profit Share of results of associates and JV Finance income Finance cost Profit before taxation Taxation Profit for the year Non-controlling interests Profit attributable to equity holders of the Group – 651 – – – 651 – 651 – – 859 – – – 859 – 859 – – 225,387 819 7,997 23,037 – – – – – 597 1,530 440 (1,231) 819 8,594 23,776 – (4,110) 819 8,594 19,666 (540) (251) (4,243) 144 1,409 3,738 651 859 279 8,343 15,423 * Details of this breakdown can be found in note 8. The non-controlling interest charge is moved to operating profit due to underlying equity being defined as a conditional share award. ** These values represent put options accounted for as conditional share awards (£7,997k) (note 30) and fair value adjustments to minority put option liabilities (£597k) (note 27), the non-controlling interest charge is the additional charge had the put option not been accounted for under IFRS2 conditional share awards. The Directors believe that the headline results and headline earnings per share provide additional useful information on the underlying performance. The headline result is used for internal performance management, calculating the value of subsidiary convertible shares and minority interest put options. The term headline is not a defined term in IFRS. The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations, changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investment in associates and investments; profit and loss on disposal of associates; and the income statement impact of put option accounting and share based payment charges. 34 Acquisition of remaining shares in loss making associate Impairment of goodwill (note 17) £000 – (note 18) £000 – Acquisition related remuneration Amortisation of acquired intangibles (note 17) £000 – – 1,940 – – – 1,940 (541) 1,399 2015 £000 375,107 178,928 14,707 2,017 299 (4,477) 12,546 (3,386) 9,160 – (217) – – – (217) 71 (146) – 889 – – – 889 – 889 Put option accounting* (note 30 & note27) £000 – – 1,125 – – 3,706 4,831 – Headline results £000 375,107 178,928 18,578 2,017 299 (771) 20,123 (3,856) 4,831 16,267 – (3,026) (note 8) £000 – – 134 – – – 134 – 134 – (2,686) (162) – (178) Note 2 2 7 10 11 12 2 14 Year ended 31 December 2015 Billings Revenue Operating profit Share of results of associates and JV Finance income Finance cost Profit before taxation Taxation Profit for the year Non-controlling interests Profit attributable to equity holders of the Group 6,474 1,237 (146) 711 134 4,831 13,241 * These values represent put options accounted for under IFRS2 (£1,125k) (note 30) and fair value adjustments to minority put option liabilities (£3,706k) (note 27). 35 NOTES Continued 1. Headline results and earnings per share continued Basic and diluted earnings per share are calculated by dividing profit attributable to equity holders of the Group by the weighted average number of shares in issue during the year. Year ended 31 December 2016 Profit attributable to equity shareholders of the Group Basic earnings per share Weighted average number of shares (thousands) Basic EPS Diluted earnings per share* Weighted average number of shares (thousands) as above Add – Conditional shares Total Diluted earnings per share 2016 £000 144 Headline 2016 £000 15,423 73,193 0.20p 73,193 21.07p 73,193 73,193 1,867 75,060 0.19p 1,867 75,060 20.55p * All the put options detailed in note 27 are non-dilutive as the exercise price approximates fair value of the underlying non-controlling interest. 36 Year ended 31 December 2015 Profit attributable to equity shareholders of the Group Basic earnings per share Weighted average number of shares (thousands) Basic EPS Diluted earnings per share* Weighted average number of shares (thousands) as above Add – Conditional shares Total Diluted earnings per share 2015 £000 6,474 Headline 2015 £000 13,241 71,319 9.08p 71,319 18.57p 71,319 71,319 300 71,619 9.04p 300 71,619 18.49p * All the put options detailed in note 27 are non-dilutive as the exercise price approximates fair value of the underlying non-controlling interest. 37 NOTES Continued 2. Segmental information Segmental and headline income statement Year ended 31 December 2016 Billings Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates and JV Financial income and cost Profit before taxation Taxation Profit for the year Non-controlling interests Profit attributable to equity shareholders of the Group Headline basic EPS UK £000 154,844 88,504 10,398 (4,879) 5,519 1,323 (343) 6,499 (811) 5,688 (1,320) Europe £000 38,504 26,685 4,028 (87) 3,941 (3) (43) 3,895 (1,350) 2,545 (494) Middle East and Africa £000 22,810 11,673 1,085 – 1,085 - 43 1,128 (362) 766 (326) Asia and Australia £000 88,665 52,531 5,754 (343) 5,411 290 124 5,825 (1,458) 4,367 (844) Americas £000 153,357 Total £000 458,180 45,994 225,387 7,119 28,384 (38) (5,347) 7,081 23,037 (80) (572) 1,530 (791) 6,429 23,776 (129) (4,110) 6,300 19,666 (1,259) (4,243) 4,368 2,051 440 3,523 5,041 15,423 21.07p Non-cash costs included in headline operating profit: Depreciation Amortisation of software Share option charges Office locations (1,364) (268) – London (242) (62) – Paris Milan Berlin Madrid Geneva Stockholm Moscow Istanbul (185) (9) – (329) (13) – (548) (2,668) (2) – (354) – New York Chicago Los Angeles San Francisco São Paulo Johannesburg Cape Town Abu Dhabi Dubai Beirut Tel Aviv Sydney Melbourne New Delhi Bangalore Islamabad Hong Kong Shanghai Tokyo Kuala Lumpur Bangkok Singapore Segmental results are reconciled to the income statement in note 1. Our segmental and headline results are one and the same. The above segments reflect the fact that our business is run on an operating unit basis. In accordance with IFRS8 paragraph 12, we have aggregated our operating units into regional segments. 38 Segmental and headline income statement Year ended 31 December 2015 Billings Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates and JV Financial income and cost Profit before taxation Taxation Profit for the year Non-controlling interests Profit attributable to equity shareholders of the Group Headline basic EPS UK £000 155,226 84,159 11,782 (4,970) 6,812 809 (527) 7,094 (506) 6,588 (1,169) Europe £000 37,668 Middle East and Africa £000 18,965 Asia and Australia £000 68,140 22,745 3,668 (83) 3,585 25 (60) 3,550 (1,190) 2,360 (658) 8,549 1,049 – 1,049 – (17) 1,032 (268) 764 (372) 42,103 4,187 (308) 3,879 325 69 4,273 (1,209) 3,064 (477) Americas £000 95,108 Total £000 375,107 21,372 178,928 3,253 23,939 – (5,361) 3,253 18,578 858 63 2,017 (472) 4,174 20,123 (683) (3,856) 3,491 16,267 (350) (3,026) 5,419 1,702 392 2,587 3,141 13,241 18.57p Non-cash costs included in headline operating profit: Depreciation Amortisation of software Share option charges Office locations (1,269) (9) (5) London (208) (51) – Paris Milan Berlin Madrid Geneva Stockholm Moscow Istanbul (145) (16) – (242) (18) – (267) (2,131) (4) – (98) (5) New York Los Angeles San Francisco São Paulo Johannesburg Cape Town Abu Dhabi Beirut Tel Aviv Sydney Melbourne New Delhi Hong Kong Shanghai Tokyo Kuala Lumpur Bangkok Singapore 39 NOTES Continued 2. Segmental information continued Segmental balance sheet This note includes balance sheet information required by IFRS8 and other information required by IFRS12. Year ended 31 December 2016 Non-current assets Current assets Total assets Current liabilities Non-current liabilities Total liabilities Non-controlling interest in equity at year end Dividends paid to non-controlling interests during year Non-headline amortisation Non-headline impairment Capital expenditure Depreciation Year ended 31 December 2015 Non-current assets Current assets Total assets Current liabilities Non-current liabilities Total liabilities Non-controlling interest in equity at year end Dividends paid to non-controlling interests during year Non-headline amortisation Non-headline impairment Capital expenditure Depreciation UK £000 47,912 56,562 104,474 Europe £000 3,861 19,493 23,354 (18,241) (20,879) (404) (439) (18,645) (21,318) 2,063 991 1,000 651 2,307 1,364 UK £000 45,905 44,144 90,049 281 678 41 – 297 242 Europe £000 3,416 16,672 20,088 (13,703) (18,269) (366) (140) (14,069) (18,409) 1,924 1,167 1,031 – 1,193 1,268 636 384 55 – 230 208 Middle East and Africa £000 1,619 7,912 9,531 (6,910) (39) (6,949) 486 129 267 – 524 185 Middle East and Africa £000 600 5,472 6,072 (4,667) (21) (4,688) 249 248 496 – 67 145 Asia and Australia £000 4,182 24,974 29,156 Americas £000 30,781 33,105 63,886 Total £000 88,355 142,046 230,401 (20,704) (631) (21,335) (49,152) (115,886) (1,095) (2,608) (50,247) (118,494) 1,111 2,887 6,828 797 77 – 543 329 Asia and Australia £000 3,318 17,495 20,813 571 3,166 939 3,738 309 548 2,324 4,389 3,980 2,668 Americas £000 16,404 36,253 52,657 Total £000 69,643 120,036 189,679 (15,337) (350) (15,687) (44,349) (96,325) (331) (1,208) (44,680) (97,533) 970 1,578 200 889 378 242 516 214 158 – 168 265 4,295 3,591 1,940 889 2,036 2,128 40 Reportable segment assets are reconciled to total assets as follows: Segment assets Current tax asset Deferred tax asset Total assets per balance sheet Reportable segment liabilities are reconciled to total liabilities as follows: Segment liabilities Deferred tax liabilities Current tax liabilities Bank overdraft Invoice discounting Other financial liabilities Minority shareholder put option liabilities Total liabilities per balance sheet Additional regional splits required for IFRS8 by origin. 2016 £000 230,401 1,057 3,112 2015 £000 189,679 844 1,476 234,570 191,999 2016 £000 (118,494) (380) (1,186) – (3,645) (28,302) (33,166) 2015 £000 (97,533) (30) (1,204) (98) (3,130) (23,619) (24,364) (185,173) (149,978) Year ended 31 December 2016 Revenue Non-current assets Year ended 31 December 2015 Revenue Non-current assets UK £000 88,504 47,912 Europe £000 26,685 3,861 Middle East and Africa £000 11,673 Australia £000 42,311 1,619 2,940 Asia £000 10,220 1,242 Americas £000 45,994 30,781 UK £000 84,159 45,904 Europe £000 22,745 3,416 Middle East and Africa £000 8,549 Australia £000 33,272 600 2,291 Asia £000 8,831 1,028 Americas £000 21,372 16,404 Total £000 225,387 88,355 Total £000 178,928 69,643 41 NOTES Continued 2. Segmental information continued Segmental income statement translated at 2015 exchange rates It is normal practice in our industry to provide like-for-like results and constant currency results. Had our 2016 results been translated at 2015 exchange rates then our constant currency results would have been: Year ended 31 December 2016 Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates and JV Financial income and cost Profit before taxation Taxation Profit for the year Increase/(decrease) in 2016 results caused by translation differences UK £000 88,504 10,398 (4,885) 5,513 1,323 (393) 6,443 (799) 5,644 44 Europe £000 23,766 Middle East and Africa £000 11,356 Asia and Australia £000 47,418 Americas £000 42,106 3,573 (78) 3,495 (5) (43) 3,447 (1,197) 2,250 295 1,095 – 1,095 – 44 1,139 (371) 768 5,298 (308) 4,990 273 113 5,376 (1,337) 4,039 (2) 328 6,800 (38) 6,762 (72) (510) 6,180 (65) 6,115 185 Total £000 213,150 27,164 (5,309) 21,855 1,519 (789) 22,585 (3,769) 18,816 850 Had our 2016 results been translated at 2015 exchange rates, with the companies we owned in 2015, then our like-for-like results would have been: Year ended 31 December 2016 Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates and JV Financial income and cost Profit before taxation Taxation Profit for the year Increase/(decrease) in 2016 results caused by translation and acquisition differences UK £000 88,504 10,398 (4,885) 5,513 1,323 (393) 6,443 (799) 5,644 44 Europe £000 23,766 Middle East and Africa £000 10,557 Asia and Australia £000 47,418 Americas £000 25,294 3,573 (78) 3,495 (5) (43) 3,447 (1,197) 2,250 295 1,095 – 1,095 – 44 1,139 (371) 768 (2) 5,298 (308) 4,990 273 113 5,376 (1,337) 4,039 3,934 (38) 3,896 555 (454) 3,997 123 4,120 Total £000 195,539 24,298 (5,309) 18,989 2,146 (733) 20,402 (3,581) 16,821 The key currencies that affect us and the average exchange rates used were: US dollar Malaysian ringgit Australian dollar South African rand Brazilian real Euro 42 328 2,180 2,845 2016 1.3558 5.6104 1.8247 19.9843 4.7442 1.2244 2015 1.5282 5.9695 2.0354 19.5022 5.0952 1.3780 3. Group subsidiaries The Group believes that local entrepreneurs should own a local stake in their destiny. This is reflected in the list below and the accounting effects in notes 20, 27 and 30. The principal group subsidiaries and associated companies are: As at 31 December 2016 UK Audience Communications Ltd** Clear Ideas Consultancy LLP** Clear Ideas Ltd** FYND Media Ltd Horizon PR Ltd** Human Digital Ltd** Influence Communications Ltd Lean Mean Fighting Machine Ltd** LIDA (UK) LLP** LIDA Ltd** & *** M&C Saatchi (UK) Ltd** & *** M&C Saatchi Accelerator Ltd** M&C Saatchi European Holdings Ltd** M&C Saatchi Export Ltd** & *** M&C Saatchi German Holdings Ltd** M&C Saatchi International Ltd** M&C Saatchi Marketing Arts Ltd** M&C Saatchi Merlin Ltd** M&C Saatchi Middle East Holdco Ltd** M&C Saatchi Mobile Ltd** M&C Saatchi Network Ltd** & *** M&C Saatchi PR International Ltd** M&C Saatchi PR Ltd** M&C Saatchi PR UK LLP** M&C Saatchi Russia Ltd** M&C Saatchi Shop Ltd** M&C Saatchi Sport & Entertainment Ltd** & *** M&C Saatchi WMH Ltd** M&C Saatchi World Services LLP** M&C Saatchi Worldwide Ltd** & *** Play London Ltd Re Worldwide Ltd** SaatchInvest Ltd** Talk Content Ltd Talk PR Ltd** & *** Talk Store PR Ltd Talk Tech PR Ltd Country Effective % ownership United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom 100 100 100 100 80 100 95 100 99 100 100 80 96 100 96 100 50 55 80 90 100 100 100 60 50 73 97 100 80 100 100 100 100 46 51 51 51 Activities Dormant Marketing Marketing Media Buying PR Agency (joint venture) Research Dormant Advertising Direct Marketing Direct Marketing Adverting Advertising Holding Company Advertising Holding Company Holding Company Advertising Talent Management Holding Company Mobile Marketing Holding Company PR Agency PR Agency PR Agency Advertising Marketing Sport Sponsorship & Entertainment PR Agency Holding Company Marketing Holding Company Dormant Dormant Holding Company Dormant PR Agency Dormant Dormant 43 NOTES Continued 3. Group Subsidiaries continued As at 31 December 2016 UK The Source (London) Ltd** The Source (W1) LLP** Tricycle Communications Ltd** Walker Media Ltd EUROPE M&C Saatchi PR srl Media By Design Spain SA FCINQ SAS M&C Saatchi Gad SAS M&C Saatchi Little Stories SAS M&C Saatchi One SARL Paris Gad Holding SAS M&C Saatchi Berlin GmbH M&C Saatchi Sports & Entertainment GmbH M&C Saatchi Sun GmbH M&C Saatchi SpA M&C Saatchi International Holdings BV Clear Netherlands BV M&C Saatchi Madrid SRL M&C Saatchi Digital SL M&C Saatchi AB M&C Saatchi (Switzerland) SA MIDDLE EAST AND AFRICA M&C Saatchi Bahrain WLL M&C Saatchi Tel Aviv Ltd Creative Spark Interactive (Pty) Ltd*** Dalmation Communications (Pty) Ltd M&C Saatchi Abel (Pty) Ltd M&C Saatchi Africa (Pty) Ltd M&C Saatchi Connect (Pty) Ltd M&C Saatchi Sports & Entertainment South Africa Pty Ltd M&C Saatchi Istanbul M&C Saatchi Middle East Fz LLC M&C Saatchi Fz LLC M&C Saatchi SAL 44 Country Effective % ownership United Kingdom United Kingdom United Kingdom United Kingdom France France France France France Germany Germany Germany Italy Italy Netherlands Netherlands Spain Spain Spain Sweden Switzerland Bahrain Israel Lebanon South Africa South Africa South Africa South Africa South Africa South Africa Turkey United Arab Emirates United Arab Emirates 88 76 80 25 88 100 80 100 60 75 64 91 80 80 100 100 24* 24 24 60 88 100 80 10 50 50 50 50 50 50 25 80 100 Activities Research Agency Research Agency Holding Company Media Agency (Associate) Website Construction Advertising PR Agency Digital Marketing Holding Company Advertising Sport Sponsorship & Entertainment PR Agency Dormant Advertising PR Agency Holding Company Dormant Direct Marketing (Associate) Digital Advertising (Associate) Media Agency (Associate) Advertising and Marketing Advertising Dormant Advertising Advertising (Associate) Advertising Advertising Advertising Advertising Advertising Dormant Advertising (Associate) Advertising Advertising As at 31 December 2016 Country Effective % ownership Activities ASIA AND AUSTRALIA Saatchi Ventures Pty Ltd Bang Pty Ltd Bellwether Global Pty Ltd Brands In Space Pty Ltd Bright Red Oranges Pty Ltd Clear Australia Pty Ltd Go Studios Pty Ltd LIDA Australia Pty Ltd M&C Saatchi Agency Pty Ltd M&C Saatchi Asia Pac Holdings Pty Ltd M&C Saatchi Direct Pty Ltd M&C Saatchi Sport & Entertainment Pty Ltd M&C Saatchi Melbourne Pty Ltd Park Avenue PR Pty Ltd Re Team Pty Ltd Tricky Jigsaw Pty Ltd eMCSaatchi Pty Ltd M&C Saatchi Advertising (Shanghai) Ltd Clear Asia Ltd M&C Saatchi Asia Ltd M&C Saatchi (HK) Ltd M&C Saatchi Communications Pvt Ltd February Communications Pvt Ltd M&C Saatchi Ltd M&C Saatchi (M) Sdn Bhd M&C Saatchi World Services Pakistan (Pvt) Ltd Clear Ideas (Singapore) Pte Ltd M&C Saatchi (S) Pte Ltd M&C Saatchi Mobile Asia Pacific Pte Ltd Love Frankie Ltd Intelligence Factory Sdn Bhd Design Factory Sdn Bhd Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia China Hong Kong Hong Kong Hong Kong India India Japan Malaysia Malaysia Malaysia Pakistan Singapore Singapore Singapore Thailand 76 80 80 80 100 80 80 80 100 80 48 48 80 76 60 68 80 40 93 100 40 95 20 10 49 49 49 41 93 80 95 20 Branding and Digital Marketing PR Agency Design Design Marketing Strategy Finished Art & Production Management Studio Digital Marketing Advertising Holding Company Direct Marketing Sport Sponsorship & Entertainment PR Agency Advertising PR & Marketing Marketing Holding Company Marketing Dormant Consultancy (Associate) Dormant Advertising Advertising (Associate) Advertising Advertising (Associate) Advertising Advertising Advertising Advertising Marketing (joint venture) Marketing Advertising Mobile Marketing Marketing (Associate) 45 NOTES Continued 3. Group Subsidiaries continued As at 31 December 2016 Country Effective % ownership AMERICAS LIDA NY LLP M&C Saatchi LA Inc. M&C Saatchi Brasil Comunicação Ltda M&C Saatchi Brasil Participacoes Ltda Lily Participacoes Ltda Santa Clara Participacoes Ltda M+C Saatchi/Insight Pesquisa & Planejamento Ltda Clear USA LLC M&C Saatchi Agency Inc. M&C Saatchi Mobile LLP M&C Saatchi Share Inc. M&C Saatchi Sports & Entertainment NY LLP Shepardson Stern & Kaminsky LLP M&C Saatchi NY LLP World Services US Inc. M&C Saatchi PR LLP Clear NY LLP Brazil Brazil Brazil Brazil Brazil USA USA USA USA USA USA USA USA USA USA USA USA 100 60 100 25 100 91 51 100 90 99 100 75 93 51* 100 80 100 Activities Holding Company Advertising Holding Company Advertising (Associate) Dormant Marketing Direct Marketing Holding Company Advertising Mobile Marketing PR Marketing Sport Sponsorship & Entertainment PR Agency Marketing Consultant (Associate) Dormant Dormant Dormant * Following year end, step acquisitions have been made to increase these shareholdings. ** This subsidiary undertaking is exempt from the Companies Act 2006 requirements relating to the audit of their individual accounts by virtue of Section 479A of the Act as M&C Saatchi plc has guaranteed the subsidiary company under Section 479C of the Act. *** With the exception of M&C Saatchi Network Ltd and Creative Spark Interactive (Pty) Ltd where all our equity is directly held by M&C Saatchi plc, all other subsidiary companies’ equity is either in part or wholly held indirectly via subsidiaries of M&C Saatchi plc. Most of our subsidiaries, associates and joint ventures (entities) have different classes of equity so that board representation reflects parties equity splits, and minorities can be protected from right changes, in all other regards our entities equity ranks pari passu. List of the entities local registered address can be found in note 43. M&C Saatchi plc exists as a holding company with all direct client relationships performed by its indirect subsidiaries. The results of the entities reflect the result of the Group less the results of M&C Saatchi plc. 46 4. Summary accounting policies Basis of preparation The Group’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Going concern Given the strength of the Group’s balance sheet, its net cash, its bank covenants, the risks the Group faces (note 6), the expected trading performance and the two-year cash flow projections, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors continually review the Groups profit forecasts, and reviews monthly its balance sheet and cash flow forecasts. Annually, or earlier if needed, we review the long term (greater than one year) cash flow projections for the Group based on anticipated scenarios and acquisitions. If additional funding is required, it is secured before expenditure is made, as we have done during the year by extending our bank facility on 4 January 2016 (note 25). Based on this the Directors believe the Group will continue as a going concern for the foreseeable future. Headline results The Directors believe that the headline results and headline earnings per share provide additional useful information on the underlying performance of the business. The headline results reflect the underlying profitability of our business units by excluding all effects of buying and selling equity by the Group; and the accounting effects of our entrepreneurs holding equity in the business they run (business model). Such business model accounting effects charge the income statement for the Groups fair value liability of its local entrepreneurs' equity conversion rights, but does not account for the value enhancement they make to our local holdings. In addition, the headline results are used for internal performance management and minority shareholder put option liabilities. The term 'headline' is not a defined term in IFRS. Note 1 reconciles reported to headline results. Our segmental reporting (note 2) reflects our headline results in accordance with IFRS8. The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations, changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investment in associates and investments; profit and loss on disposal of associates; and the income statement impact of put option accounting and share based payment charges. See Note 3 for a reconciliation between the Group’s statutory results and the headline results. Accounting developments and changes There were no significant accounting developments or changes during 2016 that affect these accounts. Other future developments are described in note 34. IFRS elections IFRS provides certain options available within accounting standards. Material judgements we have made, and continue to make, include goodwill and intangible asset acquisitions where the Group does not recognise the non-controlling interests share of goodwill. Critical accounting policies Revenue recognition Billings comprises the gross amounts billed to clients in respect of commission based and fee based income together with the total of other fees earned. Revenue comprises commission and fees earned in respect of amounts billed. Revenue and billings are stated exclusive of VAT, sales taxes and trade discounts. Each type of revenue is recognised on the following basis: a) Project fees are recognised over the period of the relevant assignments or agreements, in line with incurred costs. The primary input of all work performed under these arrangements is labour. As a result of the relationship between labour and cost, there is normally a direct relationship between costs incurred and the proportion of the contract performed to date. b) Retainer fees are spread over the period of the contract on a straight-line basis. c) Commission on media spend is recognised when the advertisements appear in the media. Subsidiary acquisitions The acquisition of subsidiaries is accounted for using the purchase method. The cost of acquisition is measured at the aggregate of the fair values of the assets given, liabilities incurred or assumed and the equity instruments issued by the Group in exchange for control. The identifiable assets and liabilities (including contingent liabilities) acquired that meet the conditions for recognition under IFRS3 are recognised at their fair values at the date of acquisition. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. All acquisition costs are expensed to the income statement in the period that they occur. 47 NOTES Continued Goodwill Goodwill arising on the acquisition of a subsidiary is recognised as an asset, being the excess of consideration paid over the interest in the fair value of the identifiable net assets acquired. Cost comprises the fair value of assets given, liabilities assumed (contingent and deferred consideration) and equity instruments issued. In 2009 and before, where the Group increased its stake in a subsidiary, goodwill equals the difference between the consideration paid and the fair value of the minority interest acquired. In 2010 and beyond, such balances are taken to reserves in accordance with IAS27. The amendment to the standard did not require retrospective restatement. Goodwill relating to associates is included within the carrying value of the investment in associates. Employee benefits – equity settled share based payments In addition to the put option liabilities, some entities have issued put options which are forfeited on termination of employment of the minorities. As such, these arrangements are treated as share based payment and accounted for under IFRS2, as opposed to IAS39. The cost of such equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted, including assumptions non- market vesting conditions such as, profitability and sales growth targets. Subsequent changes in the likelihood of achieving such non-market conditions are reflected as adjustments to the share option charge over the vesting period. Where awards depend on future events, we assess the likelihood of these conditions being met and make an appropriate charge at the end of each reporting period. The credit for equity settled transactions is taken to retained earnings. Following initial recognition, goodwill is carried at cost less any accumulated impairment losses. Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at net book value as at that date. Assets and liabilities in respect of put options held by shareholders in associates are accounted for as derivatives and not recognised until the Group gains control and fully consolidates the entity. The remaining accounting policies, details of IFRS13 hierarchy and additional details on the above are set out in note 34. Put option conditional shares awards The cost of awards to employees of subsidiary undertakings classified as conditional shares awards is accounted for as a share option under IFRS2 and is charged to the income statement over the period of the award. On exercise, the share for share exchange is treated at nominal value or initial acquired value. Dividends paid to employees of subsidiaries who have conditional share awards are expensed as employee remuneration. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication of impairment. Any impairment is recognised immediately in the income statement and is not subsequently reversed. The impairment test is based on management’s projections for the next five years and regional growth rates thereafter. Goodwill arising from foreign investments is retranslated at the year end rate. Minority shareholder put option liabilities The equity partners In the Group’s subsidiaries hold put options that allow them to require the Group to purchase their non- controlling interest on exercise. The put options can be exchanged for either a variable number of shares or cash. The Group has elected to account for these as put option liabilities under IAS32 and measures them at the present value of the amounts expected to be payable on exercise; this is deemed a proxy for fair value. The fair value is remeasured at each period end with the movements being recognised in the income statement in finance income or cost. On inception of a put option, the liability is recognised on the balance sheet and a corresponding debit is included in the minority interest put option reserve (note 5). On exercise, the liability is extinguished, and its related minority interest put option reserve is moved to the non-controlling interest acquired reserve (note 5). 48 5. Definition of terms Foreign exchange reserve For overseas operations, results are translated at the annual average rate of exchange and balance sheets are translated at the closing rate of exchange. The annual average rate of exchange approximates to the rate on the date that the transactions occurred. Exchange differences arising from the translation of foreign subsidiaries are taken to a separate component of equity. Such translation differences will be recognised as income or expense in the period in which the operation is disposed of. Gearing ratio Gearing ratio is equal to net debt divided by market capitalisation at the balance sheet date. Key management Key management has been defined as the persons discharging managerial responsibilities (PDMRs) of the Group. Net cash (debt) Cash and cash equivalents at the end of the year less external borrowings (excluding any capitalised finance cost, finance leases and debt factoring). Merger reserve Premium paid for shares above the nominal value of share capital, caused by the acquisition of more than 90% of subsidiaries’ shares. The merger reserve is released to retained earnings when there is a disposal or impairment charge or amortisation charge posted in respect of the investment that created it. Minority interest put option reserve Corresponds to the initial fair value of the liability in respect of the put options at creation. When the put option is exercised, the related amount in this reserve is taken to non-controlling interest acquired reserve. All revaluations of put options are expensed via the income statement to profit and loss reserve. Non-controlling interest Contains the non-controlling interest’s share of equity reserves of our subsidiaries. Non-controlling interest acquired reserve From 1 January 2010, a non-controlling interest acquired reserve is used when the Group acquires an increased stake in a subsidiary. If the stepped acquisition is due to a put option then the non-controlling interest acquired reserve is equal to the minority interest put option reserve transferred less book value of the minority interest acquired. Otherwise the non-controlling interest acquired reserve is equal to the consideration paid less book value of the minority interest acquired. If the equity stake in the subsidiary is subsequently sold, then balances from this reserve will be taken to retained earnings. Retained earnings Cumulative gains and losses recognised. Share premium Premium paid for shares above the nominal value of share capital, where that premium was not taken to merger reserve. Treasury reserve Amount paid for own shares acquired 6. Risk and risk management The Group has identified specific categories of business risk and developed policies for their management and control. These policies are kept under constant review as risk and risk perceptions change. Currency risk (see below, and note 23 and 24) Interest rate risk (note 13) Share price risk (note 27) Market risk (see below) Credit risk (note 23) Talent risk (Directors’ report) Income statement currency exposure The Group’s results are presented in sterling and are subject to fluctuation as a result of exchange rate movements. The Group continues to review its exposure to exchange rate movements and considers methods to reduce the exchange rate risk. 2016 profits would have changed as follows, had average exchange rates been changed by: Increase/(decrease) in profit before tax £000 (1,177) 1,439 Increase/(decrease) in profit after tax £000 (868) 1,061 Exchange rate +10% (10)% See note 2 for the income statement translated at prior year exchange rates. Market risk The Group does not have a substantial market share in any market. The key risk the Group is exposed to is the loss of clients. The Group has policies to monitor client feedback and act where there are issues. Largest clients as a % of total revenue Top client Top 10 Top 15 Top 30 2016 % 4.9 30.5 39.5 54.2 2015 % 5.9 30.4 42.8 56.2 49 NOTES Continued Liquidity risk Centrally the Group ensures that bank facilities are available to meet the Group’s liquidity needs. Liquidity is monitored centrally and managed locally. Spare local cash is released to the centre by way of dividends and loan repayments. In managing its liquidity risk, management considers its net cash and minimises its gearing ratio, and where working capital is utilised to fund the business, management makes sure that the Group has sufficient bank facilities to cope with an unwinding of positive working capital flows and to fund the negative working capital effect of revenue growth. Our bank debt maturity analysis can be seen in note 25 and financial liability maturity analysis can be seen in note 24. Capital risk The Group’s capital reserves consist of all its equity reserves with the exclusion of the minority interest put option reserve. Capital reserves safeguard the Group’s going concern, as well as providing adequate return to its shareholders. The capital reserves total £69,995k (2015: £54,616k ). The Group minimises the amount of debt it uses to finance its activities, to reduce the risk to the shareholders. Excess working capital is used to reduce debt. Excess cash is used to invest or is returned to shareholders by way of dividend or through buying shares into treasury. Our key process for managing capital is regular Board reviews of our capital structure and needs. Key estimates Management’s estimates of the future profitability of the Group can be significantly affected by single account wins or losses, and to a lesser extent by the estimated phase of a project, exchange rates and underlying economic growth rates. We have therefore based our estimates on the budgets for the coming year and estimated growth rates and margins thereafter. Changes in these underlying assumptions could give rise to material adjustments as set out in the following notes: Note 17 – Intangible assets – goodwill estimation of value in use; Note 27 – Minority shareholder put options liabilities; and Note 30 – Share based payments – initial measurement of Conditional share awards. Sensitivities to accounting estimates Our results and financial position are sensitive to assumptions made in determining accounting estimates, as set out below. Management are satisfied with the exception of companies acquired in the year and Bang Pty Ltd (Australia) which was impaired last year. No possible changes in key assumptions, apart from a significant loss of clients by a CGU, would cause the recoverable amount of any of our CGUs to be below their carrying amount. Management have tested the key assumptions of pre-tax discount rates and management forecasts and projections by adjusting them individually 5% and 20% respectively as well as comparing management forecasts to historic results. None of these sensitivity tests lead to further impairments. Bang Pty Ltd (Australia) was impaired in 2015, and continues to trade around the forecast used to justify the impairment. Shepardson Stern & Kaminsky LLP and M&C Saatchi Middle East Fz LLC were acquired in the year, thus its carrying value is close to its recoverable amount. In testing our key assumptions on Bang Pty Ltd, Shepardson Stern & Kaminsky LLP and M&C Saatchi Middle East Fz LLC, increasing pre-tax discount rates by 5% results in a £3.1m potential impairment and reducing management forecast by 20% creates a £0.5m potential impairment. Key judgements Management has made the following key judgements, which have a significant effect: deciding which of its shareholder contracts are share options and which are put options (whether created through acquisitions or organic); deciding to what extent tax losses are recognised as an asset in the balance sheet; useful lives of assets – tangible and intangible; recoverability of amounts receivable; and to use a discount to value an associate when it is created from selling a controlling stake in a subsidiary. Projections Projections take account of management’s view of the local operations future profitability given expected market growth, inflation, exchange rates and rapidly growing/shrinking markets. They are based on our budgets for 2017. They are used in calculating the fair value of minority put options, management’s assessment of value in use calculations, to identify goodwill impairment indicators and in calculating the value of conditional share awards. IFRS13 disclosures with respect of fair value have been detailed in note 34 and relevant notes. 50 Note 8 17 17 17 21 7. Operating costs Year ended 31 December Total staff costs Other costs Operating costs Other costs include: Profit on exchange Amortisation of intangibles – Acquired intangibles – Capitalised software Goodwill impairment Associate impairment Fair value revaluation of associate on acquisition Provision against investments Depreciation of plant and equipment Loss on disposal of fixed assets Year ended 31 December Operating lease rentals Plant Property Property sublease receipts Year ended 31 December Total commitments Plant and equipment Commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: – Within one year – Between two and five years Property Commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: – Within one year – Between one and five years – Greater than five years Sublease receipts Commitments for future minimum lease receipts under non-cancellable operating leases, which fall due as follows: – Within one year – Between one and five years – Greater than five years For further details of finance leases, see in note 25 2016 £000 157,481 61,257 Total 2015 £000 118,089 46,132 218,738 164,221 859 1,134 2,324 354 - 3,738 859 651 2,668 542 1,940 98 889 - - - 2,128 36 2016 £000 2015 £000 514 7,556 8,070 (180) 7,890 650 6,777 7,427 (506) 6,921 2016 £000 2015 £000 913 1,134 2,047 552 594 1,146 9,059 31,993 11,033 52,085 7,077 24,970 13,354 45,401 (432) (1,554) (384) (544) (946) - (2,370) (1,490) 51 NOTES Continued 8. Staff costs Staff costs (including Directors) comprise: Year ended 31 December Wages and salaries Social security costs Defined contribution pension scheme costs Other staff benefits Acquisition related remuneration Allocations and dividends paid to conditional share award holders Contingent acquisition cost with leaver provision (note 18) Share based incentive plans Cash settled Equity settled Total staff costs Staff cost to revenue ratio Staff numbers UK Europe Middle East and Africa Asia and Australia America 2016 £000 127,233 15,085 1,697 4,650 148,665 540 279 819 - 7,997 7,997 157,481 70% 743 326 277 611 361 2,318 2015 £000 99,898 11,019 3,108 2,779 116,804 - 134 134 26 1,125 1,151 118,089 66% 789 298 227 532 240 2,086 Pensions The Group does not operate any defined benefit pension schemes. The Group makes payments, on behalf of certain individuals, to personal pension schemes. Payments of £1,697k (2015: £3,108k) were made in the year and charged to the income statement in the period they relate to. At the year end there were unpaid amounts included within accruals totalling £156k (2015: £133k). 2016 £000 3,062 17 1,366 4,445 2015 £000 4,140 34 779 4,953 Key management remuneration Short term employee benefit Post-employment benefit Share based payments Total 52 9. Auditors’ remuneration Services provided by the Group’s Auditors and network firms. Year ended 31 December Audit services Audit of the Company and its consolidated accounts Audit of the Company’s subsidiaries pursuant to legislation Other services provided by the Auditors Taxation compliance services Other advice Total 10. Share of associates and joint ventures Year ended 31 December Share of associates’ profit before taxation Share of associates’ taxation For further details of associates, see note 20. 11. Finance income Year ended 31 December Bank interest receivable Other interest receivable Total finance income 12. Finance costs Year ended 31 December Bank interest payable Interest payable on finance leases Total interest payable Fair value adjustments to minority shareholder put option liabilities (note 27) Total finance costs 2016 £000 239 201 440 20 1 21 461 2016 £000 1,981 (451) 1,530 2016 £000 338 102 440 2016 £000 (1,227) (4) (1,231) (597) (1,828) 2015 £000 227 173 400 31 1 32 432 2015 £000 2,386 (369) 2,017 2015 £000 181 118 299 2015 £000 (766) (5) (771) (3,706) (4,477) 53 NOTES Continued 13. Interest rate risk The Group is exposed to interest rate risk on both interest-bearing assets and liabilities. The majority of interest paying and earning assets are exposed to UK interbank rates (non-sterling denominated loans are at local interbank rates). An analysis of net interest by our segmented geographic regions is provided in note 2. At the year end, the Group had a £38.0m bank facility, which expires in April 2020. The facility can borrow in sterling, US dollars or euros. At 31 December 2016, £28.3m (2015: £23.8m) of this loan was drawn down. The Group regularly reviews its treasury structures to minimise commercial interest rate margins. For further details of Group borrowings, see note 25. 14. Taxation Year ended 31 December Current taxation Taxation in the year – UK – Overseas Withholding taxes payable Adjustment for over provision in prior periods Total Deferred taxation Origination and reversal of temporary differences Recognition of previously unrecognised tax losses* Effect of changes in tax rates Total Total taxation * Recognised to reflect the probable future corporation tax that we can reclaim. 2016 £000 2015 £000 891 3,700 (49) (104) 4,438 106 (1,093) – (987) 3,451 817 3,919 5 (526) 4,215 (46) (788) 5 (829) 3,386 54 14. Taxation continued The differences between the actual tax and the standard rate of corporation tax in the UK applied to profits for the year are as follows: Year ended 31 December Profit before taxation Taxation at UK corporation tax rate of 20.00% (2015: 20.25%) Tax effect of associates Non-controlling interest share of partnership income Expenses not deductible for tax Option charges not deductible for tax Different tax rates applicable in overseas jurisdictions Effect of changes in tax rates on deferred tax Withholding taxes payable Utilisation of previously unrecognised tax losses Recognition of previously unrecognised tax losses Adjustment for current tax over provision in prior periods Adjustment for deferred tax over provision in prior periods Tax losses for which no deferred tax asset was recognised Fair value adjustments on minority shareholder put options Impairment of goodwill and investment in associates Total taxation Statutory tax rate Year ended 31 December Headline profit before taxation (note 1) Taxation at UK corporation tax rate of 20.00% (2015: 20.25%) Tax effect of associates Non-controlling interest share of partnership income Expenses not deductible for tax Option charges not deductible for tax Different tax rates applicable in overseas jurisdictions Effect of changes in tax rates on deferred tax Withholding taxes payable Utilisation of previously unrecognised tax losses Recognition of previously unrecognised tax losses Adjustment for current tax under provision in prior periods Adjustment for deferred tax over provision in prior periods Tax losses for which no deferred tax asset was recognised Headline taxation (note 3) Headline effective tax rate 2016 £000 6,791 (1,358) 306 467 (484) (1,698) (826) – 49 – 1,093 104 – (107) (119) (878) (3,451) 50.8% 2016 £000 23,776 (4,755) 306 467 (484) – 2015 £000 12,546 (2,541) 409 191 (378) (256) (1,099) (5) (5) – 788 526 – (86) (750) (180) (3,386) 27.0% 2015 £000 20,123 (4,075) 409 191 (378) – (1,055) (1,194) – 49 – 1,193 104 – 65 (4,110) 17.3% (5) (5) – 788 526 – (113) (3,856) 19.2% As can be seen above, the largest driver of tax charge is our local entities profitability, local tax rates, recognition of previously unrecognised tax losses and our disallowable share based payment charges. 55 NOTES Continued 15. Deferred taxation Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and the Group intends to settle its current tax assets and liabilities on a net basis. At 31 December Deferred tax assets Deferred tax liabilities Net deferred tax The movement on the net deferred tax asset is as follows: At 1 January Exchange differences Income statement credit Acquisitions At 31 December 2016 £000 3,112 (380) 2,732 2016 £000 1,446 303 987 (4) 2,732 The following is the deferred tax asset (liability) recognised by the Group and movements in 2016 and 2015: At 1 January 2015 Exchange differences Income statement credit/(charge) Acquisitions At 31 December 2015 Exchange differences Income statement credit/(charge) Acquisitions At 31 December 2016 Capital allowances and amortisation £000 (264) Tax losses £000 528 2 284 (292) (270) (56) 683 (4) 353 (40) 44 – 532 173 222 927 Options and bonus accruals £000 124 – (124) – – – – – Working capital differences £000 705 (146) 625 – 1,184 186 82 1,452 2015 £000 1,476 (30) 1,446 2015 £000 1,093 (184) 829 (292) 1,446 Total £000 1,093 (184) 829 (292) 1,446 303 987 (4) 2,732 Within capital allowances and amortisations, £309k (2015: £534k) relates to intangibles created as part of acquisition accounting. 56 15. Deferred taxation continued Unrecognised deferred tax asset in respect of carried forward tax losses: At 1 January 2016 Exchange differences Change in potential tax rates Disposal Losses utilised in year Losses in year At 31 December 2016 Expiry date of losses: One to five years Five to ten years Ten years or more Total Loss £000 9,734 1,905 - (665) (5,692) 13 5,295 2016 £000 26 1,211 336 1,573 Deferred tax impact £000 3,327 660 (334) (233) (1,852) 5 1,573 2015 £000 23 1,791 1,513 3,327 A deferred tax asset in respect of certain losses in overseas territories has not been recognised as there is insufficient certainty of future taxable profits against which these would reverse. 16. Dividends Year ended 31 December 2015 final dividend paid 5.60p on 8 July 2016 (2014: 4.87p)* 2016 interim dividend paid 1.85p on 11 November 2016 (2015: 1.61p) 2016 £000 4,084 1,374 5,458 2015 £000 3,504 1,158 4,662 * 2015 dividend has been restated to reflect the number of shares in issue when the dividend was paid, as opposed to the number of shares in existence at 31 December 2015. The 2016 proposed final dividend of 6.44p, totalling £4,876k. The dividends relate to the profit of the following years: Year ended 31 December Interim dividend paid 1.85p on 11 November 2016 (2015: 1.61p) Final dividends payable 6.44p on 7 July 2017 (2015: 5.60p) Headline dividend cover 2016 £000 1,374 4,876 6,250 2.5 2015 £000 1,158 4,033 5,191 2.6 Headline dividend cover is calculated by taking headline profit after tax attributable to equity shareholders and dividing it by the total dividends that relate to that year’s profits. The Group seeks to maintain a long-term headline dividend cover of between 2 and 3. Retained profits are used to reinvest in the long term growth of the Group through funding working capital and investing activities; and to repaying bank debt. 57 NOTES Continued 17. Intangible assets Cost At 1 January 2015 Exchange differences Acquired Acquired through business combination Disposal At 31 December 2015 Exchange differences Acquired Acquired through business combination Disposal Disposal of subsidiary At 31 December 2016 Accumulated amortisation and impairment At 1 January 2015 Exchange differences Amortisation charge* Impairment Disposal At 31 December 2015 Exchange differences Amortisation charge* Disposal Disposal of subsidiary At 31 December 2016 Net book value At 1 January 2015 At 31 December 2015 At 31 December 2016 * Charged to income statement. Goodwill £000 Brand name £000 Customer relationships £000 Software £000 33,788 (305) – 288 – 33,771 804 – 17,392 – – 51,967 7,151 – – 889 – 8,040 1 – – – 8,041 26,637 25,731 43,926 3,405 (24) 53 729 – 4,163 264 – 2,284 – (65) 6,646 1,557 (5) 1,486 – – 3,038 200 1,237 – (65) 4,410 1,848 1,125 2,236 6,063 (74) 285 282 – 6,556 328 – 4,757 – – 11,641 5,564 (60) 370 84 – 5,958 278 1,087 – – 7,323 499 598 4,318 1,023 (60) 793 – (71) 1,685 131 38 – (134) – 1,720 865 (50) 98 – (60) 853 113 354 (124) – 1,196 158 832 524 Total £000 44,279 (463) 1,131 1,299 (71) 46,175 1,527 38 24,433 (134) (65) 71,974 15,137 (115) 1,954 973 (60) 17,889 592 2,678 (124) (65) 20,970 29,142 28,286 51,004 Goodwill’s accumulated amortisation and impairment all relate to impairments, all other columns relate to amortisations. 58 Goodwill is allocated to the Group’s cash generating units (CGU). Goodwill is made up of: Cash generating units (CGUs) M&C Saatchi UK Group LIDA Ltd M&C Saatchi Sport & Entertainment Ltd M&C Saatchi Export Ltd M&C Saatchi Mobile Ltd M&C Saatchi Merlin Ltd Clear Ideas Ltd M&C Saatchi Berlin GmbH M&C Saatchi Middle East Fz LLC (Dubai)* Creative Spark Interactive (PTY) LTD (South Africa) M&C Saatchi Agency Pty Ltd (Australia) Bang Pty Ltd (Australia) Shepardson Stern & Kaminsky LLP* LIDA NY LLP* Total of the four CGUs with goodwill less than £0.5m Total Goodwill 31 December 2016 £000 5,977 1,462 690 600 1,814 539 9,508 1,326 749 248 2,759 621 10,951 5,692 990 43,926 Goodwill 31 December 2015 £000 5,977 1,462 690 600 1,814 539 9,508 1,143 – 181 2,379 521 – – 917 25,731 Segment UK UK UK UK UK UK UK Europe Middle East and Africa Middle East and Africa Asia and Australia Asia and Australia Americas Americas Various * Apart from these CGUs, whose movements are described in this note, all other movements are due to exchange (note 18) Goodwill and other intangibles are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the assets may be impaired. All recoverable amounts are from future trading and not from the sale of unrecognised assets or other intangibles i.e. the value in use. The 2016 review was undertaken in the last quarter of the year in conjunction with our annual business planning process; no goodwill and other intangible asset impairments were identified (2015: £973k). Management have approved the forecasts for 2017 and have prepared additional projections based on the 2017 numbers for the next four years. These were used as the basis for determining the recoverable amount of each CGU. In making the forecasts management has reflected on past performance and the present business and economic prospect. Details of uncertainties in our forecasts are described in note 6. In conducting the review, we used a residual growth rate of 3% from year five onwards and a market beta of 1.0 for UK, 1.0 for Europe, and 1.2 for rest of world. The pre-tax discount rates are based on the Group’s weighted average cost of capital adjusted for specific risks relating to the country and market in which the CGU operates. Management are satisfied, with the exception of some of the companies acquired in the year and Bang Pty Ltd (Australia) which was impaired last year, no possible changes in key assumptions, apart from a significant loss of clients by a CGU, would cause the recoverable amount of any of our CGUs to be below their carrying amount. Management have tested the key assumptions of pre-tax discount rates and management forecasts and projections by adjusting them individually 5% and 20% respectively as well as comparing management forecasts to historic results. None of these sensitivity tests lead to further impairments. Bang Pty Ltd (Australia) was impaired in 2015, and continues to trade around the forecast used to justify the impairment. Shepardson Stern & Kaminsky LLP and M&C Saatchi Middle East Fz LLC were acquired in the year, thus its carrying value is close to its recoverable amount. In testing our key assumptions on Bang Pty Ltd, Shepardson Stern & Kaminsky LLP and M&C Saatchi Middle East Fz LLC, increasing pre-tax discount rates by 5% results in a £3.1m potential impairment and reducing management forecast by 20% creates a £0.5m potential impairment. 59 NOTES Continued 17. Intangible assets continued Key assumptions UK Asia and Australia Middle East and Africa Europe Americas Residual growth rates 2015 and 2016 % 3 3 3 3 3 Pre-tax discount rates 2016 % 11-13 12-17 10-14 12-16 13-14 Pre-tax discount rates 2015 % 11-13 12-16 14-16 11-15 n/a We do not expect the residual growth rates to exceed the long term growth rates for these types of business in each location. Brand name This is made up of the brands that we acquired with acquisitions. Brand name Clear Inside Mobile Direct One Bang ST&P Merlin Elite CGU Clear Ideas Ltd M&C Saatchi Mobile Ltd M&C Saatchi GAD SAS Bang Pty Ltd (Australia) Samuelson Talbot & Partners Pty Ltd (Australia) M&C Saatchi Merlin Ltd Lean Mean Fighting Machine M&C Saatchi (UK) Ltd Mademoiselle Scarlett M&C Saatchi GAD SAS* Heavenspot Ben Natan Golan Creative Spark Expression SS+K MCD M&C Saatchi LA Inc M&C Saatchi Tel Aviv Creative Spark Interactive (PTY) LTD M&C Saatchi Middle East Fz LLC Shepardson Stern & Kaminsky LLP LIDA NY LLP * Disposed of during the year. Year acquired 2007 Cost 2016 £000 2,640 Cost 2015 £000 2,640 2010 2010 2012 2013 2013 2014 2015 2015 2015 2015 2016 2016 2016 103 89 280 50 186 82 - 64 590 278 25 1,670 589 6,646 103 79 245 44 186 82 56 53 483 192 - - - 4,163 Amortisation period 3 years Immediately Infinity 3 years Immediately Immediately Immediately Immediately Immediately Immediately 1 year Immediately 5 years 5 years There is no foreseeable limit to the duration of ‘Direct One’ brands as we continue to use them for existing and future clients; hence the brand has been treated as having an indefinite life. 60 18. Acquisitions During the year, the Group made acquisitions in US (Shepardson Stern & Kaminsky LLP and LIDA NY LLP), and UAE (M&C Saatchi Middle East Fz LLC ) to enhance its service and offering. The Acquisition of 18% of Shepardson Stern & Kaminsky LLP converted from an associate (note 20) to a subsidiary. Income statement effects of 2016 acquisitions The results of these three acquisitions included in the consolidation and their full year results are as follows: Shepardson Stern & Kaminsky LLP Note LIDA NY LLP M&C Saatchi Middle East Fz LLC Total £000 2016 Date of acquisition Revenue in consolidation Profit before tax in consolidation Full year revenue Full year profit before tax Goodwill on 2016 acquisition 2016 Consideration, satisfied by: Cash Fair value of associate Exchange rate adjustment Total consideration Less – Fair value of net assets made up of: Brand name intangible Customer relationship intangible Plant and equipment Deferred tax asset Other non-current assets Cash Other current (liabilities)/assets Non-controlling interests share – Total fair value of net assets Goodwill arising 17 1 March 1 March 1 March 10,977 1,691 12,599 1,545 8,015 678 9,751 770 901 (94) 974 (103) Shepardson Stern & Kaminsky LLP* Note LIDA NY LLP* M&C Saatchi Middle East Fz LLC 4,568 7,700 1,192 13,460 1,670 2,176 970 15 146 1,610 (2,159) (1,919) 2,509 10,951 7,818 - 760 8,578 589 2,298 222 - - 1,254 (1,477) - 2,886 5,692 1,021 - 143 1,164 25 284 7 - - 31 68 - 415 749 19,893 2,275 23,324 2,212 Total £000 13,407 7,700 2,095 23,202 2,284 4,758 1,199 15 146 2,895 (3,568) (1,919) 5,810 17,392 * An external independent valuation was carried out on Shepardson Stern & Kaminsky LLP and LIDA NY LLP Intangibles. Goodwill relates to value of the business’s staff. There is local tax deduction for goodwill (with the exception of UAE where there is no tax). As part of the Shepardson Stern & Kaminsky LLP acquisition, put options were negotiated over remaining capital rights (note 27). LIDA NY LLP shareholders have put options that have been defined as a share based payment (note 30) as payments are redistributed amongst remaining employees on termination of employment (collective or individual) and therefore have been accounted for within staff costs (note 8) in accordance with IFRS3. As a consequence, the non-controlling interest charge is taken as a staff cost In statutory accounts (for headline numbers, to allow comparability to rest of the Group, the non-controlling interest charge Is included in non- controlling interest). 61 NOTES Continued 18. Acquisitions continued During 2015 the Group made minor acquisitions in South Africa (Creative Spark Interactive (PTY) LTD), Israel (Ben Natan Golan Ltd) and France (Mademoiselle Scarlett SAS) to enhance its service and offering. Income statement effects of 2015 acquisitions The results of these three small acquisitions included in the consolidation are a revenue of £711k and profit before tax and intangible amortisation of £10k. Had the results been consolidated for the full year the revenue would have been £1,395k and profit before tax and intangible amortisation £180k, the majority of these profit values relate to Creative Spark Interactive (PTY) LTD. Goodwill on 2015 acquisition 2015 Consideration, satisfied by: Cash Deferred consideration Total consideration Less – Fair value of net assets made up of: Intangibles* Plant and equipment Other non-current assets Cash Other current liabilities Deferred tax liability Non-controlling interests share – Total fair value of net assets Goodwill arising Note 17 Total £000 191 392 583 1,011 47 14 267 (609) (274) (161) 295 288 * No post yearend adjustments have been made to these aggregated values. Of the £191k cash paid, £148k relates to our acquisition in Israel, and £43k relates to a small acquisition in France (which was subsequently disposed on in 2016). The £392k deferred consideration relates to Creative Spark (South Africa). Goodwill relates to value of the business’s staff. There is no local tax deduction for goodwill. As part of the acquisition, put options were negotiated over remaining capital rights (note 27). In addition, the shareholder (management) of Creative Spark (South Africa) are entitled to further payments depending on the future performance of the company. These payments are forfeited upon termination of employment (collective or individual) and therefore have been accounted for within staff costs (note 8) in accordance with IFRS3. 62 19. Cash consumed by acquisitions Cash consideration – Shepardson Stern & Kaminsky LLP – LIDA NY LLP – M&C Saatchi Middle East Fz LLC – One/Three small purchases of non-controlling interest’s equity – Deferred and contingent consideration paid (note 26) – Two small acquisitions Less cash and cash equivalents acquired Purchase of associates 20. Associates and joint venture 2016 £000 (4,568) (7,818) (1,021) (344) (1,966) – (15,717) 2,895 (12,822) – (12,822) 2015 £000 – – – (155) – (191) (346) 267 (79) (3,765) (3,844) The Group invests in associates and joint ventures, either to deliver its services to a strategic market place or to gain strategic mass by being part of a larger local or functional entity. The following associates and joint ventures are included in the consolidated financial statements: Name Walker Media Limited M&C Saatchi Russia Limited M&C Saatchi S.A. and subsidiaries M&C Saatchi Istanbul M&C Saatchi SAL** M&C Saatchi (Hong Kong) Limited**** February Communications Private Limited M&C Saatchi Ltd*x M&C Saatchi World Services Pakistan (PVT) Ltd (joint venture) Love Frankie Ltd Santa Clara Participacoes Ltda* Shepardson Stern + Kaminsky LLP*** Total Nature of business Media buying Advertising Advertising Advertising Advertising Advertising Advertising Advertising Development communications Advertising Advertising Advertising Country of incorporation or registration UK UK Spain Turkey Lebanon Investment in associate 2015 £000 9,572 2016 £000 10,897 – – 460 – 38 – 387 – China 7,529 3,346 India Japan Pakistan Thailand Brazil USA 277 – – 114 – – 19,277 214 – – 86 3,383 7,785 24,811 Proportion of voting rights and ordinary share capital held at 2016 25% 2015 25% 50% 25% 25% 10% 40% 20% 10% 50% 25% 25% 51% 50% 25% 25% 10% 20% 20% 60% 50% 25% 25% 33% * £3,738k impaired In 2016, difference due to exchange movement. ** Influence exerted through our board membership and contractual relationship, this entity services other countries in the region. *** In March 2016 a controlling stake was acquired. The revaluation of associate at time of acquisition created a £859k charge to income statement (note 18). **** 20% acquired In 2016 by way of issuing Group shares to value of £3,605k. This entity trades as M&C Saatchi aeiou. *x 50% was sold to management for nominal value of this loss making entity during August 2016. All shares in associates are held by subsidiary companies, and have no special rights. Where the associate has a right to use our brand name we have a right to withdraw the brand name to stop it being lost, or protect it from damage. In the case of joint ventures, all key decisions have to be jointly agreed. The risk the Group is exposed to from its associates and joint ventures is our investment, our brand name and undistributed dividend flows. 63 NOTES Continued 20. Associates and joint venture continued At 1 January Exchange movements Acquisition of associates Transferred to subsidiary following acquisition Contingent consideration Impairment of associate Dividends Share of profit after taxation Profit on disposal At 31 December Summarised financial information 2016 £000 24,811 2,521 3,605 (9,275) – (3,738) (177) 1,530 – 19,277 2015 £000 18,731 (146) 3,765 – 1,400 – (1,173) 2,017 217 24,811 UK £000 Europe £000 Middle East and Africa £000 Asia and Australia £000 Americas £000 2016 £000 2015 £000 22,591 3,142 6,727 6,727 5,314 196 185 150 3,590 (1,323) (1,538) (1,538) 5,502 1,343 1,177 913 4,758 (502) (555) (605) 39,583 42,457 6,441 5,996 4,234 7,621 7,514 5,507 Income statement Revenue Operating profit Profit before taxation Profit after taxation The Group’s share of the results of associates 1,323 (3) Dividends received from associates in the year – 19 Balance sheet Total assets Total liabilities Net current assets/(liabilities) Our share Losses not recognised Goodwill Investment in associates UK £000 Europe £000 71,090 (58,538) 12,552 3,126 – 7,775 10,901 3,602 (4,201) (599) (139) 221 377 459 – – 290 (80) 1,530 2,017 158 – 177 1,173 Middle East and Africa £000 Asia and Australia £000 Americas £000 2016 £000 2015 £000 2,748 (8,984) (6,236) (624) 624 – – 6,928 (2,910) 4,018 1,495 – 6,422 7,917 2,484 (3,450) (966) (41) 41 – – 86,852 (78,083) 8,769 3,817 886 14,574 19,277 80,759 (69,768) 10,991 3,261 689 20,861 24,811 The UK is represented by Blue 449 (Walker Media Limited), which contributed all the profit during the period. Similarly, the US is represented by Shepardson Stern + Kaminsky LLP, which accounts for £(63)k of the £(80)k loss. As such, the summary financial information has not been disaggregated further. 64 21. Plant and equipment Cost At 1 January 2015 Exchange differences Additions Acquisition of subsidiaries Disposals Disposal of subsidiaries At 31 December 2015 Exchange differences Additions Acquisition of subsidiaries Disposals Disposal of subsidiary At 31 December 2016 Depreciation At 1 January 2015 Exchange differences Depreciation charge Disposals Disposal of subsidiaries At 31 December 2015 Exchange differences Depreciation charge Disposals Disposal of subsidiary At 31 December 2016 Net book value At 1 January 2015 At 31 December 2015 At 31 December 2016 Leasehold improvements £000 Furniture, fittings and other equipment £000 Computer equipment £000 Motor vehicles £000 6,646 (113) 819 11 (75) – 7,288 487 2,088 751 (670) – 9,944 2,719 (94) 774 (76) – 3,323 301 967 (333) – 4,258 3,927 3,965 5,686 6,691 (152) 384 14 (111) – 6,826 436 1,606 259 (483) (69) 8,575 3,599 (77) 685 (138) – 4,069 273 410 (295) (46) 4,411 3,092 2,757 4,164 5,011 (108) 762 22 (194) – 5,493 448 266 191 (483) (44) 5,871 3,675 (84) 647 (133) – 4,105 333 1,265 (471) (38) 5,194 1,336 1,388 677 126 (15) 71 – (42) – 140 32 20 0 (36) – 156 72 (8) 22 (33) – 53 16 26 (31) – 64 54 87 92 Net book value of assets, included in the above balances which have been purchased through finance lease arrangements are: Leasehold improvements £000 – – – Furniture, fittings and other equipment £000 – 12 5 Computer equipment £000 169 119 89 Motor vehicles £000 61 78 95 At 1 January 2015 At 31 December 2015 At 31 December 2016 Total £000 18,474 (388) 2,036 47 (422) – 19,747 1,403 3,980 1,201 (1,672) (113) 24,546 10,065 (263) 2,128 (380) – 11,550 923 2,668 (1,130) (84) 13,927 8,409 8,197 10,619 Total £000 230 209 189 65 NOTES Continued 22. Other non-current assets Investments* Rent deposits Loans to associates** Loans to employees*** Call option provision Total other non current assets 2016 £000 3,758 1,815 – 1,828 54 7,455 2015 £000 3,353 1,110 2,336 1,496 54 8,349 * The Group engages in corporate venturing by investing in start-up companies that have technologies that relate to or could enhance the services the Group provides, or could become users of the Group’s services when matured. Under IFRS13, these items are valued as level 3 financial instruments and have been recorded at cost, which was deemed fair value on the date of acquisition. Given the start-up nature of these investments, these are not remeasured to fair value at each reporting date, as fair value cannot be reliably measured. However, the values of these investments are regularly reviewed and considered for impairment, which would be recorded in the income statement immediately. Three entities had indications of impairment, being scaled down operations, and no alternative value to their assets. The Group intends to realise its investments over a three to ten-year period either through sale of the equity or receipt of dividends. In 2016 we acquired a controlling Interest in Shepardson Stern + Kaminsky LLP, the USD3.5m working capital loan, has been reclassified as an intercompany balance. The terms of this loan reflect an arm’s-length transaction. ** *** This related to the AUD3.1m (balance at 31 December 2015, AUD3.0m) loans that the Group lent local management of M&C Saatchi Agency Pty Ltd, in 2015, to enable them to acquire 20% of that business. The full recourse loan is repayable in full if the purchasers no longer have a beneficial interest in the shares of the Australian Group, or are no longer employed. The loan is unsecured and charged interest at 0.1% above the five-year Australian interbank rate at the date the loan was advanced. The carrying value of the loan approximated to fair value. The movement in investments during the year is as follows: At 1 January Acquisition of investments Provision against investments* At 31 December 2016 £000 3,353 1,056 (651) 3,758 2015 £000 1,987 1,366 – 3,353 66 23. Trade and other receivables Trade receivables Provision for bad debts Net trade receivables Prepayments and accrued income Amounts due from associates VAT and sales tax recoverable Other debtors Total trade and other receivables The carrying amount of trade and other receivables approximates to their fair value. Movement in the bad debt provision As at 1 January Exchange movements Charged to the income statement* Acquired Released to income statement Utilisation of provision As at 31 December 2016 £000 80,943 (2,107) 78,836 23,401 920 1,554 5,113 109,824 2016 £000 (232) (43) (2,070) (69) 9 298 2015 £000 59,651 (232) 59,419 20,061 654 1,140 6,418 87,692 2015 £000 (184) 7 (132) – – 77 (2,107) (232) * £1,890k of this provision relates to the billing to one client, where the work was completed in 1st quarter of 2016. At that point we recognised the remaining revenue on the job as local management believed, at the time, that the entire amount would be paid into our sterling UK bank account. Local management still believe that the debt will be paid and the client has the cash, however due to local currency controls the client is unable to remit payment out of the country. There is no indication when the currency controls will be lifted. Given this situation we believe it prudent to fully provide for the amount while continue to work for the repatriation of the cash. 67 NOTES Continued 23. Trade and other receivables continued As at 31 December, the following trade receivables were past their due date (of zero to three months) but not impaired. It is management’s belief that these debts will be fully repaid. Three to six months Over six months Total net trade receivables 2016 £000 3,245 758 78,836 2016 % 4% 1% 100% The carrying amount of the Group’s trade and other receivables are denominated in the following currencies: Sterling US dollars Australian dollars Malaysian ringgit Euros South African rand Brazilian real Other 2016 £000 35,715 34,488 13,022 3,682 13,784 1,965 1,234 5,934 2016 % 33% 31% 12% 3% 13% 2% 1% 5% 2015 £000 1,250 612 59,419 2015 £000 38,004 21,434 7,052 1,956 9,878 2,179 1,713 5,476 2015 % 2% 1% 100% 2015 % 43% 25% 8% 2% 11% 3% 2% 6% 109,824 100% 87,692 100% Credit risk The Group monitors credit risk at both a local and Group level. Credit terms are set and monitored at a local level according to local business practices and commercial trading conditions. The age of debt, and the level of accruals and deferred income is reported regularly. Age profiling is monitored both at local customer level and at consolidated entity level. Bad debt provisions are determined locally. There is only local exposure to debt from our significant global clients. Whilst the Group has some exposure to foreign currency risk, this is limited by the proportion of debt denominated in sterling. The Group continues to review its debt exposure to foreign currency movements and will review efficient strategies to mitigate risk as the Group’s overseas debt increases. There are no significant concentrations of credit risk in the Group. 24. Trade and other payables Amounts falling due within one year Trade creditors Sales taxation and social security payables Employment benefit accruals Amounts due to associates Accruals and deferred income Other payables 2016 £000 (45,700) (7,258) (1,130) (2,155) (51,314) (8,329) (115,886) 2015 £000 (37,970) (7,946) (1,195) – (43,349) (4,073) (94,533) The carrying amount of trade and other payables approximates to their fair value. Settlement of trade and other payables is in accordance with our terms of trade established with our local suppliers. 68 The carrying amount of the Group’s trade and other payables are denominated in the following currencies: Amounts falling due within one year Sterling US dollars Australian dollars Malaysian ringgit Euros South African rand Brazilian real Other 2016 £000 (34,357) (39,391) (13,936) (4,258) (14,084) (1,136) (2,271) (6,453) 2016 % 29% 34% 12% 4% 12% 2% 2% 5% 2015 £000 (36,284) (27,090) (9,413) (2,530) (10,814) (1,598) (1,667) (5,137) 2015 % 38% 29% 10% 3% 11% 2% 2% 5% (115,886) 100% (94,533) 100% The table below analyses the Group’s financial liabilities and derivative financial liabilities into relevant maturity groupings based on the period remaining until the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (including interest), and therefore will not reconcile with amounts disclosed on the consolidated balance sheet: Non-derivatives Up to six months Six to twelve months Later than one year and not later than five years Put options Up to six months Later than one year and not later than five years Total derivatives and non-derivatives 2016 £000 2015 £000 (87,669) (77,310) (13) (12) (30,445) (24,576) (118,127) (101,898) (20,216) (12,952) (33,514) (16,739) (7,974) (24,713) (151,295) (126,611) The value of put options represents the minority shareholder put option liability excluding any discount for time. The majority of these financial instruments will be fulfilled by the issue of equity (note 27). The above table is an indicator of our liquidity risk. The risk is mitigated by the receipt of cash from trade and other receivables, and in the case of put options, the majority of the liability will be fulfilled by the issue of equity (note 29). 69 NOTES Continued 25. Other financial liabilities Amounts falling due within one year Obligations under finance leases Invoice discounting Obligations under finance leases and hire purchase contracts are due as follows: 2016 £000 (25) (3,645) (3,670) 2015 £000 (25) (3,130) (3,155) In one year or less, or on demand In more than one year but not more than two years 2016 £000 (25) (18) (43) 2015 £000 (25) (39) (64) 26. Deferred and contingent consideration Amounts falling within one year – Deferred (note 18) – Contingent (note 20) At 1 January Exchange difference Associate increase in contingency* Acquisition Consideration paid (note 19) At 31 December 2016 £000 2015 £000 – – – 2016 £000 (1,792) (131) (43) – 1,966 (392) (1,400) (1,792) 2015 £000 – – (1,400) (392) – – (1,792) * This all relates to payments to Shepardson Stern + Kaminsky LLP, before we gained a controlling interest. Invoice discounting relates to borrowings secured against trade receivables in the UK. The amounts borrowed represent 60% of the receivable balance pledged. As at the balance sheet date, £1.9m was not drawn under this facility. Interest is accrued at 1.75% per annum on amounts drawn Amounts falling due after one year Obligations under finance leases Secured bank loans 2016 £000 (18) 2015 £000 (39) (28,259) (23,555) (28,277) (23,594) The carrying value of bank loans approximates to their fair value. Secured bank loans At the year end, the Group had a banking facility of up to £38.0m (2015: £30.0m) plus a one year £0.3m (2015: £0.3m) overdraft facility. The banking facility reduces by £2.0m annually. The facilities have floating rates of interest set at 1.75% above LIBOR and the overdraft has floating rates of interest set at 1.75% above the Bank of England base rate. The banking facility matures on 30 April 2020. Our operations in India have overdrafts and local short term bank loans that are guaranteed by the Group. The balances outstanding at the year end was nil (2015: £98k). Gross secured bank loans Capitalised finance costs Net secured bank loans Future interest payable on secured bank loans at balance sheet date Total secured bank loans and future interest 2016 £000 (28,582) 323 (28,259) 2015 £000 (23,800) 245 (23,555) (2,406) (894) (30,665) (24,449) Total secured bank loans and future interest are due as follows: In one year or less, or on demand In more than one year but not more than five years 2016 £000 (722) 2015 £000 (671) (29,943) (30,665) (23,778) (24,449) 70 27. Minority shareholder put option liabilities The movements in the year relating to the minority interest put options that are payable in cash and in equity are as follows: Some of our subsidiaries’ local entrepreneurs (minorities) have the right to a put option. The put options give the minorities a right to exchange their minority holdings in the subsidiary into shares in M&C Saatchi plc or cash (as per the agreement). 2016 £000 2015 £000 (1,300) (1,136) (18,916) (15,602) (20,216) (16,738) (1,999) (10,951) (12,950) (1,805) (5,821) (7,626) (33,166) (24,364) 2016 £000 (24,364) 2015 £000 (24,543) (82) (138) (10,249) (2,190) 2,126 – 4,555 1,658 Cash based At 1 January Exchange difference Reclassified to/(from) share based Additions* Exercises Income statement charge due to – Change in estimates – Change in share price – Time At 31 December 2016 £000 (2,941) (82) (319) – – 280 (235) (2) 2015 £000 (1,209) (138) 385 (2,190) – 201 10 – (3,299) (2,941) * Relating to Creative Spark Interactive (PTY) LTD and M&C Saatchi Agency Pty Ltd. Equity based At 1 January Additions Exercises Reclassified (from)/to cash based Reclassification** Income statement charge due to 2016 equity* (6,562) 2016 £000 (21,423) 2015 £000 (23,334) (2,697) (10,249) 546 2,126 319 – – 4,555 (385) 1,658 2,698 (4,108) (3,044) (294) 184 7 (7,860) (29,867) (21,423) 84 – 710 137 (78) 2,978 (3,279) (296) (597) (3,907) 194 7 (3,706) – Change in estimates – Change in share price – Time At 31 December Amounts falling due within one year – Cash – Equity Amounts falling due after one year – Cash – Equity At 1 January Exchange difference Additions Exercises Reclassification** Income statement charge due to – Change in estimates – Change in share price – Time Total income statement charge At 31 December (33,166) (24,364) * The estimated number of M&C Saatchi plc shares that will be issued, in thousands, to fulfil. ** The reclassification relate to M&C Saatchi LA Inc and M&C Saatchi (S) Pte Ltd where, due to changes in shareholder agreements, the put options are now accounted for as conditional share awards under IFRS2 (note 30). 71 NOTES Continued 27. Minority shareholder put option liabilities continued Put options are exercisable from: Subsidiary M&C Saatchi Marketing Arts Ltd M&C Saatchi (M) SDN BHD M&C Saatchi Sports & Entertainment Ltd Influence Communications Ltd M&C Saatchi Europe Holdings Ltd M&C Saatchi German Holdings Ltd M&C Saatchi Communications Pty Ltd M&C Saatchi Berlin GmbH FCINQ SAS Clear Ideas Consulting LLP M&C Saatchi Sport & Entertainment LLP (US) Clear Ideas Consulting LLP M&C Saatchi Sport & Entertainment Pty Ltd Talk PR Ltd M&C Saatchi UK PR LLP M&C Saatchi Corporate SAS M&C Saatchi (Switzerland) SA M&C Saatchi Merlin Ltd The Source (London) Ltd Shepardson Stern & Kaminsky LLP* M&C Saatchi Brazil Comunicação LTDA Samuelson Talbot & Partners Pty Ltd M&C Saatchi Merlin Ltd Shepardson Stern & Kaminsky LLP* Creative Spark Interactive (PTY) LTD M&C Saatchi Agency Pty LTD Year 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2018 2018 2018 2020 2020 * New put options in 2016. % of subsidiaries’ shares exchangeable 50.0 20.0 2.8 5.0 4.0 4.0 13.0 10.0 15.0 12.5 27.5 12.5 49.0 49.0 27.5 29.8 20.0 22.5 24.0 16.7 40.0 8.8 22.5 33.3 10.0 20.0 At each period end, the fair value of the put option liability is calculated in accordance with the shareholders’ agreement, and any movement is charged to the income statement. Where the agreement gives a right to convert to a variable number of shares (rather than a value), the number of shares is converted to a value by using the period end share price (2016: 380.0p, 2015: 326.5). Result +10% (10)% 72 The liability will vary with our share price and with the results of the subsidiary companies. Current liabilities are determined by our year end share price and the 2016 results of the companies who can exercise in 2017. Non-current liabilities are determined by our year end share price and the projected results of the companies who can exercise after 2016. The projected results show management’s best estimate of the growth rates and margin of the companies who can exercise after 2016. Given that these companies are small, single account wins/losses can have a significant effect on their results. Such account wins are far more significant than changes to exchange rates and underlying economic growth rates. The fair value of minority shareholder put option liabilities is measured using some inputs that are not based on observable market data (i.e. IFRS13, level 3 fair value measurement). Share price risk Changes in our year end share price will impact the fair value adjustment to minority shareholder put options. The year end share price was 380.0p (2015: 326.5p). The 2016 charges would have changed as follows, had the share price been: Increase/ (decrease) in profit before and after tax £000 £(2,181) £(1,470) – £1,727 £3,463 Movement % +21% +11% – (11)% (21)% Share price 460.0p 420.0p 380.0p 340.0p 300.0p Forecast accuracy Difference in actual and projected results of the companies could have an impact on the fair value adjustments as follows (assuming no change in the Group’s forecast): Increase/ (decrease) in profit before and after tax £000 £(1,103) £1,287 28. Other non-current liabilities 29. Issued share capital Employment benefit provisions* Other 2016 £000 (446) (2,162) (2,608) 2015 £000 (226) (982) (1,208) * This relates to long term service leave in some locations. Allotted, called up and fully paid At 1 January 2015 Fulfilment of options Acquisition of 10% M&C Saatchi Mobile Ltd Acquisition of 4.9% M&C Saatchi Mobile LLP (USA) Acquisition small percentages of three UK subsidiaries At 31 December 2015 Acquisition 10% M&C Saatchi Berlin GmbH Acquisition 20% M&C Saatchi (Hong Kong) Limited Acquisition of 20% M&C Saatchi Mobile SpA (Italy) Acquisition small percentages of a UK and a US subsidiary At 31 December 2016 Number of shares 68,378,629 3,057,012 1,019,267 192,289 67,822 72,715,019 155,812 1,269,458 419,970 389,937 74,950,196 1p Ordinary shares £000 683 31 10 2 1 727 1 13 4 4 749 The Group holds 700,000 of the above M&C Saatchi plc shares in treasury. Capital management The Group aims to use cash generated from our operations to fund growth. Debt is used to fund short term investment and working capital cycles. Long term and major investment obligations are fulfilled by issuing equity (e.g. put options (note 27)). In this way, we reduce the financial risk of debt markets being closed or rationed. The Group will minimise the amount of equity issues when long term and major investment obligations vest by using any available cash instead of equity. Our long term targets are to be debt free and to minimise the dilution to our shareholders and maximise our organic growth. 73 NOTES Continued 30. Share based payments Some of our subsidiaries’ local entrepreneurs (“minorities”) have the right to a put option. The put options give the minorities a right to exchange their minority holdings in the subsidiary into shares in M&C Saatchi plc, in the event that they are no longer employed by the Group either the Group buys back the local equity at a price reflecting the value on their departure or other local entrepreneurs receive the local equity (as per the agreement). Due to the changing right of the local equity, the local minority has been accounted as a share based payment under IFRS2. Share based payments include vested share options and conditional share awards. Expense recognised in year: Equity settled Cash settled Total Vested share options At 1 January 2015 Exercised paid in equity* At 31 December 2015 Vested At 31 December 2016 2016 £000 7,997 – 7,997 2015 £000 1,125 26 1,151 Conditional share awards – LTIP 55,379 New LTIP 2,771,736 2012 LTIP 229,897 UK growth shares – Total number 3,057,012 – – 2,107,224 2,107,224 (55,379) (2,771,736) (229,897) – – – – – – – – – – – – – (3,057,012) – 2,107,224 2,107,224 * The average price when these options were exercised was n/a (2015: 317.3p). The LTIP was conditional that the employee remains employed by the Group on the day of exercise; the vested options do not have this condition. Further details of these old share options can be found in the 2014 Annual Report. Conditional share awards Minority interest put options with leaver provisions In addition to the put option liabilities described in note 27, the following entities have issued put options which are forfeited on termination of employment of the minorities. As such, these arrangements are treated as share based payment and accounted for under IFRS2, as opposed to IAS39. The fair value of these options is determined on the date of grant based on the value of the underlying subsidiary and the number of shares in M&C Saatchi plc expected to be issued on exercise. The fair value of the subsidiary shares is established by means of a Monte Carlo model and the number of shares to be issued are determined in line with the formula prescribed in the respective shareholder agreements. Typically, these are with reference to the profitability of the subsidiary over the vesting period in the context of overall Group profits such that profit growth in the underlying business would result in a larger number of shares to be issued. The fair value is charged to the income statement over the vesting period on a straight-line basis. 74 Share price at grant date £3.23 Vesting period years 2 Dividend yield Volatility 28% 1.94% M&C Saatchi Network Ltd M&C Saatchi Network Ltd M&C Saatchi LA Inc** M&C Saatchi LA Inc M&C Saatchi Shop Ltd M&C Saatchi Shop Ltd M&C Saatchi Shop Ltd M&C Saatchi Accelerator Ltd M&C Saatchi Accelerator Ltd M&C Saatchi Accelerator Ltd M&C Saatchi Mobile Singapore M&C Saatchi (S) Pte Ltd** M&C Saatchi Tel Aviv Ltd LIDA NY LLP LIDA NY LLP M&C Saatchi SpA Paris GAD Holding SAS M&C Saatchi Share Inc M&C Saatchi AB M&C Saatchi Middle East Holdco Ltd M&C Saatchi Worldwide Ltd M&C Saatchi Worldwide Ltd M&C Saatchi Mobile Ltd M&C Saatchi Mobile Ltd M&C Saatchi Mobile Ltd M&C Saatchi Mobile USA M&C Saatchi Mobile USA M&C Saatchi Mobile USA M&C Saatchi Berlin GMBH Grant date 05/05/15 05/05/15 16/12/04 15/01/15 03/12/15 03/12/15 03/12/15 26/11/15 26/11/15 26/11/15 £3.23 £1.30 £3.15 £3.32 £3.32 £3.32 £3.27 £3.27 £3.27 24/06/15 £3.16 01/09/13 21/04/15 15/03/16 15/03/16 09/12/15 24/02/16 12/06/15 11/02/14 23/03/16 01/06/16 18/07/16 23/08/16 23/08/16 23/08/16 28/10/16 28/10/16 28/10/16 14/12/16 £2.68 £3.28 £3.14 £3.14 £3.33 £2.98 £3.30 £3.03 £3.23 £3.38 £2.95 £3.67 £3.67 £3.67 £3.29 £3.29 £3.29 £3.29 4 15 5 4 5 6 4 5 6 4 6 5 1 3 3 4 5 4 3 3 2 1 2 4 1 2 3 4 1.94% 1.78% 1.99% 0.70% 1.89% 1.87% 1.91% 1.91% 1.91% 1.98% 1.85% 1.91% 2.30% 2.30% 1.88% 2.42% 2.19% 1.80% 2.23% 2.13% 2.44% 2.03% 2.03% 2.03% 2.27% 2.27% 2.27% 2.26% Fair value of option (per M&C Saatchi plc share issued)* £3.10 Company dividend rights PE Cap No No £2.93 £1.00 £2.85 £3.21 £3.19 £3.06 £3.00 £2.94 £2.84 £1.53 £0.96 £3.26 £3.09 £2.95 £3.11 £2.72 £2.78 £2.61 £3.02 £0.77 £0.45 £3.60 £3.51 £3.38 £3.23 £3.15 £3.04 £2.98 No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No No No No No No No No No No No No No No No 12 12 No 8 8 No No No No No No No No No No No No No No Vesting date*** 15/04/17 15/04/19 15/04/20 15/04/20 15/04/20 15/04/21 15/04/22 15/04/20 15/04/21 15/04/22 15/04/20 15/04/19 15/04/20 30/11/16 30/11/18 15/04/19 01/05/20 15/04/20 01/12/17 15/04/19 01/01/19 01/01/19 27/08/17 14/10/18 15/04/20 27/08/17 14/10/18 15/04/20 15/04/21 Risk free rate 0.70% 1.20% 1.64% 1.04% 1.17% 1.35% 1.48% 1.16% 1.32% 1.47% 43% 45% 54% 27% 42% 54% 26% 42% 54% 43% 1.54% 63% 44% 25% 25% 28% 27% 41% 48% 27% 28% 29% 33% 31% 31% 41% 33% 30% 31% 1.84% 1.20% 0.57% 0.57% 1.23% 1.23% 0.81% 1.22% 0.57% 0.81% 0.81% 0.11% 0.11% 0.12% 0.11% 0.11% 0.12% 0.56% * The valuation was made using a Monte Carlo model. ** Reclassified from minority interest put option In 2015, due to new shareholder agreement being issued (note 27). *** The vesting date is set in the agreements on the date that the Group’s Annual Report is published. These dates are estimates based on our historic timetable. The actual number of M&C Saatchi plc shares that these minority interests will convert into is based on the entities’ proportion of Group profits. Based on our future forecasts, that have not been discounted for risk, the following number of shares are likely to vest, giving rise to the following accounting charges. 75 NOTES Continued 30. Share based payments continued M&C Saatchi Network Ltd M&C Saatchi Network Ltd M&C Saatchi LA Inc** M&C Saatchi LA Inc M&C Saatchi Shop Ltd M&C Saatchi Shop Ltd M&C Saatchi Shop Ltd M&C Saatchi Accelerator Ltd M&C Saatchi Accelerator Ltd M&C Saatchi Accelerator Ltd M&C Saatchi Mobile Singapore M&C Saatchi (S) Pte Ltd M&C Saatchi Tel Aviv Ltd LIDA NY LLP LIDA NY LLP M&C Saatchi SpA Paris GAD Holding SAS M&C Saatchi Share Inc M&C Saatchi AB M&C Saatchi Middle East Holdco Ltd M&C Saatchi Worldwide Ltd M&C Saatchi Worldwide Ltd M&C Saatchi Mobile Ltd M&C Saatchi Mobile Ltd M&C Saatchi Mobile Ltd M&C Saatchi Mobile USA M&C Saatchi Mobile USA M&C Saatchi Mobile USA % shareholding in entity 0.0% 5.0% 6.0% 4.0% *9.2% *9.2% *9.2% 6.7% 6.7% 6.7% Vesting date 15/04/17 15/04/19 15/04/20 15/04/20 15/04/20 15/04/21 15/04/22 15/04/20 15/04/21 15/04/22 5.0% 15/04/20 20.0% 15/04/19 *20.0% 15/04/20 24.5% 24.5% 20% 40% 20% 40% 20% 0% 0% 10% 10% 10% 0% 0% 0% 30/11/16 30/11/18 15/04/19 01/05/20 15/04/20 01/12/17 15/04/19 01/01/19 01/01/19 27/08/17 14/10/18 15/04/20 27/08/17 14/10/18 15/04/20 M&C Saatchi Berlin GMBH 13% 15/04/21 Fair value of option (Per M&C Saatchi plc share issued) £3.10 Estimated number of shares at vesting 000 300 Total accounting charge at vesting £000 £931 Accounting charge 2016 £000 £479 Accounting charge 2015 £000 £311 £2.93 £1.00 £2.85 £3.21 £3.19 £3.06 £3.00 £2.94 £2.84 £1.53 £0.96 £3.26 £3.09 £2.95 £3.11 £2.72 £2.78 £2.61 £3.02 £0.77 £0.45 £3.60 £3.51 £3.38 £3.23 £3.15 £3.04 £2.98 881 184 123 26 25 23 47 54 51 66 360 32 631 648 428 0 0 301 7 1,271 127 1,112 1,139 622 476 488 265 250 £2,581 £656 £184 £350 £83 £79 £72 £141 £158 £145 £101 £347 £104 £1,950 £1,911 £1,332 £0 £0 £787 £22 £977 £57 £4,000 £4,000 £2,106 £1,537 £1,537 £806 £746 £12 £67 £19 £14 £11 £32 £29 £23 £21 £62 £14 £1,950 £562 £422 £0 £0 £597 £6 £220 £11 £1,409 £665 £206 £325 £137 £41 £7 £430 £131 £64 £2 £1 £1 £3 £3 £2 £11 £144 £22 - - - - - - - - - - - - - - - - 9,937 £27,044 £7,997 £1,125 * Shareholder left Group In the year and the shares were bought back by the Group. In creating the accounting charge, we have assumed that all shareholders will be employed at time of vesting. 76 31. Post balance sheet events 33. Related party transactions During February 2017, the Group made the following small acquisitions: • £0.4m paid to company to acquire a controlling interest in our Spanish associate; • £2.6m paid in M&C Saatchi plc equity to increase our holding in Shepardson Stern & Kaminsky LLP from 50.1% to 66.7% by issuing Group equity; and • Acquired Bohemia, an Australian media planning and buying operation. 32. Commitments Capital commitments There are no other significant capital commitments contracted for but not provided. Operating leases Commitments under operating leases are reported within note 7. Key management remuneration Key management remuneration is disclosed in note 8. Unaudited detail on Directors’ remuneration is disclosed in the Remuneration Report on pages 24 and 25. Other related parties During the year, the Group entered into the following transactions with related parties: Tom Dery is a director of Australian Cancer. During the year the Group passed on no third party costs to Australian Cancer (2015: £30k), and charged them £9k (2015: £4k) in fees, of which nil (2015: nil) was outstanding at the year end. Lara Hussein has an equity interest in Brand Energy. During the year, the Group was charged, on an arm’s-length basis, by Brand Energy £713k (2015: £465k), of which £512k (2015: nil) was unpaid at the year end. An Australian employee’s wife owns Rapid Films Pty Ltd; purchase was made at an arm’s-length basis. £77k was owed at year end (2015: £167k). To assist the local directors to acquire 20% of M&C Saatchi Agency Pty Ltd in 2015, loans of AUD3.6m were issued. At the year end, the balance of the loan was AUD3.1m (see note 22 for further details). Maurice Saatchi is a trustee of Josephine Hart Foundation. During the year the Group charged, on an arm’s-length basis, Josephine Hart Foundation £92k (2015: £44k), of which nil (2015: £2k) was outstanding at the year end. In 2015 the Group lent Antoine Barthuel, an arm’s-length interest- bearing Euro 150k loan, the balance of the loan was Euro 150k at the year end. During the year, M&C Saatchi Italy's directors sold 20% of the company’s equity in exchange for 419,970 PLC shares. To assist the local directors Saatchi LA Inc in 2016, loans of USD400k were issued. At the year end, the balance of the loan was USD400k. During the year, the Group made purchases of £3,138k (2015: £37k) from its associates. At 31 December 2016, there was £2,801k due to associates in respect of these transactions (2015: £799k). During the year, £150k (2015: £374k) of fees were charged by Group companies to associates. At 31 December 2016, associates owed Group companies £409k (2015: £3,251k). 77 Corporate venturing investments Investments in debt and equity securities held by the Group are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity (in the fair value reserve), except for impairment losses and, in the case of monetary items such as debt securities, foreign exchange gains and losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss. Associates and joint ventures Associates and joint ventures are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 10% and 50% of the voting rights, minority or equal board representation and, in case of shareholdings of between 10% and 20%, the Group treats the entity as an associate where there are significant minority and contractual protections that allow us to influence dividend and investment flows. Investments in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates and joint ventures includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ and joint ventures’ post acquisition profits or losses is recognised in the income statement, and its share of post acquisition movements is recognised in other comprehensive income. The cumulative post acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. NOTES Continued During the year, the Company recharged its subsidiaries and indirect subsidiaries with £818k (2015: £821k) of its costs, £559k (2015: £223k) of interest. The balance outstanding can be seen in notes 37, 38 and 39. 34. Accounting policies Critical accounting policies are set out in note 4. Additional accounting policies followed by the Group are: Cost convention The financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial instruments. Basis of consolidation The M&C Saatchi plc consolidated financial statements incorporate the financial statements of M&C Saatchi plc and entities (including special purpose entities) controlled by M&C Saatchi plc (and its subsidiaries). Control is achieved where M&C Saatchi plc has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Where subsidiaries are acquired in the year, their results and cash flows are included from the date that we gain control up to the balance sheet date. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra Group transactions, balances, income and expenses are eliminated on consolidation. Where a consolidated company is less than 100% owned by the Group, the non-controlling interest share of the results and net assets is recognised at each reporting date. Disposals of subsidiaries’ equity that do not affect control The difference between the consideration received and the credit to the non-controlling interest reserve is credited directly to retained earnings. In the event that equity had previously been acquired under this revised standard then such a disposal will result in a release from non-controlling interest acquired reserve to retained earnings. Acquisitions of subsidiaries’ equity that do not affect control From 1 January 2012, acquisitions of subsidiaries’ equity that do not affect control have been accounted for using non-controlling interest acquired reserve. How the non-controlling interest acquired reserve is used is described in note 5. 78 Discontinued operations Discontinued operations are a component of the Group’s business that represents a separate major line of business or geographical area of operation that has been disposed of or is held for sale. Classification as discontinued operations occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation has been discontinued from the start of the comparative period. Intangible assets Separately acquired intangible assets are capitalised at cost. Intangible assets acquired as part of a business combination are capitalised at fair value at the date of acquisition if they arise from contractual or other legal rights, and sufficient information exists to measure the fair value of the asset. Intangible assets that relate to associates are included within the carrying value of the investment in associates. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques. Intangible assets are stated at historical cost less accumulated amortisation and impairment. Amortisation is provided to write off the cost of all intangible assets, less estimated residual values, evenly over their expected useful lives. The charge in the income statement is included in operating costs. Intangible assets are amortised to residual values over the useful economic life of the asset as follows: Software Customer relationships Brand name – three years – one to five years – zero to infinity Cash and cash equivalents Cash and cash equivalents include, for the purposes of the balance sheet and cash flow statement, cash at bank and in hand and deposits with an original maturity of three months or less, net of legally offsettable overdraft, which are managed as part of cash balances. Leased assets Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance lease agreements are treated as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable over the term of the lease. The corresponding leasing commitments are shown as amounts payable to the lessor. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Where operating lease agreements include a fixed uplift for rental payments, the expense is straight-lined, except in cases where another systematic basis better represents the benefit to us. Reverse premiums and similar incentives to enter into operating lease agreements are initially recorded as deferred income and released to profit or loss on a straight-line basis over the lease term. Segmental reporting Segmental reporting reflects how management controls the business. Sales between business units are on an arm’s-length basis. The assets and liabilities of the segments reflect the assets and liabilities of the underlying companies involved. The need for any intangible asset impairment write down is assessed by comparison of the carrying value of the asset against the higher of value in use and fair value less cost to sell. Our business is run on an operating unit basis. In accordance with IFRS8 paragraph 12, we have aggregated our operating units into regional segments. Plant and equipment Tangible fixed assets are stated at historical cost less accumulated depreciation. Employee benefits – pensions Contributions to personal pension plans are charged to the income statement in the period in which they are due. Depreciation is provided to write off the cost of all fixed assets, less estimated residual values, evenly over their expected useful lives. Depreciation is calculated at the following annual rates: Leasehold improvements Furniture and fittings Computer equipment Other equipment Motor vehicles – over the period of the lease – 10% in equal instalments – 33% in equal instalments – 25% in equal instalments – 25% in equal instalments The need for any fixed asset impairment write down is assessed by comparison of the carrying value of the asset against the higher of fair value less cost to sell and the value in use. Employee benefits – cash share based compensation For cash settled share based payments, a liability is recognised for the amount payable at the balance sheet date with a corresponding charge being made to the profit and loss account. Where payments depend on future events, an assessment is made of the likelihood of these conditions being met in determining the amounts to be recorded. Where cash settled share options are only part of the way through their vesting period, the liability and profit and loss account charge are adjusted to reflect the proportion of the vesting period that has been covered up to the balance sheet date. 79 NOTES Continued 34. Accounting policies continued Taxation Current tax, including UK and foreign tax, is provided for using the tax rates and laws that have been substantively enacted at the balance sheet date. Foreign currency Foreign currency transactions arising from normal trading activities are recorded in functional currency at the rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are translated at the year end exchange rate. Where they form part of the net investment in foreign operations, the gain or loss is charged directly to the foreign exchange reserve. Foreign currency gains and losses are credited or charged to the income statement as they arise. For overseas operations, results are translated at the average rate of exchange and balance sheets are translated at the closing rate of exchange. The average rate of exchange approximates to the rate on the date that the transactions occurred. Exchange differences arising from the translation of foreign subsidiary results are taken to a separate component of equity. Such translation differences will be recognised as income or expense in the period of disposal. Financial instruments Financial assets and financial liabilities principally include the following: Trade receivables Trade receivables do not carry any interest and are stated at amortised cost. Impairment provisions are recognised when there is objective evidence that the Group will be unable to collect all of the amounts due under the terms receivable. Trade and other liabilities Trade and other liabilities are not interest-bearing and are stated at their amortised cost. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not provided for temporary differences that arise: from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profits or loss; and on the initial recognition of goodwill. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and the Group intends to settle its current tax assets and liabilities on a net basis. Dividends Interim dividends are recorded when they are paid and the final dividends are recorded when they become legally payable. Earnings per share The dilutive effect of unvested outstanding options is calculated based on the number that would vest had the balance sheet date been the vesting date. This dilution is reflected in the computation of diluted earnings per share. 80 Classification of financial instruments The financial assets and liabilities of the Group are classified into the following financial statement captions in accordance with IAS39 financial instruments: Loans and receivable Measured at amortised cost, separately disclosed as cash and cash equivalents; current tax assets; trade and other receivables (with the exclusion of prepayments); and loans to employees within other non-current assets. Financial liabilities at fair value through profit or loss Separately disclosed as minority shareholder put option liabilities. Financial liabilities measured at amortised cost Separately disclosed as trade and other payables; current tax liabilities; other financial liabilities; deferred and contingent consideration; and other non-current liabilities. IFRS13 hierarchy – Capital structure and finance cost Level 1 Fair values measured using quoted (unadjusted) prices in active markets for assets and liabilities (e.g. cash, debtors and creditors). Level 2 Fair values using inputs, other than quoted prices including within Level 1, that are observable for assets or liability either directly or indirectly. The Group does not hold such items at year end, though may hold such items during the year. These items include forward foreign exchange contracts. Level 3 Fair values measured using inputs for assets or liabilities that are not based on observable market data. Such items include the Group’s put option liability, contingent consideration, investments, and some inputs to profit based share options. Bank borrowings Interest-bearing bank loans and overdrafts are initially recorded as the proceeds received, net of direct issue costs. Direct issue costs are amortised over the period of the loans and overdrafts to which they relate. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the income statement using the effective interest method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Standards effective for the first time this year There are no significant new and amended standards that became effective for periods beginning on or after 1 January 2015. The Directors consider the impact of the minor changes in the year on the Group and conclude that none are material to the Group’s results and financial position. Standards not yet effective New standards, amendments and interpretations to existing standards that are mandatory for the Group’s accounting periods beginning after 1 January 2016 and which the Group has decided not to adopt early. None of these standards have a material effect on our accounts. Those that are relevant to the Group are: Treasury shares When the Group reacquires its own equity instruments, those instruments (treasury shares) are debited to treasury reserve. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s treasury shares. Such treasury shares may be acquired and held by other members of the Group. Consideration paid or received is recognised directly in equity. IFRS15 Revenue from Contracts with customers, replaces IAS18 Revenue and all other revenue related standards. Effective for accounting periods beginning on or after 1 January 2018. We will be transitioning in 2018 restating 2017 opening balances. Our initial review is that on a portfolio basis It will have an immaterial effect, however there is a large risk that different auditors will interpret the standards differently, we await the interpretation as practices develop. IFRS9 Financial Instruments will eventually replace IAS39 in its entirety. (Effective for accounting periods beginning on or after 1 January 2018.)* IFRS16 Leases will replace IAS17. (Effective for accounting periods beginning on or after 1 January 2019. We will be transitioning in 2018 restating 2017 opening balances.) * These standards have not yet been endorsed by the EU. 81 COMPANY BALANCE SHEET At 31 December Non-current assets Investments Intangible assets Deferred tax assets Other non-current assets Current assets Trade and other receivables Cash at bank Current liabilities Trade and other payables Deferred consideration Net current assets Total assets less current liabilities Noncurrent Liabilities Other financial liabilities Total net assets Capital and reserves Share capital Share premium Merger reserve Treasury reserve Share based payment reserve Profit and loss account Shareholders’ funds Note 2016 £000 2015 £000 36 91,225 83,459 37 38 39 40 40 – 2,250 93,515 55,800 258 56,058 (29,069) – (29,069) 26,989 120,504 66 – 13,496 97,021 47,842 1,407 49,249 (35,153) (392) (35,545) 13,704 110,725 (17,577) 102,927 (23,555) 87,170 749 24,099 63,197 (792) 8,891 6,783 102,927 727 17,338 63,197 (792) 1,125 5,575 87,170 These financial statements were approved and authorised for issue by the Board on 15 March 2017 and signed on its behalf by: Jamie Hewitt Finance Director M&C Saatchi plc Company Number 05114893 As permitted by Section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account. Included within the consolidated income statement for the year ended 31 December 2016 is a profit after tax of £6,435k (2015: loss £1,138k). The notes on pages 84 to 85 form part of these financial statements. 82 STATEMENT OF CHANGES IN EQUITY At 1 January 2015 Options exercised Share option charge Put options exercised Dividends paid Profit for the year AT 31 DECEMBER 2015 Share option charge Put options exercised Dividends paid Profit for the year Share capital £000 683 Share premium £000 16,807 Merger reserve £000 59,294 Treasury reserve £000 (792) 31 – 13 – – 727 – 22 – – 307 – 224 – – 17,338 – 6,761 – – – – 3,903 – – – – – – – 63,197 (792) – – – – – – – – Share based payment reserve £000 – – 1,125 – – – 1,125 7,766 – – – Profit and loss account £000 11,713 (338) – – (4,662) (1,138) 5,575 231 – (5,458) 6,435 Total £000 87,705 – 1,125 4,140 (4,662) (1,138) 87,170 7,997 6,783 (5,458) 6,435 AT 31 DECEMBER 2016 749 24,099 63,197 (792) 8,891 6,783 102,927 The notes on pages 84 to 85 form part of these financial statements. 83 NOTES 35. Accounting policies The financial statements have been prepared under the historical cost convention in accordance with the reduced disclosure framework of FRS 101. The amendments to FRS 101 (2014/15 cycle) issued July 2015 and effective immediately have been applied. In adopting the reduced disclosure framework of FRS101, the Company has made the following exemptions from disclosure: • the cash flow statement and related notes; • disclosures in respect of transactions with wholly owned subsidiaries; • disclosures in respect of capital management; • the effects of new but not yet effective IFRSs; and • an additional balance sheet for the transition to FRS101. Accounting policies applied The following principal accounting policies have been applied: (a) Valuation of investments Investments held as fixed assets are stated at cost, less any provision for impairment. (b) Pensions Contributions to personal pension plans are charged to the profit and loss account in the period in which they are due. (c) See Group policy (note 34 and note 4) See Group policy for current tax, deferred tax, share based payments and borrowings. (d) Share based payments in Company The cost of awards to employees of subsidiary undertakings classified as conditional shares awards is accounted for as an additional investment in the employing subsidiary. (e) Dividends Interim dividends are recorded when they are paid and the final dividends are recorded when they become legally payable. (f) Treasury shares When the Company reacquires its own equity instruments, those instruments (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s treasury shares. Such treasury shares may be acquired and held by the Company or by other members of the Group. Consideration paid or received is recognised directly in equity. 36. Investments in subsidiary undertakings At 1 January Acquisition of a subsidiary* Conditional share awards ** At 31 December 2016 £000 83,459 - 7,766 91,225 2015 £000 81,942 392 1,125 83,459 The direct and indirect subsidiary undertakings are listed in note 3 to the consolidated financial statements. * Acquisition of 50.1% of Creative Spark Interactive (Pty) Ltd (note 18). ** Conditional share awards (Minority interest put options with leaver provisions) (note 30). 84 37. Other non-current assets 39. Creditors falling due within one year Trade creditors Amounts due to subsidiaries* Accruals and deferred income * Repayable on demand. 2016 £000 (174) (28,490) (405) 2015 £000 (243) (34,560) (350) (29,069) (35,153) 40. Creditors falling due after more than one year Bank loans See note 25 for more details. 2016 £000 (17,577) 2015 £000 (23,555) Amounts from subsidiary undertakings Loan to assist equity purchase** Loans to subsidiary employees* Total 2016 £000 – 435 1,815 2,250 2015 £000 12,000 – 1,496 13,496 * This related to the AUD3.6m (current balance AUD3.0m) loans that the Group lent local management of M&C Saatchi Agency Pty Ltd, in 2015, to enable them to acquire 20% of that business. The full recourse loan is repayable in full if the purchasers no longer have a beneficial interest in the shares of the Australian Group, or are no longer employed. The loan is unsecured and charged interest at 0.1% above the five-year Australian interbank rate at date loan advanced. The carrying value of the loan approximated to fair value. ** Loan to South African indigenous equity holders to enable them to acquire equity in South African subsidiary in accordance with local laws. 38. Trade and other receivables Amounts due less than one year Amounts from subsidiary undertakings* Prepayments and accrued income Corporation tax debtor Other debtors Total trade debtors and other receivables 2016 £000 54,334 85 1,049 332 2015 £000 46,816 33 993 – 55,800 47,842 * Repayable on demand. Amounts receivable from subsidiary undertakings include receivables relating to exercised put options. As detailed in notes 4 and 27, the Group has a number of put option arrangements in place. On exercise of these put options, the Company is required to issue shares in exchange for the shares of the minority interests. Where the Company’s shareholding of the acquired subsidiary becomes equal to or higher than 90% as a result, amounts are credited to the Merger Reserve on exercise. The acquired shares are then immediately sold to subsidiaries of the Company, thereby creating an intercompany receivable and eliminating the Company’s increase in investments. During the year, put option liabilities of £2.8m were exercised in relation to The Source (London) Ltd, M&C Saatchi PR UK LLP and three smaller international subsidiaries (note 27). These liabilities are not recorded in the books of the Company as these are treated as derivative instruments with a negligible fair value. 85 NOTES Continued 41. Directors’ remuneration Total for nine Directors: Directors’ salaries and benefits Bonuses* Contribution to money purchase pension schemes Total remuneration before accounting charges Share option charges Highest paid Director: Directors’ salaries and benefits Bonus* Contribution to money purchase pension schemes Total remuneration before accounting charges Share option charges During the year, no (2015: 2,827,115) M&C Saatchi plc shares were issued to Executive Directors, in return for Directors’ interest in M&C Saatchi Worldwide Ltd B ordinary shares. The number of Directors with a money purchase pension scheme was 5 (2015: 5). The Directors are the key management personnel of the Company. 42. Related parties During the year, the Company charged a management recharge to subsidiaries totalling £818k (2015: £821k). £372k (2015: £45k) was due in relation to this management recharge from subsidiaries as at the balance sheet date. Including these amounts the Company also provides short term working capital loans to and borrows funds from certain subsidiaries, disclosed in notes 37, 38 and 39. The amounts due from subsidiary undertakings payable in cash of £54,334k (2015: £58,816k) is net of £5,881k (2015: £5,874k) provisions for doubtful accounts. Further details of related parties of the Company are provided in note 33. 2016 £000 2015 £000 2,058 200 16 2,274 231 2,505 2016 £000 422 50 1 473 55 528 2,075 - 17 2,092 31 2,123 2015 £000 429 – – 429 – 429 * The bonus relates to equity in a subsidiary company issued at under value. The Director paid personally the tax on this bonus. Unaudited detail on Directors’ remuneration is disclosed in the Remuneration Report on pages 24 and 25. These numbers include accounting charges for the LTIP schemes which the Remuneration Report excludes. 86 43. List of registered addresses Country Australia Bahrain Brazil China France Entity M&C Saatchi Sport & Entertainment Pty Ltd Park Avenue PR Pty Ltd Saatchi Ventures Pty Ltd Tricky Jigsaw Pty Ltd Bellwether Global Pty Ltd Brands in Space Pty Ltd Lida Australia Pty Ltd Bright Red Oranges Pty Ltd Go Studios Pty Ltd M&C Saatchi Direct Pty Ltd M&C Saatchi Agency Pty Ltd Re Team Pty Ltd EMCSaatchi Pty Ltd M&C Saatchi Asia Pac Holdings Pty Ltd Bang Pty Ltd Clear Australia Pty Ltd M&C Saatchi Melbourne Pty Ltd M&C Saatchi Bahrain WLL Lily Participacoes Ltda M&C Saatchi Brasil Comunicação Ltda M&C Saatchi Brasil Participacoes Ltda M+C Saatchi/Insight Pesquisa & Planejamento Ltda Santa Clara Participacoes Ltda M&C Saatchi Advertising (Shanghai) Ltd FCINQ SAS M&C Saatchi Gad SAS M&C Saatchi Little Stories SAS M&C Saatchi One SARL Paris Gad Holding SAS Registered Address 99 Macquarie Street Sydney NSW 2000 Level 12, 131 Macquarie Street Sydney NSW 2000 Level 6 131 Macquarie Street Sydney NSW 2000 Unit 6 223-227 O’Sullivan Road, Bellevue Hill NSW 2023 Level 12, 131 Lucouarel Street Sydney NSW 2000 Unit 19, 285A Crown Street Surry Hills NSW 2010 Level 1, 437 St Kilda Road Melbourne VIC 3004 51,122,1605,316 Manama Center Avenida Brigadeiro Faria Lima, 1355 Jardim Paulistano 16 Andar, Sal Sao Paulo 01452-919 Rua Girassol, 925/927 1st Floor, Vila Madalena, 05433-002 Rua Wisard, 305, Vila Madalena 3 Andar-Con, Sao Paolo Room 227, Guichang Road Pudong, Shanghai 32 Rue Notre Dame des Victoires 75002 Paris 87 Registered Address Munzstrasse 21-23 10178, Berlin 29/F Cambridge House, Taikoo Place 979 King's Road, Quarry Bay 6/F Alexandra House 18 Chater Road, Central 2 Palam Mang, Vasant Vihar New Delhi, 110057 141B Shahpur Jat New Delhi Viale Monte Nero, 27 20135, Milan 1 Abba Even, Boulevard Herzlia 4672519 26-1 Ebisy-Nishi 1-Chome Shibuya- Ku, Tokyo Quantum Tower, Charles Malek Avenue St Nicolas, Beirut Unit 10-2, 10th Floor, Bangunan Malaysia RE 17 Jalan Dungun, Damansara Heights 50490 Kuala Lumpur 36 Golden Square London W1F 9EE, UK Keizersgracht 203 Amsterdam 48M, Block 6 P.EC.H.S, Karachi 21 Media Circle #05-09/10 Infinte Studios, 138562 152 Ann Crescent, Sandton Johannesburg, 2196 Media Quarter, 5th Floor, Corner Somerset and De Smit Street, Ded Waterkant, Cape Town NOTES Continued 43. List of registered addresses continued Country Germany Hong Kong India Italy Israel Japan Lebanon Malaysia Entity M&C Saatchi Berlin GmbH M&C Saatchi Sports & Entertainment GmbH M&C Saatchi Sun GmbH Clear Asia Ltd M&C Saatchi (HK) Ltd M&C Saatchi Asia Ltd M&C Saatchi Communications Pvt Ltd February Communications Pvt Ltd M&C Saatchi SpA M&C Saatchi PR srl M&C Saatchi Tel Aviv Ltd M&C Saatchi Ltd M&C Saatchi SAL M&C Saatchi (M) Sdn Bhd Design Factory Sdn Bhd Intelligence Factory Sdn Bhd Netherlands M&C Saatchi International Holdings BV Clear Netherlands BV M&C Saatchi World Services Pakistan (Pvt) Ltd Clear Ideas (Singapore) Pte Ltd M&C Saatchi Mobile Asia Pacific Pte Ltd M&C Saatchi (S) Pte Ltd Creative Spark Interactive (Pty) Ltd M&C Saatchi Sports & Entertainment South Africa Pty Ltd Dalmation Communications (Pty) Ltd M&C Saatchi Abel (Pty) Ltd M&C Saatchi Africa (Pty) Ltd M&C Saatchi Connect (Pty) Ltd Pakistan Singapore South Africa 88 Country Spain Sweden Switzerland Thailand Turkey Entity M&C Saatchi Madrid SRL M&C Saatchi Digital SL Media By Design Spain SA M&C Saatchi AB M&C Saatchi (Switzerland) SA Love Frankie Ltd M&C Saatchi Istanbul United Arab Emirates M&C Saatchi Middle East Fz LLC M&C Saatchi Fz LLC United Kingdom All UK entities except for the following: USA Clear Ideas Ltd Clear Ideas Consultancy LLP Talk Content Ltd Talk PR Ltd Talk Store PR Ltd Talk Tech PR Ltd Walker Media Ltd Clear USA LLC Clear NY LLP M&C Saatchi PR LLP M&C Saatchi Sports & Entertainment NY LLP Shepardson Stern & Kaminsky LLP M&C Saatchi Agency Inc. M&C Saatchi NY LLP LIDA NY LLP M&C Saatchi LA Inc. M&C Saatchi Share Inc. World Services US Inc. M&C Saatchi Mobile LLP Registered Address Calle Gran Via, 27 28013, Madrid Skeppsbron 16 11130, Stockholm Boulevard Carl-Vogt 83 1205, Geneve 571 RSU Tower, 10th Floor Soi Sukhumvit 31, Sukhumvit Road Wattana District, Bangkok Acarkent Mah. 1 Cadde No 132B Beykoz, Istanbul Al Thuraya Tower 1, Floor 14, Office 1404 Dubai Media City, Dubai, 62614 PO Box: 77932 Abu Dhabi 36 Golden Square London W1F 9EE 2 Golden Square London, W1F 9HR 3-5 Rathbone Place London, W1T 1HJ Pembroke Building, Kensington Village, Avonmore Road, London, W14 8DG 88 Pine Street, 30th Floor New York NY 10005 138 W 25th Street New York NY 10001 2032 Broadway, Santa Monica, CA 90404 625 Broadway, 6th Floor New York, NY 10012 89 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF M&C SAATCHI PLC Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors’ report: • we have not identified material misstatements in those reports; and • in our opinion, those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us 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 financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. John Bennett (Senior Statutory Auditor) For and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL United Kingdom 15 March 2017 We have audited the financial statements of M&C Saatchi plc for the year ended 31 December 2016 set out on pages 26 to 89. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. 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. Respective responsibilities of Directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 22, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 31 December 2016 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company’s financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. 90 ADDITIONAL INFORMATION Advisors Nominated advisor and broker Numis Securities Ltd The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT www.numiscorp.com Solicitors Olswang 90 High Holborn London WC1V 6XX www.olswang.com Auditor KPMG LLP 15 Canada Square Canary Wharf London E14 5GL www.kpmg.co.uk Bankers National Westminster Bank Plc 1 Princes Street London EC2R 8BP www.natwest.com Registrars Computershare Investor Services Plc The Pavilions Bridgwater Road Bristol BS13 8AE www.computershare.com Secretary and registered office Andy Blackstone M&C Saatchi plc 36 Golden Square London W1F 9EE www.mcsaatchiplc.com Country of registration England and Wales Company number 05114893 Investor relations website www.mcsaatchiplc.com Corporate events AGM 7 June 2017 Final 2016 dividend paid 7 July 2017 To those on the register on 9 June 2017 Interim 2017 statement 25 September 2017 Interim 2017 dividend paid 10 November 2017 To those on the register on 27 October 2017 Preliminary announcement of 2017 result Late March 2018 Designed and produced by Addison Group www.addison-group.net A N N U A L R E P O R T 2 0 1 6