Parity Group plc
Annual Report 2016

Plain-text annual report

PARITY GROUP PLC (PTY.L) – LSE Ticker Parity Group plc Dawson House, 5 Jewry Street, London EC3N 2EX Tel: 020 8543 5353 www.parity.net stock code: PTY Perivan Financial Print 244774 Parity Group plc Report and Accounts Year ended 31 December 2016 Headlines Parity Group plc (“Parity” or the “Group”), the UK information and technology services group, announces its full year results for the year ended 31 December 2016. Results Summary ● Continuing Group1 revenues increased by 11% to £91.8m from £82.6m ● Continuing Group adjusted EBITDA2 increased by 47% to £2.2m from £1.5m (£2.5m including discontinued operations {2015: £1.6m}) ● Operating profi t before non-recurring items increased by 72% to £1.77m from £1.03m and replaces adjusted EBITDA as a key measure of performance ● Profi t before tax of £0.96m (2015: loss before tax £3.27m) ● Earnings per share 0.87p (2015: loss per share 3.37p) ● Signifi cant increase in cash infl ow from operations to £3.4m (2015: £0.2m) ● Reduction in net debt to £4.4m (2015: £7.4m) ● Signifi cant reduction in non-recurring items before tax to £0.4m (2015: £3.7m) ● £15m fi nancing facility extended with PNC Bank on improved terms Parity Professionals – Specialising in the sourcing and development of professional staff ● Revenue increased by over 10% to £86.4m (2015: £78.2m) ● Divisional contribution3 increased by 17% to £2.66m (2015: £2.28m) Parity Consultancy Services – Niche expertise and technology solutions ● Revenue increased by 20% to £5.3m (2015: £4.4m) ● Divisional contribution3 increased by 30% to £0.91m (2015: £0.70m) Operational Headlines ● Delivering against new growth strategy o Continued progress following robust H1 performance. KPIs positive with improvement in revenues, profi tability and cash in both businesses ● Aligned functions supporting further growth opportunity in higher margin services o Functions are maintaining expertise in their services with a shift in momentum to managed service projects o Parity Consultancy Services awarded two new signifi cant long-term contracts with a total opportunity of £6.7m ● Development of Parity Consultancy Services (“PCS”) o Strengthened sales focus on data driven technology solutions to deliver business intelligence and cost modelling applications ● Strong cost controls maintained whilst self-funding organic growth ● Inition business held for sale to allow greater focus on the core business, with the eventual sales proceeds to be used to support the development of PCS, and to further reduce debt ● Extension of signifi cant contracts including £1.4m for Military Capability Output Costing System (“MCOCS”) business intelligence solution for MoD in the Consultancy division and FastStream graduate recruitment programme into the Civil Service for Parity Professionals ● Reduced pensions contributions commenced in line with the improved payment terms on the legacy pension defi cit ● Board of Directors enhanced with the appointment of David Firth as a Non-Executive Director, and the announcement that John Conoley will shortly replace Lord Freeman as Non-Executive Chairman 1 The Continuing Group excludes the Inition service offering, which has been classified as discontinuing operations 2 In prior years, the directors used a non-GAAP measure “Adjusted EBITDA” being the measure of EBITDA, prior to non-recurring items and share based compensation as detailed in note 4 to assess the performance of the business. 3 Divisional contribution in this narrative refers to the segment contribution before Group costs4, tax, interest, non-recurring items and share based payment charge. 4 Group costs include directors’ salaries and costs relating to group activities and are not allocated to reporting segments. 01 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Chairman’s Statement Lord Freeman – Non-Executive Chairman Financials The Group’s financial performance in 2016 reflects the effectiveness of the changes initiated in the second half of 2015 and is underpinned by the operational performance through the year as the strategy has been executed. On a Continuing Group basis, revenues improved by 11.1% to £91.8m (2015: £82.6m), and operating profit before non-recurring items increased by 71.8% to £1.77m (2015: £1.03m). The Parity Board has taken the decision to divest the Inition service offering as it is not in-line with our strategic direction. Inition’s performance has improved as the focus has shifted to Virtual Reality and Augmented Reality installations and whilst an exciting and creative arena, it provides little opportunity for collaboration with the Continuing Group. We have presented our results with Inition as a discontinued operation. The table below represents the impact of this decision on the Group’s results for 2016. Year Ended 31 December 2016 Adjusted EBITDA Depreciation and share based charges Operating profit/(loss) before non-recurring charges Group Continuing Operations £m 2.19 (0.42) 1.77 Group including Inition £m 2.51 (0.86) 1.65 Inition £m 0.32 (0.44) (0.12) Parity Professionals revenues improved by 10.5% to £86.4m (2015: £78.2m) with a corresponding increase in Divisional Contribution of 16.7% to £2.66m (2015: £2.28m). The higher margin Parity Consultancy Services business is demonstrating good trading momentum with an improvement in revenue of 20.5% to £5.3m (2015: £4.4m) supporting a significant 30.0% increase in Divisional Contribution to £0.91m (2015: £0.70m). Non-recurring costs and impairment have reduced significantly (from £3.7m in 2015 to £0.4m in 2016) and include the restructuring costs associated with the previous strategy. As a result of the restructuring and new focus of the Group, the Directors have decided to use Operating Profit as the key measure to assess its performance, replacing adjusted EBITDA. Cash, Dividend and Pension The Group has been financially proactive, further strengthening the balance sheet with net debt at the year-end of £4.4m (2015: £7.4m) from the strong cash generation performance, extending the finance facility, and maintaining strong working capital controls. We have also improved the payment terms for our discontinued defined benefit pension scheme with the continued support of the trustees. PNC Bank has provided Parity’s banking arrangements since 2010 and the relationship remains strong. On 1 September 2016 Parity extended the £15 million finance facility to 31 December 2018 at an improved discount rate. The Group has been restructured in line with the new strategy and as a result, in order to ensure funds remain available for further investment in Parity’s growth, the Board is not recommending that a dividend is payable for 2016. We intend to keep this policy under review. Board I have very much enjoyed my involvement with the Parity Group for many years and as we have moved to a new strategic direction I have been happy to provide an element of stability and continuity. Nevertheless, as announced in October 2016, I intend to retire shortly and am pleased that John Conoley has agreed to join the Board as the Group’s new Chairman, to help drive our future strategic ambitions. On 22 April 2016, Mike Aspinall stepped down as Group Finance Director and was replaced by Roger Antony. Roger has been with Parity for over 18 years, holding the position of Group Financial Controller since 2006, and prior to that the role of Financial Controller for the International Resources Division. Roger joined the Group after qualifying as an accountant in 1997, and previously held managerial roles within a variety of listed entity finance departments. He has a thorough understanding, and experience, of the IT Services sector. As first announced on 31 May 2016, David Firth joined the Parity Board as a Non-Executive Director. David was Finance Director of Penna Consulting plc and Finance Director of Parity Group in the 1990s and he has been able to make an immediate positive impact with his directly related industry experience. On 6 October 2016, Neal Ransome stepped down from the Board after three years’ service. On behalf of the Board, I would like to thank both Neal Ransome and Mike Aspinall for their respective contributions to the Board. 02 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Chairman’s Statement continued Current Trading and Outlook The Group has made significant progress in delivering growth in all the KPIs for both Parity Professionals and Parity Consultancy Services. These improvements have been the result of organic growth in the specialist services of each business, and additionally the result of collaboration across the businesses. One of the opportunities we highlighted at the interim results was the ability and opportunity to cross-sell solutions to clients, supported by the consolidation of offices and unification onto a single CRM, which improved communication whilst also reducing costs. The divestment of Inition underwrites the ambition of the strong management team to focus on the core businesses as well as the significant opportunities for collaboration that have been demonstrated. With early signs of success, the management team continues to work closely to identify opportunities for the wider business that will further consolidate our relationship with key clients as a multi-channel partner of choice with the flexibility to adjust the delivery model to suit specific needs. The year has certainly seen the potential for wider market impact as we progress to a future outside of the EU and with a new President of the U.S.A. The UK Government is also closely reviewing the employment status and tax-structure of the contractors providing services into Government projects (IR35). Despite the UK proving resilient to the broader global macro-economic outlook, there has been an increased level of uncertainty due to Brexit with a potential for this to impact both client and candidate confidence. With a UK focus we are somewhat de-risked on the flux impacting the global markets, and to date we have seen minimal impact as a result of Brexit. We do not anticipate significant supply side issues in relation to access to labour. At the time of writing it is too early to fully appreciate the potential impact due to the review of IR35 Intermediaries Legislation which will apply from April 2017, which is intended to reform off-payroll working practices within the Public Sector. This has the potential to impact supply into the Public Sector with engagements less attractive to contractors which may result in higher costs to the clients. There have been delays from HMRC in publishing final legislative guidance, including the tool to assess the tax status of our clients’ roles which has created uncertainty, though we ensure regular communication to stakeholders on the latest updates. As a Group we are well positioned to be able to deliver both service based solutions and contingent recruitment to best meet client and market demand. The managed service propositions are an opportunity for growth in our Consultancy Services that we are exploring. We have formed working parties to closely monitor changes, risks and opportunities driven by Brexit and IR35. Notwithstanding the market influences, Parity Professionals expects to maintain steady progress with the usual seasonality through 2017, whilst maintaining investment in new sales staff to target opportunities aligned with the wider Group, business transformation and leadership, and higher demand technology skills. This growth is being managed whilst adhering to our scalable structure enabling effective and efficient cost control underwritten by our inclusion in the Recruiter Hot 100 for 2016. Parity Consultancy Services is an exciting growth opportunity as illustrated by the two recent awards of long-term managed service contracts for the delivery and support of IT solutions with a total opportunity of £6.7million which will be delivered by wrapping the very best of the wider Group services into packaged solutions. We have the ambition to develop this part of the Group with an increased focus on technical solutions to generate competitive advantage for our clients by transforming them into data guided organisations. We will also develop close ties in supporting clients with business transformation and project management solutions which are now being taken to market by our industry focussed consultants which will drive revenues for the wider Group. Despite some elements of uncertainty in the market potentially delaying decision-making, Parity should continue to benefit from improvements in the underlying markets, the cross-sell ability, and the increasing potential in new consultancy based solutions. This is due to the Group’s ability to adapt to market conditions due to its breadth of offerings, which enable it to react quickly and therefore, meet the evolving needs of our clients. With current trading in-line with our expectations, the Board remains confident in the future of the business with a clear strategy supporting its’ commitment to increasing shareholder value through both organic growth and targeted strategic investment. The Board is dedicated to driving profitability, cash flow and shareholder value and looks forward to 2017 with confidence. Lord Freeman Non-Executive Chairman 22 March 2017 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 03 Summary Parity is a client-centric organisation, delivering a range of services and scale rapidly to meet existing and new client objectives. Our clients’ need for change is driven by both advances in technology, and by the demands of their customers with the market changing ever-more rapidly. Parity Group, as both a people and technology provider, is ideally placed to service our clients’ needs, enabling the changes which will drive their growth. We have aligned the businesses and clarified the proposition to the market with proven capability to cross-sell. We have the ambition to further develop higher margin services whilst delivering improvements in all key metrics across both businesses. The Parity Board remains confident that we are well positioned to become the clients’ technology partner of choice where they seek efficiency and competitive advantage. We will leverage our established Parity Professionals business to build a strong and stable consultancy brand, which is intended to in turn increase revenues, generate further positive cash flows and improve shareholder value. Strategy Alan Rommel – Chief Executive Officer Parity Group is: Driving Change, People Led, Technology Enabled Parity has created a well-established, stable and robust business model. We provide managed IT services, supported by expertise and a depth of industry understanding, in order to align the skills that clients require in their market sector. We are now ideally placed to provide clients with the people they need and the technology that will enable them to drive change through two strongly defined and complementary business units. Parity Professionals This division provides targeted recruitment of temporary and permanent professionals and leadership development to support business change. We ensure our clients have both the capacity and capability to transform organisational performance in high growth and rapidly evolving markets. Parity Consultancy Services This division is focused on niche expertise driven by senior industry-experienced consultants, exploiting technology and generating competitive advantage for our clients by transforming them into data guided organisations. We clarified a 3 year plan focused on growth, market leadership and future investment, to be achieved by organically expanding our established offerings and targeting strategic investment where we identify aligned opportunity in the higher margin consultancy proposition. Growth Whilst both businesses have grown independently, we have also identified the synergies between them and are now starting to deliver these benefits to our clients, which in turn is beneficial for the Group. This provides us with the opportunity to develop a much more balanced business through solutions that are of greater value to the client and can command higher margins. We expect this to lead to increased project revenue over longer durations and improves forward looking visibility for our business. Our flexible delivery structure also supports greater agility, with a rapidly scalable and cost-effective model. Market Leadership Each business has its own direct sales team to ensure the depth of understanding in their area of expertise and the quality of service, but we have aligned the structure to facilitate collaboration. Clients can benefit from the breadth of our capability to select the best solution to meet their exact needs at that time, be that individual services or an integrated solution. This is supported by the strengthening of our shared bids and marketing functions and scheduled further investment in our websites and social media presence. Future Investment Whilst we are investing internally in marketing, sales and new services to target the higher margin consultancy and managed service propositions, it should be expected that there is a lead-time to build momentum. The Parity Board is ambitious and whilst 2016 has been focussed on establishing the structure and organic growth, at the right point we will actively engage in reviewing bolt-on opportunities to enhance and accelerate the development of the higher margin consultancy offerings in aligned services and growing sectors. 04 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Operating Review PARITY PROFESSIONALS Overview Parity Professionals has a clear ‘people’ focus – building capacity and capability for our clients to transform organisational performance. We provide targeted recruitment of temporary and permanent professionals and leadership development to support business change. This broader capability has elevated the proposition for the recruitment and placement services with the added benefit of differentiation through leadership and coaching services for our clients to support large change programmes. We make significant change programmes easier for our clients through our broad range of integrated HR services – from graduate recruitment and induction through to delivering high demand IT specialists and business transformation services. We strive to provide a more consultative range of services to our clients, adding value and strengthening the relationship and securing repeat business. Revenues in the year improved by 10.5% to £86.4m (2015: £78.2m) with divisional contribution increasing by 16.7% to £2.66m (2015: £2.28m) with all operating overheads allocated to the business. The IT Resources Offering Client side demand and recruitment activity levels remained strong through the year in both contract and permanent markets. The increased volumes in opportunity and in placements delivered consistent growth though the rate of growth softened in the fourth quarter where uncertainty on IR35 increased contractor churn and we identified a reduction in average order value with shorter durations. Despite the impact, the increased sales levels ensured the business delivered improvement in all the primary KPIs including volumes (average number of contractors on billing increased by 13% vs 2015), margins (average weekly gross profit improved by 19% against 2015), and permanent placement fees (improved by 34% vs 2015). Demand for skills in the IT sector continues to outstrip supply and remains an opportunity for organic growth, especially in the contract market when combined with the demographic shift we are experiencing with younger workers looking for more flexible working as part of the ‘Gig Economy’. Research from the UK Careers and Employability Service has predicted a 20% growth in employment for the IT sector to 2024 which is the highest growth in any of the main sectors of the UK economy, with a need for 518,000 additional workers within the highest skilled occupational groups in the digital arena by 2022. We are afforded some protection against recruitment process outsourcing due to our focus in high demand IT skills, and close client relationships, through being able to offer a broad range of solutions, including collaborations with Parity Consultancy Services enabling managed service solutions. We also develop and maintain strong relationships with our contractor base, underwritten by good service and high levels of engagement – in 2016, 93% of candidates rated the responsiveness of our recruitment consultants to issues as “Excellent” or “Very Good”. The focus for our resourcing offering remains on contract placements with higher overall profitability over their full duration and the stability it provides to our forward-order book. It is important to balance this with an ability to provide a permanent recruitment service to lock-in client engagement, and further build our brand in the candidate and client community for niche skills. The growth in our permanent business has been primarily due to targeting skills verticals such as the digital sector, infrastructure and information security. This is a resilient business and we need to maintain targeted strategic investment in new areas to support longer term organic growth. We have proven our resilience to adapt to market conditions, and through tough times we have by necessity applied appropriate close cost controls in the core business whilst ensuring sustained profitability as evidenced by our inclusion in the Recruiter Hot 100 which assesses profitability per head. The Talent Management Offering As a relatively small team, our Talent Management specialists have re-engineered their offering to be more streamlined and focussed upon ‘Leadership Development’ with the ability to apply this to different audiences from graduate level through to senior management. This more productised delivery solution has proven successful with our clients and simplifies scalability and replication. The focus for new sales activity has moved to mainland GB from Northern Ireland which has improved the average fee rates, average project value and reduced reliance on public sector spend. PARITY CONSULTANCY SERVICES Overview Whilst still able to deliver broader technical solutions with some established contracts, the Technical Solutions team have refined their sales offering to target data solutions to assist clients in generating competitive advantage by transforming them into data guided organisations. We have supplemented our clients’ technical teams by recruiting Practice Heads with sector expertise to drive Business Consultancy opportunities in Health, Utilities and Defence where we have established relationships to leverage, and we have identified that there is significant change driven by legislative or industry evolution. Growth in the Consultancy Services business creates much better balance with strong, higher margin and higher value sales linked with greater project and recurring revenue. Technical Solutions Offering At the core of the Parity Consultancy Services business, the Technical Solutions offering helps our clients by developing, delivering and supporting IT projects with niche expertise to provide efficiency gains and competitive advantage. This creates an important differentiator between the people-led Parity Professionals business and the solution driven Parity Consultancy Services though the two businesses complement each other as we supplement our in-house development teams with expertise provided by Parity Professionals. Technical solutions to a rapidly evolving market have been at the core of Parity Group’s services from the very beginning and we will build upon this reputation with an offer more directly related to the fast-growing data solutions software market. This is not new as ‘Information technology’ has always been about successful storage, interrogation and interpretation of i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 05  Operating Review continued information, but the volumes of data have increased exponentially whilst the sources multiply. ‘Data’ is a currency with real value, but to leverage that value, the data needs to be collated and interrogated to enable decision making and drive targeted campaigns. Our Data Consulting proposition supports the client transition to becoming a Data-guided organisation, clarifying its: development service with the benefit of being able to deliver all of this through the wider Parity Group. Current sectors are complementary to the wider business in Health, Utilities and Defence, where we have experience and understand the opportunity due to market dynamics or legislation. We intend to diversify into additional sectors where we identify strong opportunity as the offering gains momentum. SUMMARY In an increasingly complex landscape, Parity is uniquely placed in being able to offer clients multi-channel access to the best solution to fit their needs – a consultancy that understands the challenges they face in their markets, supporting and developing their leadership team, plus flexible access to skills for the management and delivery of projects to give competitive advantage with data driven decision making. We have strong visibility of skills that are in demand across different sectors through Parity Professionals and can use this to our benefit with the ability to redirect focus to new and emerging trends without recruitment and development start-up delays. With increased clarity of a more aligned and targeted business strategy, and with an underlying strength in the business model, we have leveraged several cross-selling opportunities at higher values, leading to long-term orders. We are confident that the business provides further enhanced growth opportunities, positive cash flows and shareholder value. Alan Rommel Chief Executive Officer 22 March 2017 • Data Strategy • Data Usage • Data Governance • Data Management That leads into the technology solution and the development and implementation of applications to support all the above, including: • Data Collection • Storage • Management • Security • Analysis • Visualisation • Monetisation The development team have secured a further extension to the Military Capability Output Costing System (MCOCS), a major Business Intelligence programme for the MoD worth an additional £1.4 million over the next two years. This team is supplemented with interim technology skills resourced by Parity Professionals. We have replicated this success with the award of two longer- term project based orders with an opportunity of £6.7m with two new clients for Parity Consultancy Services as we establish our managed service offering. The business has successfully tendered for the G-Cloud and the Digital Outcomes and Specialists frameworks which provide access to our specialist services to Public Sector clients. We continue to benefit from a high level of repeat business with strong relationships developed through our customer centric approach. In 2016, we achieved greater efficiency, with an improvement in internal delivery staff utilisation to 80% (2015: 73%). The new projects and frameworks, provide additional opportunity in the future pipeline and generate continuing recurring revenue, giving enhanced forward visibility of our order-book and cashflow. Business Consultancy Offering The Practice Heads have been recruited, and are now raising their profile with propositions that support clients in the adoption of change, getting the most from both their people and technology. They offer initial diagnostics to facilitate and review business change programmes, clarify outcomes, and understand existing capabilities to then support clients through the transformation. The client solutions can range from contingent access to niche specialist knowledge and skills, through to project management, and creating a full 06 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Financial Review Roger Antony – Group Finance Director Overview – Continuing Operations Revenue Adjusted EBITDA Operating Profit before non-recurring items Net Debt Operating Margin % Net Debt/Adjusted EBITDA ratio 2016 £’000’s 91,764 2,187 1,766 (4,386) 1.9% 2.0 2015 £’000’s 82,607 1,531 1,026 (7,379) 1.2% 4.8 Incr./(Decr.) % 11.1% 42.8% 72.1% (40.6%) Group revenue in the year increased by 11% from £82.6m to £91.7m, with growth in both divisions. The revenue growth has translated to a 72% increase in Group operating profit before non-recurring items, with Group operating margins improving from 1.2% to 1.9%. During 2016 we have made significant progress towards strengthening the balance sheet, with the Net Debt/ Adjusted EBITDA ratio at the end of year improved to 2.0x (2015: 4.8x). We have decided to sell the Inition subsidiary, as it is not aligned to the current Group strategy. Accordingly, the Inition service offering is presented as “Assets Held for Sale” and its financial results for 2016 and 2015 presented as “Discontinued Operations”. Inition’s results were previously included in the Parity Consultancy Services division. Divisional performance Revenue Parity Professionals Parity Consultancy Services Group Revenue Divisional Contribution Parity Professionals Parity Consultancy Services Total Divisional Contribution 2016 £000’s 2015 £000’s Incr. % 86,419 5,345 91,764 78,190 4,417 82,607 2,660 910 3,570 2,276 698 2,974 10.5% 21.0% 11.1% 16.9% 30.4% 20.0% Both divisions grew revenues and contribution during the year. The increase in Group revenues is mainly as a result of the 10.5% increase in revenues in the Professional’s division. The growth was predominately driven by an increase in contractor volumes, with average contractor numbers on billing increasing to 1,009 (2015: 891). Parity Consultancy Services revenues were enhanced by the ongoing work on the MCOCS contract for the MoD during the year, as well as continued work with BAT. The division invested in three new senior Practice Heads in H2 2016, to support the Group’s strategic growth plans. Reconciliation of divisional contribution to operating profit/(loss) from continuing operations Divisional contribution Group costs Depreciation and amortisation Share-based payment charges Operating profit before non-recurring items Non-recurring items (continuing operations) Impairment Operating profit / (loss) from continuing operations 2016 £’000 3,570 (1,383) (365) (56) 1,766 (355) – 1,411 2015 £’000 2,974 (1,443) (357) (148) 1,026 (1,731) (1,994) (2,699) 07 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n         Financial Review continued Group costs reduced to £1.38m (2015: £1.44m) as a result of the cost reduction programme implemented in 2015. Share based payment charges have fallen due to a one-off credit under “bad leaver” provisions. Non-recurring items Continuing operations Write down of GPSeer Impairment loss Restructuring costs – Employee benefit costs – Write down of tangible fixed assets – Other operating costs Transaction costs Property provisions Insolvency dividend 2016 £’000 267 – 2015 £’000 – 1,994 260 1,077 – 36 52 46 (306) 355 341 126 125 62 – 3,725 Impairment The £0.27m write down charge in 2016 relates to the full write down of GPSeer, an initiative under the previous Digital strategy to develop a cutting-edge internet search engine. No further development work has been performed by the Group since the change in strategy. In 2015, an impairment loss of £1.99m was recorded in respect of the Inition service offering. Other non-recurring items Employee benefit costs relate to compensation payments incurred in downsizing the Talent Management service offering in Northern Ireland, and Board changes aligned to the Group’s strategy. The insolvency dividend relates to a one-off payment received in 2016 from the administrators of a legacy overseas subsidiary. In 2015, employee benefit costs related to compensation payments incurred in exiting the digital acquisition strategy, the streamlining of the Board and the closure of the Golden Square Content service offering. The impairment of tangible fixed assets relates to the closure of Golden Square. Earnings per share and dividend The basic earnings per share from continuing operations was 0.87 pence (2015: loss per share 3.37 pence). The Board does not propose a dividend for 2016 (2015: nil), but will continue to review this policy each year. Statement of Financial Position Intangible assets Following the decision to sell the Inition service offering, the associated goodwill of £1.17m, and related other intangible assets of £0.15m, have been reclassified as “Assets held for sale” at the balance sheet date. The intellectual property in relation to GPSeer of £0.12m was written down. Trade receivables and accrued income Trade and other receivables decreased by £1.2m to £14.4m (2015: £15.6m). Of this movement, £0.9m was due to the reclassification of Inition’s assets, and £0.3m broadly due to an improvement in debtor days. At the end of the year, calculated on billings on a countback basis, debtor days decreased to 29 days (2015: 31 days). Trade and other payables Trade and other payables increased during the year to £9.1m (2015: £8.6m). The increase is after the reclassification of £0.5m of liabilities relating to Inition, and relates to an increase in fees in advance of £0.3m and timing differences in the Parity Professional’s contractor payment cycle. At the end of the year, creditor days were 26 days (2015: 26 days). Other financial liabilities Other financial liabilities represent the Group’s debt under the asset-based lending facility. This is a working capital facility and is consequently linked to the same cycle as the trade receivables. The asset-based lending facility with PNC provides for borrowing of up to £15m depending on the availability of appropriate assets as security. The current facility was renewed on 1 September 2016, and runs until the end of 2018. Upon renewal, the interest rate applied to borrowings improved to 2.35% from 2.50% over the prevailing base rate. 08 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Financial Review continued Cash flow and net debt The Group generated positive net cash flows from operating activities of £3.4m (2015: £0.2m), helped by an increase in client fees received in advance of £0.6m (includes £0.2m from Inition), and a one-off receipt of £0.3m in respect of a legacy overseas subsidiary. As a result of the positive cash flow, net debt reduced to £4.4m (2015: £7.4m). Pension Fund In March 2016, we reached agreement with the trustees of the defined benefit pension scheme to reduce deficit reduction contributions. Following a contribution holiday, the Group resumed payments in April 2016, commencing with a lump sum payment of £0.1m, and followed be reduced monthly amounts. The agreement will help the Group’s interest cover ratio and cash generating capability. At the end of the year the deficit increased to £1.85m (2015: £1.49m), primarily due to lower bond yields, which resulted in a lower discount rate used to calculate scheme liabilities. There was a good return on plan assets which partially offset the increase in scheme liabilities. Principal risks and uncertainties Specific present risks, such as Reform of the Intermediaries Legislation (IR35) are discussed in the Chairman’s Report on pages 2 and 3. Market The Group continues to monitor its exposure to the public sector and while the Group’s exposure has reduced over recent years, it still remains exposed to potential public sector budget reductions and changes to recruitment. The Group trades almost exclusively in the UK, and is aware of the changing competitive environment that faces both its divisions. As a result, there is a major emphasis on addressing the lower volume but higher margin niche sectors and opportunities in the Parity Professionals division and the new growth areas for the Parity Consultancy Services division. People Our people are the most important part of our service and having appropriately trained and motivated staff helps us reduce the risk of poor service delivery. Share plans are used to incentivise and retain senior staff in the medium term. HR policies and procedures are reviewed regularly to ensure the business recruits and retains appropriately trained and experienced staff. Financial The Group actively monitors its liquidity position to ensure it has sufficient available funds and working capital in order to operate and meet its planned commitments and has a credit risk policy that requires appropriate status checks and or references as necessary. Technology As an IT services provider the Group relies on its IT, telecommunications and infrastructure systems to perform and manage the services we provide to clients. The Group reviews its own disaster recovery systems regularly in order to minimise the risk of prolonged disruption to systems. Legal The Board recognises that non-compliance with relevant laws and regulations can result in substantial fines or penalties. Suitable controls are built into our service delivery processes to reduce the risk of non-compliance. Roger Antony Group Finance Director 22 March 2017 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 09 Board of Directors Lord Freeman1, 2, 3 Non-Executive Chairman Roger Freeman, 74, was appointed Non-Executive Chairman in November 2015 and is Chairman of the Remuneration and Nominations Committees. Roger joined as a Non-Executive Director in 2007. After qualifying as a Chartered Accountant in 1969 he joined Lehman Brothers, the US Investment Bank, and was a Partner in the London Office until 1983 when he entered the House of Commons. He served as a Minister between 1986 and 1997 including Cabinet Minister for Public Service. He became a Life Peer in 1997 and also became a Partner with PricewaterhouseCoopers for whom he was chair of their UK Advisory Board. He is Chairman of the Trustees of the Thales UK Pension Fund. David Firth1, 2, 3 Non-Executive Director David Firth, 56, was appointed to the Board as a Non-Executive Director on the 14 September 2016, and is Chairman of the Audit Committee. David was previously the Finance Director of Penna Consulting plc for over 16 years and has a wealth of experience in the people management and consultancy markets. Prior to that, David has held senior finance positions in public companies across a number of sectors including financial markets, recruitment, IT services, motor retailing and advertising. He was a member of the finance team at Parity for the period 1993 to 1999 and served as its Group Finance Director from 1995. Alan Rommel Chief Executive Officer Alan Rommel, 45, is the Chief Executive Officer of Parity and was appointed to the Board in August 2015. Alan joined Parity following completion of his degree in Economics and Business Studies from the University of Sheffield. Alan is a specialist in the sector with over 20 years’ recruitment experience and a solid understanding of the industry. He spent 5 years as MD of Parity Resources before promotion in 2013 to CEO of Parity Professionals which was created by combining the recruitment and talent management services. In addition to holding a number of senior posts within the Parity Group, Alan was elected to the APSCo (The Association of Professional Staffing Companies) Executive Committee for 3 terms covering the period 2010 – 2014. Roger Antony Group Finance Director Roger Antony, 49, is the Group Financial Director and was appointed to the Board on 22 April 2016. Roger had been with Parity for over 18 years prior to his appointment, holding the position of Group Financial Controller since 2006, and prior to that the role of Financial Controller for the International Resources Division. Roger joined the Group after qualifying as an accountant in 1997, and previously held managerial roles within a variety of listed entity finance departments. He has a thorough understanding, and experience, of the IT Services sector. 1 Member of the nominations committee 2 Member of the remuneration committee 3 Member of the audit committee 10 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Directors’ Report The Directors present their report and the audited accounts for the year ended 31 December 2016. Principal activities The Group delivers a range of recruitment and business and technology solutions to clients across the public and private sectors. During the period under review the Group operated through two divisions; Parity Professionals and Parity Consultancy Services. The principal activity of the Parity Professionals division is to provide recruitment, predominately interim recruitment, and graduate placement services, to a diverse range of clients. In 2016 its clients’ market sectors included central and local government within the public sector and Utilities, FMCG, Insurance, Oil, and Transport in the private sector. The principal activities of the Parity Consultancy Services division comprise business intelligence solutions, technology solutions and business consultancy services. Parity Consultancy Services delivered its services during the year to central government departments in the public sector, and to FMCG and Legal clients in the private sector. Review of business and future developments A review of the business and its outlook, including commentary on the key performance indicators of turnover, gross margin, contribution, debtor days and net debt, and the principal risks and uncertainties facing the Group is included in the Chairman’s Statement, Strategy, Operating Review and Financial Review on pages 2 to 9. The Group’s social, environmental and ethical policies are set out on page 13 . A statement on the application of the going concern principle is set out below. Details of financial instruments are set out in note 22 to the financial statements. Each of the above is incorporated in this report by reference. Group results The Group profit from continuing operations before taxation for the year was £959,000 (2015: loss of £3,265,000) after charging non-recurring items of £355,000 (2015: £3,725,000). After a tax expense of £75,000 (2015: £164,000) and a loss after tax from discontinued operations of £78,000 (2015: £490,000), the retained profit of £806,000 (2015: loss of £3,919,000) has been transferred to reserves. The results for the year are set out in the consolidated income statement on page 24. Philip Swinstead Hargreave Hale Limited Timothy Watts David Courtley Citrine Investments Dominion Holdings Killik Asset Management Barclays Wealth Halifax Share Dealing Brewin Dolphin Dividends The Directors do not recommend a final dividend (2015: nil pence per ordinary share). The total dividends for the year were nil pence per ordinary share (2015: nil pence per ordinary share). Pension The Group operates a defined contribution pension scheme. There is also a defined benefit scheme which is closed both to new members and to future service accrual. Details of the defined benefit pension scheme are given in note 24. Purchase of own shares At the end of the year, the Company had authority, under the shareholders’ resolution of 31 May 2016, to purchase in the market 10,182,402 of the Company’s ordinary shares at prices ranging between two pence and an amount equal to 105% of the average of the middle market prices quoted in the five business days immediately preceding the day of purchase. No purchases were made during the year. The Directors intend to seek renewal of this authority at the forthcoming Annual General Meeting. Board of Directors Biographical information on each of the Directors as at 22 March 2017 is set out on page 1 0, together with details of membership of the Board committees. In accordance with the Company’s Articles of Association, David Firth, who was appointed after the announcement of the 2016 AGM, will retire and offer himself for re-election at the 2017 Annual General Meeting. The Company’s Articles of Association also require that each Director retire from office and seek reappointment at the third annual general meeting after the general meeting at which he was last appointed, or reappointed. Lord Freeman is due for re-election at the next AGM, however, as announced on 6 October 2016, he intends to retire from the Board and work is underway to appoint a successor. Directors’ interests The Directors’ beneficial interests in the ordinary share capital of the Company are set out within the remuneration report on page 22. Principal shareholders At the close of business on 8 March 2017 (being the latest practical date prior to the signing of the Directors’ Report) the Company had received notification of the following substantial interests representing over 3% of the issued share capital: Number of Ordinary 2p shares Percentage Held 14,673,939 12,596,050 8,225,000 6,566,031 5,558,766 4,950,000 4,680,667 3,634,673 3,308,434 3,187,454 14.37 12.33 8.05 6.43 5.44 4.85 4.58 3.56 3.24 3.12 11 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Directors’ and officers’ liability insurance and indemnity The Company has purchased insurance to cover its Directors and officers against their costs in defending themselves in any legal proceedings taken against them in that capacity and in respect of damages resulting from the unsuccessful defence of any proceedings. Political donations There were no political donations made by the Group during the year (2015: none). Corporate Governance The Corporate Governance Report on pages 14 to 17 forms part of the Directors’ Report. Auditor Resolutions will be proposed at the Annual General Meeting to reappoint KPMG LLP as auditor to the Company and to authorise the Directors to determine their remuneration. Post Balance Sheet Events There were no material post balance sheet events. Annual General Meeting The resolutions to be proposed at the Annual General Meeting, together with the explanatory notes, will appear in the Notice of the Annual General Meeting which will be circulated with the annual report when sent to all Shareholders. By order of the Board Roger Antony Director 22 March 2017 Directors’ Report continued Capital structure The Company has two classes of shares in issue, ordinary shares of 2p and deferred shares of 0.04p. The ordinary shares are listed on the London Stock Exchange and ordinary shareholders are entitled to vote at Company meetings, to receive dividends and to the return of their capital in the event of liquidation, with the exception of ordinary shares held by the Parity Group plc Employee Share Ownership Trust which are not entitled to receive dividends. The deferred shares are not listed, have no voting rights, no rights to dividends and the right only to a very limited return on capital in the event of liquidation. The Directors are not aware of any restrictions on transfers of shares in the Company or on voting rights or of any agreements between holders of the Company’s shares which may result in such restrictions. Going concern During 2016 a number of factors improved the Group’s financial position. Firstly, the Group’s strong cash performance resulted in a reduction of the Group’s net debt, from £7.4m to £4.4m. Secondly, the Group’s £15.0m asset-based facility, which is used to finance working capital requirements, was extended until 31 December 2018. Also in 2016, the Group reached agreement with the Trustees of the defined benefit plan to reduce the level of contributions. The Directors have reviewed the Group’s cash flow forecasts for the period to 31 December 2018, taking account of reasonably possible changes in trading performance. After making appropriate enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. The Company is not party to any significant agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid, except for the finance facility agreement with PNC. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. Payments to suppliers The Group seeks to abide by the payment terms agreed with suppliers when it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms and conditions. In the United Kingdom and Ireland the Group agrees payment terms with its suppliers when it enters into binding purchase contracts. Corporate social responsibility The Group recognises its corporate social responsibilities and reports on these in a separate statement of social, environmental and ethical policies on page 13. This statement covers the Group’s Employment Policies, Environmental Policy and Health and Safety Policy. 12 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Social, Environmental and Ethical Policies Employment policies As a professional services business, Parity’s strength derives from the commitment, capability and cultural diversity of its employees. The Group aims to adopt a policy of diversity at all levels including selection, role assignment, teamwork and individual career development. The Group encourages the participation of all employees in the operation and development of the business by offering open access to senior management, including the Executive Directors, and adopting a policy of regular communications through road shows and the intranet. The Group also encourages all employees to participate in an annual employee survey. The survey is administered by an independent organisation and responses are anonymous. Results are communicated to staff with proposed actions to address any identified issues. The Group incentivises employees through share-based incentives and the payment of bonuses and commissions linked to performance objectives. Where appropriate these objectives are linked to profitability. The Group also has a structured approach to performance appraisal and career development and ensures that every employee has an annual performance review and has clear objectives and performance standards. Health & safety The health and safety of Parity’s employees is paramount. Group policy is to provide and maintain safe and healthy working conditions, equipment and systems of work for all employees and to provide such information, training and supervision as is needed for this purpose. Appropriate written health and safety information outlining the Group’s policy in each area is issued to all new employees. This includes: • First aid — Each office has a person qualified in first aid. First aid boxes are readily accessible and records kept of all accidents and injuries. • Fire safety — Each office has an evacuation marshal who will liaise with building management or local emergency authorities, as appropriate. Evacuation assembly points are agreed for every location and a full evacuation carried out every six months. Fire alarms are tested regularly. • Employees’ health — Any employee who believes he/she is suffering from an illness or condition related to their working environment is encouraged to report this to his/her manager for investigation. Annual Health and Safety audits are carried out at every Parity office to ensure high standards are maintained. As part of its benefits package Parity offers a number of benefits to support the health and well being of its staff, as well as an Employee Assistance helpline. Social responsibilities It is Group policy to be a good corporate citizen wherever it operates. As part of the Group’s social responsibility, employees are encouraged to support national charities and also become involved in their local communities and fund raising events. The Group encourages employees who undertake volunteer work and firmly believes that the experience gained contributes to the individual’s personal development. Where possible, the Group provides flexibility with working hours to accommodate such commitments outside of work. Environmental policy While Parity Group’s operations by their very nature have minimal environmental impact, the Group recognises its responsibilities to protect and sustain the environment and its resources. The Group’s policy is to meet or exceed the statutory requirements in this area and it has adopted a code of good environmental practice, particularly in its main areas of environmental impact, namely energy efficiency, use and recycling of resources and transport. Transport Public transport is used whenever possible. Interest-free season ticket loans are made to staff as part of the benefits package. Teleconference facilities are extended to main office locations to minimise business travel and increase efficiency. PCs (portable or desktop) are made available to staff where needed to facilitate home working and minimise the need to travel to offices where this is appropriate for their role. Energy Only energy-efficient computers and peripherals are acquired and they are turned off at the end of each day. As a normal part of its operations the Group seeks to occupy offices which have efficient building management systems and, ideally, low energy lighting. Office lighting is turned off at the end of each day. Whenever economically justifiable, the paper and other consumables used are made from environmentally-friendly or recycled material or from renewable resources. Recycling The Group makes every effort to recycle office paper and envelopes. Appropriate containers are provided at all offices and all paper collected is sent to recycling plants. The Group also recycles as much other material, such as toner cartridges, as is economically viable. When replaced, computers and peripherals are offered to employees at market value, local schools or charities, or sent to recycling plants. Paper usage The Group constantly strives to implement paper-saving practices to reduce wastage. Examples include: electronic timesheets, E-invoicing, E-payslips, and electronic expense claims. Ethics Parity Group is committed to maintaining the highest standards of ethics, professionalism and business conduct as well as ensuring that we act in accordance with the law at all times. The Group supports and promotes the principles of equal opportunities in employment and promotes a culture where every employee is treated fairly. A culture of teamwork, openness, integrity and professionalism forms a key element of our company principles and values which sets out the standards of behaviour we expect from all our employees. Modern Slavery Policy Parity Group has a zero-tolerance approach to modern slavery, and is committed to acting ethically and with integrity in all its business dealings and relationships, and to implement and enforce effective systems and controls to ensure modern slavery is not taking place anywhere in its own business, or its supply chain. In accordance with the requirements of the Modern Slavery Act 2015, the Group has published its anti-slavery statement on its website. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 13 Corporate Governance Report Introduction As the Company is AIM listed, it is not required to follow the provisions of The UK Corporate Governance Code published by the Financial Reporting Council in September 2014 (the Code). However, the Board continues to maintain that high standards of corporate governance remain a key priority and that it will seek to continue to follow the Code as far as is practicable and appropriate, having regard to the size and resources of the Company and to the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies. Accordingly, this report sets out how the Company applies elements of the Code that are deemed appropriate. Going concern The Board confirms that, after making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Further details are outlined in the Directors’ Report on pages 1 1   and 12. The workings of the Board and its Committees The Board At the date of this report, the Board comprises the Non- Executive Chairman, Lord Freeman, Non-Executive Director, David Firth, Group Chief Executive, Alan Rommel and Group Finance Director, Roger Antony. During the year Mike Aspinall stepped down as Group Finance Director on 22 April 2016, and Neal Ransome stepped down as a Non-Executive Director on 6 October 2016. Roger Antony joined the Board on 22 April 2016 as Group Financial Director, and David Firth joined the board as Non-Executive Director on 14 September 2016. The table on page 20 sets out the dates of tenure of the current Directors on the Board. The Directors’ biographies, which are set out on page 1 0, illustrate the range of business backgrounds, skills, independence and experience contributed by each Board member. Non-Executive Chairman The Non-Executive Chairman, Lord Freeman, is responsible for the leadership of the Board, ensuring its effectiveness on all aspects of its role. This includes ensuring that Board meetings are held in an open manner, that the Directors receive accurate, timely and clear information and allowing sufficient time for agenda items to be discussed. Annual appraisals are held of each Director, providing feedback and reviewing any training or development needs. The Chairman is also responsible for effective communications with shareholders, and relaying any shareholder concerns to the Directors. During the year the Non-Executive Chairman met the Non-Executive Directors without the Executive Directors present. Senior Independent Director Neal Ransome acted as Senior Independent Directors until he stepped down on 6 October 2016. He was an additional contact point for shareholders if they had reason for concern, when contact through the normal channels of the Executive Directors and Chairman had failed to resolve their concerns, or where such contact was inappropriate. David Firth became the de facto Senior Independent Director when Neal Ransome stepped down. Re-election of Directors Directors appointed since the last annual General Meeting, and those retiring by rotation will submit themselves for election or re-election at the next Annual General Meeting, as set out in the Directors’ report on page 1 1 and in the separate Notice of Annual General Meeting sent to all Shareholders. The Non- Executive Chairman confirms that the performance of each Director continues to be effective and the individuals continue to demonstrate commitment to their role. Company Secretary All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures, applicable rules and regulations are observed. There is an agreed procedure for Directors to obtain independent professional advice, if necessary, at the Company’s expense. New Directors receive a comprehensive, formal and tailored induction to the Group’s operations including corporate governance, the legislative framework and visits to Group premises. Board meetings The Board has meetings scheduled regularly throughout the year to set long term objectives and to monitor progress against those objectives. Additional meetings are also held as business dictates. A table showing the number of meetings of the Board and its Committees held during the year, and attendance at those meetings by each Board member, is set out on page 15. The Board maintains close dialogue by email, telephone and conference calls between scheduled meetings. The Board has a formal schedule of matters reserved for its specific approval which was reviewed during the year and includes a review of Group strategic, operational and financial matters such as proposed acquisitions and divestments. It approves the annual accounts and interim report, the annual budget, significant transactions, major capital expenditure and reviews the effectiveness of the system of internal control and the risks faced by the Group. It covers all controls, including financial, operational, compliance and risk management. Authority is delegated to management through Group authorisation limits on a structured basis, ensuring that proper management oversight exists at the appropriate level. The Group authorisation levels were reviewed by the Board in November 2015. All members of the Board are normally supplied in advance of meetings with the agenda and supporting papers covering the matters which are to be considered. If unable to attend a meeting the Director is able to provide feedback to the Chairman, the Chair of the Committee or the Company Secretary and their comments are then communicated at the meeting. A procedure exists for the Directors, in the furtherance of their duties, to take independent professional advice if required. If a Director has any concerns about a particular issue, such concerns are recorded in the minutes of the relevant Board meeting. In the event that a Director resigned over a matter that was of concern to him, such concerns would be communicated to the other Directors. All Directors have the opportunity to undertake relevant training. The operational businesses are divided into two separate divisions, Parity Professionals comprising Parity Resources and Talent Management and Parity Consultancy Services comprising Parity Solutions and Inition. Each business has a Managing 14 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Corporate Governance Report continued Director. The operational boards of each business meet monthly. The meetings are attended by the Group Chief Executive and/or the Group Finance Director and relevant members of their finance and operational teams. Any key issues arising from these meetings are reported to the Board. Non-executive Directors are invited to visit the Group’s premises and are encouraged to have an informal dialogue with the divisions. Performance evaluation The Board undertook an annual evaluation of its own performance and that of its Committees and individual Directors in the year. The performance of the Non-Executive Chairman was reviewed by the other Non-Executive Director. The outcome of the evaluation of the Board is reviewed by the Board as a whole and the results are used to assist the Board in developing its approach going forward. Number held Number attended1 Lord Freeman David Firth2 Alan Rommel Roger Antony3 Neal Ransome4 Mike Aspinall5 Board balance and independence The Board has a balance of Executive and Non-Executive Directors such that no individual or small group of individuals can dominate the Board’s decision making. The Board has a range of backgrounds and skills. The Non-Executive Directors ensure that independent judgement is brought to Board discussions and decisions. The Board are aware of the importance of attaining greater diversity amongst its members. The Board considers that there are no relationships or circumstances which are likely to affect the independent judgement of the Non-Executive Directors. Attendance at board and committee meetings During the year 11 scheduled Board meetings and 6 ad hoc Board meetings were convened as necessary to deal with various matters. Details of attendance at Board meetings is summarised below. Committee attendance is shown for Committee members only. Board 17 14/17 4/4 17/17 12/12 13/14 4/5 Audit Nomination Remuneration 3 3/3 1/1 – – 2/2 – 4 4/4 2/2 – – 2/2 – 4 4/4 1/1 – – 3/3 – 1 All Directors who were members of the Board at the time attended the Group’s Annual General Meeting on 31 May 2016 2 Appointed to the Board 14 September 2016 3 Appointed to the Board 22 April 2016 4 Stepped down from the Board 6 October 2016 5 Stepped down from the Board 22 April 2016 Committees The Audit, Remuneration and Nomination Committees of the Board each have formal written terms of reference. These terms of reference are made available on request to the Company Secretary, can be inspected at the Company’s head office and are also available in the Corporate Governance section of the Group’s website. Audit Committee David Firth was appointed Chair of the Audit Committee after Neal Ransome stepped down on 6 October 2016. Details of Davids’s recent and relevant financial experience are set out in his biography on page 1 0. The Audit Committee meets three times a year. Lord Freeman is the other member of the Audit Committee. Audit committee meetings are attended by the external auditors and all of the Executive Directors, at the invitation of the Committee. The external auditors meet separately with the Audit Committee on request, without the presence of the Executive Directors, to ensure open communication. The Audit Committee reviews and, as appropriate, actively engages in the processes for financial reporting, internal control, risk assessment, audit, compliance assurance and considers the independence of the Group’s external auditor as well as the effectiveness of the Group’s system of accounting, its internal financial controls, external audit process and risk management. The Audit Committee’s principal terms of reference include: • the oversight responsibilities described in the foregoing paragraph; • reviewing compliance with laws, regulations and the Group’s code of conduct and policies; • monitoring the integrity of the Group’s financial statements and announcements relating to the Group’s financial performance and reviewing significant financial reporting judgements, changes in accounting policies and practices, significant adjustments resulting from the audit and the application of the going concern assumption; • reviewing the findings of the external audit with the external auditor; • making recommendations to the Board, for it to put to the shareholders for their approval, regarding the appointment, re-appointment and removal of the external auditor and 15 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Corporate Governance Report continued approving the remuneration and terms of engagement of the external auditor; • monitoring and reviewing the external auditor’s independence and the effectiveness of the audit process; • developing and implementing policy on the engagement of the external auditors to supply non-audit services; • reviewing the risk management framework and risk assessments; • reviewing the Group’s arrangements for its employees to raise concerns, in confidence, about possible wrong doing in financial reporting or other matters; and • reviewing and monitoring the adequacy and effectiveness of the Company’s internal financial controls, internal control, and risk management systems. In order to ensure an appropriate balance between cost effectiveness, objectivity and independence, the Audit Committee reviews the nature of all services, including non-audit work, provided by the external auditor each year. The Group normally expects to retain the external auditor to provide non-audit related services, including work in relation to shareholder circulars and similar services. The external auditor provided non-audit related services during 2016, details of which are set out in note 3 to the accounts. Remuneration Committee The Remuneration Committee comprises both Non-Executive Directors and is chaired by Lord Freeman. Details of the responsibilities of the Remuneration Committee are set out in the remuneration report on pages 18 to 22. Where necessary, specialist external consultants are used to assist the Committee. David Firth became a member after Neal Ransome stepped down on 6 October 2016. Nomination Committee The Nomination Committee comprises both Non-Executive Directors and is chaired by Lord Freeman. David Firth became a member after Neal Ransome stepped down on 6 October 2016. The Committee is responsible for proposing candidates for appointment to the Board, having due regard to the balance and structure of the Board, as well as succession planning. During the year the Committee considered the size, composition, skills, experience and independence of the Board having regard to the requirements of the business. The process for new Board appointments includes an initial search, preliminary interviews and discussions. Following this process, recommendations are then made by the Committee to the Board on merit against objective criteria. Where necessary external recruitment consultants are used to assist the process. Investor relations The Company engages where possible in regular dialogue with its major Shareholders through presentations and meetings after the announcement of the Group’s full year and interim results. Private and institutional shareholders are given an opportunity to communicate directly with the Board at the Annual General Meeting. Shareholders’ queries received via the Company Secretary’s email address at cosec@parity.net or by telephone to the Group’s head office are responded to in person by the Company Secretary or by another appropriate employee. All members of the Board usually attend the Annual General Meeting. The chairmen of the Audit, Remuneration and Nomination Committees will normally be available to answer Shareholders’ questions at that meeting. Notice of the Meeting is posted to Shareholders with the report and accounts no fewer than 21 clear days prior to the date of the Annual General Meeting. The information sent to Shareholders includes a summary of the business to be covered at the Annual General Meeting, where a separate resolution is proposed for each substantive matter. The Group’s annual report and accounts, interim report and other stock exchange announcements are published on the Group’s website at www.parity.net. Annual Report The Annual Report is designed to present a fair, balanced and understandable view of the Group’s activities and prospects. The Operating & Financial Review provides an assessment of the Group’s affairs and position. The Annual Report and Interim Report are sent to all Shareholders on the Register. Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the 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. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report that complies with that law and those regulations. 16 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Corporate Governance Report continued This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Roger Antony Company Secretary 22 March 2017 Website publication The Directors are responsible for ensuring the annual report and the financial statements are made available on the Parity Group website. Financial statements are published on the Company’s website in accordance with AIM company requirements governing the preparation and dissemination of financial statements. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the on-going integrity of the financial statements contained therein. Internal control The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness and is assisted in this respect by the Audit Committee. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Group’s system of internal control, which materially complies with the Financial Reporting Council’s Risk Management, Internal Control and Related Financial and Business Reporting September 2014 guidance has been in place throughout the year and up to the date of this report. The Directors confirm that they have reviewed the effectiveness of the Group’s system of internal controls during the year. The Group did not consider it necessary to have a separate internal audit function, but will continue to keep the need under review. Risk management The Group is exposed through its operations to the following financial risks: • Interest rate risk; • Foreign currency risk; • Liquidity risk; and • Credit risk The policies for managing these risks are set by the Board following recommendations from the Group Finance Director. Certain risks are managed centrally, while others are managed locally following guidelines communicated from the centre. The policies for each of the above risks, and the nature and extent of those risks, are described in detail in note 22 to the financial statements. Other risks and uncertainties are discussed in the Financial Review on page 9. Each of the persons who is a Director as at the date of approval of this annual report confirms that: • so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and • the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 17 Remuneration Report Remuneration committee The Remuneration Committee comprises Lord Freeman as Chairman, and David Firth who joined on 14 September 2016. Neal Ransome was a member in the year until 6 October 2016. Directors are excluded from discussions about their personal remuneration. The committee is responsible for reviewing the Group’s remuneration policy, the emoluments of the Executive Directors and other senior management and the Group’s pension arrangements and for making recommendations thereon to the Board. The committee also makes recommendations to the Board in respect of awards of options under the Senior Executive Share Option Plan, Executive Share Option Plan and Sharesave Schemes and in respect of employees who should be invited to participate in the Co-investment Scheme. It also reviews the terms of service contracts with senior employees and Executive Directors and any compensation arrangements resulting from the termination by the Company of such contracts. The committee has access to external advisors to assist it with ensuring that salary and benefit packages are competitive and appropriate. In addition, committee members keep themselves fully informed of all relevant developments and best practice by reading the circulars on remuneration and related matters that the Company receives from its advisers and, if appropriate, by attending seminars. Pension advice is provided by Cartwright Group Limited in relation to the defined benefit scheme and advice is taken on an ad hoc basis in relation to the defined contribution scheme. Advice on share options and Co- investment Plans is provided by Pinsent Masons, who also provide other legal services to the Group. The Board determines the remuneration of all Non-Executive Directors within the limits set out in the Company’s Articles of Association. Non-executive Directors are not involved in any decisions about their own remuneration. Details of Directors’ remuneration for the year ended 31 December 2016 are set out in the table on page 21. Remuneration policy Parity aims to recruit, motivate and retain high calibre executives capable of achieving the objectives of the Group and to encourage and reward appropriately superior performance in a manner which enhances shareholder value. Accordingly, the Group operates a remuneration policy which ensures that there is a clear link to business strategy and a close alignment with shareholder interests and current best practice, and aims to ensure that senior executives are rewarded fairly for their respective individual contributions to the Group’s performance. The three key elements of the remuneration package of senior executives, including Executive Directors, in the Group in 2016 were basic annual salary and benefits in kind; long term incentives including share options; and pension arrangements. Salaries and benefits are reviewed annually. In order to assess the competitiveness of the pay and benefits packages offered by the Group, comparisons are made to those offered by similar companies. These are chosen with regard to the size of the company (turnover, profits and employee numbers); the diversity and complexity of their businesses; the geographical spread of their businesses; and their growth, expansion and change profile. 18 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Performance bonus The terms of an incentive bonus for Executive Directors are agreed annually. For 2016 no target was set and no performance bonuses were earned by, or paid to, Executive Directors in 2016. Long-term incentive arrangements The long-term incentive arrangements operated by the Company for Executive Directors comprise Share Option Schemes including a Co-investment Scheme. Share option schemes During 2016 the Group operated two types of share option scheme: An Executive Share Option Plan, and a Savings Related Share Option Scheme (Sharesave Scheme). There are currently no live options under the Senior Executive Share Option Plan. Executive share option plans The Group operates both an HMRC Approved Share Option Plan and an Unapproved Share Option Plan for options awarded to UK employees in excess of the HMRC limit of £30,000. Share options are granted to Executive Directors and other senior employees over a period of time and according to performance. The rules of the Executive Share Option Plans allow for annual grants to be awarded equivalent to a value of up to one times salary or up to two times salary in exceptional circumstances. A limit of 15% of the issued share capital of the Company in a ten year period, on a rolling basis, is applicable to the headroom available to award options over the life of the Schemes. Rules of the current Plans expire in May 2019. The terms and conditions of existing share options have not been varied in the year. Executive Share Options granted after 2004 are exercisable in normal circumstances between three and ten years after the date of grant. The exercise of the options is conditional upon the share price either outperforming the average Total Shareholder Return performance of a comparator group comprising a basket of companies in the IT services sector, or outperforming a target price. The exercise of share options is satisfied either through shares issued by the Company or through purchases in the market via the Employee Benefit Trust. In the event that an employee resigns, the options that they hold will lapse. Options are granted at nil cost. The option exercise price is set at the closing mid-market share price on date of grant without any discount. On 15 April 2009 150,000 share options were awarded under this scheme to Alan Rommel. The exercise price of the options is 9 pence, and the options are subject to a performance condition based upon the Group’s share price outperforming the average total shareholder return of a comparator group of IT companies. The options vested after 3 years and the performance condition was met. The options lapse in 10 years from the grant date if not exercised. On 19 May 2010 a further 150,000 share options were awarded under this scheme to Alan Rommel and 100,000 share options were awarded under this scheme to Roger Antony. The exercise price of the options is 8.75 pence, and the options are subject to a performance condition based upon the Remuneration Report continued Group’s share price outperforming the average total shareholder return of a comparator group of IT companies. The options vested after 3 years and the performance condition was met. The options lapse in 10 years from the grant date if not exercised. On 28 September 2010 a further 100,000 share options were awarded under this scheme to Alan Rommel. The exercise price of the options is 7.5 pence, and the options are subject to a performance condition based upon the Group’s share price outperforming the average total shareholder return of a comparator group of IT companies. The options vested after 3 years and the performance condition was met. The options lapse in 10 years from the grant date if not exercised. On 8 March 2013 a further 160,000 share options were awarded under this scheme to Alan Rommel and a further 20,000 share options were awarded to Roger Antony. The exercise price of the options is 26.5 pence, and the options are subject to a performance condition being that the share price must be greater than or equal to 33.125 pence for 5 consecutive days. The options vested after 3 years and the performance condition was met. The options lapse in 10 years from the grant date if not exercised. On 18 March 2014 a further 600,000 share options were awarded under this scheme to Alan Rommel and a further 160,000 share options were awarded to Roger Antony. The exercise price of the options is 21.12 pence, and the options are subject to a performance condition being that the share price must be greater than or equal to 26.4 pence for 5 consecutive days. The options will vest in 3 years and lapse in 10 years from the grant date if not exercised. On 27 November 2014 2,000,000 share options were awarded under this scheme to Andy Law. The exercise price of the options was 16.75 pence, and the options were subject to a performance condition being that the share price must be greater than or equal to 20.94 pence for 5 consecutive days. The options would have vested in 3 years and lapse in 10 years from the grant date if not exercised. However, Andy Law stepped down from the Board on 13 August 2015, and his options lapsed on his termination date 1 March 2016. On 19 September 2016 a further 1,500,000 share options were awarded under this scheme to Alan Rommel and a further 800,000 share options were awarded to Roger Antony. The exercise price of the options is 8.62 pence and the share options granted have been divided into thirds with each third being subject to the following performance condition: i) To exercise the first third (1/3 in total) of the share options awarded, the share price must be greater than or equal to 10.74 pence for 5 consecutive days. ii) To exercise the second third (2/3 in total) of the share options awarded the share price must be greater than or equal to 12.93 pence for 5 consecutive days. iii) To exercise the final third (100% in total) of the share options awarded the share price must be greater than or equal to 15.08 pence for 5 consecutive days. The options will vest in 3 years and lapse in 10 years from the grant date if not exercised. Sharesave schemes All UK employees, including the Executive Directors, are eligible to participate in the Group’s savings related option scheme (Sharesave Scheme) which enables them to subscribe for ordinary shares in the Company. Options granted under the Sharesave Scheme do not have performance related conditions attached to them. There were no grants made under the Sharesave scheme in 2016. Co-investment scheme The Co-investment Scheme was approved by shareholders in 2004. Members are invited to join by the Board, having regard to the recommendations of the remuneration committee. At present the scheme is open to the Chief Executive Officer, Group Finance Director and the Managing Directors of the business units. Under the rules of the scheme, members are entitled to invest up to 50% of the bonus that they earn under the Annual Performance Bonus Scheme in Parity shares. The shares are held on behalf of the employee and, providing the employee remains in Parity’s employment, any bonuses invested will be matched in number by the Company on a sliding scale of up to 1.5 for 1 at the end of a defined period of up to three years following the date of purchase. The award of matching shares is subject to the share price outperforming the average Total Shareholder Return performance of a comparator group comprising a basket of companies in the IT services sector and the period during which the employee has to hold shares before they are matched by the Company increases from one year to three years. Depending on the Group’s performance over those three years, the shares purchased by the employee will be matched on a sliding scale up to a maximum of 1.5-to-1 for outstanding performance. None of the Directors have awards outstanding under the Co-investment Scheme. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 19 Remuneration Report continued Share price The Parity Group plc mid-market share price on 31 December 2016 was 9.75 pence. During the period 1 January to 31 December 2016 shares traded at market prices between 6.88 pence and 14.50 pence. Directors’ pension information Alan Rommel and Roger Antony are entitled to a contributory company pension contribution of 5% of basic salary. Up until 30 June 2014, Paul Davies was entitled to a non-contributory company pension contribution of 11% of basic salary. As from 1 July 2014, Paul Davies has received an amount equal to 11% of his basic salary as an additional payment which is paid as part of his monthly salary as a director, up to the date he stepped down from the board. Mike Aspinall and Alastair Woolley were entitled to a contributory company pension contribution of 5% of basic salary up to their dates of resignation. Andy Law was entitled to a contributory company pension contribution of 2% of basic salary up to his resignation. Non-executive Directors’ remuneration The Board determines the remuneration of the Non-executive Directors with the benefit of independent advice when required. The fees are set at a level which will attract individuals with the necessary experience and ability to make a significant contribution to the Group and are benchmarked against those fees paid by other UK listed companies. The Non-executive Directors do not receive bonuses or pension contributions and are not eligible for grants under any of the Group’s share incentive schemes. They are entitled to be reimbursed for reasonable expenses incurred by them in carrying out their duties as Directors of the Company. Service contracts and letters of appointment The Group’s policy is that no Director has a service contract with a notice period of greater than one year or has provision for pre-determined compensation on termination which exceeds one year’s salary, bonus and benefits in kind. Non-executive Directors have letters of appointment which set out the terms of their appointments. All Board appointments are subject to the Company’s articles of association. Contractual arrangements for current Directors are summarised below: Director Lord Freeman1 Alan Rommel Roger Antony David Firth1 Contract date Notice period Contractual termination payment 1 July 2007 12 August 2015 22 April 2016 31 May 2016 n/a 12 months 6 months n/a n/a 12 months rolling 6 months rolling n/a 1 The appointment of Non-executive Directors is terminable at the will of the parties. Other non-executive posts Subject to the approval of the Board, the Executive Directors may hold external non-executive appointments. The Group believes that such appointments provide a valuable opportunity in terms of personal and professional development. Fees derived from such appointments may be retained by the Executive Director concerned. 20 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Remuneration Report continued Directors’ remuneration The remuneration of the Directors who served during the year is set out below: Salary/ fees 2016 £’000 200 96 48 40 13 31 428 Salary/ fees 2015 £’000 56 41 228 114 125 65 40 40 17 732 Executive Directors A Rommel R Antony1 M Aspinall2 Non-executive Directors Lord Freeman D Firth3 N Ransome4 Total emoluments Executive Directors A Rommel M Aspinall2 P Swinstead5,8 P Davies6,8 A Law7,8 A Woolley9 Non-executive Directors Lord Freeman N Ransome4 D Courtley10 Total emoluments Notes Benefi ts 2016 £’000 Compensation for loss of offi ce 2016 £’000 Total emoluments 2016 £’000 Company pension contributions11 2016 £’000 Share Based Payment 2016 £’000 14 8 3 – – – 25 – – 87 – – – 87 214 104 138 40 13 31 540 10 5 2 – – – 17 25 8 – – – – 33 Benefi ts 2015 £’000 Compensation for loss of offi ce 2015 £’000 Total emoluments 2015 £’000 Company pension contributions11 2015 £’000 Share Based Payment 2015 £’000 5 4 – 16 3 5 – – – 33 – – – – – 43 – – – 43 61 45 228 130 128 113 40 40 17 808 3 2 – – 3 3 – – – 11 1. R Antony was appointed as a Board director on 22 April 2016 2. M Aspinall resigned as a Board director on 22 April 2016 3. D Firth was appointed as a Board director on 14 September 2016 4. N Ransome resigned as a Board director on 6 October 2016 5. P Swinstead resigned as a Board director on 4 November 2015 6. P Davies resigned as a Board director on 4 November 2015 7. A Law resigned as a Board director on 13 August 2015 8. Following their respective resignations from the Board, P Swinstead, P Davies and A Law served their notice periods on gardening leave. 9. A Woolley resigned on 27 May 2015 10. D Courtley resigned on 13 August 2015 11. Company pension contributions disclosed in the table above represent the contractual pension entitlements due to the Directors of the company. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 10 – – – 46 (38) – – – 18 21 Remuneration Report continued Executive Directors’ share options As at 1 January 2016 Lapsed/ Surrendered in the year Exercised in the year Awarded in the year As at 31 December 2016 Exercise period Exercise price per share Alan Rommel Executive share option plan 2009 2010 2010 2013 2014 2016 Sub-total Roger Antony Executive share option plan 2010 2013 2014 2016 Sub-total Andy Law 150,000 150,000 100,000 160,000 600,000 – 1,160,000 100,000 20,000 160,000 – 280,000 – – – – – – – – – – – – Executive share option plan 2014 Total 2,000,000 (2,000,000) 3,440,000 (2,000,000) – – – – – – – – – – – – – – – – – – 150,000 2012-2019 150,000 2013-2020 100,000 2013-2020 160,000 2016-2023 600,000 2017-2024 1,500,000 1,500,000 2019-2026 1,500,000 2,660,000 – – – 100,000 2013-2020 20,000 2016-2023 160,000 2017-2024 800,000 800,000 2019-2026 800,000 1,080,000 £0.0900 £0.0875 £0.0750 £0.2650 £0.2112 £0.0862 £0.0875 £0.2650 £0.2112 £0.0862 – – 2017-2024 £0.1675 2,300,000 3,740,000 Directors’ interests in shares The beneficial interests of the Directors who served during the year and their families in the ordinary share capital of the Company are shown below. At 31 December 2015 (or date of appointment if later) % issued share capital (or date of resignation) % issued share capital Shareholding as at 31 December 2016 6,250 33,000 – 3,128 – – 0.01 0.03 – – – – 6,250 33,000 100,000 203,128 100,000 – 0.01 0.03 0.10 0.20 0.10 – Lord Freeman Neal Ransome David Firth Alan Rommel Roger Antony Mike Aspinall For and on behalf of the Board Lord Freeman Chairman of the remuneration committee 22 March 2017 22 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Independent Auditor’s Report to the Members of Parity Group 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 for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following 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. Kelly Dunn (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL United Kingdom 22 March 2017 We have audited the financial statements of Parity Group plc for the year ended 31 December 2016 set out on pages 24 to 61. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 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 auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 16, 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 of 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 EU; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 23 Consolidated Income Statement for the year ended 31 December 2016 Before non- recurring items 2016 £’000 Notes Non-recurring items 2016 (note 5) £’000 Before non- recurring items (Restated) 2015 £’000 Total 2016 £’000 Non-recurring Items (Restated) 2015 (note 5) £’000 Total (Restated) 2015 £’000 2 3 3 3 7 7 10 91,764 (6,245) (365) (83,388) (89,998) 1,766 611 (1,063) 1,314 (154) – (260) (115) 20 (355) (355) – – (355) 79 1,160 (276) 91,764 (6,505) 82,607 (6,765) – (1,077) 82,607 (7,842) (480) (357) (2,335) (2,692) (83,368) (90,353) 1,411 611 (1,063) 959 (75) 884 (74,459) (81,581) 1,026 506 (1,072) 460 (353) 107 (313) (3,725) (3,725) – – (3,725) 189 (74,772) (85,306) (2,699) 506 (1,072) (3,265) (164) (3,536) (3,429) 8 (78) – (78) (226) (264) (490) 1,082 (276) 806 (119) (3,800) (3,919) 11 11 0.87p 0.83p (3.37p) (3.37p) Continuing operations Revenue Employee benefit costs Depreciation, amortisation & impairment All other operating expenses Total operating expenses Operating profit/(loss) Finance income Finance costs Profit/(loss) before tax Tax (charge)/credit Profit/(loss) for the year from continuing operations Discontinued operations Loss from discontinued operations, net of tax Profit/(loss) for the year attributable to owners of the parent Basic earnings/(loss) per share Diluted earnings/(loss) per share The notes on pages 29 to 6 1 form part of the financial statements. 24 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Statement of Comprehensive Income for the year ended 31 December 2016 Profi t/(loss) for the year Other comprehensive income: Items that may be reclassifi ed to profi t or loss Exchange differences on translation of foreign operations Items that will never be reclassified to profit or loss Remeasurement of defined benefit pension scheme Other comprehensive income for the year net of tax Total comprehensive income for the year attributable to equity holders of the parent The notes on pages 29 to 6 1 form part of the financial statements. Notes 24 Consolidated 2016 £’000 806 (13) (13) (413) (413) (426) 380 2015 £’000 (3,919) 42 42 848 848 890 (3,029) i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 25 Statements of Changes in Equity for the year ended 31 December 2016 Consolidated At 1 January 2016 Profit for the year Exchange differences on translation of foreign operations Remeasurement of defined benefit pension scheme Share options – value of employee services Share capital £’000 2,037 Deferred shares £’000 14,319 Share premium reserve £’000 33,195 Other reserves £’000 44,160 – – – – – – – – – – – – – – – – Retained earnings £’000 (87,689) 806 (13) (413) 58 At 31 December 2016 2,037 14,319 33,195 44,160 (87,251) Consolidated At 1 January 2015 Loss for the year Exchange differences on translation of foreign operations Remeasurement of defined benefit pension scheme Issue of new ordinary shares Share options – value of employee services Share capital £’000 2,035 Deferred shares £’000 14,319 Share premium reserve £’000 33,189 Other reserves £’000 44,160 – – – 2 – – – – – – – – – 6 – – – – – – Retained earnings £’000 (84,812) (3,919) 42 848 – 152 Total £’000 6,022 806 (13) (413) 58 6,460 Total £’000 8,891 (3,919) 42 848 8 152 At 31 December 2015 2,037 14,319 33,195 44,160 (87,689) 6,022 Company At 1 January 2016 Loss for the year Share options – value of employee services Share capital £’000 2,037 – – Deferred shares £’000 14,319 – – Share premium reserve £’000 33,195 – – Other reserves £’000 22,729 – – Retained earnings £’000 (53,177) (4,531) (1) Total £’000 19,103 (4,531) (1) At 31 December 2016 2,037 14,319 33,195 22,729 (57,709) 14,571 Company At 1 January 2015 Loss for the year Issue of new ordinary shares Share options – value of employee services Share capital £’000 2,035 – 2 – Deferred shares £’000 14,319 – – – Share premium reserve £’000 33,189 – 6 – Other reserves £’000 22,729 – – – Retained earnings £’000 (51,657) (1,558) – 38 Total £’000 20,615 (1,558) 8 38 At 31 December 2015 2,037 14,319 33,195 22,729 (53,177) 19,103 The notes on pages 29 to 6 1 form part of the financial statements. 26 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Statements of Financial Position As at 31 December 2016 Company number 3539413 Assets Non-current assets Intangible assets and goodwill Property, plant and equipment Trade and other receivables Investment in subsidiaries Deferred tax assets Current assets Stocks and work in progress Trade and other receivables Cash and cash equivalents Assets classified as held for sale and included in disposal groups Total assets Liabilities Current liabilities Loans and borrowings Trade and other payables Non-current liabilities Loans and borrowings Trade and other payables Provisions Retirement benefit liability Liabilities associated with assets classified as held for sale and included in disposal groups Total liabilities Net assets Shareholders’ equity Called up share capital Share premium account Other reserves Retained earnings Total shareholders’ equity Approved by the Directors and authorised for issue on 22 March 2017. The notes on pages 29 to 61 form part of the financial statements. Alan Rommel Chief Executive Officer Roger Antony Finance Director Consolidated Company Notes 2016 £’000 2015 £’000 2016 £’000 2015 £’000 12,13 5,055 14 17 30 15 16 17 18 19 20 19 20 21 24 18 25 23 23 23 72 – – 409 5,536 – 14,373 4,272 18,645 2,389 26,570 7,113 180 – – 507 7,800 61 15,619 2,648 18,328 – 1 122,736 20,527 – – 2 113,332 20,527 – 143,264 133,861 – 3,370 111 3,481 – 3,350 18 3,368 – – – 26,128 146,745 137,229 (8,636) (9,104) (17,740) (10,016) (8,574) (18,590) – (10,919) (10,919) – (9,561) (9,561) (22) – (17) (1,848) (1,887) (483) (11) – (14) (1,491) (1,516) – – (121,255) (108,565) – – – – (121,255) (108,565) – – – (20,110) (20,106) (132,174) (118,126) 6,460 6,022 14,571 19,103 16,356 33,195 44,160 16,356 33,195 44,160 (87,251) (87,689) 6,460 6,022 16,356 33,195 22,729 (57,709) 14,571 16,356 33,195 22,729 (53,177) 19,103 27 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n  Consolidated Company Notes 2016 £’000 2015 £’000 2016 £’000 2015 £’000 806 (3,919) (4,531) (1,558) 7 7 9 8,10 12 14 12,13 12 5 24 12 14 25 7 (611) 1,063 58 44 652 147 – 115 – 2,274 44 330 962 33 (231) 3,412 – 3,412 – (22) (129) (151) – (1,360) – (277) (1,637) 1,624 2,648 4,272 (506) 1,072 152 6 546 173 1,994 3 341 (138) (34) (96) 522 (68) (28) 158 23 181 (250) (349) (92) (691) 8 476 – (300) 184 (326) 2,974 2,648 (1,272) 4,937 (1) (362) (2,077) 1,568 38 (249) – 1 – – – – 1 – – – (1,228) (2,277) – (1,185) 1,848 – – (565) – (565) – – – – – – 931 (273) 658 93 18 111 – (1,374) 1,536 (68) – (2,183) – (2,183) – – (1) (1) 8 – 2,391 (299) 2,100 (84) 102 18 Statements of Cash Flows for the year ended 31 December 2016 Cash flows from operating activities Profit/(loss) for year Adjustments for: Finance income Finance expense Share-based payment expense Income tax expense/(credit) Amortisation of intangible assets Depreciation of property, plant and equipment Impairment of goodwill Loss on write down of intangible assets Loss on write down of property, plant and equipment Working Capital Decrease/(increase) in work in progress Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Payments to retirement benefit plan Cash generated from operations Income taxes received Net cash flows from operating activities Investing activities Acquisition of subsidiaries Purchase of intangible assets Purchase of property, plant and equipment Net cash used in investing activities Financing activities Issue of ordinary shares (Repayment of)/proceeds from finance facility Net movements on intercompany funding Interest paid Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes on pages 29 to 6 1 form part of the financial statements. 28 Parity Group plc Report and Accounts 201 6 www.parity.net stock code: PTY Notes to the Accounts 1 Accounting policies Basis of preparation Parity Group plc (the “Company”) is a company incorporated and domiciled in the UK . Bo th the parent company financial statements and the group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). On publishing the parent company financial statements here together with the group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented unless otherwise stated. The financial statements have been prepared on a going concern basis. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Directors’ Report (Review of business and future developments). The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 7 to 9 and in note 22 to the financial statements. Note 22 also includes the Group’s objectives for managing capital. As outlined in note 22, the Group meets its day to day working capital requirements through an asset-based finance facility. The facility contains certain financial covenants which have been met throughout the period. The facility was renewed during 2016, on favourable terms, and is currently subject to a minimum period up to 31st December 2018, at which point the facility becomes evergreen rolling over on the same terms, with six months’ notice from either party. The bank has not drawn to the attention of the Group any matters to suggest that this facility will not be continued. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group will be able to operate within the level of its current facility for the foreseeable future. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2016. Subsidiaries are entities controlled by the Group. Control exists when the Group has: • • • existing rights that give it the ability to direct the relevant activities that significantly affect the subsidiary's returns; and exposure, or rights, to variable returns from its involvement with the subsidiary; and the ability to use its power over the subsidiary to affect the amount of the Group's returns. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. In accordance with Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement or Statement of Comprehensive Income. The loss for the year dealt with in the accounts of the Company was £4 ,531,000 (2015: £1,558,00). Business Combinations The acquisition of subsidiaries is accounted for using the purchase method. The related costs of acquisition other than those associated with the issue of debt or equity securities, are recognised in the profit and loss as incurred. The acquiree’s identifiable assets and liabilities and contingent liabilities that meet the conditions for recognition under IFRS3 (2008) “Business combinations” are recognised at their fair value at the acquisition date. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 29 Notes to the Accounts continued 1 Accounting policies continued Changes in accounting policies: new standards, interpretations and amendments effective in 2016 adopted by the Group and published standards not yet effective No new standards, amendments to published standards or interpretations of existing standards effective in 2016 had a material impact on the Group’s 2016 financial statements. The following new standards and interpretations to existing standards have been published that are mandatory for the Group’s future accounting, which the Group does not expect to have significant impact on its accounting policies or disclosures: • • • • • • • IFRS 2 ‘Classification and Measurement of Share-based Payment Transactions’ (not yet effective) – amendment IFRS 4 ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’ (not yet effective) – amendment IFRS 9 ‘Financial Instruments’ (not yet effective) IFRS 15 ‘Revenue from Contracts with customers’ (not yet effective) IFRS 16 ‘Leases’ (not yet effective) IAS 7 ‘Disclosure Initiative’ (not yet effective) IAS 12 ‘Recognition of Deferred Tax Assets for Unrealised Losses’ (not yet effective) – amendment Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and financial instruments classified as fair value through the profit or loss or as available-for-sale. Non-current assets are stated at the lower of previous carrying amount and fair value less costs to sell. Revenue recognition The Group generates revenue principally through the provision of recruitment and technology services. The Group recognises revenue when certain criteria are met: there is clear evidence that a contract exists, the amount of revenue can be measured reliably, it is probable that future economic benefits will flow to the Group, and the stage of completion can be measured reliably where services are delivered. Revenue is measured at the fair value of the consideration received or receivable, net of discounts, volume rebates and value added tax. Revenue on contracts for the supply of professional services at pre-determined rates is recognised as and when the work is performed, irrespective of the duration of the contract. Permanent placement staffing revenue is recognised when candidates commence employment. Rebates may be applicable on a sliding scale where the candidate’s employment is terminated within 9 weeks. Rebate provisions are created based on the experience of claims. The Group presents interim recruitment revenues, and the related direct costs of services, in accordance with IAS 18’s guidance – Principal versus Agency Considerations. The Group acts as principal in all of its interim recruiting transactions in that it carries the risks and rewards of ownership e.g. it has the obligation to pay the contractor, and it carries the risks of non-payment due to insolvency or poor performance, and also the risk of pricing reductions. Accordingly, in respect of interim recruitment, the Group reports gross revenues and gross direct costs. Revenue is recognised on fixed price contracts while the contract is in progress, using the percentage of completion method, having regard to the proportion of the total contract costs which have been incurred at the reporting date. Provision is made for all foreseeable future losses. Revenue from systems integration and consulting services under time and material arrangements is recognised as the services are rendered. Non-recurring items Items which are both material and non-recurring are presented as non-recurring items within the relevant Income Statement category. The separate reporting of non-recurring items helps provide a better indication of the Group’s underlying business performance. Events which may give rise to the classification of items as non-recurring, if of a significantly material value, include gains or losses on the disposal of a business, restructuring of a business, transaction costs, litigation and similar settlements, asset impairments, onerous contracts, and gains on bargain purchases. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. 30 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 1 Accounting policies continued Financing income and expenses Financing expenses comprise interest payable, finance charges on shares classified as liabilities and finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on the retirement benefit scheme liabilities, and net foreign exchange losses that are recognised in the income statement (see foreign currency accounting policy). Financing income comprises the expected return on the retirement benefit scheme assets, interest receivable on funds invested, dividend income, and net foreign exchange gains. Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established. Foreign currency gains and losses are reported on a net basis. Dividends Final dividends proposed by the Board of Directors and unpaid at the year end are not recognised in the financial statements until they have been approved by the shareholders at the Annual General Meeting. Interim dividends, which do not require shareholder approval, are recognised when paid. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Foreign currencies Company Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the Income Statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. Group On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in Other Comprehensive Income. On disposal of a foreign operation, the cumulative exchange differences recognised in Other Comprehensive Income relating to that operation up to the date of disposal are transferred to the consolidated Income Statement as part of the profit or loss on disposal. Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or its subsidiary acquired exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified as held for sale. Discontinued operations are presented in the Income Statement (including in the comparative period) as a single line which comprises the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the re- measurement to fair value less costs to sell or on disposal of the assets or disposal groups constituting discontinued operations. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker is the Group Board. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 31 Notes to the Accounts continued 1 Accounting policies continued Intangible assets Goodwill Goodwill represents the excess of the cost of acquisition of a business combination over the Group’s share of the fair value of identifiable net assets of the business acquired. After initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee. Gains and losses on disposal of a business include the carrying amount of goodwill relating to the business sold in determining the gain or loss on disposal, except for goodwill arising on business combinations on or before 31 December 1997 which has been deducted from Shareholders’ equity and remains indefinitely in Shareholders’ equity. Software The carrying amount of software is its cost less any accumulated amortisation and any provision for impairment. Software is amortised on a straight line basis over its expected useful economic life of three to seven years. Intellectual Property Intellectual property represents the expenditure incurred on developing new, innovative products/services that are expected to generate future economic benefits. The carrying amount of intellectual property is its cost less any accumulated amortisation and any provision for impairment. Intellectual property is amortised on a straight line basis over two years, with amortisation commencing from the date that the products/services are available for sale. Property, plant and equipment Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost less estimated residual value of each asset on a straight line basis over its expected useful economic life, as follows: Leasehold improvements Office equipment The lesser of the asset life and the remaining length of the lease Between 3 and 5 years The carrying value of property, plant and equipment is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. Impairment of non-financial assets (excluding deferred tax assets) An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount, the latter being the higher of the fair value less costs to sell associated with the CGU and its value in use. Value in use calculations are performed using cash flow projections for the CGU to which the goodwill relates, discounted at a pre-tax rate which reflects the asset specific risks and the time value of money. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. Goodwill is tested for impairment at each reporting date. The carrying value of other intangible assets and property, plant and equipment is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or (“CGU”). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 32 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 1 Accounting policies continued Financ ial assets The Gr oup’s financial assets fall into the categories discussed below, with the allocation depending to an extent on the purpose for which the asset was acquired. Unless otherwise indicated, the carrying amounts of the Group’s financial assets are a reasonable approximation of their fair values. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables: these assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables). They are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition or issue, less provision for impairment. The effect of discounting on these financial instruments is not considered to be material. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, such provisions are recorded in a separate allowance account with the loss being recognised within other operating expenses in the Income Statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Investments: investments in subsidiary undertakings are recorded at cost. The carrying values of investments are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Cash and cash equivalents: cash and cash equivalents in the Statement of Financial Position comprise cash at bank and in hand, short term deposits and other short-term liquid investments. In the Cash Flow Statement, cash and cash equivalents comprise cash and cash equivalents as defined above, net of bank overdrafts. Stocks and work in progress Stocks are stated at the lower of cost and net realisable value. Cost comprises equipment for resale. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Costs recoverable on contracts which are expected to benefit performance and be recoverable over the life of the contracts are recognised in the Statement of Financial Position as work in progress and charged to the Income Statement over the life of the contract so as to match costs with revenues. Work in progress is stated at the lower of cost and net realisable amount and represents that element of start-up costs which, at the reporting date, has not been charged to the Income Statement. Cost includes materials, direct labour and an attributable portion of overheads based on normal levels of activity. Net realisable amount is based on estimated selling price, less further costs expected to be incurred to completion and disposal including provision for contingencies and anticipated future losses. Amounts recoverable on contracts and payments in advance Amounts recoverable on contracts are stated at the net sales value of work done less amounts received as progress payments on account. Where progress payments exceed the sales value of work done, they are included in payables as payments in advance. Financial liabilities All of the Group’s financial liabilities are classified as financial liabilities carried at amortised cost. The Group does not use derivative financial instruments or hedge account for any transactions. Unless otherwise indicated, the carrying amounts of the Group’s financial liabilities are a reasonable approximation of their fair values. Financial liabilities include the following items: • • • Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. Finance leases which are initially measured at fair value and subsequently carried at amortised cost using the effective interest method. Bank borrowings, which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated Statement of Financial Position. Interest expense in this context includes initial transaction costs and premiums payable on redemption, as well as any interest or coupon payable while the liability is outstanding. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 33 Notes to the Accounts continued 1 Accounting policies continued Operating Leases Rentals paid under operating leases are charged to income on a straight line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability. From time to time the Group faces the potential of legal action in respect of employment or other contracts. In such situations, where it is probable that a payment will be required to settle the action, provision is made for the Group’s best estimate of the outcome. Where leasehold properties are surplus to requirements, provisions are made for the best estimates of the unavoidable net future costs. Provisions for dilapidation charges that will crystallise at the end of the period of occupancy are provided for in full on non-serviced properties. Pensions The Group operates a number of retirement benefit schemes. With the exception of the ‘Parity Retirement Benefit Plan’, all of the schemes are defined contribution plans and the assets are held in separate, independently administered funds. The Group’s contributions to defined contribution plans are charged to the Income Statement in the period to which the services are rendered by the employees, and the Group has no further obligation to pay further amounts. The ‘Parity Retirement Benefit Plan’ is a defined benefit pension fund with assets held separately from the Group. This fund has been closed to new members since 1995 and with effect from 1 January 2005 was also closed to future service accrual. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets at bid price, and any unrecognised past service costs are deducted. The liability discount rate is the yield at the balance sheet date on AA credit rated bonds denominated in the currency of, and having maturity dates approximating to, the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the present value of benefits available in the form of any future refunds from the plan, reductions in future contributions to the plan or on settlement of the plan and takes into account the adverse effect of any minimum funding requirements. Share capital Following the adoption of IAS 32, financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) (b) they include no contractual obligations upon the company (or group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the company (or group); and where the instrument will or may be settled in the company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the company’s own equity instruments or is a derivative that will be settled by the company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. For the purposes of the disclosures given in note 22, the Group considers its capital to comprise its cash and cash equivalents, its asset-based bank borrowings, and its equity attributable to equity holders, comprising issued capital, reserves and retained earnings, as disclosed in the statement of changes in equity. Financial guarantee contracts Where Group companies enter into financial guarantee contracts and guarantee the indebtedness of other companies within the Group, the company considers these to be insurance arrangements and accounts for them as such. In this respect, the company treats the guarantee contract as a contingent liability until such time that it becomes probable that any Group company will be required to make a payment under the guarantee. 34 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 1 Accounting policies continued Employee Share Ownership Plan (ESOP) As the Company is deemed to have control of its ESOP trust, it is treated as an agent and consolidated for the purposes of the consolidated financial statements. The ESOP’s assets (other than investments in the Company’s shares), liabilities, income and expenses are included on a line-by-line basis in the consolidated financial statements. The ESOP’s investment in the Company’s shares is deducted from shareholders’ equity in the Consolidated Statement of Financial Position as if they were treasury shares. Share-based payment transactions Share-based payment arrangements in which the Group and Company receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group and Company. The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the Income Statement over the remaining vesting period. Significant accounting estimates and judgements The preparation of financial statements under IFRS requires the Group to make estimates and assumptions regarding the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below. Retirement benefit liability The costs, assets and liabilities of the defined benefit scheme operated by the Group are determined using methods relying on actuarial estimates and assumptions. Details of the key assumptions are set out in note 24. The Group takes advice from independent actuaries relating to the appropriateness of the assumptions. Changes in the assumptions used may have a significant effect on the Income Statement and the Statement of Financial Position. Recoverability of deferred tax assets The deferred tax assets are reviewed for recoverability and recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. This is determined based on management estimates and assumptions as to the future profitability of the related business units. The forecasts for the business used in this review were the same as those used in the review of impairment of goodwill (see note 13). The deferred tax asset would not require writing down if the forecast future profitability of Parity Professionals Limited was 10% lower. Intangible assets – intellectual property T he Group capitalises costs incurred in developing its range of technologies and services where management believe that future economic benefits will flow from the Group’s intellectual property. In assessing the carrying value of the intellectual property, management estimate future related revenues, by analysing its order book and qualified sales pipeline. Management are also required to make a judgement on the useful life of the Group’s intellectual property, which they base on the useful lives of previously developed technologies and services, and the current pace of change within the industry. Impairment of goodwill The Group is required to test whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. The use of this method requires the estimation of future cash flows expected to arise from the continuing operation of the cash generating unit and the choice of a suitable discount rate in order to calculate the present value (see note 13). Investments in subsidiaries The Company reviews its investment in subsidiaries to test whether any impairment has been suffered. The recoverable amounts are determined using discounted future cash flows. Intercompany receivables The Company reviews receivables due from subsidiary undertakings to test whether they are recoverable. Provision is made for where there is uncertainty as to full recovery. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 35 Notes to the Accounts continued 2 Segmental information Factors that management used to identify the Group’s reporting segments In accordance with IFRS 8 ‘Operating Segments’ the Group’s management structure, and the reporting of financial information to the Chief Operating Decision Maker (the Group Board), have been used as the basis to define reporting segments. The Group has two continuing defined cash generating units (see note 13) which form the basis of each operating segment. The components of each segment are described below. The internal financial information prepared for the Group Board includes contribution at a segmental level, and the Group Board allocates resources on the basis of this information. Segmental contribution, defined as divisional revenues less attributable overheads, profit before tax, and assets and liabilities are internally reported at a Group level. Description of the types of services from which each reportable segment derives its revenues The Group has two segments: • • Parity Professionals – this segment provides IT recruitment services across all UK markets. It also provides graduate selection, training, placement and career development services. Parity Professionals provides 94% (2015: 95%) of the continuing Group’s revenues. Parity Consultancy Services – this segment delivers business intelligence solutions designed around client problems. Parity Consultancy Services provides 6% (2015: 5%) of the continuing Group’s revenues. Group costs include directors’ salaries and costs relating to Group activities and are not allocated to reporting segments for internal reporting purposes. Measurement of operating segment contribution The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Group evaluates performance on the basis of contribution from operations before tax not including non-recurring items, such as restructuring costs. Inter-segment sales are priced on the same basis as sales to external customers, with a discount applied to encourage the use of group resources at a rate acceptable to the tax authorities. Revenue from external customers Inter-segment revenue Segment revenue Attributable costs Segmental contribution Group costs Depreciation and amortisation Share based payment Other non-recurring items Operating Profit Finance income Finance costs Profit/(loss) before tax (continuing activities) Parity Professionals 2016 £’000 Parity Consultancy Services 2016 £’000 Before non- recurring Items 2016 £’000 Non- recurring items 2016 £’000 86,419 481 86,900 (84,240) 2,660 5,345 91,764 – 481 5,345 92,245 (4,435) (88,675) 910 3,570 (1,383) (365) (56) – 1,766 611 (1,063) 1,314 – – – – – – (115) – (240) (355) – – (355) Total 2016 £’000 91,764 481 92,245 (88,675) 3,570 (1,383) (480) (56) (240) 1,411 611 (1,063) 959 36 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 2 Segmental information continued Revenue from external customers Inter-segment revenue Segment revenue Attributable costs Segmental contribution Group costs Depreciation and amortisation Share based payment Impairment of goodwill Other non-recurring items Operating Profit Finance income Finance costs Parity Professionals 2015 £’000 78,190 118 78,308 (76,032) 2,276 Parity Consultancy Services 2015 £’000 Before non- recurring Items 2015 £’000 4,417 82,607 – 4,417 (3,719) 698 118 82,725 (79,751) 2,974 (1,443) (357) (148) – – 1,026 506 (1,072) 460 Non- recurring items 2015 £’000 – – – – – – (341) – (1,994) (1,390) (3,725) – – (3,725) Total 2015 £’000 82,607 118 82,725 (79,751) 2,974 (1,443) (698) (148) (1,994) (1,390) (2,699) 506 (1,072) (3,265) Profit/(loss) before tax (continuing activities) – – The continuing Group operates exclusively in the UK. All revenues are generated and all segment assets are located in the UK. All revenues are generated and all segment assets are located in the UK. Inter-segment revenue in the year is a result of Parity Professionals selling IT recruitment services to Parity Consultancy Services. 61% (2015: 57%) or £52.7m (2015: £44.8m) of the Parity Professionals revenue was generated in the public sector. 57% (2015: 32%) or £3.0m (2015: £1.4m) of the Parity Consultancy Services revenue was generated in the Public Sector. The largest single customer in Parity Professionals contributed revenue of £10.8m or 12% and was in the public sector (2015: £11.8m or 15% and in the private sector). The largest single customer in Parity Consultancy Services contributed revenue of £2.9m or 54% and was in the public sector (2015: £2.4m or 53% and in the private sector). 37 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 3 Operating costs Continuing operations Employee benefit costs – wages and salaries – social security costs – other pension costs Depreciation and amortisation Amortisation of intangible assets – software Depreciation of leased property, plant and equipment Depreciation of owned property, plant and equipment Write down of property, plant and equipment Write down of intangible assets Impairment of goodwill All other operating expenses Contractor costs Sub-contracted direct costs Operating lease rentals – plant and machinery – land and buildings Sub-let income – land and buildings Other occupancy costs IT costs Equity settled share based payment charge Other operating costs Total operating expenses Disclosures relating to the remuneration of Directors are set out on page 21. During the year the Group obtained the following services from the Group’s auditor, KPMG LLP: Audit of the Parent Company and consolidated financial statements Other services: Audit of the Company’s subsidiaries Interim review Tax compliance Other Consolidated 2016 £’000 2015 (restated) £‘000 5,688 6,997 639 178 660 185 6,505 7,842 294 35 36 – 115 – 480 254 27 76 341 – 1,994 2,692 80,409 72,014 350 27 775 – 147 348 56 1,256 83,368 90,353 366 37 1,003 (150) 263 249 148 842 74,772 85,306 Consolidated 2016 £’000 11 65 6 27 17 115 126 2015 £‘000 11 65 6 27 33 131 142 All other services have been performed in the United Kingdom. Other refers to services provided in relation to advice relating to the Retirement Benefit Plan and transaction costs. 38 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 4 Reconciliation of operating profit/(loss) to adjusted EBITDA Operating profit/(loss) from continuing operations Non-recurring items Share-based payment charges Depreciation and amortisation Adjusted EBITDA Note 5 3 3 2016 £’000 1,411 355 56 365 2015 (restated) £’000 (2,699) 3,725 148 357 2,187 1,531 The directors previously used EBITDA before non-recurring items and share-based payment charges (‘Adjusted EBITDA’) as a key performance measure of the business. 5 Non-recurring items Continuing Operations Write down of GPSeer – Write down of intangible assets – Other operating costs Total write down of GPSeer Impairment of goodwill Restructuring – Employee benefit costs – Write down of property, plant and equipment – Other operating costs Transaction costs Property provisions Insolvency dividend Note 2016 £’000 115 152 267 – 12,13 2015 (restated) £’000 – – – 1,994 260 1,077 – 36 52 46 (306) 355 341 126 125 62 – 3,725 The continuing operations non-recurring charge for 2016 includes: • • • • • The write down of assets in the GPSeer joint venture. GPSeer is an initiative under the previous digital strategy to develop a cutting-edge internet search engine. Since the change in strategy, no further development work has been performed by the Group. Restructuring costs including compensation payments incurred to downsize the Talent Management service offering in Northern Ireland, the cost of Board changes aligned to the Group’s strategy, and residual expenses incurred to close the Golden Square service offering. Transaction costs relating to professional services incurred to implement the Board’s strategy to focus on core business. Property provisions represent empty property costs incurred as a result of centralising the London office. The insolvency dividend relates to a one-off payment received in 2016 from the administrators of a legacy overseas subsidiary. The continuing operations non-recurring charge for 2015 includes: • • • A goodwill impairment charge relating solely to the Group’s investment in Inition Limited (see note 13). Restructuring costs of £737,000 relating to the closure of the Golden Square business (including a £341,000 write down of tangible fixed assets) and £787,000 of compensation payments made in respect of redundancies and Board changes following the Group’s decision to discontinue its digital acquisition initiative. Transaction costs for professional services incurred in the Group’s acquisition programme which was discontinued during the year. 39 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 6 Average staff numbers Continuing operations Professionals – United Kingdom1 Consultancy Services – United Kingdom, including corporate office2 Discontinued Operations Consultancy Services 1 Includes 22 (2015: 19) employees providing shared services across the Group. 2 Includes 7 (2015: 8) employees of the Company. At 31 December 2016, the Group had 112 continuing employees (2015: 110). 7 Finance income and costs Finance income Finance income in respect of post-retirement benefits Finance costs Interest expense on financial liabilities Finance costs in respect of post-retirement benefits 2016 Number 2015 Number 89 28 117 92 32 124 22 25 2016 £’000 611 611 277 786 2015 £’000 506 506 300 772 1,063 1,072 The interest expense on financial liabilities represents interest paid on the Group’s asset-based financing facilities. A 1% increase in the base rate would increase annual borrowing costs by approximately £100,000. 8 Discontinued operations In December 2016 the Group Board committed to a plan to sell the Inition cash generating unit following the strategic decision made in May 2015 to place greater focus on the Group’s core business. Inition was not previously classified as held-for-sale or as a discontinued operation. As such, the comparative consolidated income statement has been restated to show the discontinued operation separately from continuing operations. The results of discontinued operations also include the results of other statutory entities still owned by the Group which sold their businesses in 2005 and 2006. These entities are not held for sale. The post-tax result of discontinued operations was determined as follows: Revenue Expenses Pre-tax loss Taxation credit Loss for the year Basic loss per share Diluted loss per share Note 11 11 2016 £’000 3,263 (3,372) (109) 31 (78) 0.08p 0.07p 2015 £’000 2,235 (2,883) (648) 158 (490) 0.48p 0.48p The loss from the discontinued operation of £78,000 (2015: £490,000) is attributable entirely to the owners of the Company. Cash flows from (used in) discontinued operations: Net cash from operating activities Net cash used in investing activities Net cash flows for the year 40 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY 2016 £’000 45 (88) (43) 2015 £’000 208 (156) 52 Notes to the Accounts continued 9 Share based payments The Group operates several share based reward schemes for employees: • • • • • A United Kingdom tax authority approved scheme for executive directors and senior staff; An unapproved scheme for executive directors and senior staff; A Co-Investment Scheme for senior management; A Save As You Earn Scheme for all employees; and A Senior Executive Share Option Plan for Executive Directors. Under the approved and unapproved schemes and the Co-Investment Scheme, options vest if the share price averages a target price for 5 consecutive days over a three year period from the date of grant. Options lapse if the individual leaves the Group, except under certain circumstances such as leaving by reason of redundancy, when the options lapse 12 months after the leaving date. Save As You Earn options lapse if not exercised within six months after the vesting date. They are also subject to continued employment within the Group. Options under the Senior Executive Share Option Plan have no performance conditions other than continued employment within the Group and must be exercised within five years of the date of grant. All employee options other than those issued under the Senior Executive Share Option Plan have a maximum term of ten years from the date of grant. The total share-based remuneration recognised in the Income Statement was £58,000 (2015: £152,000). 2016 Weighted average exercise price (p) 2016 Number 2015 Weighted average exercise price (p) 2015 Number Outstanding at beginning of the year 19 8,452,583 18 13,536,921 Granted during the year Exercised during the year Lapsed during the year Outstanding at the end of the year 9 – 19 15 3,100,000 – (3,131,732) 8,420,851 – 8 16 19 – (97,500) (4,986,838) 8,452,583 The exercise price of options outstanding at the end of the year and their weighted average contractual life fell within the following ranges: Exercise price (p) 7.5 - 10 17 - 28 2016 Weighted average contractual life (years) 8 7 Number 4,200,000 4,220,851 8,420,851 Exercise price (p) 7.5 - 10 17 - 28 2015 Weighted average contractual life (years) 4 8 Number 1,250,000 7,202,583 8,452,583 Of the total number of options outstanding at the end of the year 2,030,000 (2015: 1,782,500) had vested and were exercisable at the end of the year. The weighted average exercise price of those options was 17 pence (2015: 14 pence). There were no options exercised during the year (2015: 97,500 options were exercised at an average exercise price of 8 pence). There were 3,100,000 (2015: nil) options granted during the year. The weighted average fair value of option granted was 9 pence. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 41 Notes to the Accounts continued 9 Share based payments continued The following information is relevant in determining the fair value of options granted during the year under equity–settled share- based remuneration schemes operated by the Group. There are no cash-settled schemes. Option pricing model Weighted average share price at grant date (p) Weighted average exercise price (p) Weighted average contractual life (years) Weighted average expected life (years) Expected volatility Weighted average risk free rate Expected dividend growth rate 2016 Stochastic 2015 Stochastic 9 9 10 5 43 – 50% 0.27% 0% – – – – – – – The volatility assumption is calculated as the historic volatility of the share price over a 3 and 5 year period prior to grant date. Share options issued to defined benefit pension scheme In December 2010 the Group issued 1,000,000 share options in Parity Group plc to the pension scheme at an exercise price of 9 pence per share. These options may be exercised at the discretion of the Trustees; they vested on grant and have no expiry date. Any gain on exercise is to be used to reduce the scheme deficit. These options were valued using the stochastic method. The share price on the grant date was 15.75 pence. Whilst the options do not have an expiry date, for valuation purposes it is assumed that the expected life of the options is 8 years. The expected volatility is 64.2% and the average risk free rate assumed was 3.4%. 10 Taxation Current tax expense Current tax on profit for the year Total current tax expense Deferred tax expense Accelerated capital allowances Origination and reversal of other temporary differences Change in corporation tax rate Adjustments in respect of prior periods Total tax expense Tax expense on continuing operations 2016 £’000 2015 (Restated) £’000 5 5 39 3 20 8 70 75 125 125 (7) (7) 53 – 39 164 Tax expense on continuing operations excludes the tax income from the discontinued operation of £31,000 (2015: £158,000). This has been included in ‘profit/(loss) from discontinued operation, net of tax’ (see Note 8). The standard rate of corporation tax in the UK changed from 21% to 20% with effect from 1 April 2015. Accordingly, the Group’s profits for this accounting period are subject to tax at a rate of 20% (2015: 20.25%). In his Autumn Statement, the Chancellor confirmed there will be a reduction in the corporate tax rate from 1 April 2017 to 19%, and then a further reduction from 1 April 2020 to 17%. As such, the tax rate of 17% has been applied in calculating the UK deferred tax position of the Group at 31 December 2016. The 2016 tax expense is after a tax credit of £79,000 (2015: £189,000) in respect of non-recurring items. 42 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 10 Taxation continued The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to losses for the year are as follows: Profit/(loss) before tax from continuing operations Expected tax charge/(credit) based on the standard rate of United Kingdom corporation tax of 20% (2015: 20.25 %) Expenses/(income) not allowable for tax purposes Adjustment for under provision in prior years Reduction in deferred tax asset due to change in enacted rate Tax losses not recognised Deferred tax not provided Tax on each component of other comprehensive income is as follows: Exchange differences on translation of foreign operations Actuarial (loss)/gain on defined benefit pension scheme 11 Earnings per ordinary share Before tax £’000 2016 Tax £’000 After tax £’000 Before tax £’000 (13) (413) (426) – – – (13) (413) (426) 42 848 890 2016 £’000 959 192 5 8 20 – (150) 75 2015 Tax £’000 – – – 2015 (Restated) £’000 (3,265) (661) 445 2 53 272 53 164 After tax £’000 42 848 890 Basic earnings per share is calculated by dividing the basic earnings from continuing operations for the year by the weighted average number of fully paid ordinary shares in issue during the year. Diluted earnings per share is calculated on the same basis as the basic earnings per share with a further adjustment to the weighted average number of fully paid ordinary shares to reflect the effect of all dilutive potential ordinary shares. In 2015, none of the potential ordinary shares are dilutive, as the Group made a loss on continuing activities during the year. Basic earnings/(loss) per share Effect of dilutive options Diluted earnings/(loss) per share Weighted average number of shares 2016 000’s Earnings 2016 £’000 884 – 884 101,824 4,691 106,515 Earnings per share 2016 Pence 0.87 – 0.83 Weighted average number of shares 2015 000’s Earnings 2015 £’000 (3,429) 101,731 – – (3,429) 101,731 Earnings per share 2015 Pence (3.37) – (3.37) As at 31 December 2016 the number of ordinary shares in issue was 101,824,020 (2015: 101,824,020). Basic loss per share from discontinued operations was 0.08p (2015: 0.48p). Diluted loss per share from discontinued operations was 0.07p (2015: 0.48p). i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 43 Notes to the Accounts continued 12 Intangible assets Software Intellectual Property Goodwill Total 2016 £’000 2015 £’000 Cost At 1 January 1,285 1,219 Additions Disposals Impairment Transferred to assets held for sale 22 (51) – (173) 66 – – – At 31 December 1,083 1,285 Accumulated amortisation At 1 January 495 Charge for the year 287 Disposals Transferred to assets held for sale At 31 December Net book amount (51) (94) 637 446 233 262 – – 495 790 2016 £’000 852 – – (115) (628) 109 288 365 – (559) 94 15 2015 £’000 572 283 (3) – – 852 4 284 – – 288 564 2016 £’000 2015 £’000 2016 £’000 2015 £’000 5,759 7,753 7,896 9,544 – – – – – 22 (51) 349 (3) (1,994) (115) (1,994) (1,165) 4,594 – 5,759 (1,966) 5,786 – 7,896 – – – – – – – – – – 4,594 5,759 783 652 (51) (653) 731 5,055 237 546 – – 783 7,113 During 2016, the Inition business reduced its spending on developing new and existing technologies and utilised the intellectual property developed in prior years. At balance date, the intangible assets held in the Inition business unit have been reclassified as held for sale (see notes 8 and 18). Intellectual property held in the GPSeer joint arrangement has been written down to £nil due to uncertainty surrounding the future of the project (see note 5). During 2015, the Inition business invested in enhancing certain of its existing technologies in addition to developing new technologies. This resulted in additional intellectual property of £157,000. Other additions to IP included content development for the Talent Management business. Th e Company does not hold any intangible assets. Neither the Group nor the Company had any additional capital commitments for the purchase of intangible assets as at the balance sheet date. 13 Goodwill The carrying amount of goodwill is allocated to the Group’s three separate cash generating units (CGUs) being; Parity Professionals, Parity Solutions and Inition. At balance date, the goodwill associated with the Inition CGU has been reclassified as held for sale (see notes 8 and 18). Carrying amounts are as follows: Carrying value Balance at 1 January 2016 Transferred to assets held for sale Balance at 31 December 2016 Balance at 1 January 2015 Impairment losses Balance at 31 December 2015 Professionals Solutions £’000 £’000 Inition £’000 Total £’000 2,642 – 2,642 2,642 – 2,642 1,952 – 1,952 1,952 – 1,952 1,165 (1,165) – 3,159 (1,994) 1,165 5,759 (1,165) 4,594 7,753 (1,994) 5,759 44 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 13 Goodwill continued Goodwill was tested for impairment in accordance with IAS 36 at the year end and no impairment charge was recognised (2015: An impairment charge of £1,994,000 was recorded in respect of the Group’s investment in Inition Limited). The recoverable amounts of the CGUs are based on value in use calculations using the pre-tax cash flows based on budgets approved by management for 2017. Years from 2018 onward are based on the budget for 2017 projected forward at expected growth rates. This is considered prudent based on current expectations of the 2017 long-term growth rate. Major assumptions are as follows: 2016 Discount rate Forecast revenue growth Operating margin 2017 Operating margin 2018 onward 2015 Discount rate Forecast revenue growth Operating margin 2016 Operating margin 2017 onward Professionals % Solutions % Inition % 5.5 5.5 3.5 3.1 9.9 18.4 3.4 – 3.9 19.0 – 19.9 6.9 4.8 3.1 4.5 9.2 15.8 – – – – 15.6 9.9 5.4 3.0 – 3.5 16.1 – 16.9 9.5 – 10.0 Discount rates are based on the Group’s weighted average cost of capital adjusted for the specific risks of each cash generating unit. Forecast revenue growth is expressed as the compound growth rate over the next 4 years. For all CGUs the rates are based on past experience of growth in revenues and future expectations of economic conditions. Operating margins are based on past experience adjusted for investments. A 10% change in any of the underlying assumptions used in the discounted cash flow forecasts would not lead to the carrying value of goodwill being in excess of their recoverable amount. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 45 Leasehold improvements £’000 Office equipment £’000 Total £’000 3,872 92 (445) 3,519 129 (375) (193) 3,856 92 (445) 3,503 129 (375) (193) 3,064 3,080 3,254 173 (104) 3,323 147 (375) (103) 3,270 173 (104) 3,339 147 (375) (103) 2,992 3,008 602 180 72 602 180 72 16 – – 16 – – – 16 16 – – 16 – – 16 – – – Notes to the Accounts continued 14 Property, plant and equipment Consolidated At cost Balance at 1 January 2015 Additions Disposals Balance at 31 December 2015 and 1 January 2016 Additions Disposals Transferred to assets held for sale Balance at 31 December 2016 Accumulated depreciation Balance at 1 January 2015 Depreciation charge for the year Disposals Balance at 31 December 2015 and 1 January 2016 Depreciation charge for the year Disposals Transferred to assets held for sale Balance at 31 December 2016 Net book value At 1 January 2015 At 31 December 2015 At 31 December 2016 46 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 14 Property, plant and equipment continued Company At Cost Balance at 1 January 2015 Balance at 31 December 2015 and 1 January 2016 Balance at 31 December 2016 Accumulated amortisation Balance at 1 January 2015 Depreciation charge for the year Balance at 31 December 2015 and 1 January 2016 Depreciation charge for the year Balance at 31 December 2016 Net book value At 1 January 2015 At 31 December 2015 At 31 December 2016 Leasehold improvements £’000 Office equipment £’000 Total £’000 1 1 1 1 – 1 – 1 – – – 3 3 3 1 – 1 1 2 2 2 1 4 4 4 2 – 2 1 3 2 2 1 At balance date, the property plant and equipment held in the Inition business unit has been reclassified as held for sale (see notes 8 and 18). In 2015, following the closure of the Golden Square business, its tangible fixed assets were written down resulting in a loss on disposal of £341,000. As at 31 December 2016, neither the Group nor the Company had any capital commitments contracted for but not provided, for the purchase of tangible assets (2015: £nil). Leased plant and equipment At 31 December 2016 the total net carrying value of the leased equipment was £27,000 (2015: £28,000). 15 Deferred tax At 1 January Recognised in the income statement Change in enacted tax rate Adjustments in relation to prior periods Depreciation in excess of capital allowances Other short term timing differences Transferred to assets held for sale At 31 December The deferred tax asset of £409,000 (2015: £507,000) comprises: Depreciation in excess of capital allowances Short term and other timing differences Consolidated 2016 £’000 507 (24) 6 (23) (3) (54) 409 2015 £’000 536 (56) (1) 21 7 – 507 Consolidated 2016 £’000 355 54 409 2015 £’000 447 60 507 47 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 15 Deferred tax continued A deferred tax asset on tax losses brought forward is not recognised unless it is more likely than not that there will be taxable profits in the foreseeable future against which the deferred tax asset can be offset. The Directors believe that the deferred tax asset recognised is recoverable based on the future earning potential of the Group. The forecasts for the business used in this review were the same as those used in the review of the impairment of goodwill (see note 13). The forecasts for Parity Professionals comfortably support the unwinding of the deferred tax asset held by this division of £409,000 (2015: £479,000). The deferred tax asset at 31 December 2016 has been calculated on the rate of 17% substantively enacted at the balance sheet date. The movements in deferred tax assets during the period are shown below: Depreciation in excess of capital allowances Other short-term timing differences Trading losses Depreciation in excess of capital allowances Other short-term timing differences (Charged)/ credited to income statement 2016 £’000 Transferred to assets held for sale 2016 £’000 (59) (6) 21 (44) (33) – (21) (54) (Charged)/ credited to income statement 2015 £’000 Transferred to assets held for sale 2015 £’000 (16) (13) (29) – – – Asset 2016 £’000 355 54 – 409 Asset 2015 £’000 447 60 507 The Group has unrecognised carried forward tax losses of £30,078,882 (2015: £30,611,584). The Company has unrecognised carried forward tax losses of £24,301,882 (2015: £24,229,376). The Group has unrecognised capital losses carried forward of £281,875,386 (2015: £281,875,386). These losses may be carried forward indefinitely. 16 Work in progress Work in progress: Net costs less foreseeable losses Consolidated 2016 £’000 2015 £’000 – 61 Work in progress comprises stock on hand. At balance date, work in progress held by the Inition business has been reclassified as held for sale (see notes 8 and 18). 17 Trade and other receivables Amounts falling due within one year: Trade receivables Accrued income Amounts recoverable on contracts Amounts owed by subsidiary undertakings Other receivables Prepayments Amounts falling due after one year: Amounts owed by subsidiary undertakings Total 48 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Consolidated 2016 £’000 7,577 2,588 3,771 – 84 353 2015 £’000 9,365 4,707 946 – 259 342 Company 2016 £’000 2015 £’000 – – – – – – 3,367 3,346 – 3 – 4 14,373 15,619 3,370 3,350 – – 14,373 15,619 122,736 126,106 113,332 116,682 Notes to the Accounts continued 17 Trade and other receivables continued The fair values of trade and other receivables are not considered to differ from the values set out above. £7,430,000 (2015: £8,998,000) of the Group’s trade receivables, and £5,748,000 (2015: £4,262,000) of the total of the Group’s accrued income and amounts recoverable on contracts, are pledged as collateral for the asset-based borrowings. These borrowings fluctuate daily and at the year end totalled £8,613,000 (2015: £9,973,000). The Group records impairment losses on its trade receivables separately from gross receivables. Factors considered in making provisions for receivables include the ability of the customer to settle the debt, the age of the debt and any other circumstance particular to the transaction that may impact recoverability. The movements on the allowance account during the year are included within operating costs in the consolidated income statement and are summarised below: Opening balance Increases in provisions Written off against provisions Recovered amounts reversed Closing balance Consolidated 2016 £’000 2015 £’000 7 4 (2) (9) – – 7 – – 7 The balance of impaired losses at 31 December 2016 was £nil (2015: the balance was greater than 60 days old and the allowance account represents full provision against specific gross debts). All other debts at 31 December 2016 are considered to be recoverable. As at 31 December 2016 trade receivables of £1,335,000 (2015: £1,532,000) were past due, but not impaired. These relate to customers where there is no evidence of unwillingness or of an inability to settle the debt. The ageing of Group trade receivables is as follows: Not past due 31-60 days, and past due 61-90 days >90 days Total Gross £’000 6,242 957 250 128 7,577 2016 Impaired £’000 – – – – – Total £’000 6,242 957 250 128 Gross £’000 7,833 922 393 224 7,577 9,372 2015 Impaired £’000 – – – (7) (7) Total £’000 7,833 922 393 217 9,365 The Company had no provisions for trade receivables, as it has no trade receivables. Other receivables in the Group and the Company were not past due and not impaired. The Company’s receivables due from subsidiary undertakings were reviewed for impairment at the year end based on the performance of 2016 and on subsequent years forecast projections. A discounted future cash flow method was employed for the review. As a result of this review, no provision was deemed necessary. The assessment was performed on a value in use basis using discount rates of between 3.1% and 5.5% (2015: between 4.5% and 15.6%) and the other parameters used in the goodwill impairment review, as outlined in note 13. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 49 Notes to the Accounts continued 18 Assets and liabilities classified as held for sale and included in disposal groups The major classes of assets and liabilities comprising the operations classified as held for sale are set out below. Goodwill Intangible assets – software Intangible assets – intellectual property Property, plant and equipment – office equipment Trade and other receivables Work in progress Deferred tax asset Total assets classified as held for sale Trade and other payables Provisions Total liabilities associated with assets classified as held for sale Net assets of disposal group 19 Loans & Borrowings Non-current Finance lease liabilities Current Bank and other borrowings due within one year or on demand: Asset-based financing facility Current portion of finance lease liabilities Finance lease liabilities Less than one year Between one and two years Future minimum lease payments 2016 £’000 25 22 47 Present value of minimum lease Payments 2016 £’000 23 22 45 Future minimum lease payments 2015 £’000 47 11 58 Interest 2016 £’000 2 – 2 Further details of the Group’s banking facilities are given in note 22. 31 December 2016 £’000 1,165 79 69 90 915 17 54 2,389 (453) (30) (483) 1,906 Consolidated 2016 £’000 22 22 2015 £’000 11 11 8,613 23 9,973 43 8,636 10,016 Present value of minimum lease payments 2015 £’000 43 11 54 Interest 2015 £’000 4 – 4 50 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 20 Trade and other payables Consolidated 2016 £’000 594 6,018 – 1,126 1,366 9,104 – 9,104 Amounts falling due within one year: Payments in advance Trade payables Amounts due to subsidiary undertakings Other tax and social security payables Other payables and accruals Amounts falling due after one year: Amounts due to subsidiary undertakings Total 21 Provisions Consolidated At 1 January 2016 Created in year Utilised in year At 31 December 2016 Due within one year or less Due after more than one year Total 2015 £’000 439 5,424 Company 2016 £’000 2015 £’000 – – – – – 10,724 9,149 1,377 1,514 8,574 – 8,574 21 174 32 380 10,919 9,561 121,255 132,174 108,565 118,126 Leasehold dilapidations £’000 Total £’000 14 3 – 17 – 17 17 14 3 – 17 – 17 17 At balance sheet date the Company had no provisions (2015: no provisions). Leasehold dilapidations Leasehold dilapidations relate to the estimated cost of returning a leasehold property to its original state at the end of the lease in accordance with the lease terms. Dilapidation charges that will crystallise at the end of the period of occupancy are provided for in full on all non-serviced properties. Based on current lease expiry dates it is estimated these provisions will be settled over a period of two to three years. The main uncertainty relates to the estimation of the costs that will be incurred at the end of the lease. 22 Financial instruments – risk management The Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group’s exposure to financial instrument risks and the methods used to measure them from previous periods unless otherwise stated in this note. 51 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 22 Financial instruments – risk management continued Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, cash and cash equivalents, trade and other payables and bank borrowings. A summary by category of the financial instruments held by the Group is provided below: Consolidated As at 31 December 2016 Financial assets Net cash and cash equivalents Trade and other short term receivables Financial liabilities Asset-based financing facility Finance lease liabilities Trade and other short term payables As at 31 December 2015 Financial assets Net cash and cash equivalents Trade and other short term receivables Financial liabilities Asset-based financing facility Finance lease liabilities Trade and other short term payables Amortised cost £’000 Loans and receivables £’000 Total £’000 – – – 4,272 14,020 18,292 8,613 45 8,510 17,168 – – – – – – – 2,648 15,277 17,925 9,973 54 8,315 18,342 – – – – 4,272 14,020 18,292 8,613 45 8,510 17,168 2,648 15,277 17,925 9,973 54 8,315 18,342 52 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 22 Financial instruments – risk management continued Principal financial instruments continued A summary by category of the financial instruments held by the Company is provided below: Company As at 31 December 2016 Financial assets Non-current trade and other receivables Net cash and cash equivalents Trade and other short term receivables Financial liabilities Trade and other short term payables Non-current trade and other payables As at 31 December 2015 Financial assets Non-current trade and other receivables Net cash and cash equivalents Trade and other short term receivables Financial liabilities Trade and other short term payables Non-current trade and other payables Amortised cost £’000 Loans and receivables £’000 Total £’000 – – – – 122,736 122,736 111 3,367 111 3,367 126,214 126,214 10,919 121,255 132,174 – – – 10,919 121,255 132,174 – – – – 113,332 113,332 18 3,346 18 3,346 116,696 116,696 9,561 108,565 118,126 – – – 9,561 108,565 118,126 Non-current amounts due to subsidiary undertakings have no specific repayment terms but are subject to notice periods of at least one year. Fair values of financial instruments The fair values of all of the Group’s, and of the Company’s, financial instruments are the same as their carrying values. General objectives, policies and processes – risk management The Group is exposed through its operations to the following financial instrument risks: credit risk; liquidity risk; interest rate risk; and foreign currency risk. The policy for managing these risks is set by the Board following recommendations from the Finance Director. Certain risks are managed centrally, while others are managed locally following guidelines communicated from the centre. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. The policy for each of the above risks is described in more detail below. Credit risk Credit risk arises from the Group’s trade and other receivables. It is the risk that the counterparty fails to discharge their obligation in respect of the instrument. The Group is mainly exposed to credit risk from credit sales. It is Group policy to assess the credit risk of new customers before entering contracts. Such credit ratings are then factored into the credit assessment process to determine the appropriate credit limit for each customer. The Group does not collect collateral to mitigate credit risk. The Group operates exclusively in the UK. Approximately 61% (2015: 56%) of the Group’s turnover is derived from the public sector. The largest customer balance represents 19% (2015: 22%) of the trade receivable balance. 53 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 22 Financial instruments – risk management continued Credit risk continued Quantitative disclosures of the credit risk exposure in relation to financial assets are set out below. Further disclosures regarding trade and other receivables, which are neither past due nor impaired, are provided in note 17. Financial assets Cash and cash equivalents Trade and other receivables Total financial assets 2016 Carrying value £’000 Maximum exposure £’000 2015 Carrying value £’000 Maximum exposure £’000 4,272 14,020 18,292 4,272 14,020 18,292 2,648 15,277 17,925 2,648 15,277 17,925 Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates. It is Group policy that all external Group borrowings are drawn down on the asset-based financing facilities arranged with our bankers which bear a floating rate of interest based on the PNC base rate. Borrowings against the asset-based financing facilities are typically drawn or repaid on a daily basis in order to minimise borrowings and interest costs and transaction charges. Although the Board accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates, nor eliminates the cash flow risk associated with interest payments, it considers that it achieves an appropriate balance of these risks. Throughout 2016 and 2015 the Group’s variable rate borrowings were denominated in Sterling. Interest costs on borrowings from the asset-based financing facility with PNC was charged at 2.5% above base rate until 1 September 2016, and at 2.35% above base rate subsequently. Amounts under this facility are repayable upon demand. If interest rates on borrowings had been 1% higher/lower throughout the year with all other variables held constant, the loss after tax for the year would have been approximately £100,000 higher/lower and net assets £100,000 higher/lower. The Directors consider a 1% change in base rates is the maximum likely change over the next year, being the period to the next point at which these disclosures are expected to be made. The Company holds interest bearing loan agreements with some of its subsidiary undertakings. Interest on all loans is charged at 2.0% above the prevailing Bank of England base rate, except for one loan with Parity International B.V. which is charged at 2.0% above the prevailing European Central Bank base rate. As at 31 December 2016, the loan balance due by the Company to Parity International BV, translated into Sterling, was £26,696,000 (2015: £22,993,000 payable). Foreign exchange risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group no longer has any active overseas operations, but does retain certain overseas subsidiaries that are not trading and are in the process of being closed down. The Group’s net assets arising from overseas operations are exposed to currency risk resulting in gains or losses on retranslation into sterling. The asset exposure is mainly in respect of intercompany balances. The Group does not hedge its net investment in overseas operations as it does not consider that the potential financial impact of such hedging techniques warrants the reduction in volatility in consolidated net assets. The continuing business has few transactions in foreign currency. The hedging of individual contracts is considered on a case by case basis. Owing to the small value and volume of such contracts no hedging transactions were entered in 2016 or 2015. During 2014, the underlying denomination of a large intercompany balance between the Company and one of the Group’s inactive overseas subsidiaries was revised. As at 31 December 2013, the Company held a loan balance due to the relevant subsidiary of £24,471,000 which was denominated in Sterling. The base currency of the Company is Sterling and the overseas subsidiary’s base currency is Euros. In 2014, the denomination of the loan was revised to Euros, and thus subject to exchange rate fluctuations in the books of the Company. As a result, in 2016 the Company recorded a translation loss of £3,212,000 (2015: gain of £965,000). As at the 31 December 2016, the loan balance due by the Company, translated into Sterling, was £26,696,000 (2015: £22,993,000). 54 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Sterling Euro US Dollar Total net exposure Notes to the Accounts continued 22 Financial instruments – risk management continued Foreign exchange risk continued The currency profile of the Group’s net financial assets was as follows: Sterling Euro US Dollar Total Functional currency of individual entity Net foreign currency fi nancial assets 2016 £’000 2015 £’000 – – (26,694) (22,988) 2016 £’000 219 – 2015 £’000 131 – 4 18 1,350 1,150 2016 £’000 966 – – 2015 £’000 966 – – 2016 £’000 1,185 2015 £’000 1,097 (26,694) (22,988) 1,354 1,168 (26,690) (22,970) 1,569 1,281 966 966 (24,155) (20,723) The profile of the Company’s net financial assets was as follows: Net foreign currency financial assets Sterling Euro US Dollar Total net exposure Functional currency: Sterling 2015 £’000 2016 £’000 – – (26,694) (22,988) 4 18 (26,690) (22,970) Sensitivity analysis – Group and Company If the exchange rate between Sterling and the Euro had been 10% higher/lower at the balance sheet date, with all other variables held constant, the effect on equity for the year would have been approximately £2,669,600 higher/lower. A 10% fluctuation in any other currency exchange rate would not have a significant impact on profit and loss, nor equity. Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance charges on its borrowings under its asset- based financing arrangements. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The liquidity of each Group entity is managed centrally, with daily transfers to operating entities to maintain a pre-determined cash balance. Normal supplier terms range from 2 weeks to 30 days. The level of the Group facility is approved periodically by the Board and negotiated with the Group’s current bankers. At the reporting date, cash flow projections were considered by the Board and the Group is forecast to have sufficient funds and available funding facilities to meet its obligations as they fall due. The following table sets out the contractual maturities (representing undiscounted contractual cash flows) of financial liabilities: Consolidated At 31 December 2016 Trade and other payables Borrowings Total Consolidated At 31 December 2015 Trade and other payables Borrowings Total Up to 1 month £’000 8,510 8,613 17,123 Up to 1 month £’000 8,574 9,984 18,558 Over 1 month £’000 – 45 45 Over 1 month £’000 – 43 43 Total £’000 8,510 8,658 17,168 Total £’000 8,574 10,027 18,601 55 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 22 Financial instruments – risk management continued Liquidity risk continued Company At 31 December 2016 Trade and other payables Total Company At 31 December 2015 Trade and other payables Total Up to 1 month £’000 10,919 10,919 Up to 1 month £’000 9,561 9,561 Between 1 and 12 months £’000 Over 1 year £’000 – – 121,255 121,255 Between 1 and 12 months £’000 Over 1 year £’000 – – 108,565 108,565 Total £’000 132,174 132,174 Total £’000 118,126 118,126 More detail on trade and other payables is given in note 20. Capital disclosures The capital structure of the Group consists of cash and cash equivalents, equity attributable to equity holders, and asset-based finance. There is no long-term external debt, except for a small number of finance leases. The leases represent a liability of £45,000 (2015: £54,000) and are repayable within two years. The Company is funded through equity and intercompany loans. The Group uses an asset-based finance facility with PNC Business Credit, a member of The PNC Financial Services Group, Inc. The facility, which enables the Group to borrow against both trade debt and accrued income and provides for borrowing of up to £15.0m depending on the availability of appropriate assets as security. The Group’s and Company’s objectives when maintaining capital are: • • to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. Cash and cash equivalents Asset-based borrowings Finance lease liabilities Net debt 2016 £’000 4,272 (8,613) (45) 2015 £’000 2,648 (9,973) (54) (4,386) (7,379) The Board regularly reviews the adequacy of resources available and considers the options available to increase them. The asset- based borrowing facility contains certain externally imposed financial covenants which have been met throughout the period. The Company does not have distributable reserves available for dividend payments. A capital reconstruction would be necessary to create reserves available for distribution. 23 Reserves The Board is not proposing a dividend for the year (2015: nil pence per share). The following describes the nature and purpose of each reserve within owners’ equity: Share capital is the amount subscribed for ordinary share capital at nominal value. There was no change to share capital during 2016 (2015: 97,500 share options were exercised, increasing the Group’s share capital from £16,353,638 to £16,355,588). Deferred share capital is the nominal value assigned to the deferred share capital. Share premium is the amount subscribed for share capital in excess of nominal value. There was no change to share premium in 2016 (2015: Following the exercise of share options, the share premium increased from £33,189,314 to £33,195,689). Other Reserves of the Group of £44,160,000 relate principally to a reserve created following a change of the Group’s ultimate parent, and a corresponding Scheme of Arrangement in July 1999. Other Reserves of the Company of £22,729,000 relate to a reorganisation of the Group’s capital structure in 2002, which resulted in the Company increasing its investment in subsidiary undertakings. Retained earnings represent the cumulative net gains and losses recognised in the Income Statement. Consolidated retained earnings are stated after adjustment for the ESOP’s investment in the Company’s shares of £351,000 (2015: £351,000). 56 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 24 Pension commitments The Group operates a number of pension schemes. With the exception of the Parity Group Retirement Benefit Plan, all of the schemes are defined contribution plans and the assets are held in separately administered funds. Contributions to defined contribution schemes from continuing operations were £178,000 (2015: £185,000). Defined benefit plan In March 1995, the Group established the Parity Retirement Benefit Plan, renamed as the Parity Group Retirement Benefit Plan, following a Scheme of Arrangement in 1999, in order to facilitate the continuance of pension entitlements for staff transferring from other schemes following acquisitions in 1994. This is a funded defined benefit scheme and has been closed to new members since 1995. With effect from 1 January 2005 this scheme was also closed to future service accrual and future contributions paid into money purchase arrangements. Principal actuarial assumptions Rate of increase of pensions in payment Discount rate Retail price inflation Consumer price inflation 2016 % 2015 % 3.7% – 4.0% 3.6% – 3.9% 2.6% 3.4% 2.4% 3.8% 3.1% 2.1% Note: the rate of increase in pensionable salaries is no longer applicable as the scheme is closed for future service. In accordance with the revised IAS19, the assumption for future investment returns is the same discount rate (2.6%) used in calculating the pension liabilities. The scheme’s assets are invested in equities, gilts and bonds in approximately equal proportions. The underlying mortality assumption used is in accordance with the standard table known as S1PA_H, S1PA or S1PA_L mortality, dependent on the size of each member’s pension, using the CMI_2015 projection based on year of birth with a long term rate of improvement of 1.25% p.a. (2015: 1.25% p.a.). Contributions In 2015, contributions were initially at a rate of £711,000 per annum. During March 2015 the Trustees agreed to a temporary suspension of contributions, and subsequently extended this agreement until July 2016. In February 2016, a lump sum contribution of £100,000 was made by the Group. In March 2016, agreement was reached with the trustees of the defined benefit pension scheme to reduce deficit reduction contributions, linking amounts payable to company performance and affordability on a sliding scale as part of the 2015 triennial valuation review. As a result, monthly contributions of £15,000 resumed from May 2016, with conditional annual bonus payments predicated on the Groups financial performance. Other contributions include payments made to the Pension Protection Fund. In 2012 an issue was made to the Plan of 1,000,000 share options in Parity Group plc at an exercise price of 9 pence per share to be exercised at the discretion of the Trustees and any gain to be used for the benefit of the Plan. These options vested on grant and have no expiry date. Reconciliation to consolidated statement of financial position Fair value of plan assets Present value of funded obligations At the end of the year Reconciliation of plan assets At the beginning of the year Expected return Contribution by Group Benefits paid Expenses met by scheme Actuarial (loss)/gain At the end of the year 2016 £’000 2015 £’000 22,465 19,703 (24,313) (21,194) (1,848) (1,491) 2016 £’000 2015 £’000 19,703 20,356 728 231 (1,006) (117) 2,926 22,465 693 28 (786) (187) (401) 19,703 57 i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n Notes to the Accounts continued 24 Pension commitments continued Composition of plan assets Equities – Quoted Gilts Bonds Options in Parity Group plc Cash Total Reconciliation of plan liabilities At the beginning of the year Interest cost Benefits paid Actuarial (gain)/loss At the end of the year 2016 £’000 7,993 7,114 7,087 96 175 2015 £’000 6,722 6,436 6,404 96 45 22,465 19,703 2016 £’000 2015 £’000 21,194 22,457 786 (1,006) 3,339 24,313 772 (786) (1,249) 21,194 The actuarial loss for the year of £3,339,000 (2015: Gain of £1,249,000) in respect of plan liabilities is mainly as a result of the change in the discount rate assumption. The assumption is based upon the yield on AA rated corporate bonds, and these decreased during 2016. The gain in 2015 was as a result of a rise in the yield on AA rated corporate bonds. The cumulative amount of actuarial losses recognised since 1 January 2002 in other comprehensive income is £6,383,000 (2015: £5,970,000). The Group is unable to disclose how much of the pension scheme deficit recognised on 1 January 2002 and taken directly to equity is attributable to actuarial gains and losses since inception of the pension scheme because that information is not available. Amounts recognised in the consolidated income statement Included in Finance Income Expected return on plan assets Included in Finance Costs Unwinding of discount on plan liabilities (interest cost) 2016 £’000 611 786 2015 £’000 506 772 The actual return on plan assets was £3,654,000 (2015: £292,000). This represents the sum of the expected return on assets and the actuarial gain. Defined benefit obligation trends Plan assets Plan liabilities Deficit Experience adjustments on assets Experience adjustments on liabilities 2016 £’000 2015 £’000 2014 £’000 2013 £’000 2012 £’000 22,465 19,703 20,356 17,421 16,260 (24,313) (21,194) (22,457) (19,591) (19,667) (1,848) 2,926 15.0% 3,339 15.9% (1,491) (401) (2.0%) (1,249) (5.6%) (2,101) (2,170) (3,407) 2,251 12.4% 2,900 14.8% (34) (0.2%) (255) (1.3%) 441 2.7% 2,016 11.4% 58 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 24 Pension commitments continued Sensitivity Analysis Effect of change in assumptions No change 0.25% rise in discount rate 0.25% fall in discount rate 0.25% rise in inflation 0.25% fall in inflation 25 Share capital Authorised share capital Authorised at 1 January Authorised at 31 December Issued share capital Liabilities £’000’s 24,313 23,454 25,222 24,331 24,177 Assets £’000’s 22,465 22,465 22,465 22,465 22,465 Surplus/ (Deficit) £’000’s (1,848) (989) (2,757) (1,866) (1,712) Ordinary shares 2p each Deferred shares of 0.04p each 2016 number 409,044,603 409,044,603 2016 £’000 8,181 8,181 2016 number 35,797,769,808 35,797,769,808 2016 £’000 14,319 14,319 Issued and fully paid at 1 January 101,824,020 Issued and fully paid at 31 December 101,824,020 2016 number 2016 £’000 2,037 2,037 2016 number 35,797,769,808 35,797,769,808 2016 £’000 14,319 14,319 Ordinary shares 2p each Deferred shares of 0.04p each Increase/ (Decrease) in deficit £’000’s – (859) 909 18 (136) Total 2016 £’000 22,500 22,500 Total 2016 £’000 16,356 16,356 The deferred shares are not listed on the London Stock Exchange, have no voting rights, no rights to dividends and the right only to a very limited return on capital in the event of liquidation. Shares held by ESOP/Treasury Shares Ordinary shares held by the ESOP 2016 Number 43,143 2015 Number 43,143 The shares held by the ESOP are expected to be issued under share option contracts. 26 Operating lease commitments Operating leases – lessee The total future minimum rents payable under non-cancellable operating leases are as follows: Continuing operations Amounts payable: Within one year Between two and five years 27 Contingencies Land and buildings 2016 £’000 Plant and machinery 2016 £’000 Land and buildings 2015 £’000 Plant and machinery 2015 £’000 854 518 1,372 17 18 35 508 90 598 27 35 62 In the normal course of business, the Group is exposed to the risk of claims in respect of contracts where the customer or supplier is dissatisfied with the performance, pricing and/or completion of the contracted service or product. Such claims are normally resolved by a combination of negotiation, further work by Parity or the supplier, and/or monetary settlement without formal legal process being necessary. Occasionally, such claims progress into legal action. At the present time, Group management believes the resolution of any known claims or legal proceedings will not have a material further impact on the financial position of the Group. i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 59 Notes to the Accounts continued 28 Key management remuneration Key management comprises the Board of Directors. The total remuneration received by key management for 2016 was £590,000 (2015: £837,000). This comprises emoluments received, pension contributions, compensation for loss of office and share based payment charges. Key management remuneration, including that of the highest paid director A Rommel, is disclosed in detail within the remuneration report on page 21. Salary and fees Other short term benefits Post employment benefits Compensation for loss of office Share-based payments 29 Related party transactions Consolidated 2016 £’000 428 25 17 87 33 590 2015 £’000 732 33 11 43 18 837 There were no related party director transactions during the year. During the year to 31 December 2015 the Group transacted with one entity over which one of the Groups directors, at the time, had control or significant influence, as follows: Director D. Courtley Transaction IT interim recruitment Transaction value Balance outstanding 2016 £’000 – 2015 £’000 81 2016 £’000 – 2015 £’000 – During the comparative year, the Group provided IT contractors to Mozaic Services Limited, a company that is significantly influenced by Mr D Courtley. Mr Courtley was a non-executive director of the Group during 2015 until he stepped down on 13 August 2015. Amounts were billed at normal market rates for such services, and were due and payable under standard client payment terms. Company Details of the Company’s holding in Group undertakings are given in note 30. The Company entered into transactions with other Group undertakings as shown in the table below. Operating costs 2016 £’000 Amounts incurred from Group subsidiaries (528) Amounts charged to Group subsidiaries – Finance income 2016 £’000 – 1,272 Finance expense 2016 £’000 1,451 – Operating costs 2015 £’000 (457) – Finance income 2015 £’000 – 1,112 Finance expense 2015 £’000 (1,269) – At 31 December, the Company had the following amounts payable to/recoverable from Group undertakings. Amounts owed by subsidiary undertakings Falling due within one year (note 17) Falling due after one year (note 17) Amounts due to subsidiary undertakings Falling due within one year (note 20) Falling due after one year (note 20) 2016 £’000 2015 £’000 3,367 3,346 122,736 113,332 (10,724) (9,149) (121,255) (108,565) 60 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY Notes to the Accounts continued 30 Subsidiaries The principal subsidiaries of Parity Group plc, which have been included in these consolidated financial statements, are Parity Professionals Limited, Parity Consultancy Services Limited (formally Parity Solutions Limited), and Inition Limited. Parity Professionals Limited and Parity Consultancy Services Limited (formally Parity Solutions Limited) are wholly owned by Parity Holdings Limited and incorporated in the United Kingdom. Inition Limited has been included in these Consolidated financial statements as a discontinued operation and as assets and associated liabilities held for sale. Inition Limited is wholly owned by Parity Solutions Limited (formally Parity Consultancy Services Limited) and is incorporated in the United Kingdom. Parity Solutions Limited (formally Parity Consultancy Services Limited) is a direct subsidiary of Parity Holdings Limited, and Parity Holdings Limited is a direct subsidiary of Parity Group plc. Parity Professionals Limited is a specialist IT recruitment and talent management services company. Parity Consultancy Services Limited (formally Parity Solutions Limited) delivers technology solutions. Inition Limited specialises in virtual reality, augmented reality and 3D solutions. The Company’s investment in subsidiaries was reviewed for impairment at the year end based on the performance of 2016 and on subsequent years forecast projections. A discounted future cash flow method was employed for the review. As a result of this review, no provision was deemed necessary, leaving a carrying value of £20,527,000 (2015: £20,527,000). The assessment was performed on a value in use basis using discount rates of between 3.1% and 5.5% (2015: between 4.5% and 15.6%) and the other parameters used in the goodwill impairment review, as outlined in note 13. The remaining Group subsidiaries are either discontinued or dormant, are wholly owned by the Group ultimate parent Parity Group plc, and are registered in the UK (at Dawson House, 5 Jewry Street, London EC3N 2EX) unless stated otherwise in the list below: Parity Solutions (Ireland) Limited Parity Technology Laboratories Limited Performance Agency Limited Prime Selection Limited Readypatch Limited Scene Systems Limited Software 92 Limited Systems Support Services Technology Media Limited TMS Information Solutions Limited Tobruk Limited Trident Computer Services plc Class Limited Comtec Computer Training Limited Comtec International Limited CSS Software Solutions Limited Disqo Limited ESP (Europe) Limited Eurosoft Germany Limited Eurosoft Solutions (France) Limited Eurosoft Solutions Limited Golden Square Content Limited GPSeer Limited IC Software Limited Information Mapping Limited Inition LLC (registered at 10100 Santa Monica Blvd., 7th Floor, Los Angeles, CA 90067, USA) Interactive Developments (Scotland) Limited Interactive Developments Limited Intercity Consultants Limited Integer79 Limited Made Content Limited Online Personnel Services Limited Parity Computing Limited Parity Eurosoft BV (registered at Keizersgracht 62-64, 1015 CS Amsterdam, Netherlands) Parity Eurosoft Limited Parity Group Quest Trustee Limited Parity International BV (registered at Keizersgracht 62-64, 1015 CS Amsterdam, Netherlands) Parity International plc Parity Limited Parity Management Limited Parity Permanent Investments Limited Parity Selection Limited i S t r a t e g c R e p o r t G o v e r n a n c e A c c o u n t s , n o t e s a n d o t h e r i n f o r m a t i o n 61  Advisors Auditor KPMG LLP 15 Canada Square London E14 5GL Bankers RBS Group 9th Floor 280 Bishopsgate London EC2M 4RB PNC Business Credit 8-14 The Broadway Hayward’s Heath West Sussex RH16 3AP Nominated advisors & brokers Investec 2 Gresham Street London EC2V 7QP Solicitors Pinsent Masons 30 Crown Place London EC2A 4ES Corporate information Registered office Dawson House 5 Jewry Street London, EC3N 2EX Tel: 020 8543 5353 Registered in England & Wales No. 3539413 Registrars Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA Tel: 037 1384 2382 Equiniti offer a range of information on-line. You can access information on your shareholding, indicative share prices and dividend details and find practical help on transferring shares or updating your details at www.shareview.co.uk Enquiries concerning shareholdings in Parity Group plc should be directed, in the first instance, to the Registrars, Equiniti, as above. Investor relations MHP Communications 60 Great Portland Street London W1W 7RT Tel: 020 3128 8100 Further information for shareholders including copies of the Annual and Interim Reports can be obtained from the company secretary’s office at the registered office address below or from the Parity Group website at www.parity.net The Company Secretary Parity Group plc Dawson House 5 Jewry Street London, EC3N 2EX Or by email to: cosec@parity.net 62 Parity Group plc Report and Accounts 2016 www.parity.net stock code: PTY PARITY GROUP PLC (PTY.L) – LSE Ticker Parity Group plc Dawson House, 5 Jewry Street, London EC3N 2EX Tel: 020 8543 5353 www.parity.net stock code: PTY Perivan Financial Print 244774 Parity Group plc Report and Accounts Year ended 31 December 2016 

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