The Sage Group Annual Report 2017

Plain-text annual report

AnnualReportandAccounts2017SageBusinessCloud:AccelerationstartshereSage is the global market leader for technology that helps businesses of all sizes manage everything from money to people – whether they're a start-up, scale-up or enterprise. Our mission is to free Business Builders from the burden of administration, so they can spend more time doing what they love; because when Business Builders do well, we all do.We’ve invested for the future…Financial highlightsAbout our non-GAAP measures and why we use themThroughout the Strategic report we quote two kinds of non-GAAP measure: underlying and organic. We use these measures in monitoring performance and incentivising management.Underlying measures allow management and investors to compare performance without the potentially distorting eﬀ ects of foreign exchange movements, one-oﬀ items or non-operational items.Organic measures allow management and investors to understand the like-for-like performance of the business.Full deﬁ nitions of underlying and organic can be found within note 2 of the ﬁ nancial statements.Reconciliations of statutory revenue, operating proﬁ t and basic earnings per share to their underlying and organic equivalents are in the Financial and operating review starting on page 34. Statutory revenue growth Organic operating margin161728.0%27.1%28.0%161719.1%9.3%19.1%Underlying basic EPS growthStatutory basic EPS growth16173.5%9.0%3.5%161744.2%6.4%44.2%Underlying cash conversion16176.6%6.7%6.6%161795%100%95%Organic revenue growthAccelerationstartshere.OurCapitalMarketsDayin2015signifiedthestartofatransformationprocesswhichfocusedondevelopingtheorganisationalalignment,leadership,brandandinnovationrequiredtoaccelerateourstrategy.Thesuccessfulexecutionofthistransformationhasprovideduswiththeplatformforaccelerating,sustainablegrowth.AnditallstartswithSageBusinessCloud.StrategicreportGovernanceFinancialstatements2Inves�ingfor�hefu�ure63Chairman’sin�roduc�ion�o110Independen�audi�or’srepor��o�he12Chairman’ss�a�emen�corpora�egovernancemembersofTheSageGroupplc14Ourbusinessmodel64BoardofDirec�ors119Groupfinancials�a�emen�s16Inconversa�ionwi�h�heChief66Execu�iveCommitee124No�es�o�heGroupfinancialExecu�iveandChiefFinancialOfficer68Corpora�egovernancerepor�s�a�emen�s178Companyfinancials�a�emen�s20Ours�ra�egy84Direc�ors’remunera�ionrepor�32OurKeyPerformanceIndica�ors104Direc�ors’repor�185Glossary34Financialandopera�ingreview187Shareholderinforma�ion40Corpora�eresponsibili�y41People44BusinessBuilders46Communi�y48Environmen�52Principalrisksanduncer�ain�iesContentsS�ra�egicrepor�GovernanceFinancialstatements1TheSageGroupplc|AnnualRepor�&Accoun�s2017We’ve invested for the future…Developing our model...Transforming our business...moved to a subscription-based business model...We’ve improved the margin proﬁ le through extensive cost savings…General & Administration ("G&A") expense as a % of organic revenue 13.8%Soft ware subscription revenue as a % of organic revenue37%...acquired new customers at scale......and maintained focus on our existing customer base.Cloud Annual Recurring Revenue (£m)*£300mNet Promoter Score**25FY15FY16FY1713.8%19.1%FY14FY15FY16FY17FY1422%37%FY15FY16FY17FY143002FY15FY16Q417Q115253* Annual recurring revenue (“ARR”) is the value of all components of recurring revenue, annualised for the ensuing year. Cloud ARR includes the contributions of Sage People and Sage Intacct in addition to Sage One, Sage Live, the cloud version of Sage X3 and the cloud-enabled versions of the Sage 50 and Sage 200 families.** NPS is measured by an external company, Medallia, following the industry prescribed process. This is the ﬁ rst year that we have disclosed NPS and quarterly ﬂ uctuations may be expected.The Sage Group plc | Annual Report & Accounts 20172...whilst delivering a compelling investment caseAcceleration starts here.In FY18 we are changing the deﬁ nition of organic to include the impact of the acquisitions of Intacct (now Sage Intacct) and Fairsail (now Sage People). Combined, they are expected to contribute around 1% of growth. On this basis we will be raising our organic revenue growth guidance to around 8%. We expect to continue to achieve cost eﬃ ciencies that will be more than suﬃ cient to oﬀ set any losses in the acquired businesses as they scale. We are therefore conﬁ dent of delivering an organic operating margin of around 27.5% in FY18.Higher quality revenue –78% of organic revenueis recurring –37% of organic revenue is from subscription contracts –9.0% growth in organic recurring revenue –6.6% organic revenue growth –86% renewal ratesStrong cash ﬂ ow –Underlying cash conversion of 95% –Free cash conversion of revenue of 15%Superior operating margin –£59m annualised cost savings –G&A expense as a percentage of revenue reduced by 360 bps to 13.8%Progressive dividend –We remain one of the very few FTSE 100 businesses that have delivered an increased ordinary dividend every year since 1999Strategic reportGovernanceFinancial statements3The Sage Group plc | Annual Report & Accounts 2017Welcome to Sage Business CloudGolden TrianglePeopleand PayrollPayments and BankingAccountingSmall and medium-sized businesses are the lifeblood of the economy, driving over two thirds of job creation. 80% of these Business Builders work every weekend, with 50% working more than 50 hours per week. At Sage we help the real heroes of the economy by using the best technology to oﬀ er them integrated soft ware solutions that increase eﬃ ciency and insight, freeing up their time so that they can run their business more eﬀ ectively.We are the only worldwide company that can oﬀ er a complete suite of cloud business management solutions following the journey of a business all the way from start-up, to scale-up, through to enterprise, across the Golden Triangle. All of these cloud solutions can now be accessed through Sage Business Cloud, the one and only cloud business management platform companies will ever need throughout their business journey.Launched in October 2017, Sage Business Cloud is designed to support companies of all sizes across a range of verticals. Sage Business Cloud delivers a powerful set of cloud services including Accounting, Financials, Enterprise Management, People, Payroll, Payments and Banking, as well as marketplace apps that can be provisioned to match the exact needs of any business. Sage Business Cloud uses artiﬁ cial intelligence (AI) and collective intelligence as technology catalysts to power the cloud products, driving intelligent automation, simplicity and ease of use for all our customers, partners, ISVs and developers. The cloud solution for start-up to enterpriseAccountingWinning in the market productsOur cloud accounting solutions allow us to win in the market. Cloud-led technology att racts start-ups to ﬁ nancial soft ware and provides the catalyst for larger Business Builders to review their existing soft ware and migrate to a Sage cloud solution. (previously Sage One)Serving customers who need a powerful, essential accounting solution that will enable them to take full control of their ﬁ nances and help them reduce time spent on manual business administration and navigating complex, expensive accounting tools. Sage Accounting is accessible across any device (smartphone, tablet, laptop, PC) and includes technology advancements in mobile and chatbot technology, enabling day-to-day AccountingWe’ve invested for the future…The Sage Group plc | Annual Report & Accounts 20174Payments and BankingPeople and Payroll AccountingPayrollIntacctPayPayments100c200cScale-up5m businessesFinancials50cPeopleStart-up77m businessesWinning in the marketCustomer for lifeEnterpriseManagement300cAccountingEnterprise200k businessesbalance visibility, invoice and expense management and next generation conversational accounting.(previously Sage Live) Serving customers beyond principal accounting needs, Sage Financials adds functionality to support more complex ﬁ nancial processing needs. Sage Financials is a hub that, when combined with other Sage Business Cloud products and marketplace applications, delivers a full end-to-end view of your business. Our powerful Financials product is designed to help you seamlessly scale and manage your business in real-time by integrating accounting with critical business functions. We enable business and ﬁ nance leaders to access integrated management and ﬁ nancial reports across their business entities in minutes, not days, improving decision-making to grow and drive their businesses. IntacctSage Intacct, acquired in August 2017, is a sophisticated and powerful solution perfect for growing businesses, especially in technology, services and not-for-proﬁ t verticals. The solution allows for process-automation, rich ﬁ nancial and operational insight, cutt ing-edge features and seamless integration with the customer’s existing application ecosystems. (previously Sage X3)Sage Enterprise Management is not your typical ERP solution. It's a faster, simpler and more ﬂ exible industrial-strength business management solution for globally connected, large-scale businesses. Sage Enterprise Management oﬀ ers multi-company, multi-currency, multi-language and multi-legislation support and is perfectly suited to manufacturing and complex distribution verticals.Customer for life productsWe recognise that not all customers want revolutionary change, especially when our traditional products give them everything they feel they need – that’s why we never force migration. Instead we have cloud-enabled our much-loved Sage 50 and Sage 200 families of products so that customers can beneﬁ t from the best of both worlds, retaining the familiarity and functionality of desktop, combined with the ﬂ exibility and automation of the cloud.People and PayrollSage People, our Payroll & Human Capital Management (“HCM”) solution, is simple, secure and eﬃ cient; helping our customers to remain compliant, pay their employees accurately and on time, and to deliver a great employee experience.Payments and BankingThrough a combination of our existing payments assets and our partnerships with leading payments providers, we are continuing to develop a comprehensive range of payment solutions to speed up the movement of money in and out for our customers, across all of our major geographies. These solutions are designed to make the lives of Business Builders easier, automating routine transactions and utilising the latest Fintech innovations (see page 27 for more).FinancialsEnterprise ManagementStrategic reportGovernanceFinancial statements5The Sage Group plc | Annual Report & Accounts 20175The Sage Group plc | Annual Report & Accounts 2017Sageisamarketleaderinthe23countriesinwhichitoperates.GrowinginourmarketsIntheUS,70%o�buyersarelookingtopurchasecloudsolutions.Ourcustomersmoveover£3trillionthroughtheirbusinesseseveryyearusingSageaccountssofware,twicetheGDPo�theUK.OverhalfofourtotaladdressablemarketisinNorthAmerica,wherecloudaccelerationisthehighest,representingasignificantgrowthopportunityforSage.–USA–CanadaofrevenueWeserve3millioncustomersin23countries,withthetopninecountriesproviding95%ofourrevenue.Whilstwehaveintegratedandglobalisedfunctions,weensurethattheresponsibilityforeachcustomerwillremainundertheremitofthatcountry,withsalesandserviceprovidedlocally,inlocallanguage,bySageexperts.EnhancingourglobalnetworkNorthAmericaMajorgeographies:28%We’veinvestedforthefuture…TheSageGroupplc|AnnualReport&Accounts20176NorthernEuropeInSpain,over50%oftaxesarepaidthroughSagesolutions.IntheUK,over50%ofbusinessespaytheiremployeesusingSagesolutions.IntheInternationalregion,56%ofrevenueisonsubscription.Cen�ralandSou�hernEuropecon�ribu�es�helarges�por�ionofrevenue,wi�hhighmarke�shareandahis�oryofcus�omerloyal�y,allowingus�omain�ainourins�alledbasewhils�winningnewcus�omers.FoundedinNewcas�le,Nor�hernEuropeisourhomemarke�,–Francewhereweare�hemarke�leader–Spaininscale-upanden�erprisedue�o–Germanys�rongbrandawarenessandloyalcus�omers.–UKandIrelandofrevenueofrevenueIn�erna�ionalisourfas�es�growingregion,drivinggrow�h�hroughnewcus�omeracquisi�ionandwi�hoverhalfofrevenuenowonsubscrip�ion.–Sou�hAfrica–Brazil–Aus�raliaThereremainsasignifican�amoun�ofrevenueofvalue�ounlockinourexis�inggeographiesandinFY18wewillcon�inue�ofocuson�hese23coun�ries,offeringmore�oourexis�ingcus�omersandatrac�ingnewcus�omerswi�h�heSageBusinessCloud.Majorgeographies:22%CentralandSouthernEuropeMajorgeographies:34%InternationalMajorgeographies:16%Accelerationstartshere.StrategicreportGovernanceFinancials�a�emen�s7TheSageGroupplc|AnnualRepor�&Accoun�s2017Our deep knowledge of local regulations sets us apart from our competition. It also ensures our customers remain 100% compliant, 100% of the time across all 23 countries.But we know that customer experience is as important as compliance and we have continued to develop our multi-channel approach so customers have the choice in how they communicate with us. Customers can choose to pick up the phone or chat online to our maintenance and support workers, or even to self-serve through Sage City, our online forum.We have also moved to a universal operating model, ensuring that our service remains personal but is standardised to guarantee consistent levels of quality, no matt er the geography. These developments are reﬂ ected in our improving Net Promoter Score ("NPS"), an indicator of customer advocacy, which reached a three-year high in the ﬁ nal quarter of the year, with the score of +25 a 22-point increase on three years ago.Supporting customers along the wayWe’ve invested for the future…Q12015Q22015Q32015Q42015Q12016Q22016Net Promoter ScoresRolling 12 months8The Sage Group plc | Annual Report & Accounts 2017Q32016Q42016Q12017Q22017Q32017Q42017The Sage Group plc | Annual Report & Accounts 20179Acceleration starts here.Continuing to drive up our NPS is very important to us.To achieve this we will continue to improve our digital contact, providing a bett er quality of service whilst generating a greater bandwidth for the busiest periods of the year. We will also learn from the best-in-class customer success models implemented by our colleagues in Sage People and Sage Intacct, who drive strong renewal rates and NPS.Acceleration starts here.The cloud and acceleration in the marketThe cloud enables Business Builders to access their ﬁ nancial data anywhere, at any time, whilst providing a secure, easy-to-install and user friendly way of running their business.The up-take of cloud-based technology is accelerating fast, in the scale-up segment in particular, with IDC research forecasting double-digit growth in cloud spend in each year up until 2020, at which point over 50% of market spend will be on ﬁ nancial soft ware in the cloud.Our Total Addressable MarketOperating in 23 countries, providing solutions across the Golden Triangle for start-ups through to enterprise, gives us access to a huge total addressable market worth $27 billion across 82 million businesses. A signiﬁ cant number of these businesses are still currently using traditional methods such as spreadsheets or pen and paper.These methods are becoming increasingly redundant as Business Builders place greater importance on automation, ﬂ exibility and data-security. The speed at which technology is increasing in our markets means that in the future all businesses will be soft ware enabled, a huge opportunity for Sage. of scale-up market spend on cloud products53%2020$27bn82macrossbusinessesWe’ve invested for the future…The Sage Group plc | Annual Report & Accounts 201710InnovationFragmentedmarketTechnologycontinuestoevolverapidly,allowingSagetoprovidesolutionsthatcontinuallyofferthecustomermore.Ourmarketsremainincrediblyfragmented.SageBusinessCloudisacompletebusinessmanagementplat�orm,takingusbeyondofferingjustfinancialsofware.SageBusinessCloudsolutionsuseAItoincreaseautomationandprovideintuitivedashboardstooffermoreinsightintoacustomer’sbusiness.Thesolutionsalsoprovidereal-timeaccesstocurrentfinancialdatasocustomerscanlookaheadinsteado�lookingbackwards.Additionalbenefitsarethattheycanbecustomisedandintegratedwithotherappsandareallavailableonsmartphone,tabletordesktop.Weareoneo�themarketleadersineverycountryinwhichweoperatebutcompetitioniscurrentlylocalisedand�ragmented.Webelievetheemergenceo�thecloudprovidesanopportunity�orthemarkettoconsolidateovertime,enablingustogrowourmarketshareandstrengthenourpositioninthemarket.Peggin2016Sagelaunchedtheworld'sfirstaccountancychatbotThecloudhasactedasacatalystforacceleratedgrowthandprovidesauniqueandunprecedentedopportunitytodevelopinnovativeproductsthatwillRevolutioniseBusinesses,meetingthedemandsofallcustomers,inallmarkets.Throughourglobalreach,wecancapitaliseonthesemarketopportunitiesandachieveacceleratedgrowth,ledbySageBusinessCloud,whichwillallowustoWinintheMarketandstrengthenourabilitytoemergeasthetruemarketleader.StrategicreportGovernanceFinancialstatements11TheSageGroupplc|AnnualReport&Accounts2017DonaldBrydonChairmanChairman’sstatementContinuingtodrivevalue“Thepastyearhasbeenanotherstrongyearofprogress,withgreatstridesmadeinstrengtheningSage’scommitmenttowinninginthemarketanditsphilosophyofachievingcustomersforlife.”TheSageGroupplc|AnnualReport&Accounts201712With all the change taking place in your Company, the Board has placed great importance on the evolution of the right culture in the Company. During the year we conducted the “Your Voice” survey with encouraging results that the work we have done to develop the right culture is progressing well. The survey was completed by 70% of colleagues, providing us with valuable insight into how the business is viewed though the lens of our colleagues.Members of the Board took the opportunity to meet with Sage partners and customers at Sage Summit, as we have enjoyed doing in prior years. This year there were no fewer than eight Sage Summit conferences held around the world with over 29,000 registered att endees, providing an unrivalled channel to support and champion the cause of our Business Builder entrepreneurs and partners. Board members also visited various parts of the Company during the year and also supported Sage Foundation by spending a strategy day with one of the recipients of Sage Foundation’s help.Ruth Markland and Inna Kuznetsova retired at the AGM in February, the former having served as both Senior Independent Director and Chair of the Remuneration Committ ee. I would like to thank them both for their contribution. We were joined by Soni Jiandani in February 2017 and Cath Keers in July 2017 as new Non-executive Directors. Soni brings with her awealth of knowledge in the technology industry, having worked at Cisco for 22 years, amongst other technology companies. Cath has substantial digital and customer experience gained through high-proﬁ le FTSE companies including Tesco Mobile and O2 and has a deep understanding of leveraging sales and marketing activity to build successful brands. Drummond Hall succeeded Ruth as both Senior Independent Director and Chair of the Remuneration Committ ee.We also created a new position of Board Associate and appointed Amy Lawson from the communication team to ﬁ ll this role. The role is reserved for an employee and Amy has begun att ending all Board meetings and participating in the discussion and debate. We believe this development will help further strengthen the bonds with our employees and provide new insights to the Board.Donald BrydonChairmanIn the world of technology change is the only constant. Change has been continuously evident at Sage also as your Company has continued on its journey of transformation. Very considerable progress has been made in focusing the business and ensuring that it is ﬁ t for purpose in a world that will be dominated by cloud-based solutions. During the past three years there has been signiﬁ cant change within the organisation: soft ware subscription contracts have risen from 450k to 1,234k, G&A as a proportion of organic revenue has reduced from 19.1% to 13.8% and retention rates have increased from 83% to 86%. Chief Executive, Stephen Kelly and his team have delivered on all of this whilst achieving organic revenue growth of 6% and operating margins of 27% throughout the transformation phase, quite an achievement. This matched the public commitments given by management when the transformation was announced.Maintaining margins has been an important discipline to ensure that increased expenditure on research and product development was internally funded through increased productivity. Steve Hare, our CFO, has been relentless in ensuring that we met our commitments.The past year has been another strong year of progress, with great strides made in strengthening Sage’s commitment to winning in the market and its philosophy of achieving customers for life. It also saw the rollout of our cloud accounting solutions, Sage Live, Sage One (Global Accounting Core), X3 and the cloud-enabled Sage 50c and Sage 200c families across our major geographies, and there has been a step change in the discipline and eﬃ ciency of the go-to-market functions under the leadership of our President, Blair Crump.Sage also completed the acquisitions of Intacct (now Sage Intacct), Fairsail (now Sage People) and Compass. With the current acceleration of the cloud market, it is essential to invest for growth. These acquisitions, combined with the organic progress made with our new customer acquisition strategy, provide some very compelling evidence that Sage can build on what it has achieved to date to continue to win new customers at scale and show accelerating momentum into next year and beyond, whilst maintaining and even enhancing margins over time.Your Company remains highly cash-generative and the Board was careful to balance the need to grow with investors’ desire for dividends. Striking the appropriate balance allowed an increase of 9% in the dividend to 15.42p, as announced on 22 November 2017.I would like to thank Stephen Kelly and his team for another year of strong progress and I look forward to the next phase of Sage’s evolution as we start to see the beneﬁ ts of the work carried out during transformation, with accelerating growth and strong margins that will beneﬁ t customers, colleagues, partners and shareholders.More information on the Board Associate on page 6813The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsVolume driversDrivenby One SageOne company, working together with pace and agilityOur business modelOur business model is the means by which we can deliver on our strategic objectives.Creating valueBuilding on our resourcesGrowing revenueInputs – Creating valuePeopleA tone from the top approach by an experienced management team, combined with a talent acquisition programme, provide an exceptionally skilled and engaged workforce.Trusted adviserWe know our customers and our customers know Sage.InnovationIn a continuously changing landscape we use the latest technology to bring forward-thinking products to the market.Local knowledgeOur deep knowledge of the regulatory landscapes in which we operate ensures our customers remain compliant and enables us to plan for new legislation on the horizon.Routes to marketOur multi-channel approach consisting of direct sales channels, business partners and accountants helps us grow in our markets.Customer Serviceproviding exceptional experiencesCross-sellincreasing the average number of products per userMigrationallowing customers to move seamlessly to the next Sage solution as their business needs evolveUp-selloﬀ ering customers the latest features and functionalityRe-activationre-engaging with oﬀ -plan customers who no longer have a recurring contractNew Customer Acquisitionatt racting new customers to Sage Value driversThe Sage Group plc | Annual Report & Accounts 201714Financial Disciplineensuring diligence with our capital allocationOperating Leverageincreasing proﬁ ts as we scaleCostSavingscreating eﬃ ciencies, minimising unnecessary expenditureDriving operating proﬁ tCreating value and delivering to our stakeholdersOutcomesCustomers: –NPS at a three-year high of +25 –The introduction of Sage Business CloudColleagues: –70% of colleagues completed the “Your Voice” survey within the ﬁ rst nine days –At least three days’ applicable training completed by every employeeCommunities: –23,000 voluntary days given back to the community –A combined corporation tax and national insurance charge of £191m for FY17 –£1.8m in grants awarded in FY17 Shareholder: –Higher quality recurring revenue –Superior operating margin –Strong free cash ﬂ ow –Progressive dividendMore information about our strategy on p20-31More information about the value we create for our stakeholders on p40-47The right strategy for our marketsCustomers for lifeWinning in the marketOne SageCapacity for growthRevolutionise business15The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsStephenKellySteveHareChiefExecutiveOfficerChiefFinancialOfficer@SKellyCEO@SHareCFOInvestedinthefutureInconversationwiththeChiefExecutiveandChiefFinancialOfficerTheSageGroupplc|AnnualReport&Accounts201716invest for growth. This has allowed us to reduce the G&A expense as a proportion of revenue from over 17% in FY16 to under 14% this year, down from 19% three years ago.We’ve also committ ed that this will be the last year of transformational non-recurring (exceptional) costs. We will continue to identify cost savings but this ﬁ nancial discipline is now business as usual.SK: The work that we have carried out throughout the transformation is already starting to show signs of progress, especially in our mid-size regions that have been more agile in adapting to change, with four out of our eight regions showing double-digit growth in FY17, clear signs that the strategy is working.What should we look forward to in FY18?SK: FY18 is the year of Sage Business Cloud, which we launched in October 2017, providing customers with the one and only cloud business management platform they will ever need from start-up to enterprise. Sage Business Cloud oﬀ ers our customers a powerful set of cloud services, perfectly aligned to their requirements, unifying the Golden Triangle of Accounting, People & Payroll and Payments & Banking. Supporting core solutions, we are developing a thriving ecosystem with market place applications from ISV partners powered by a Sage developer platform for APIs and innovative platform services including AI and the Pegg bot framework. There is no other consistent global competitor who oﬀ ers this breadth of cloud solutions across our market segments and the Golden Triangle. It also accelerates the shift away from high-cost, hard to implement, monolithic ERP systems and positions Sage Business Cloud as compelling for new and existing customers, allowing them to join the platform and grow at any stage of their business journey.SH: For me FY18 means we are starting on the path towards double digit revenue growth and superior operating margins. Our organic growth aspirations through Sage Business Cloud, combined with the acquisitions we have made, mean that we can start to target a more ambitious growth rate in FY18, with plans to reach 10% revenue growth in the mid-term. We are also sett ing ourselves the goal to trend our operating margins upwards in the mid-term. To do this we will continue to target cost savings and instil ﬁ nancial discipline within Sage. When the time is right we can stop over-investing in our go-to-market functions and these factors, combined with operating leverage, will allow our margins to rise.SK: Free cash ﬂ ow remains a key priority too. We are one of the only FTSE 100 companies that have increased their dividend every year since 1999 and we will continue to do that but we will also be mindful of how we deploy our capital. Steve and I spend a lot of time thinking about how we employ capital to drive the best What have been your highlights both in FY17 and throughout the transformation?SK: Well the ﬁ rst thing to say is we’ve achieved 6.6% organic revenue growth and a 28.0% organic operating margin in FY17. In fact, we’ve consistently exceeded 6% revenue growth and 27% margins for the past three years whilst carrying out a signiﬁ cant transformation programme.In terms of our Customer for Life strategy, the continued shift to a subscription model has been a highlight in the year. 78% of our revenue is now recurring and soft ware subscription revenue now represents 37% of total revenue, a striking improvement from 22% three years ago.In FY17 the focus has been on moving our existing customers to the cloud-enabled versions of Sage 50 and Sage 200, which are protecting and enhancing the value in our installed base. These solutions provide the ﬂ exibility of the cloud, combined with the functionality of desktop.The results here have been very encouraging, with cloud-enabled revenue rising by 140% in the year to £133m, with over 170,000 customers now on a cloud-enabled solution.And this commitment to the installed base has also resulted in an 22 point increase in NPS from three years ago to 25 as at Q4 17, our highest rate throughout the transformation. We talk about customer obsession in the corridors of Sage and we are committ ed to building on this NPS trend.FY17 has also been the year of the cloud for Sage. From virtually no cloud presence in FY14 we’ve now launched a comprehensive suite of cloud-ﬁ rst solutions in our major geographies. So we now have Sage One in 14 countries, Sage Live – which we developed internally in 26 weeks and has won multiple awards – is now in nine countries and Sage X3 cloud-ﬁ rst is now in 14 countries.SH: Yes, and importantly these solutions are all growing signiﬁ cantly faster than the market rate and are starting to become a signiﬁ cant revenue stream. FY17 cloud ARR, including cloud enabled solutions and Sage Intacct and Sage People, was £300m and is growing at over 80%.For me the cost transformation has also been a real achievement. We achieved £59m of annualised savings in FY17, which means over £100m of annualised savings achieved over the past two years, which we continue to 17The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsrenewals by value of 100%. And Compass has increased user numbers by 65% since acquisition.Sage has transformed into a cloud-ﬁ rst company. How are you driving success in the cloud and which areas are you focusing on?SH: Throughout FY17 we have really focused on improving functionality, user-experience and overall ecosystem in the cloud. This has resulted in driving our cloud-ﬁ rst solutions higher within their market segments and increasing revenue per contract. For instance, returns. So when we look at an acquisition, ﬁ nancial discipline and strategic ﬁ t of the acquisition are very important considerations. In FY17 we have invested a signiﬁ cant amount of cash on acquisitions but we have retained strong year-end Group return on capital employed of 27% and net debt: EBITDA leverage at 1.6x, well within our guided range of 1-2x. So I think shareholders can expect to see a continuation of that discipline and an increasing acceleration of the performance of the Company.Speaking of acquisitions, there were some signiﬁ cant purchases made in FY17. Can you tell us a bit more about them and their progress since joining Sage?SK: Yes, I’m really excited about the three acquisitions which we announced in FY17. The largest was the acquisition of Intacct, now Sage Intacct, which has been named the Gartner Visionary for Cloud Financial Management Suites in North America. We also announced the acquisition of Fairsail, which we have rebranded as Sage People, the cloud HCM solution, and Compass, the benchmarking and collective intelligence platform.Each of these acquisitions was carefully selected for its ability to accelerate our success in the cloud and to reinforce our Golden Triangle. Thanks to these acquisitions and the signiﬁ cant focus internally, we now have a comprehensive suite of cloud solutions across our Golden Triangle to take a customer from start-up all the way to enterprise in our major geographies.SH: These were three diﬀ erent acquisitions but they do have some similarities, with the best example being that in all cases we have acquired fantastic teams led by ﬁ rst-class leadership. The acquisitions weren’t about Sage acquiring businesses and imposing an inﬂ exible way of working on them, it’s about us learning from each other to accelerate Sage’s strategy. The teams in our acquired businesses have built market-leading, cloud-ﬁ rst subscription models and we are delighted to welcome them to the Sage family.It’s very encouraging that all three businesses have grown more strongly under our ownership. Sage Intacct has surpassed ARR of $100m for the ﬁ rst time ever and continues to grow at over 30%. Sage People had a record Q4 with the highest ever contract signed, the highest ever average contract value (ACV) and “ The acquisitions weren’t about Sage acquiring businesses and imposing an inﬂ exible way of working on them, it’s about us learning from each other to accelerate Sage’s strategy”.In conversation with the Chief Executive and Chief Financial Oﬃ cer continuedduring the year we signed over 50 Sage X3 contracts over £100,000 resulting in Sage X3 revenue growing at over 20% in FY17. Sage Live average ACV has shown a four-fold increase in the year and Sage One average ACV has risen by 34% on the prior year as we focus on customers more suited to these functionally-rich solutions.SK: Yes, we are the clear market leader in scale-up to lower enterprise and these market segments continue to drive most of our revenue, providing the sweet-spot of strong proﬁ tability and fragmented competition. The acquisition of Intacct signiﬁ cantly enhances this position as we now have a market-leading, The Sage Group plc | Annual Report & Accounts 201718SK: We’ve seen some successful marketing campaigns too this year thanks to a laser-guided focus on areas that will drive a signiﬁ cant conversion. Our targeted campaign in September 2017, featuring our updated brand in San Francisco and Chicago, resulted in a 41% rise in brand search queries and a rise of over 2,000% in web sessions.There have been many achievements under your leadership at Sage, what would you say is your proudest so far?SK: Throughout a transformation, instilling a positive culture is incredibly important. Sage Foundation has been an integral part of this and I’m really proud of what we have achieved so far. We oﬀ er each of our colleagues up to ﬁ ve paid days a year to volunteer, in which they can do something personal and important to them. I think it’s fantastic that actually, in what is a relatively short period of time over three years, in FY17 we had an average of two Foundation days per colleague.SH: I completely agree. To add to that we have a system where we look to our colleagues to make recommendations in causes they would like us to support. In FY17 alone we have awarded nearly two million pounds of grants which is a huge achievement. I think in this day and age everybody wants to see businesses cloud-ﬁ rst solution in this space to win in the US, which represents over 50% of our total addressable market.The start-up market also remains an important part of the strategy. With Sage One, as well as improving functionality, we are continuing to focus on building our accountant network and launching Sage One through our new e-commerce website.Tell us about your current go-to-market strategy, have there been any signiﬁ cant changes this year?SK: I’m pleased to say things are progressing well under the stewardship of our President, Blair Crump. Regional leaders now report into Blair and ﬁ ve out eight of these top leaders have changed in the past 18 months, assembling a highly competent and eﬀ ective team. Blair is cutt ing through the complexity so our sales teams can focus on winning. There is still more to do here but we are making good progress.SH: We’ve also made good progress with our partners and accountants this year, expanding our network, enhancing our referral programme and using this channel to advise on our product roadmap and strategy. The green shoots of this work are starting to show with partner revenue growing by 9% in the year and an increase in cloud partners by 125%.Stephen KellyChief Executive Oﬃ cer@SKellyCEOSteve HareChief Financial Oﬃ cer@SHareCFOdoing the right thing and contributing to their communities and it’s been a great way to att ract and retain the best talent.SK: We can’t talk about Sage Foundation without mentioning our partnership with the Invictus Games, which was a real highlight of FY17 and an immensely humbling experience. I was privileged to meet some inspirational people who told some truly amazing and moving stories. When you bring that back into the workplace, some of the things you grapple with on a day to day basis don’t seem quite so big when you compare them to the journeys that these people have been through. Progress through the transformation:General & Administration (“G&A”) expense as a % of organic revenue13.8%Soft ware subscription revenue as a % of organic revenue37%FY15FY16FY1713.8%19.1%FY14FY15FY16FY17FY1422%37%Cloud Annual Recurring Revenue (£m)*£300mNet Promoter Score**25FY15FY16FY17FY143002FY15FY16Q417Q115253* Annual recurring revenue (“ARR”) is the value of all components of recurring revenue, annualised for the ensuing year. Cloud ARR includes the contributions of Sage People and Sage Intacct in addition to Sage One, Sage Live, the cloud version of Sage X3 and the cloud-enabled versions of the Sage 50 and Sage 200 families.** NPS is measured by external company, Medallia, following the industry prescribed process. This is the ﬁ rst year that we have disclosed NPS and quarterly ﬂ uctuations may be expected.19The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsDelivering our strategyIntacct – acquisitionIn August 2017 we acquired Intacct, the leading provider of cloud ﬁ nancial management solutions, based in San Jose, California, with thousands of customers in North America. Intacct’s cloud–based solution (to be known as Sage Intacct) is suitable for the upper scale-up to lower enterprise market and ﬁ ts well between our Sage Live and X3 products, with very litt le overlap. Sage Intacct is hugely popular in the North American market, growing at over 30%, well in excess of the market rate. The acquisition will provide us with the platform to build a market-leading position for cloud ﬁ nancial management solutions in North America, which represents over 50% of our total addressable market. FY18 public spend on cloud ﬁ nancial soft ware in the scale-up market is expected to grow by $400m, more than the entire cloud market of the next biggest geography. Whilst the solution is currently only available in North America, in the medium term we have plans to deploy Sage Intacct across our other major English-speaking geographies, once we have integrated and established the business within Sage in North America.Fairsail – acquisitionHaving previously held a minority interest, we obtained full control of Fairsail (rebranded as Sage People) in March 2017. Sage People is a pure-cloud HCM system which keeps our Business Builders legal and compliant, whilst providing a single touchpoint for talent management, colleague recognition, career development and payroll services.Sage People enhances our People and Payroll oﬀ ering and reinforces our commitment to the Golden Triangle and the cloud. The solution is complementary with accounting products such as X3, providing cross-sell opportunities to the existing customer base, as well as growth opportunities through new customer acquisition internationally. Compass – acquisitionWe acquired Compass in March 2017, an innovative collective intelligence and e-commerce benchmarking platform. Compass can be integrated into our suite of ﬁ nancial solutions and enables customers to benchmark their own metrics in the context of their peers; another great example of our commitment to revolutionising business.North American Payments – disposalIn FY17 we conducted a review of our payments strategy, concluding that we would leverage existing payments assets that are complementary to our core business model and growth aspirations and exit those areas where the strategic ﬁ t is less strong. The North American Payments business was in an industry where it is considered that partners would be able to provide a bett er service to our customers than providing the service internally. We therefore disposed of this business, and have since signed partnerships with best-in-class payments providers who will be able to oﬀ er market-leading payments solutions in North America and globally, increasing automation and speeding up the movement of money. Our strategyA year of strategic acquisitions and disposals.This year’s M&A activity has seen Sage strengthen the Golden Triangle by acquiring technology that will complement our existing suite of products seamlessly, whilst reinforcing our commitment to the cloud. The integration of collective intelligence modules within our existing products will fortify our customers for life, whilst being able to oﬀ er a complete suite of cloud solutions maximises our potential to win new customers at scale in the market.“We were att racted to Sage because it is the global category leader in the scale-up market segment. Working together, Sage and Intacct have a fantastic opportunity to grow this market position by winning in the US and worldwide cloud markets.”Rob ReidCEO IntacctThe Sage Group plc | Annual Report & Accounts 201720siutnoimiefrosfboersluifrneteCanoeynnSaheOtgettsmrugainlpivnkehtWeracgowiiosCsRPutingourcus�omersa��hehear�ofevery�hingwedo�oprovideexcep�ionalexperiences.Ourpeopleandourcul�ure,Ou�pacingmarke�grow�h�oworkingcollabora�ivelywi�hgainmarke�shareandrealisepaceandagili�y�opu�ourourambi�ion�obe�hecus�omersfirs�.marke�leader.Buildingasingle,uni�edopera�ingUsing�hela�es��echnologywi�hinourmodel,increasingefficienciesandecosys�em�omakeourcus�omers’synergy�odrivesuperiorliveseasier,so�heycanfocusonquali�ymargins.doingwha��heylove.Seepage23Seepage31Seepage25Seepage29Seepage27WepresentedourstrategyatourJune2015CapitalMarketsDay,basedaroundfivestrategicpillars.Thesepillarsremainimportanttodayandcontinuetoevolvewiththebusiness.efiroshaefegmoeninentSsmrtnoirslaisfrniuagiotbguryotciwOektunleCinaehopstvseCWR21TheSageGroupplc|AnnualReport&Accounts2017Ourstrategy“Today,Ineedhelpwithmorethanjustmanaginginvoicesandtrackingexpenses,Ialsoneedreportsandcashflowforecaststhatenablemetoplanaheadandcontinuebringingnew,innovativeproductstothemarket.Sagegivesmethat.”DeniseZannuOwnerofBlackMermaid’sBath&BodyDenisehelpspeopletofeelcomfortableintheirownskin.Asherbusinessmovesfromstart-uptoscale-up,SagehashelpedBlackMermaid’sBath&Bodynotonlysurvive,butthrive.www.sage.com/investorsTheSageGroupplc|AnnualReport&Accounts201722Customers for lifeWinning in the marketOne SageCapacity for growthRevolutionise businessHelping our customers be more successful through a deeper, enduring relationship with Sage. This involves providing choice, indispensable advice and the right product for the customer – however they want to deploy their solution.We’ve invested for the future…Throughout the transformation we have focused on the transition of customers from a licence model to subscription, allowing the mutual beneﬁ ts of improved features and functionality for the customer, whilst driving higher value contracts and increasing our retention rates. We do not force migration and pride ourselves on being able to give our customers products and contracts that best suit their needs. Any migrations are hassle-free and are delivered with exceptional customer service. Demonstration that our strategy is workingSoft ware subscription revenue as a proportion of total revenue has increased year-on-year and is now 37%, up from 22% in FY14. We have managed this transition whilst increasing our renewal rates and NPS. Signiﬁ cant momentum has also been achieved with our cloud-enabled solutions with revenue increasing by 140% to £133m, whilst the number of cloud-enabled contracts have increased by 87% to 172,000.…acceleration starts here.A pathway to the cloud for our on-premise customers. At Sage we want to make it easy for our customers to take advantage of the beneﬁ ts of the cloud, but we recognise that they want to upgrade their solutions at their own pace. That’s why at Sage, our existing customers can upgrade to the cloud-enabled version of their existing solution, giving the ﬂ exibility and mobility of the cloud, whilst keeping the functionality and familiarity of the solutions they know and love.And when our customers are ready for a native-cloud solution, we have Sage Business Cloud that will deliver the full beneﬁ ts and advantages that the cloud has to oﬀ er. New and existing customers can access Sage Business Cloud at any stage of their business journey, adding solutions from Money to People as their business continues to grow and evolve. Start-up or enterprise, manufacturing or services company, Sage oﬀ ers a rich and powerful set of cloud solutions from easy to use cloud accounting, to industry-speciﬁ c business management soft ware to support unique business requirements.140%increase in cloud-enabled revenue in FY1787%increase in cloud-enabled contracts in FY17Customer for life…KPIs –Renewal ratePrincipal risks –Licensing model transition –Market intelligence More information about our KPIs on p32-33More information about our Risks on p52-6123The Sage Group plc | Annual Report & Accounts 2017Ourstrategy“ThankstoSage,whenweaddedawarehouseinBerlin,wewereabletomovetothecloud,keepteamworkanddatainoneplaceandeasilymanageeverythingfromourheadofficeinMadrid.”LuisOngilCEOandCo-founderofPercentilPercentilkeepsalready-madeclothingfromendingupinlandfillsandsavesoverahundredthousandlitresofwaterperday.Asoneofourcloudcustomers,thePercentilbusinesscanbemanagedfromanylocationintheworld.www.sage.com/investorsTheSageGroupplc|AnnualReport&Accounts201724Customers for lifeWinning in the marketOne SageCapacity for growthRevolutionise businessOutpacing the competition to gain market share and achieve our ambition to be the leader in our chosen markets. Providing the very best cloud technology will unlock huge opportunities for growth.We’ve invested for the future…Throughout the transformation, signiﬁ cant work has been done to prime the organisation to win new customers at scale. We’ve launched a suite of award-winning cloud accounting solutions across our major geographies to provide the latest technology and functionality to win in the market. We continue to drive discipline and eﬃ ciency through our sales and marketing functions to unlock our potential to grow in the cloud.FY17 has seen the launch of a new web and mobile experience on sage.com, which delivers an end-to-end experience for prospects, customers and partners to access any product, service or information from Sage. Visitors now have a seamless experience across all their devices, as they engage with blogs, communities and marketplaces through our site, geo-targeted to their location.Demonstration that our strategy is workingWe are starting to see clear evidence of new customer acquisition at scale: aided by 52 country launches of cloud products in FY17, we now have nearly 600,000 cloud contracts and the net new recurring contract number has increased by 32% since FY14.Sage Business Cloud comprises revenue from the cloud and cloud-enabled elements of Sage One, Sage Live, Sage X3, Sage Intacct, Sage People and the Sage 50C and Sage 200C families. FY17 cloud ARR was £300m, growing at 83% in FY17.52Country launches of cloud products in FY17£300mCloud annualised recurring revenue…acceleration starts here.Cloud business management solutions are set to dominate the market for years to come. IDC predicts that by 2020, nearly 50% of consumer soft ware spend in our major geographies will be on cloud-based solutions and cloud adoption growth rates are accelerating fast.In FY17 the US spend on cloud ﬁ nancial soft ware exceeded $11bn and this pace is set to continue. Sage is strategically positioned to take full advantage of this transition to accelerate growth and deliver the best overall customer solutions and experiences.To capitalise on this market shift , Sage has launched Sage Business Cloud in FY18, the one and only business management platform a customer will need throughout their business journey. Designed to support companies of all sizes across a range of verticals, Sage Business Cloud is a platform comprised of cloud products including Accounting, Financials, Enterprise, People, Payroll, Payments and Banking, as well as marketplace apps that can be provisioned to match the exact needs of any business. Sage Business Cloud products are supported by the very latest technology, such as AI and Machine Learning, to help our customers cut the burden of administration and improve productivity.Winning in the market…KPIs –Adoption of Sage One –Adoption of Sage X3More information about our KPIs on p32-33Principal risks –Market intelligence –Competitive positioning and product development More information about our Risks on p52-6125The Sage Group plc | Annual Report & Accounts 2017Ourstrategy“WechoseSagebecausethecompletebusinessmanagementsolutionisper�ect�orourphilosophy.Ilovethatonesystemcanaccount�orallpartso�thecompany.I�youtakeastrollaroundthebuildingyouwillfindSagesofwareineveryroom.”MaxGülcherHeadofFinance&ITa�DreesLichtechnikSagefulfilsDrees’songoingneedformaximumvisibilityintheirincreasinglycomplexoperations.Withtheabilitytoeasilymanagesomanypartsofthebusiness,Drees,likeSage,continuestochargedownapathofinnovationasthebusinessgrows.www.sage.com/investorsTheSageGroupplc|AnnualReport&Accounts201726Customers for lifeWinning in the marketOne SageCapacity for growthRevolutionise business…acceleration starts here.Our commitment to revolutionising how start-ups launch their business is underpinned by our payments and banking partnerships. Every partnership signed is designed to make life easier for these Business Builders:Gett ing started straight away: Our partnership with Stripe means an entrepreneur can set up and receive card payments instantly, with easy reconciliation.Sett ing up direct debits: Our partnership with Go Cardless enables direct debits to be set up in minutes, ensuring that our Business Builders get paid on time, every time. This automated payment service reduces admin and is seamlessly integrated into our accounting solutions, enhancing eﬃ ciencies and reducing the risk of error.Raising ﬁ nance faster: Our partnership with Liberis means our customers can gain ﬁ nance for their business quickly, accessing higher acceptance rates and a more eﬃ cient way to get access to working capital, taking care of the cash ﬂ ow concern that most start-up businesses face.Gett ing paid earlier: Embedding pay now butt ons into our customers’ sales invoices encourages faster cash receipts from their customers, improving their cash ﬂ ow. Direct bank feeds: Our partnerships with major global banks mean bank statement data can be imported to Sage soft ware instantly via live direct bank feeds.Innovation and exciting technology are at the heart of Sage’s strategy. We deliver the latest solutions supported by our ecosystem of partners and third party applications to our nations of Business Builders, giving them the technology they deserve so they can focus on doing what they love.We’ve invested for the future…Our products have matched changes in technological advancements stride for stride, not only in terms of the cloud, but also in understanding the role that automation and AI will play in making accounting invisible. Sage One now uses AI to automatically perform bank reconciliations. We also developed the world’s ﬁ rst accounting chatbot which has thousands of users across all Sage platforms. Currently embedded within Sage One in the UK&I, US, Canada, Spain and Brazil, supporting three diﬀ erent languages, Pegg provides a virtual personal assistant to perform administration tasks through chat, voice and camera. Our M&A activity has reinforced our commitment to being market leaders in providing the most innovative and forward thinking products. The acquisition of Compass now allows users to benchmark their own performance against their competition, whilst Intacct has been classiﬁ ed as a visionary in the renowned Gartner magic quadrant.Demonstration that our strategy is workingPegg has recently been integrated to provide customer service support for Sage 50 Payroll customers and can answer over 500 of the most frequently asked questions, reducing the time consumers spend waiting for a response from help desks, allowing them to improve their productivity.Revolutionise business…KPIs –Annualised Soft ware Subscription Base (‘’ASB’’)More information about our KPIs on p32-33Principal risks –Partners and alliances –Third party reliance More information about our Risks on p52-61500questions that Pegg is trained to answer500ISV partners in our ecosystem27The Sage Group plc | Annual Report & Accounts 2017Ourstrategy“Sagehelpedusbuildafoundationforgrowthbymakingiteasyforustomanageinventoryplanning,monthlyreporting,complianceandmore.”Cocofinasells32productsin28countries.Withsomuchrapidgrowth,Jacobneededastrongfinancialpartnertohelpmaintainasolidfoundationforthefuture.www.sage.com/investorsJacobThundillFounderandDirectorofCocofinaTheSageGroupplc|AnnualReport&Accounts201728Customers for lifeWinning in the marketOne SageCapacity for growthRevolutionise business…acceleration starts here.Beyond the transformation we will continue to strive for eﬃ ciencies and cost savings across all our functions; this will be achieved through a combination of people and process, with a tone from the top culture created amongst our colleagues who see ﬁ nancial discipline as business as usual. Where appropriate, cost savings will be reinvested into those areas that will deliver growth, either organically through speciﬁ c products, regions and functions or through targeted bolt-on M&A of high growth technology assets. We are committ ed to maintaining and enhancing margins beyond the transformation. Financial discipline and eﬃ cient capital allocation are integral to Sage’s strategy to ensure ongoing cost savings generate superior operating margins as the business scales.We’ve invested for the future…Throughout the transformation there has been a huge drive for cost savings. Functions such as Marketing, Product Delivery and Technology have been centralised, we have halved the number of properties we occupy whilst investing in existing sites and we have hired top talent to drive forward growth and eﬃ ciencies. This has resulted in reducing the general & administration ("G&A") spend as a proportion of revenue ("G&A expense ratio") from 19% to 14%. We continue to identify cost savings across all business functions, to reinvest into go-to-market functions to drive growth.Whilst reducing our operating expenditure we have continued to invest in capital expenditure. Of the savings made from property consolidation, £32 million was reinvested in FY17 in 11 new locations across nine countries, creating 270,000 square feet of agile, best-in-class work space, delivered for the beneﬁ t of 2,700 colleagues.Any M&A activity is conducted with ﬁ nancial discipline, ensuring any acquisitions generate a strong return on investment. Furthermore, acquisitions of high-growth technology assets are funded through our cost saving initiatives to ensure that we can maintain and even enhance our margins.Demonstration that our strategy is workingThe reduction of unnecessary back oﬃ ce costs has generated over £100 million of cost savings over the transformation period and, as a result, our G&A expense ratio as a percentage of revenue has reduced signiﬁ cantly.Capacity for growth…KPIs –G&A expense ratioPrincipal risks –Competitive positioning and product development –Business model delivery –Supporting control environment More information about our KPIs on p32-33More information about our Risks on p52-61£59mannualised cost savings in FY17360bpsreduction in G&A expense ratio29The Sage Group plc | Annual Report & Accounts 2017Ourstrategy“Itusedtotakedaystoshareticketinginformationbetweentwopeopleinthesameroom.Sagehelpsuscutthroughtheredtape,andhelpsusdobusinessfaster.Thisgivesusmoretimetofocusondoingwhatwelove,bringingthepeopleofBristoltogether.”GavinMarshallCFOofBristolSportBristolSportsharesSage’svalueofinstillingpride,focus,andasenseofunityinitspeople.Aperfectpartnership.www.sage.com/investorsTheSageGroupplc|AnnualReport&Accounts201730Customers for lifeWinning in the marketOne SageCapacity for growthRevolutionise business£1.8mgrants awarded in FY1723,000volunteer days organised by Sage Foundation in FY17…acceleration starts here.We will continue to deploy suﬃ cient resources to ensure the seamless integration of Sage's vision and strategy within any acquisitions we make. The key to our success during the integration phase is to protect the business model of the acquired company, to nurture continued momentum. We do this whilst welcoming colleagues to the Sage family and embedding a positive, aligned culture, as demonstrated through our recent acquisition of Intacct.Welcoming Intacct into the Sage family – here's how we did it: –Sage management invested signiﬁ cant time with Intacct management during the due diligence process to ensure that both cultures, values and strategic vision for Intacct as part of the Sage family were aligned –Sage key management visited Intacct in the days following the acquisition announcement to welcome Sage Intacct colleagues and outline the new vision and strategy –Key management personnel have been retained –Sage Intacct has been strategically positioned within Sage Business Cloud –The day that the acquisition was closed, CRM systems were linked and sales leads began to be shared between North American teams Our people and our culture; working collaboratively with pace and agility, ensuring that we integrate our acquired businesses thoroughly. Operating as a truly uniﬁ ed organisation that provides exceptional experiences for our customers.We’ve invested for the future…Creating a uniﬁ ed culture in a previously decentralised business has been at the forefront of Sage’s strategy during the transformation period. The creation of Sage TV Live – broadcast live to all employees – and All Hands meetings have increased colleague engagement.The Sage Foundation has enabled Sage to give back to the local community, with colleagues being encouraged to take up to ﬁ ve days paid volunteering each year.One Sage also means investing in the development of our colleagues, which continued in FY17 with a strong focus on creating consistent learning experiences across all of our geographies. This included SageLearning, a cloud-based learning management system, intensive standardised training for all sales and service colleagues, and the "Leading at Sage" programme which supports our community of 2,000 managers. Demonstration that our strategy is workingSince its creation in 2015, Sage Foundation has led to over 150,000 hours being dedicated across 36,000 volunteer days by Sage colleagues to community-based projects and local charities.One Sage…KPIs –Sage Foundation days Principal risks –Supporting control environment –Information management and protection (including cyber) –Regulatory and legal framework –Brand More information about our KPIs on p32-33More information about our Risks on p52-6131The Sage Group plc | Annual Report & Accounts 2017Our Key Performance IndicatorsThe measurement of progress in delivering our strategy is essential. Our KPIs are designed speciﬁ cally to align to our ﬁ ve strategic pillars and to focus management conversations on future outcomes and performance improvements. KPIs help us map out speciﬁ cally how we are doing against our strategy.Winning inthe marketRevolutionise businessCustomersfor lifeAnnualised Soft ware Subscription Base (“ASB”)£705mFY16: £535mRenewal rate86%FY16: 86%Adoption of Sage OnePaying subscriptions405,000FY16: 313,000Adoption of Sage X3Revenue growth21%FY16: 19%Description: We use our suite of cloud accounting products to att ract new customers. Our KPI considers the revenue generated from cloud products and includes the number of paying subscriptions at the end of the year for Sage One (all editions) and revenue growth for Sage X3.Performance: Sage One paying subscriptions have continued to increase throughout the year, as the solution has expanded its market reach and is now suitable for businesses with up to 50 employees. The number of X3 customers has increased by 10%, leading to continued revenue growth of 21% for the year.Description: ASB is the leading indicator for how our move to subscription is progressing. Growth is supported by our latest technology updates which are delivered regularly on subscription. ASB is the amount of organic soft ware subscription revenue in the last month of the period multiplied by 12.Performance: Our progressive move to subscription continues to gain momentum with growth in ASB of 32% for the year to £705m.Description: If we are successful in delighting customers with technology and service levels, they will respond when it is time to renew their contracts. Calculated as the number of contracts successfully renewed in the year as a percentage of those due for renewal.Performance: Our renewal rate has been consistently high at over 80% for a number of years, which is testament to the value that customers place on our service.Soft ware subscription drives even closer relationships and the continuation of our transition to subscription has helped to maintain our renewal rate at 86%.Measuring our progress15161786%86%84%151617405,000313,000173,00015161720.8%18.7%10.8%151617£705m£535m£381mThe Sage Group plc | Annual Report & Accounts 201732One SageCapacityfor growthFinancialmeasuresUnderlyingEPS growth3.5%FY16: 9.0%General & administration expense ratio 13.8%FY16: 17.4%UnderlyingCash Conversion95%FY16: 100%Sage Foundation days23,000FY16: 13,000Description: Doing business the right way is important at Sage (see more at page 40). Giving back to the community through Sage Foundation allows our colleagues to volunteer to work with charitable causes and we encourage every colleague to take up to ﬁ ve Sage Foundation days per year.Performance: The success of Sage Foundation in its ﬁ rst year continued to gain traction in its second year, leading to an additional 23,000 voluntary days organised by the Sage Foundation.Description: Underlying cash conversion is underlying cash ﬂ ow from operating activities divided by underlying operating proﬁ t. Underlying cash ﬂ ow from operating activities is statutory cash ﬂ ow from operating activities less net capital expenditure and adjusted for movements on foreign exchange rates and non-recurring cash items.Performance: The business remains cash generative with underlying cash conversion of 95%, down slightly from FY16, reﬂ ecting an increase in capital expenditure as we invest for growth, combined with strong Q4 sales, for which cash was collected in October 2017 and strong X3 performance, which att racts longer payment terms. See how our underlying EPS growth KPI links to remuneration on page 94.Description: Our G&A expense for the period expressed as a percentage of our total revenue for the period.Performance: Throughout our transformation we have been moving towards a single, united operating model. In FY17 we have reduced our G&A cost as a proportion of revenue by 360bps.Description: Underlying basic EPS is deﬁ ned as underlying proﬁ t aft er tax divided by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury shares. Underlying proﬁ t aft er tax is deﬁ ned as proﬁ t att ributable to owners of the parent excluding: –Recurring items including amortisation of acquired intangible assets, acquisition-related items, fair value adjustments, foreign currency movements on intercompany balances and imputed interest –Non-recurring items that management judge to be one-oﬀ or non-operationalAll of these adjustments are net of tax. The impact of foreign exchange is neutralised in prior year ﬁ gures.For a reconciliation of underlying basic EPS to statutory basic EPS, turn to page 140.Performance: Slower underlying EPS growth primarily reﬂ ects the impact of the loss-making acquisitions made during the period, combined with a higher eﬀ ective tax rate. 15161713.8%17.4%19%161723,00013,00019%1516173.5%9.0%12.6%15161795%100%106%33The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsContinuing our strong performanceFinancial and operating reviewRevenueStatutoryOrganicFY17FY16ChangeFY17FY16ChangeNorthern Europe£368m£336m10%£363m£338m7%Central and Southern Europe£580m£491m18%£579m£547m6%North America£492m£405m21%£481m£457m5%International£275m£207m33%£273m£249m10%Group£1,715m£1,439m19%£1,696m£1,591m7%Operating proﬁ tStatutoryOrganicUnderlyingFY17FY16ChangeFY17FY16ChangeFY17FY16ChangeGroup£348m£267m30%£475m£431m10%£496m£471m5%Margin20.3%18.6%1.7%28.0%27.1%0.9%27.0%27.0%(0%)Statutory operating proﬁ t is stated aft er non-recurring costs incurred relating to business transformation and recurring costs relating to amortisation of acquisition-related intangible assets and other M&A activity-related charges.Throughout FY17, Sage has secured annualised savings of £59m (FY16: £51m), used to reinvest in go-to-market functions and to oﬀ set losses in high growth technology acquisitions. An associated non-recurring (exceptional) cost of £73m (FY16: £110m) has been recognised in the year.Group performanceSage achieved organic revenue growth of 6.6% (FY16: 6.7%) and an organic operating proﬁ t margin of 28.0% (FY16: 27.1%). Recurring revenue growth continues to drive revenue, growing at 9.0% in FY17 (FY16: 10.4%), including soft ware subscription growth in FY17 of 30.3% (FY16: 32.1%).T he organic revenue deﬁ nition for FY17 neutralises the impact of foreign currency ﬂ uctuations and excludes the contribution from current and prior period acquisitions, discontinued operations, disposals and assets held for sale. The underlying revenue deﬁ nition neutralises the impact of foreign currency ﬂ uctuations but includes the contribution from current and prior period acquisitions, discontinued operations, disposals and assets held for sale.From FY18 onwards, organic revenue will include acquired businesses from the beginning of the ﬁ nancial year following their date of acquisition. Adjustments will be made to the comparative period to present acquired businesses as if these had been part of the Group throughout the period. Acquisitions and disposals which occurred close to the start of the opening comparative period where the contribution impact would be immaterial will not be adjusted. A reconciliation of operating proﬁ t to statutory operating proﬁ t is shown on page 38.Statutory performance has been impacted by favourable movements in key exchange rates during the year. Statutory ﬁ gures are based on continuing operations and include the impacts of acquisitions and disposals.The Sage Group plc | Annual Report & Accounts 201734Revenue mixSegmental reportingRecurring revenueProcessing revenueSSRS revenueOrganicFY17FY16ChangeFY17FY16ChangeFY17FY16ChangeNorthern Europe£287m£262m9%£37m£35m4%£39m£41m(4%)Central & Southern Europe£449m£424m6% –£2m(100%)£130m£121m7%Total Europe£736m£686m7%£37m£37m0%£169m£162m4%North America£378m£347m9%£32m£31m2%£71m£79m(11%)International£200m£174m15%£14m£13m7%£59m£62m(5%)Group£1,314m£1,207m9%£83m£81m2%£299m£303m(1%)% of total organic revenue78%76%5%5%17%19%Recurring revenueSage delivered recurring revenue growth of 9% (FY16: 10%), driven by the year-on-year increase in subscription revenue of 30% (FY16: 32%), in line with the transition to a subscription model. The slight slow down of recurring revenue is due to performance in France: excluding this region, recurring revenue grew at 11% for the year. Contract renewal rates remain stable at 86% (FY16: 86%) and recurring revenue now represents 78% of organic revenue (FY16: 76%).Processing revenueProcessing revenue has grown by 2% (FY16: 22%), reﬂ ecting growth in Northern Europe, North America and International. SSRS revenueSSRS revenue declined by 1% (FY16: decline of 8%) in line with the continued transition to subscription revenue, balanced by strong growth in Sage X3 and an increase in professional services and training revenue. Performance – European regionsOrganic Revenue GrowthFY17FY16Northern Europe+7%+7%Central Europe+12%+4%France+1%+6%Iberia+10%+7%Central & Southern Europe+6%+6%Total Europe+6%+6%Revenue in the European regions grew by 6% overall in FY17 (FY16: 6%). Within Europe, all major geographies excluding France have grown in excess of the organic Group growth rate of 7% with double digit growth in Iberia (Spain and Portugal) and Central Europe (Germany, Switzerland, Poland).Recurring revenue in Europe grew by 7% (10% excluding France), of which soft ware subscription revenue grew by 19% (FY16: 27%). Soft ware subscription revenue now represents 37% of total revenue in Europe (FY16: 33%).Processing revenue was ﬂ at in Europe (FY16: 12%) reﬂ ecting growth in Sage Pay in the UK & Ireland, oﬀ set by slowing growth elsewhere.SSRS revenue grew by 4% (FY16: decline of 8%) reﬂ ecting growth of Sage X3 and professional services, oﬀ set by the planned decline in licences. Northern EuropeUK & Ireland – continuing momentum through C4L UK & Ireland revenue grew by 7% (FY16: 7%) in the year, with recurring revenue growth of 9% underpinned by soft ware subscription growth of 25%. The main growth driver in FY17 was the 17% growth in Sage 50 Accounts, which remains a popular solution in the UK and Ireland, underpinned by growth of 86% in Sage 50c, the cloud enabled solution.The Sage 200 franchise also performed well in the UK and Ireland, growing at 14%, as Sage continues to grow its position in the scale-up market. Sage X3 revenue grew by 48% in the year in the UK and Ireland as the region continues to increase contract size, targeting bigger customers through the direct sales team. There were seven Sage X3 transactions signed over £100k in the year in the UK and Ireland. Sage One revenue grew by 53% in the UK and Ireland driven by a 32% increase in ACV and increasing subscription numbers as the region continues to att ract higher paying customers. Processing growth of 4% was driven by Sage Pay as e-commerce continues to be popular in the UK and Ireland.The focus for FY18 in the UK and Ireland is on the continued migration to subscription through cloud enabled solutions as well as driving growth in ACV and subscription numbers in Sage One and Sage Live. 35The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsFinancial and operating review continuedCentral and Southern EuropeFrance – challenges with up-front fees and partners France revenue growth of 1% (FY16: 6%) was below the Group’s ambitions for the country, largely due to a ﬁ rst year premium charged in prior years as customers were migrated to subscription. This is now being phased out but is expected to impact revenue growth in H1 18 with an improvement in performance expected in H2 18. There were also challenges in driving recurring revenue in the partner channel as signiﬁ cant upgrades had already been implemented in FY16 under the i7 migration.Conversely, SSRS grew by 1%, driven by strong Sage X3 growth of 22% in the year with 18 contracts for over £100k signed in the year. Focus in France for FY18 is on re-energising the partner channel and focusing on driving growth through Sage Business Cloud and the updated e-commerce website. Sage has also announced the appointment of new leadership in the country. Iberia – revenue acceleration in the year Strong revenue growth of 10% (FY16: 7%) was driven by growth in both recurring and SSRS revenue. The two largest solutions, Sage 200 (locally known as Murano) and Sage 50 (locally known as Contaplus), grew by 17% and 9% respectively, driven by cloud enabled launches in the year.SSRS revenue growth has been driven, in part, by early adoption of functionality in Sage soft ware to comply with a VAT legislative change – well ahead of the competition. The focus for Iberia in FY18 is to continue to grow recurring and SSRS revenue through cloud solutions and driving growth in the partner channel. Central Europe – signiﬁ cant acceleration in the year Central Europe delivered revenue growth of 12% (FY16: 4%), a signiﬁ cant acceleration on the prior year, growing both recurring and SSRS revenue. In Germany, growth of 14% was largely driven by the Sage 200 family (locally known as Oﬃ ce Line) which grew by 34%, driven by a strong partner channel. SSRS growth has been driven by Sage X3 growth and success in professional services. The smal ler Central European regions of Poland and Switzerland grew by 16% and 2% respectively with the Sage 50 family driving growth in each country. The focus for Central Europe in FY18 is to drive growth in the cloud and on subscription. Performance – North American regionOrganic revenue growthFY17FY16USA+4%+6%Canada+10%+10%North America+5%+6%Growth of 5% in North America reﬂ ects 9% growth in recurring revenue (FY16: 9%), underpinned by soft ware subscription growth of 97% (FY16: 85%); soft ware subscription revenue is now 25% of total revenue (FY16: 14%). Processing revenue growth of 2% (FY16: 25%) reﬂ ects a slow-down on the prior year due to some turnover of staﬀ in the year with plans in place to recruit in Q1 FY18. SSRS decline of 11% (FY16: 8%) reﬂ ects the planned decline of licences in line with the transition to subscription. Note this decline is more marked than other geographies, due to the lower relative subscription penetration rate in North America, oﬀ set by rapid acceleration of soft ware subscription revenue. US – success in cloud enabled solutionsFollowing a slow start to the year, new leadership has turned around the performance of the region by driving accountability and clearer targets in the salesforce and building partner relationships, leading to four quarters of successive acceleration in recurring revenue, with an exit rate of over 10% in Q4 FY17 and with subscription revenue doubling in the year. Growth in the year was driven through the migration to cloud enabled solutions in the Sage 50 and Sage 200 families with triple digit soft ware subscription revenue in both product lines, with particular success in selling the Sage 200 family through the reinvigorated channel.Sage X3 was also successful, growing at 20%, as the product continues to expand geographically and vertically. The US achieved Sage’s biggest X3 contract in the year at $600k. Canada – double digit organic and recurring revenue growthIn Canada, both organic and recurring revenue achieved double digit growth with accelerating growth in each successive quarter in the year. Success in Canada reﬂ ects double digit growth in Sage X3 and Sage 50c. In North America the focus in FY18 is to continue to increase the penetration of cloud enabled solution adoption in the Sage 50 and 200 families, as well as continuing to drive growth in Sage X3. Intacct will form part of North American revenue in FY18 so continuing to drive momentum in this solution, as well as encouraging collaboration and learning between the North American teams, is also a priority. The Sage Group plc | Annual Report & Accounts 201736Performance – International regionOrganic revenue growthFY17FY16Africa and Middle East+12%+18%Brazil+12%+12%Australia & Asia+4%–7%International+10%+9%Organic revenue in the International region grew by 10% year-on-year (FY16: 9%), with recurring revenue growth of 15% (FY16: 16%), processing revenue growth of 7% (FY16: 48%) and SSRS decline of 5% (FY16: decline of 11%). Soft ware subscription revenue in International is now 56% of total revenue (FY16: 50%).Growth in the region has been driven by strong performance in Brazil, Africa & Middle East and Australia, balanced by a decline in the much smaller Asia region. Africa and Middle East – winning in the market with Sage X3 and Sage OneGrowth in Africa Middle East of 12% reﬂ ects growth of Sage X3 of 8% with strong growth in Africa in the Sage 200 family of 13% and 66% growth in Sage One. Africa continues to embrace a strong relationship with customers, with the highest NPS score of all regions at +53 and retention rates of 87%. Africa’s growth has slowed slightly from H1 17, reﬂ ecting challenging market conditions in the region. The focus for the region in the year is to drive strong growth through new customer acquisition and services.Brazil – success in new customer acquisitionGrowth in Brazil of 12% was driven by recurring revenue growth of 17%, oﬀ set by an increase in slow and non-payment due to the ongoing recession in the country. Sage One revenue grew by over 400% in the country, driven by increasing contract value and subscription numbers, and Sage X3 grew by 48%.The focus in FY18 is to improve retention rates and debt collection as well as expanding the partner channel. Australia and AsiaIn Australia, revenue growth of 7% is underpinned by recurring revenue growth of 9%, driven by local Sage One, which doubled in the year, and local growth products. Asia revenue (accounting for 1% of total revenue) declined by 6% in the year due to challenges in sales of local products but with Sage X3 revenue doubling in the region. The focus for FY18 is to build the salesforce and partner channel to boost retention rates and win in the cloud. 37The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsFinancial and operating review continuedFinancial reviewFY17FY16Organic to statutory reconciliationsRevenueOperating proﬁ tMarginRevenueOperating proﬁ tMarginOrganic£1,696m£475m28.0% £1,591m £431m 27.1% Organic adjustments1£24m(£8m) £5m£1m Underlying – Continuing£1,720m £467m 27.2% £1,596m£432m 27.1% Discontinued operations£119m£29m£146m£39mUnderlying£1,839m£496m27.0%£1,741m£471m27.0%Discontinued operations(£119m)(£29m)(£146m)(£39m)Impact of foreign exchange2– – (£157m)(£39m) Underlying (as reported) – Continuing£1,720m £467m 27.2% £1,439m £393m 27.3% Recurring items3 (£5m)(£49m) (£18m) Non-recurring items4 (£70m) (£108m) Statutory£1,715m £348m20.3% £1,439m £267m 18.6%1. Organic adjustments are as per note 2 of the ﬁ nancial statements2. Impact of retranslating FY16 results at FY17 average rates3. Recurring items comprise amortisation of acquired intangible assets, M&A activity-related items (including adjustments to acquired deferred income) and fair value adjustments4. Non-recurring items comprise items that management judge to be one-oﬀ or non-operational including business transformation costs RevenueStatutory revenue grew by 19% to £1,715m (FY16: £1,439m), reﬂ ecting organic growth, foreign exchange movements experienced throughout the year and the revenue contribution from acquisitions of Fairsail and Intacct, net of the adjustment to acquired deferred income. The impact of foreign exchange of £157m in FY16 reﬂ ects a currency tailwind during the period. Operating proﬁ tOrganic operating proﬁ t increased by 10% to £475m (FY16: £431m) in line with organic revenue and the 1% increase in margin. Statutory operating proﬁ t increased by £81m, with the operating proﬁ t margin rising by 1.7% due to the impact of foreign exchange in FY16 combined with recurring and non-recurring items in FY17.Adjustments between underlying and statutory operating proﬁ t Non-recurring items excluded from the underlying operating proﬁ t of £467m include £73m costs in relation to the business transformation comprised of people organisation charges of £32m, net property exit costs of £14m and other directly att ributable costs of £27m, oﬀ set by £3m gain on sale of Syska GmbH, a subsidiary held in Germany. Recurring items of £49m represents amortisation of acquisition-related intangible assets and M&A activity-related charges. Net ﬁ nance c ostThe statutory net ﬁ nance cost for the period was £18m (FY16: £24m) and the underlying net ﬁ nance cost was £25m (FY16: £21m). The diﬀ erence between underlying and statutory net ﬁ nance costs for the period reﬂ ects a gain of £7m (FY16: nil) from valuation adjustments of ﬁ nancial assets and a gain of £1m (FY16: charge of £6m) on FX movements on intercompany balances, oﬀ set by a fair value adjustment to a debt-related instrument charge of £1m (FY16: income £3m).Taxation The statutory income tax expense was £98m (FY16: £67m). The eﬀ ective tax rate on statutory proﬁ t before tax was 25% (2016: 24%), whilst the underlying tax rate on continuing operations was 26% (2016: 25%). The diﬀ erence between the statutory eﬀ ective tax rate and the underlying tax rate relates to non-recurring items which are deductible in countries with a tax rate higher than the UK.Earnings per shareUnderlying basic earnings per share increased by 4% to 31.90p (FY16: 30.82p) and statutory basic earnings per share increased to 27.80p (FY16: 19.28p) due to increased operating proﬁ t beneﬁ tt ing from the weakening of sterling, and lower non-recurring charges. Adjusted for transactions, underlying earnings per share increased by 7% reﬂ ecting a 3% impact from the losses contributed by acquired businesses and the disposal of the North America Payments business. Cash ﬂ ow and net debtCash ﬂ owFY17FY16Underlying operating proﬁ t£496m£471mExchange rate translation movements– (£44m) Underlying operating proﬁ t (as reported)£496m£427mRecurring & non-recurring items(£94m)(£58m)Depreciation/amortisation/proﬁ t on disposal£36m£30mShare-based payments£6m£8mWorking capital and balance sheet movements(£18m)(£10m)Exchange rate translation movements£2m£1mStatutory cash ﬂ ow from operating activities£428m£398mNet interest paid(£20m)(£20m)Tax paid(£102m)(£92m)Net capital expenditure(£52m)(£32m)M&A & integration-related expenditure£22m–Free cash ﬂ ow£276m£254mCash ﬂ owFY17FY16Statutory cash ﬂ ow from operating activities£428m£398mRecurring & non-recurring items£94m£58mNet capital expenditure(£52m)(£32m)Working capital adjustment£2m–Eliminate exchange rate translation movements(£2m)£1mUnderlying cash ﬂ ow from operating activities£470m£425mUnderlying cash conversion95%100%The Sage Group plc | Annual Report & Accounts 201738The Group remains cash generative with underlying cash ﬂ ows from operating activities of £470m, which represents underlying cash conversion of 95%, down slightly from FY16, reﬂ ecting an increase in capex of £20m as the Group invests for growth, combined with strong Sage X3 performance which att racts longer payment terms. A total of £157m was returned to shareholders through ordinary dividends paid. Net debt stood at £813m at 30 September 2017 (30 September 2016: £398m) with the increase reﬂ ecting cash spent on acquisitions, oﬀ set by disposal proceeds and exchange diﬀ erences.Treasury managementThe Group continues to be able to borrow at competitive rates and currently deems this to be the most eﬀ ective means of raising ﬁ nance. The Group’s syndicated bank multi-currency Revolving Credit Facility (RCF) expires in June 2019 with facility levels of £603m (US$551m and €218m tranches). At 30 September 2017, £318m (FY16: Nil) of the RCF was drawn. Current year RCF drawings were used principally to fund the Fairsail and USPP note repayment in March 2017 and partly fund the Intacct acquisition in August 2017. A new term loan was arranged in July 2017 to partially fund the Intacct acquisition. This term loan was initially for $390m (£291m), with $240m (£179m) repaid at the end of August 2017 following the receipt of disposal proceeds from the North American Payments business. The balance, $150m (£112m), remained outstanding at 30 September 2017, the term loan is initially for a 12 month term, with an unconditional option to extend for a further 12 months.Total USPP loan notes at 30 September 2017 were £523m (US$600m and EUR€85m), (FY16: £575m (US$650m and €85m). Approximately £40m (US$50m) of maturing USPP notes were repaid in March 2017 from free cash ﬂ ow and RCF drawings.Foreign exchangeThe Group does not hedge foreign currency proﬁ t and loss translation exposures and the statutory results are therefore impacted by movements in exchange rates.The average rates used to translate the consolidated income statement and to neutralise foreign exchange in prior year underlying and organic ﬁ gures are as follows:Average exchange rates (equal to GBP)FY17FY16ChangeEuro (€)1.15 1.28 (10%) US Dollar ($)1.27 1.42 (11%)South African Rand (ZAR)16.95 21.05 (19%) Australian Dollar (A$)1.66 1.94 (14%) Brazilian Real (R$)4.06 5.18 (22%) Capital structure and dividendWith consistent and strong cash ﬂ ows, the Group retains considerable ﬁ nancial ﬂ exibility going forward. The Board’s main strategic policy remains an acceleration of growth, both organically and through targeted bolt-on acquisitions. The growth underpins the Board’s sustainable, progressive dividend policy. Consistent with this policy, the Board is proposing a 9.0% increase in the total ordinary dividend per share for the year to 15.42p per share (FY16: 14.15p per share). 39The Sage Group plc | Annual Report & Accounts 2017GovernanceFinancial statementsStrategic reportDoingbusinesstherightwayCorpora�eresponsibili�yPeopleBuildingahigh-performancecul�ureandaposi�ivecolleagueI�isinallofourin�eres�s�ochampionsmallbusinessesandexperienceisessen�iala�Sage.OurPeoplemissionis�ocrea�e�heen�repreneurs–anda�Sage,wi�hmillionsofsmallbusinessbes�workplaceforcolleagueswholiveSagevaluesandarealigned,cus�omersaround�heworld,wesee�ha�asournoblecause.engagedandpassiona�eabou�Sageproduc�s,cus�omersandpar�ners.Wearecommited�oenablingallcolleagues�obe�hemselvesa�work,believing�ha�diversi�yof�hough�,inclusionandequaloppor�uni�ydrivesgenuineinnova�ion.Foundedin2015,SageFounda�ion’smissionissimple:�oInaddi�ion�oadhering�olocallawswearecommited�oreducingmobiliseour13,000colleaguesaround�heworld�obuildenergyuseandincreasingrecycling.social,economicanden�repreneurialoppor�uni�iesinourlocalcommuni�ies.BusinessBuildersCommunityEnvironmentSeepages41-43Seepages44-45Seepages46-47Seepages48-49TheSageGroupplc|AnnualReport&Accounts201740PeopleBuildingacultureofhighperformanceandagreatcolleagueexperience.DuringFY17SagecontinuedtodevelopaOurseniormanagementteam(“SMT”)arethecohesiveandcapableleadershipcommunitykeydrivingforcebehindachievingourresultsthroughthecreationofanewleadershipandshapingourculture.WeareinvestingindevelopmentframeworkwhichiscentredFY18todevelopthecapabilityofour150SMTaroundfourpillars:leaderswithquarterlydevelopmentsessions.ThiswillfurtherembedtheOneSagemodelas1.Manageressentials;weharmoniseourleadershipvalues,2.Seniorleaders;behavioursandcapabilities.3.Executiveleaders;Werecognisethatourexecutiveleadershavedifferentdevelopmentneedsandleadership4.Futureleaders.experienceandduringFY18wewillbecontinuingtoinvestinourmostseniorManageressentialsisdesignedforour2,000executivesthroughtailoredbespokemanagersacrossSage.Wehavedesignedanddeployedthe“LeadingatSage”programmedevelopmentplansforeachofourtopSagecontinuedtodeliveronitswhichencouragescontinualfeedbackand30leaders,underpinnedwithatargetedtransformationaimsduringFY17bydevelopmentprogramme.evaluationagainstthetransformationalembeddingtheOneSageoperatingmodelleadershipmodel(align,model,coach,andunifyingtheorganisationwithasinglereinforce)andculminatesina“LicencetosetofSagevaluesandbehaviours.Lead”forexistingandnewmanagement.Buildingandnurturingahigh-performanceandcustomer-obsessedcultureisattheheartofthePeopleagenda.Wehaveinvestedinnewcloud-basedsystems,talentacquisitionpracticesandleadershipdevelopmentinordertocreateagreatcolleagueexperiencewhichenablessustainabledeploymentofourstrategy.Weareembeddingpracticeswhichfocusondevelopingourtalentinternally,valuingdiversityandcreatingthemostinspiringworkplacewhichchallengesourcolleaguestobethebestthattheycanbesothatwecanprovideourcustomers,partnersandeachotherwiththebestexperienceofSage.LeadershipOurValuesAmandaCusdinChiefPeopleOfficer(interim)CustomersfirstVelocityInnovateDotherightthingMakeadifferenceStrategicreportOurcustomersareattheWeareactionorientedandWecreatenewwaysofheartofeverythingwedo;agile;wekeepthingssimple,doingthingsanddelivertheyarewhyweareheredeliveratpaceandinnovativesolutionswhichandwewouldn’texistoverachieve.ourcustomersneedtohelpwithoutthem.theirbusinessgrow.OurcolleaguesarealignedSageisagreatplacetoandwetrusteachothertoworkandourcolleaguesdotherightthingtoenablemakeadifferencetolocalourcustomerstosucceed.communitiesbyrelentlesslysupportingourcustomersandtheirbusinessestobesuccessful.41TheSageGroupplc|AnnualReport&Accounts2017GovernanceFinancialstatementsDiversityWe have signiﬁ cant ambitions for improving our gender balance in technology and leadership roles and we set targets to achieve 35% female representation in the SMT and in technology roles by the end of FY18. Signiﬁ cant progress has been made against this ambition, with SMT female representation increasing from 26% to 29% in FY17, and we have 28% representation of women in technology which is higher than industry standards. During FY17 we progressed the development of a strong pipeline of high-potential female talent. Sage continued to receive external recognition for our tech leader Kriti Sharma, VP Bots and Artiﬁ cial Intelligence, making the Forbes 30 under 30 list for Technology.The Sage diversity agenda is underpinned by a number of initiatives, including the launch of the Women@Sage mentoring programme, supporting the development of women and the Women@Sage Network which provides a platform to share experiences and learnings. Complementing this, and the wider diversity agenda, unconscious bias training has been developed and deployed as a mandatory learning module for all colleagues.Kids@Sage days took place across a number of locations, including North America, Brazil, UK and Spain. Over 300 children came to work at Sage with their parents for one day, helping to introduce technology at an early age, whilst creating a stronger connection between work and family life for colleagues.Heading into FY18, the release of Sage’s Gender Pay Report will explain the progress achieved to date and our ongoing focus on eliminating any disparity. In addition, Sage will focus on embracing all forms of diversity, placing more emphasis on ethnicity and LGBT, creating a truly inclusive environment where colleagues can be their true selves at work. To support this, Sage will launch a Returner programme for men and women who have been away from the workplace for career breaks, giving them the conﬁ dence and skills to restart their careers. Sage will continue to Corporate responsibilityPeople continuedOur people and our culture, working collaboratively with pace and agility to put our customers ﬁ rst. 25%Female75%MaleBoard gender diversitySMT gender diversity71%Male29%FemaleTotal workforce gender diversityMaleFemale48%52%invest in the LGBT community with the Pride@Sage network and in Health and Wellbeing activities for all.Talent ManagementTalent management is key to driving the business forward and we place this at the top of the People agenda, with a focus on creating consistency by identifying, harnessing and strengthening the capability of our key talent who are critical to the delivery of Sage’s ambitions.In FY17 our core development programmes were standardised across all Sage geographies. All new hires now experience a consistent on-boarding journey from oﬀ er through their ﬁ rst 90 days, including a Sage Induction with certiﬁ ed cloud product training. Colleagues who join our Sales and Services function receive intensive training which has proven results in accelerating performance and integration to Sage. In July 2017, SageLearning, Sage’s cloud-based learning management system, was launched. This allows all colleagues to view learning opportunities and take ownership of their development and career progression at Sage.Sage’s talent review process dovetails with the performance management process and seeks to identify development areas for key talent and plan succession. The Executive Committ ee meets quarterly to discuss talent and in FY18 this dynamic approach will move deeper into the organisation, ensuring the visibility and development of emerging talent (millennial talent represents 40% of Sage’s workforce).Sage supports apprenticeship schemes across the globe with a record number of 87 apprentices joining Sage in the UK alone during September 2017. To complement our apprentice programme, Sage has introduced a graduate programme in FY17 for technology and engineering graduates with the desire to grow this in FY18.Sage has developed an omni-channel approach to hiring great talent and our internal recruiters work with entrepreneurial The Sage Group plc | Annual Report & Accounts 201742partners and strong digital media campaigners who provide agile and ﬂ exible solutions to meet our resourcing needs.Great place to workOur People mission is to create the best workplace for colleagues who live Sage values and are all aligned, engaged and passionate about Sage products, customers and partners. During FY17 we have launched our new global HCM system and global Your Sage intranet, we have broadcast worldwide 11 times to all colleagues via Sage Live TV and invited 150 of our best performers on a trip of a lifetime to Dubai, we have given colleagues the chance to give their feedback and the opportunity to own a part of Sage and ﬁ nally we have devoted 150,000 hours of colleague time to voluntary work.SagePeople, Sage’s cloud HCM system, provides colleagues with a single global platform to safely and securely access information. Where possible, core people processes are now automated and the system provides enhanced visibility and improved analytics which drive operational eﬃ ciency. Launching SagePeople demonstrates our passion for our own products and builds on our X3 roll-out with another Sage product embedded in the business.Your Sage has enhanced colleague engagement by providing a single platform for cascading relevant and “in the moment” content about progress, priorities and products to all our colleagues simultaneously. This is supplemented by Sage TV Live, a monthly broadcast hosted by the CEO and guests.Year-end employee count split by region2,305North America 20174,386Central & Southern Europe 2017Rewarding colleagues for high performance is core to generating progress across the business. We review our rewards structures each year and for FY18 we have made changes to the sales compensation schemes in order to bett er align performance and reward. Each year we host our exceptional performers at our ‘Platinum Elite’ exclusive reward trip and in 2018 we will host these colleagues in Mexico.In May 2017, Sage introduced our ﬁ rst global Share Save plan available to all colleagues, predicated on the idea of “don’t just work at Sage, own it” which enables colleagues to have a personal stake in the Company’s success, rewarding contribution whilst creating a stronger sense of belonging. The scheme was very well received with 21% participation from across all colleagues.Understanding how colleagues experience the Sage culture, and their alignment with Sage strategy and values is important to the leadership of Sage. In July 2017 Sage launched an all-colleague engagement survey, Your Voice, to take feedback from across the business and received a strong response rate of 70%. The strong levels of engagement highlight the many positive aspects of being a Sage colleague and we are working to address areas of improvement. Throughout FY18 we will put in place mechanisms for more regular pulse checks on engagement across the organisation.3,603International 2017Sage is committ ed to its communities and, since its launch in January 2016, Sage Foundation has mobilised the hearts and minds of colleagues and partners; it is woven into the fabric of the organisation’s culture with a commitment to do business in the right way, giving a helping hand to those who need it. This is evidenced by the growth of volunteering, which has increased by more than 100% and is now in excess of 150,000 hours. Colleagues receive up to ﬁ ve days paid time for volunteering. Sage Foundation creates a sense of purpose beyond work itself for colleagues, it is developmental and restorative and brings together communities for good causes. The Sage Board has given their time as volunteers this year and Sage Foundation is oft en cited as a “pull” factor by new applicants to Sage, demonstrating its inﬂ uence on the strong culture Sage is building.2,998Northern Europe 201713,292Group 201743The Sage Group plc | Annual Report & Accounts 2017GovernanceFinancial statementsStrategic reportBusinessBuildersShiningaligh�on�heheroesof�heglobaleconomy.Wi�hsmallbusinessescrea�ing�wo�hirdsofallnewjobsandmakingup99%of�hepriva�esec�orinmos�coun�ries,one�hingisforcer�ain–whenBusinessBuildersdowell,wealldo.I�isinallofourin�eres�s�ochampionsmallbusinessesanden�repreneurs–anda�Sage,wi�hmillionsofsmallbusinesscus�omersaround�heworld,wesee�ha�asournoblecause.Thisyear,we’veformalisedourcommi�men��osmall&mediumbusinesses�hrough�heSageForumforBusinessBuilders–givingen�repreneurs�heworldoveravoice;campaigningforchange�ha�crea�es�heidealenvironmen�forbusinesses�oflourish,andrepresen�ingBusinessBuildersa��he�op�able.Sageiscommited�o�hreedifferen�coursesofac�ion�hrough�heForum:commissioningregularpiecesofresearch�ha�assess�hesmallbusinesslandscape;holdingeven�sandpaneldiscussions�ha�allowen�repreneurs�o�alkdirec�ly�opoli�icians;andcampaigning�ochangepolicyfor�hebeter.Herearejus�afewof�hewayswe’vesuppor�ed�heheroesof�heeconomy�hisyear.Corpora�eresponsibili�yTakingSageSummitontheroadFollowingonfrom2016’sSageSummi�inChicago–�heworld’slarges�ga�heringofen�repreneurs–inFY17we�ookSageSummi�on�heroad,�oeigh�differen�ci�iesaround�heworld.Overallaround29,000peopleregis�ered�oatendaSageSummi�.Wewerejoinedbyall-s�argues�s–fromGeorgeForemaninA�lan�a,�oDeborahMeadeninLondon,�oRickMercerinToron�o–inspiringaudi�oriumsfullofBusinessBuilders.Theeven�sgarneredover550millionsocialimpressions;around750piecesofpresscoverage;andraisedover$150,000forchari�y�hroughSageFounda�ion.TheGeorgiaTechchoirperforminga�SageSummi�USinA�lan�a.29,000552m716Regis�eredatendeesacrossallSageSummi�sSocialimpressionsInspiringsessions&�alksforen�repreneursTheSageGroupplc|AnnualRepor�&Accoun�s201744Education around the Fourth Industrial Revolution As an industry leader in Artiﬁ cial Intelligence, Sage feels a strong sense of responsibility to help create an industry that supports Business Builders today and in the future. The Fourth Industrial Revolution is changing the way entrepreneurs do business for the bett er; artiﬁ cial intelligence has the power to free Business Builders from the burden of administrative tasks, and in turn, boost productivity. We are driven to do business the right way, and are working to make sure that AI is ethically engineered, as well as building a workforce that will have the right skills for tomorrow. We have established ﬁ ve core principles towards the ethical creation of AI. We are committ ed to adhering to all of these principles, and enabling the wider tech community to do the same. We have also been working to build the next generation of engineers, AI developers and conversation designers through the creation of Botcamp – a training programme dedicated to providing school leavers with the right skills to help them become the technology leaders of tomorrow.Ireland DebateIn December 2016, Sage gathered small businesses in Dublin alongside An Taoiseach Enda Kenny, a Minister and other inﬂ uential policymakers to debate the opportunities and challenges facing Irish entrepreneurs. The debate coincided with the launch of a piece of major global research looking at the landscape of Business Builders in 16 of Sage’s markets around the world. The debate was covered in major broadcast and print media across Ireland including RTE, TV3 and the Irish Independent. As An Taoiseach said at the event – “we understand that small businesses are a key part of the social fabric of society… The Sage Forum for Business Builders oﬀ ers an important platform to entrepreneurs and SMEs to voice their opinions.”General election campaign in the UKSage responded immediately to news of the snap general election in the UK last June, sett ing out a call to action for the successful political party to back business growth and ambition. Working with think tank The Entrepreneurs Network, we reached out to Sage customers and a network of over 10,000 entrepreneurs to hear their views on how an incoming government could support their needs. Ahead of polling day we launched A Boost to British Businesses – Policies for a New Government, 25 concrete policy ideas in areas such as skills, technology, tax, regulation and procurement. An open lett er signed by Stephen Kelly gained widespread media coverage ahead of election day, and the ideas were submitt ed to key ministers as soon as they formed the new Government.70%The proportion of entrepreneurs around the world who do not feel listened to by governmentsAn Taoiseach Enda Kenny speaking at Sage’s Ireland Debate.45The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsCorporate responsibilityCommunitySage Foundation: working together to do more good.Founded in 2015, Sage Foundation’s mission is simple: to mobilise our 13,000 colleagues around the world to build social, economic and entrepreneurial opportunities in our local communities.For us, this isn’t just the right way to do business – it’s the only way.FY17 was the year that Sage Foundation truly became ingrained into the culture of the business. Our colleagues gave back almost 23,000 days in volunteering – that’s a 120% increase on last year. Commitment to Sage Foundation is the golden thread that connects us – from front-line sales colleagues to senior leaders. Indeed, this is illustrated by the Board’s group volunteering day this year.Since Sage Foundation’s inauguration, we’ve decided to concentrate our eﬀ orts down to three key groups of people that we want to help: women, young people and military veterans. Take a look at just a few examples of the work we’ve done with these groups this year.WomenIn South Africa in July, Sage Foundation released a report titled “The Hidden Factors: Fostering Female Entrepreneurship.” The study was motivated by a recognition of the importance of this emerging group’s contribution to the economy, combined with a realisation that there was very litt le information out there on female entrepreneurs in South Africa. The study found that only 20% of women surveyed saw running your own business as a viable career path when growing up. But female entrepreneurs showed greater self-conﬁ dence, leadership and competitive spirit than their counterparts in the corporate world. The report was launched with a panel event featuring Jennifer Warawa, Sage’s EVP Partners, Accountants and Alliances.Young peopleIn September 2017 in the UK, Sage launched A Place to Call Home – a report on youth homelessness in London and Newcastle. The study was launched with an exclusive exhibition and panel discussion at the Southbank Centre in London, featuring photography, ﬁ lm and conversation from a group of the young people themselves. It is part of a wider call from Sage and Stephen Kelly to make FY18 the year that businesses work together to give more young people a place to call home.#SageServingHeroes: Military veteransSage is committ ed to helping ex-servicemen and women to make the transition into civilian life, and ﬁ nd meaningful employment. We do this in part through our support of the Invictus Games. The Invictus Games use the power of sport to inspire recovery and support rehabilitation of disabled, sick or injured acting and ex-servicemen and women. Sage has supported the initiative since last year’s Games in Orlando, and this year we were proud to step up our commitment to become a Premier Partner for the Toronto Games in September.In June, we announced the launch of the Sage Serving Heroes Program in Canada, to support veterans as they move into the workplace. The program has started by working with a small group of Invictus Team Canada competitors, providing them with mentoring, business support and Sage technology to help them start and grow businesses.$1mThe total amount we have given away to charities across 201722,859The number of working days this year that Sage colleagues have spent volunteeringOver 80The number of small charities around the world that we’ve helped this yearThe Sage Group plc | Annual Report & Accounts 201746TheMillionDollarChallengeTheEnterpriseFundMandelaDayIn2016,Sage’sCFOSteveHarepledgedtorunatotalof500kmforhischosencharity–CVYP.StevecompletedthefinallegofhischallengeinJunethisyearinNewcastle,surroundedbydozensofSagecolleagues,customersandpartners.Steve’soriginalpledgehasturnedintotheMillionDollarChallenge–mobilisingSage’scolleagues,customersandpartnersinaunitedmissiontoraiseatotalofonemilliondollarsthroughout2017fortheirchosencausesandthroughtheirchosenactivities.Andbytheendof2017,we’llhavereachedourtarget.CFOSteveHarecompletinghis500krunningchallenge.TheEnterpriseFundwassetupthisyearasachanceforsmallcharitieswhomightotherwisebeoverlookedforfundingtobidformuch-neededcashtoinnovateandgrow–specifically,charitiesthataredeliveringchangeforwomen,youngpeopleandmilitaryveterans.Wegaveawaygrantsvaluedatbetween$5,000and$35,000,donatingatotalof$1,000,000toover80smallcharitiesallaroundtheworldthroughoutthewholeof2017.MandelaDaymaybeonlyoneday–anannualdayofcelebrationandactivisminSouthAfricainhonourofNelsonMandela’slegacy–butthisyearSageFoundationstretchedtheday’sgoodwilloutforthewholemonthofJuly.Bytheendofthemonth,theteamhadmobilisedalmost1,000SagecolleaguesandpartnersacrosseightdifferentregionsinAfricatosupporttheworkof35non-profitsthroughvolunteering.“I�’sabou�spreading�helove,helpgino�hersandputingasmileonpeople’sfaces.”LesediMoreiSagebusinesspartnerfromOSHoldings;volunteeredaspartofMandelaDayinSouthAfrica500km$5,000-$35,0001,000�hedis�ancerunover�helas�yearbyCFOS�eveHareforchari�yCVYP�hesizeofgran�sgivenawayinSageFounda�ion’sEn�erpriseFundThenumberofcolleaguesinAfricawhovolun�eeredinhonourofMandelaDay47TheSageGroupplc|AnnualReport&Accounts2017S�ra�egicrepor�GovernanceFinancialstatementsCorporate responsibilityEnvironmentActively managing our impact.We aim to reduce the energy our business uses and make the most of recycling opportunities. We comply with local laws as a minimum standard and Sage continues to take part in the global Carbon Disclosure Project.Greenhouse gas emissionsThis section includes our mandatory reporting of greenhouse gas emissions pursuant to the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (“Regulations”). This data is included here to provide a complete picture of our approach to environmental corporate responsibility.Reporting periodOur Mandatory Greenhouse Gas Report reporting period is 1 October 2016 to 30 September 2017. This reporting year has been established to align with our ﬁ nancial reporting year.Organisational boundary and responsibilityWe report our emissions data using an operational control approach to deﬁ ne our organisational boundary which meets the deﬁ nitional requirements of the Regulations in respect of those emissions for which we are responsible.Sage has reported on all material emission sources which we are deemed to be responsible for. We do not have responsibility for any emission sources that are beyond the boundary of our operational control.We have collected data on energy in our buildings, air conditioning refrigerant consumption and business car travel, because we believe these encompass the most material emissions to our business. Going forward, we will review this, to ensure that we continue to capture signiﬁ cant business emissions.MethodologyThe methodology used to calculate our emissions is based on the “Environmental Reporting Guidelines: including mandatory greenhouse gas emissions reporting guidance” (June 2013) issued by the Department for Business, Energy & Industrial Strategy (“BEIS”). We have also used the BEIS2017 conversion factors for the UK, combined with the most recent IEA international conversion factors (2015) for non-UK electricity, within our reporting methodology.In some cases, we have extrapolated total emissions by using available information from part of a reporting period and extending it to apply to the full reporting year. For example, this has occurred where supplier invoices for the full reporting year were not available prior to the publication of this year’s Annual Report & Accounts. For further details, our methodology document can be found at www.sage.com/company/about-sage/corporate-social-responsibility.Global greenhouse gas emissions dataFor period 1 October 2016 to 30 September 2017FY17- tonnes CO2eFY16- tonnes CO2eScope 1: Combustion of fuels and operation of facility1,338 2,108 Scope 2: Electricity, heat, steam and cooling purchased for own use11,78314,253Scope 3: Company business travel vehicles5,391 6,345 Total emissions18,51222,706Company’s chosen intensity measurement: –Emissions reported above normalised to tonnes of CO2e per total GBP £1,000,000 revenue10.76 14.47 All data is inclusive of operations active at any point during the reporting year. Where disposals have occurred or operations ceased during the year, data has been included to be reported up until this date.1,338(FY16: 2,108) Combustion of fuel and operation of facilities11,783(FY16: 14,253)Electricity, heat, steam and cooling purchased for own useThe Sage Group plc | Annual Report & Accounts 20174864%Electricity, heat, steam and cooling purchased for own use7%Combustion of fuel and operation of facilitiesInternational Scope 1: Combustion of fuels and operation of facility Scope 2: Electricity, heat, steam and cooling purchased for own use Scope 3: Company business travel vehiclesNorth AmericaNorthern EuropeSouthern EuropeScope of reported emissions Emissions data has been reported for all the Group operations in Australia, Austria, Belgium, Brazil, Canada, France, Germany, Ireland, Malaysia, Morocco, Poland, Portugal, Singapore, South Africa, Spain, Switzerland, the United Arab Emirates, the United Kingdom and the United States. However, emissions could not be reported for oﬃ ces in the United Arab Emirates (though travel emissions have been reported) and Nigeria, where energy usage is not itemised on invoices. We will be working with our suppliers in these locations to capture this information in the FY18 reporting year.Building usage emissions have not been included for where we have operations with a headcount of less than 25 people.Total CO2e by typeSum of CO2e (tonnes)Intensity ratioIn order to express our annual emissions in relation to a quantiﬁ able factor associated with our activities, we have used revenue in our intensity ratio calculation as this is the most relevant indication of our growth and provides for a good comparative measure over time.Carbon Disclosure ProjectWe once again took part in the Carbon Disclosure Project during the year under review by reporting our Scope 1, 2 and 3 emissions for the ﬁ nancial year ending 30 September 2016.Reducing carbon and wasteWe have continued to make a concerted eﬀ ort to reduce our carbon footprint, through reducing our consumption and purchasing alternative sources of fuel and generation, speciﬁ cally: –Increased use of bioethanol for business travel fuel –Investing in new technology with lower energy consumption including laptops and workstations –Further installation of LED lighting across the Group –Selected oﬃ ce moves to more energy eﬃ cient buildings –Increased low carbon energy sourcing, including hydropower, wind power, biomass and solar –Self generation including solar panel and hydroelectric plant installationsCarbon Emissions29%Company business travel vehicles964,9535712972083,3621214,2631,2713498252,19749The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsCorporateresponsibilityDoingbusinesstheSageWayisembeddedwithinourstrategy.Webelievethatengagingwithourstakeholdersandprovidingthebestpossibleserviceleadstoamoresuccessfulcompanywithstrongerreturnsthatcanbereturnedtoinvestorsandreinvestedintoourstakeholdercommunity.Whyisdoingbusinesstherightwayimportant?CommunityInvestorsPeopleCustomersWeinves�inourcommuni�y�hroughSageFounda�ionThisprovidess�rongrevenueThismo�iva�esourcolleaguesgrow�handre�urns�oinves�orsandhelpsatrac�andand�hecommuni�yre�ain�hebes��alen�This�hendrivesexcellen�cus�omerserviceandencouragesinnova�ionTheSageGroupplc|AnnualRepor�&Accoun�s201750Board reportingOur refreshed Code of Conduct was endorsed by the Board in January 2017. Board reporting includes stakeholder impact information where relevant, and the Board reviews and approves key policies at least annually, including our Energy & Environment Policy.EthicsWe are committ ed to conducting business in an honest and ethical manner, by acting professionally, fairly and with integrity in all our business dealings and relationships. Our Code of Conduct sets out the principles we expect all our people to live by. Complementing the Code of Conduct, we have a set of global policies covering areas such as anti-bribery and corruption, money laundering, whistleblowing and competition law. To embed awareness of these policies we conduct a programme of targeted training for all colleagues. We monitor the eﬀ ectiveness of training through assessments undertaken by our Risk & Assurance team. During 2017, we refreshed our whistleblowing procedures and launched a poster campaign in six languages across all our oﬃ ce locations globally to ensure that all colleagues had information about our independent whistleblowing hotline.As well as ensuring our own conduct is appropriate, we have procedures to prevent bribery being committ ed on our behalf by any associated persons, particularly in our subsidiaries, and third parties we work with. Our senior management regularly complete a conﬂ icts declaration to ensure that any additional business commitments or client and supplier relationships they or members of their teams may have are clear and transparent. Suppliers are required to adhere to our Supplier Code of Conduct. All colleagues are encouraged to report any conﬂ icts they may become aware of, and in 2018 we will be enhancing our procedures in this area. We recognise that there is no room for complacency when it comes to maintaining ethical working practices, and so we place a high priority on the review and refresh of our eﬀ orts each year to ensure that we mitigate risk and support our colleagues to do business the right way.Modern slaveryIn September 2017 we published our second annual Anti-Slavery and Human Traﬃ cking Statement in accordance with the Modern Slavery Act 2015. The statement can be found via our website homepage at www.sage.com/modern-slavery. Given the nature of Sage’s business model, we believe the risk of modern slavery in our supply chain is low compared to businesses operating in other sectors such as manufacturing and retail. However, we do not intend to be complacent and will continue to work to improve our policies and procedures to ensure slavery and human traﬃ cking is not taking place anywhere in our supply chains. Having identiﬁ ed the facilities management support as our primary area for slavery risk, we have reviewed and improved our procurement processes and policies, to ensure that goods and services originate from sources that do not jeopardise human rights, safety or the environment. Our standard form procurement contracts include language requiring suppliers to comply with applicable anti-slavery and human traﬃ cking legislation, including the Modern Slavery Act 2015. Work is ongoing to introduce or improve controls via the roll out of our enterprise solution X3 to three new countries, bringing standardised purchasing and invoicing across a greater proportion of our procurement activities. In 2018 we will continue this work and we will also gather data on our progress so far and measure the impact of our training and awareness activities.Data protection and GDPRSound data protection and privacy practices are essential for Sage. The implementation of the EU General Data Protection Regulations ("GDPR") planned for May 2018 is therefore a critical project for us. We are working hard to ensure that we are ready, and our customers can be ready too. We have established a Data Governance Committ ee to oversee Sage’s response to GDPR. Subject to speciﬁ c local data laws, GDPR will be the standard against which we assess all of our future data protection activities. Continuous improvementNo complacency when maintaining ethical working practices.51The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsPrincipal risks and uncertaintiesDuring FY17 we moved from the execution phase of our business transformation which brought together all parts of the business as a connected whole (One Sage), into a business as usual operation. Recognising the nature and pace of change in both our business and the marketplace in which we operate, and that our external risk landscape continues to evolve, we have continued to develop and enhance our risk management during FY17 to provide greater visibility and ownership of risk across the business and support this area of focus for the Board.We continue to create appropriate and scalable processes and practices, enabling us to grow the business the right way, and apply appropriate risk mitigation strategies. During the year, we have maintained our focus on driving risk consideration in decision making, working to reinforce and embed our three lines of defence model and, through the activities of the newly created Sage Compliance function, reinforce adherence to policy and process.Principal risksOur risk management process and associated reporting activities continue to evolve.The Board and the Audit and Risk Committ ee carried out a robust assessment of the principal risks facing the Company through a refresh exercise at the start of the year, including considering those that would threaten its business model, future performance, solvency or liquidity. This assessment included consideration of any potential impact associated with the UK’s decision to exercise their rights under Article 50 of the Lisbon Treaty. The Board monitors the risk environment, and reviews the relevance and appropriateness of the principal risks. These are formally reviewed at the beginning of each year in consultation with the Audit and Risk Committ ee, and continue to be proactively managed by executive sponsors and risk owners, supported by Sage’s Risk function. On an ongoing basis, consideration is given to the local relevance of the principal risks, and the identiﬁ cation and escalation of local risks as appropriate.Principal risks are also formally reported to the Global Risk Committ ee on a quarterly basis, alongside escalated local risks. We manage risk in line with our risk management policy and approach, as set out in Risk Management on page 59. Currently there are ten principal risks which we monitor and report against. These are aligned to successful delivery of our strategy and mapped against the strategic pillars to which they relate, as set out opposite. The principal risks have remained broadly consistent both throughout the year and with the prior year, reﬂ ecting the multi-year nature of our strategy and related risks.During the year the risk appetite statements and associated metrics evolved to bett er reﬂ ect outputs from plans in place. This enhanced the ongoing measurement of progress, and enabled objective review and assessment during the regular meetings with executive sponsors and risk owners. As detailed in the following table, a range of measures are in place, being deployed or developed, to manage and mitigate our principal risks.Strategic pillarStrategic pillarPrincipal riskLicensing model transitionMarket intelligenceCompetitive positioning and product developmentBusiness model deliveryPartners and alliancesThird party relianceInformation management and protection (including cyber)Regulatory and legal frameworkBrandSupporting control environmentOne SageRevolutionisebusinessWinninginthemarketCapacity forgrowthCustomersfor lifeManaging riskThe Sage Group plc | Annual Report & Accounts 201752Principal risk Risk backgroundManagement and mitigation Licensing model transitionSage does not successfully manage its ongoing transition to subscription licensing against deﬁ ned timelines and targets or appropriately adapt its customer approach.Sage is continuing its transition from a perpetual to a subscription-based licensing model.In addition to providing additional value for customers, this transition assists with cash ﬂ ow; oﬀ ers a platform for cross selling; and lowers att rition rates, which in turn aids revenue forecasting.It also provides regular customer engagement and enhanced opportunities to develop these relationships.The speed of transition needs to be balanced against any reduction in short-term revenues. –An approved licensing model transition strategy is in place –A series of approved subscription revenue targets are deﬁ ned, which span multiple years and support successful and balanced delivery of our strategy –Ongoing monitoring and review of the approved targets takes place at country, regional and Group levels to proactively manage the licence transition, and revenue targets –New products are being oﬀ ered on a subscription only basis –Customer Business Centres (CBCs) are operating in North America and Europe to integrate digital marketing, sales and service operations for customers using Soft ware-as-a-Service (SaaS), and support planned growth ambitionsCustomers for lifeStrategic alignment:KeyImproving risk environmentStatic risk environmentWorsening risk environmentMarket intelligenceSage fails to understand and anticipate changes in the external environment, including customer needs, emerging market trends, competitor strategies and regulatory / legal requirements.Sage continues to develop its market intelligence capability in support of a consolidated understanding of market and customer needs, and aligning this with competitive positioning and product development activities. –A Market and Competitive Intelligence team is established, which has Group responsibility for market intelligence –Market intelligence surveys are undertaken, to identify market opportunities –Brand health surveys are undertaken to understand customer perception of the Sage brand and its products –An approved internal communications plan is delivered, to share market intelligence and build brand awareness –Market data is provided through a market data portal, allowing ease of access and improved analysisIn progress: –Regular, targeted internal market data communications, which build awareness of the market data portal –Ongoing reﬁ nement and improvement of market data through feedback from the businessCustomers for lifeWinning in the marketStrategic alignment:53The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsPrincipal risks and uncertainties continuedPrincipal risk Risk backgroundManagement and mitigation Competitive positioning and product developmentSage is unable to clearly identify the approach to market, or deploy competitive advantage, including product development.The competitive environment in which Sage operates continues to see signiﬁ cant developments.Sage must continually translate market intelligence into eﬀ ective strategies targeting att ractive market segments with appropriate products and continually work to reinforce competitive superiority.During the transition to One Sage products, we continue to manage the local product base and plan and evolve these in line with longer-term aspirations. –A Product Marketing team is in place to oversee competitive positioning and product development –A Product Delivery team is in place to develop and deliver products –Sage-wide templates are being used for Batt lecards to ensure consistent information is provided –Batt lecards are in place for key products in all countries, which set out the strengths and weaknesses of competitors and their products –Deﬁ ned Customer for Life roadmaps are in place, detailing how products ﬁ t together, and any interdependencies –A Batt leApp has been released which provides timely information to support the activities of sales channels –Acquisitions of Fairsail (now Sage People) and Intacct to enhance Sage’s product portfolio, and cloud oﬀ ering In progress: –Prioritised product development based on Customer for Life roadmaps –Analysis of product investments is being enhanced to further consider anticipated return on investmentWinning in the marketCapacity for growthStrategic alignment:KeyImproving risk environmentStatic risk environmentWorsening risk environmentBusiness model deliverySage does not successfully deliver a global operating model that supports its growth ambitions.Sage continues to embed its global operating model which provides enhanced governance, process harmonisation, eﬃ ciencies and scalability. The eﬀ ective interaction between all parts of the organisation is essential to allow Sage to grow at pace. –The One Sage operating model has been in place from October 2016 –A Business Operations Forum is operating, providing governance over project activity in order to support the eﬀ ective operation and enhancement of the operating model –A formal gating process operates through which all projects must pass, and ensures a clear purpose and success criteria are established for each –The Programme Management Oﬃ ce (PMO) provides oversight of and reports on project progress and potential conﬂ icts –Divestiture of Sage Payment Solutions in the US, and structure of an ongoing partnership agreement, consistent with our payments service strategyIn progress: –Ongoing monitoring and management of projects through the Business Operations Forum, including measuring of success factorsCapacity for growthStrategic alignment:The Sage Group plc | Annual Report & Accounts 201754Information management and protection (including cyber)Sage fails to adequately understand, manage and protect information.Sage’s footprint has developed through a series of acquisitions, each arriving with its own processes, technologies and activities appropriate to a smaller business.Harmonising and rationalising these, as necessary, is required to support the One Sage operating model and to support a business view on all data being held and processed, including management and protection. –Accountability is established within both OneIT and Product Services for all internal and external data being processed by Sage –OneIT and Product Services report to the Chief Information Oﬃ cer and Chief Product Delivery Oﬃ cer respectively –A network of Information Security Oﬃ cers supports the business –Formal certiﬁ cation schemes are maintained, across appropriate parts of the business, and include internal and external validation of compliance –Secure coding standards are in place to design security into new products –A comprehensive information security policy suite is in place, deﬁ ning the framework within which Sage operates –Awareness training for Information Management and protection has been rolled-out across the organisation –A new Information Security Risk Management Methodology has been designed, and deployed across deﬁ ned critical assets –The Incident Management framework includes the rating of incidents and requirements for escalation has been embedded within all regions –Structured IT internal audit activity is undertaken by Sage Assurance against an agreed plan, and supplemented by ad-hoc activity. Findings are reported to management and the Audit and Risk Committ eeIn progress: –Information Security is being aligned with the existing Governance structures (Global and Regional Risk Committ ees), to establish clear accountability –Deployment of the Information Security Risk Management Methodology more widely across business critical assets –The Data Governance Committ ee provides direction around data and Data Protection, and our response to GDPRPrincipal risk Risk backgroundManagement and mitigation Supporting control environmentSage’s control environment, business processes and technology infrastructure do not support the eﬃ cient and eﬀ ective operation of the business. Sage’s footprint has developed oft en through acquisition. Ongoing alignment and rationalisation of these systems and processes, is required to support the One Sage operating model. –Established Global and Regional Risk Committ ees drive accountability for risk, provide governance, and set the tone-from-the-top –Shared Service Centres are established in Newcastle, Atlanta and Johannesburg enabling the creation of consistent and consolidated systems and processes –Policy Approval Committ ee in place to supervise and approve policies within the Sage-wide policy suite –Customer Business Centres (CBCs) are built around core systems to underpin operational consistency and expansion, including Salesforce CRM and Sage’s own X3 for General Ledger activity. As volumes scale, all new customers for CBC supported products are being set-up in these systems –A Governance, Risk and Compliance technology solution is in place In progress: –Migration of country General Ledgers onto X3 continues for certain processes, in line with plans –Continuation of the Excellence in Controls initiative to enhance the supporting control environment across key business processes –Deﬁ nition and deployment of control frameworks for Shared Service Centres and for Sales as output from the Excellence in Controls initiative –Implementation of Sage People as a single application to store and manage colleague data One SageCapacity for growthStrategic alignment:One SageStrategic alignment:55The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsPrincipal risks and uncertainties continuedPrincipal risk Risk backgroundManagement and mitigation Regulatory and legal frameworkSage does not understand and operate within the applicable regulatory and legal framework. Sage’s services operate within a complex regulatory and legal environment. Monitoring this evolving regulatory and legal environment enables timely and appropriate steps to ensure ongoing compliance. –All legal resources across Sage report directly to the General Counsel and Company Secretary –Legal services use internal and external resources to monitor planned and realised changes in legislation –All product contracts are reviewed and approved through Legal Services –A suite of policies is in place which supports key legislation, including Data Protection and anti-bribery –A Code of Conduct is in place across the business which provides clarity over how colleagues are expected to behave. Completion of Code of Conduct training is mandatory for colleagues, and conﬁ rmation of understanding is recorded and monitored –Sage Compliance function has been created to reinforce the drive towards a 100% compliance culture –Whistleblowing and Incident Management Policies and procedures are in place, which ensure appropriate treatment of identiﬁ ed events, and management visibilityIn progress: –Data Governance Committ ee providing direction around upcoming GDPRKeyImproving risk environmentStatic risk environmentOne SageStrategic alignment:Worsening risk environmentSage brandSage does not deliver clear and consistent branding to the market.Following several years of acquisition, work continues to develop and harmonise the Sage brand. Whilst it is well recognised and trusted by customers in many core markets, brand awareness remains inconsistent.A clear and consistent brand enables customers to understand Sage values. –A Brand team is in place which has overall responsibility for developing the Sage Brand –All countries must comply with Sage’s Brand Governance and Brand Guidelines, which are designed to execute the Sage Masterbrand Strategy. The timeframes for compliance of all products are deﬁ ned, and any exceptions must be approved through the Brand team –A Digital Asset Management (DAM) tool is in place which workﬂ ows requests and approvals, and acts as a single information repository –The Brand Library is used as a repository for branded assets, and any exceptions from brand guidelines are reported to the Chief Marketing Oﬃ cer –Ongoing reviews of customer experience are performed (Net Promoter Scores), and output is reviewed across both countries and products to identify variance, and develop improvement plans –Sage Summits were completed across eight cities during 2017 (Paris, Berlin, Johannesburg, Melbourne, London, Madrid, Atlanta and Toronto) –A brand awareness campaign is in place to improve brand recognition –The Sage Foundation is operating across Sage, aligned with our values and behaviours In progress: –A Compliance Programme is being rolled out, to assess and educate on compliance with Brand Governance and Brand Guidelines –Rebranding of productsOne SageStrategic alignment:The Sage Group plc | Annual Report & Accounts 201756Principal risk Risk backgroundManagement and mitigation Partners and alliancesSage fails to identify, build, enable and maintain appropriate partnerships and alliances.There are instances where leveraging partnerships and alliances can support the growth ambitions of Sage.The governance and control around engagement and use must be deﬁ ned, as well as management of the ecosystem. –A Partner and Alliances team is established to oversee the selection and management of Sage’s partners and alliances, including accountability for active management of relationships –Deﬁ nitions are in place to ensure clarity and consistency over partners and alliances, to enable appropriate and consistent management of these arrangements –All contracts for partners and alliances require approval through legal services –Deﬁ ned legal provisions are required for inclusion in contracts. Any variance in provisions must be recorded as part of the formal contract approval processIn progress: –Deployment of revised Sage Partner Programme in line with planThe principal risks are those which, it is assessed, most threaten successful delivery of Sage’s strategy. They are therefore used as the basis for challenging, and establishing, our ﬁ nancial viability. Revolutionise businessStrategic alignment:Third party relianceSage does not understand and manage its third party ecosystem.Several Sage customer service oﬀ erings are delivered or supported using third parties, whilst Sage remains accountable for quality of performance.The third party ecosystem must be understood and eﬀ ectively managed, in order to limit Sage’s exposure. –A Procurement function ensures key controls are applied in the selection and on-boarding of third parties –The Procurement function supports the business with the selection of third parties and negotiation of contracts –Legal resources are used in contract negotiation –A Procurement Lifecycle Policy and Procedures are deﬁ ned, agreed and published. These contain clear roles and responsibilities for colleagues and align with existing processes, including investment approvalIn progress: –All colleague training developed, to enhance colleague understanding and support process –Automation of procurement requests is being developed in Service Now, to simplify colleague experienceRevolutionise businessStrategic alignment:57The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsPrincipal risks and uncertainties continuedViability statementThe viability periodThe Directors reviewed the period used for the assessment and determined that a three-year period remained suitable. This period aligns our viability statement with our planning time horizon for our three-year strategic plan and is appropriate given the nature and investment cycle of a technology business. Cash ﬂ ows over this period have a relatively high degree of predictability, particularly as business moves to the subscription model. Projections beyond this period become less reliable given the inherent uncertainty of technology and market developments.Assessing viabilityThe strategy and associated principal risks, which the Board and the Audit and Risk Committ ee review at least annually, are a foundation for the Group’s strategic plan. The plan makes certain assumptions about the uptake of subscription services, the ability to reﬁ nance debt as it falls due and the acceptable performance of the core revenue streams and market segments.The plan was stress tested using sensitivity analysis. To achieve this, management reviewed the principal risks and considered which might threaten the Group’s viability. It was determined that none of the individual risks would in isolation compromise the Group’s viability, and so a number of diﬀ erent severe but plausible scenarios were considered where principal risks arose in combination. The scenarios identiﬁ ed and the combination of principal risks involved were as follows.#Description of scenarioPrincipal risks involved1An information security incident relating to Sage internal or colleague information, leading to data: –being lost or leaked outside the Group; and/or –becoming corrupted or contaminated; and/or –becoming inaccessible. –Sage brand –Third party reliance –Supporting control environment –Information management and protection (including cyber) –Legal and regulatory framework2An information security incident relating to customers, leading to data: –being lost or leaked outside the Group; and/or –becoming corrupted or contaminated; and/or –becoming inaccessible for the customers. –Sage brand –Partners and alliances –Third party reliance –Information management and protection (including cyber) –Legal and regulatory framework3Sage, or a third party acting on Sage’s behalf, fails to comply with legal obligations, leading to: –allegations of bribery or corruption; and/or –allegations of modern slavery; and/or –breach of sanctions. –Sage brand –Partners and alliances –Third party reliance –Legal and regulatory framework4A Sage product or service does not comply with regulatory or legal requirements, leading to: –action against and / or direct costs for our customers; and/or –remediation requirements. –Sage brand –Partners and alliances –Third party reliance –Legal and regulatory framework5A strategic or corporate alliance through which key customer services are delivered is acquired by a competitor or is subject to a catastrophic failure (for example, for reasons including bankruptcy, fraud or legal action), leading to: –migration of services; and/or –temporary non-availability of services; and/or –potential discontinuance of services. –Sage brand –Partners and alliances –Legal and regulatory frameworkThe monetary impact of each scenario was estimated by a cross functional group of senior leaders, including representatives from Finance, Risk, IT, Product Marketing and Legal, who evaluated the possible consequences, primarily through reducing revenues and net cash in-ﬂ ows. These impacts were based on similar events in the public domain and internal estimates. The impacts were modelled for both year one and year three of the forecast period to ensure that expected changes in the Group’s product mix, through migration towards a greater proportion of cloud-based products, did not adversely impact on the Group’s viability. As set out in the Audit and Risk Committ ee’s report on page 76, the Directors reviewed and discussed the process undertaken by management, and also reviewed the results of reverse stress testing performed to provide an illustration of the reduction in revenue that would be required to break the Group’s covenants or exhaust all available cash.Conﬁ rmation of longer-term viabilityBased on the assessment explained above, the Directors conﬁ rm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the next three years. The Sage Group plc | Annual Report & Accounts 201758The Board is responsible for maintaining and reviewing the eﬀ ectiveness of our risk management activities from a ﬁ nancial, operational and compliance perspective. These activities are designed to identify and manage, rather than eliminate, the risk of failure to achieve business objectives or to successfully deliver the business strategy. Our risk management strategy supports the successful running of the business by identifying and managing risks to an acceptable level and delivering assurance on these.How we identify riskOur risk identiﬁ cation process follows a dual approach, seeking: –to identify risks using a top down approach. These principal risks are those which threaten delivery of our strategy; and –to identify risks using a bott om up approach at the country and regional level. Such risks are those which threaten local business activity.To provide visibility, the highest rated local risks are escalated in line with the Risk Management Policy to the Regional and Global Risk Committ ees.Our risk appetiteOur risk appetite reﬂ ects our preparedness to accept risk, as part of our business activities.All identiﬁ ed risks are measured on an inherent and residual risk basis using a pre-determined scoring matrix as set out in our Risk Management Policy.Each principal risk is monitored against deﬁ ned appetite statements and supporting metrics, with these statements and metrics evaluated across the year to ensure they remain aligned to our strategic objectives and within acceptable tolerance for the Group.How we manage riskOur risk management framework enables us to identify, evaluate, analyse, manage and mitigate those risks which threaten the successful achievement of our business strategy and objectives, within acceptable tolerance. Risks are owned and managed within the business, and formally reviewed on a quarterly basis through the Global and Regional Risk Committ ees, which are described on pages 60 and 61. Sage Risk continues to review and develop its approach to guide, support and challenge the business in managing risk, in order to enable successful delivery of our strategy.To supplement business as usual risk management activities, Sage Risk undertakes a number of targeted in-focus reviews against identiﬁ ed risks each year. In 2017 these were conducted against one principal risk, namely Information Management and Protection (including cyber), and a further six reviews across speciﬁ c areas, speciﬁ cally Business Continuity, Payroll Outsource, Data Repair Services, General Data Protection Regulations, Quotas and Commissions and Sales Data in North America. In each case Sage Risk worked to critically review activities and collaboratively improve practices and processes, for which ownership remains within the business. Following each review, Sage Risk has remained engaged with the business to provide ongoing guidance, support and challenge. The results of these reviews feed into the quarterly risk reporting cycle to the Global Risk Committ ee.During 2017, Sage Risk reviewed and revised its organisational structure. The geographic footprint of the team has been enhanced with dedicated resources being onboarded in Africa, Asia, North America and Latin America. The responsibilities of each Risk colleague continue to include speciﬁ c geographic scope, together with alignment to both principal risks and Sage business functions. These changes ensure that Sage Risk can continue to eﬀ ectively support colleagues and functions within the business and in-country risk management. To assist colleagues in understanding how to identify and report risks, compulsory risk management training for all colleagues was developed and released in April 2017, followed by training for incident management in May 2017. Further, a Governance, Risk and Compliance tool has been implemented which workﬂ ows colleague reporting and management of risk.Risk managementMitigateEvaluateMeasureAssessRisk management processOur Three Lines of DefenceSage’s Three Lines of Defence approach ensures accountability and transparency by sett ing out the roles and responsibilities of all colleagues.The model and its eﬀ ective operation support a strong control environment with best in class Governance, Risk and Control procedures embedded across Sage.Sage Assurance – Independent and Objective Assurance.Sage Risk and Sage Compliance – Guide, Support, Challenge.All Colleagues – Identify, Own, Operate.2133 Lines of DefenceAll ColleaguesRisk and ComplianceSage Assurance59The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsUnderpinning this, Sage has continued to develop its three lines of defence model to ensure accountability and transparency by sett ing out the roles and responsibilities of each Sage colleague. The model and its eﬀ ective operation is intended to support a strong control environment with appropriate governance, risk and control procedures embedded across Sage. To promote this model the Sage Compliance function has grown and embedded its activities, to support the business in continuing to develop the internal control framework, assist our aim of a 100% compliance culture and ensure that we continue to embrace our values and behaviours in the Sage Way.Values and behavioursThe Board is aware that the eﬀ ectiveness of risk management and deﬁ nition and operation of an eﬀ ective control environment is dependent on values and behaviours.The Sage Values and Behaviours set out how Sage’s strategy should be executed. Our Code of Conduct supports and reinforces the required values and behaviours expected across Sage, including compliance with ethical standards. Behaviour forms a signiﬁ cant part of our colleague performance management process.In addition, as previously stated, our three lines of defence model determines clear roles and responsibilities for colleagues, and establishes accountability and how appropriate challenge, assurance and oversight is provided over business activities. To facilitate colleague understanding of the requirements of the Sage policy framework, during 2017 we have created and rolled-out a number of training courses to all colleagues, with tests of competency and understanding. Risk governanceWe operate a formal governance structure to manage risk.BoardGlobal Risk Committ eeRegional Risk Committ eesAudit and Risk Committ eeExecutive Committ eeVice President, Risk and AssuranceSage RiskPrincipal risks and uncertainties continuedBoardThe Board has overall responsibility for risk management and establishing the Group’s risk appetite. It monitors the risk environment, and reviews the relevance and appropriateness of the principal risks to the business.Audit and Risk Committ eeThe Audit and Risk Committ ee supports the Board in sett ing the Group’s risk appetite and ensuring that processes are in place to identify, manage and mitigate the Group’s principal risks. At each meeting, the committ ee reviews the principal risks, associated appetite statements and metrics, to assess whether they continue to be relevant and aligned to the achievement of Sage’s strategic objectives and within an acceptable tolerance for the Group. The committ ee also monitors the adequacy and eﬀ ectiveness of the control environment through the review of Internal Audit reports from Sage Assurance and consideration of relevant reporting from management, Sage Risk and the external auditor. Further information on the committ ee’s activity in 2017 is set out in the Audit and Risk Committ ee section on pages 76 to 81.Executive Committ eeThe Executive Committ ee is responsible for the stewardship of the risk management approach. It develops the strategy and oversees delivery of related operational plans, whilst managing risk. For each principal risk, sponsorship is assigned to a member of the Executive Committ ee. Global Risk Committ eeThe Global Risk Committ ee is chaired by the Chief Executive Oﬃ cer, and has responsibility for providing direction and support to Sage Risk in transforming and embedding risk across One Sage. It meets quarterly and seeks to: –Oversee cultural change; –Establish clear governance and accountability for risk, and any associated (remediation) activities; –Provide direction to regions and countries, including creation and deployment of common methodologies and practices; –Provide a point of escalation; –Consideration of risk in decision making;The Sage Group plc | Annual Report & Accounts 201760 –Drive the inclusion of risk management into performance management; –Enable the Company to eﬀ ectively operate as One Sage; –Review and approve deﬁ ned policies; and –Provide the Board and Audit and Risk Committ ee with suﬃ cient eﬀ ective information to enable them to discharge their risk reporting requirements.Its membership includes representatives from across the business and all key support functions. The Chairman of the Audit and Risk Committ ee may att end any meeting as desired, and joined the April 2017 meeting.Regional Risk Committ eesFour Regional Risk Committ ees were operational through 2017, in Europe, Africa / Asia, North America and South America. Each Committ ee met four times during 2017. In October 2017 the Africa / Asia committ ee was split in two to create ﬁ ve Regional Risk Committ ees. Africa Middle East and Asia Australia committ ees were formed, to allow greater risk focus in these territories.The Regional Risk Committ ees meet in advance of the Global Risk Committ ee, supporting its operation and the management of principal and local risks within each region. In addition to managing identiﬁ ed local risks, they also monitor the deployment of risk management activities throughout the countries within their regions, monitor the realisation of risks through reported incidents within their regions, and provide associated escalation and reporting. Vice President (“VP”) Risk and AssuranceThe VP Risk and Assurance is responsible for the second and third line of defence functions, namely Sage Risk, Sage Compliance and Sage Assurance. The VP Risk and Assurance is responsible for the facilitation and implementation of the risk management approach across Sage, including the consolidation of risk reports from the Regional Risk Committ ees, and the provision of appropriate risk reporting from Sage Risk for the Global Risk Committ ee, the Audit and Risk Committ ee, and the Executive Committ ee. The VP Risk and Assurance att ends the quarterly Audit and Risk Committ ee meetings and regularly meets with the Chairman of the Audit and Risk Committ ee outside of these meetings.Sage RiskSage Risk supports the eﬀ ective operation of the Risk Committ ees and provides guidance, support and challenge to the business in embedding appropriate risk management processes. Led by the Risk Director, it continues to develop its capability to ensure it fully supports business activities and assists in delivering scalable and consistent solutions to support growth, and allowing Sage to operate within risk appetite.Sage ComplianceSage Compliance provides guidance, support and challenge to the business to drive excellence in governance and control, and design and embed control frameworks which reinforce behaviours set out in the Sage Way, supporting our ambition of a 100% compliance culture. Led by the Compliance Director, it continues to develop its capability to ensure it is fully aligned with business activities.Sage AssuranceSage Assurance is led by the Assurance Director, and its purpose and activities are set out in Internal Audit section of the Audit and Risk Committ ee report on page 80.61The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsSteve HareChief Financial Oﬃ cerDirectors’ approval of Strategic ReportOur 2017 Strategic report, from page 1 to page 61, has been reviewed and approved by the Board of Directors on 21 November 2017.The Sage Group plc | Annual Report & Accounts 201762Donald BrydonChairmanThere has been much focus on corporate governance in the recent past and the landscape continues to change. Nevertheless, the core principles remain intact and I am pleased to share the way we see the role of the Board.It is important that we all remember the Board is not a committ ee where individuals represent distinct interests but rather a risk managing and capital allocation body which, in addition to shaping the framework for strategic development, participates in and is accountable for the taking of appropriately calibrated risks.The Board of the Company is committ ed to ensuring that it provides eﬀ ective leadership and promotes uncompromising ethical standards. One of the ways in which the Board achieves this is by requiring that good governance principles and practices are adhered to throughout the Company.Good governance is about helping to run the Company well. It involves being satisﬁ ed that an eﬀ ective internal framework of systems and controls is in place which clearly deﬁ nes authority and accountability and promotes success whilst permitt ing the management of risk to appropriate levels.It also involves the exercise of judgement as to the deﬁ nitions of success for the Company, the levels of risk we are willing to take to achieve that success, and the levels of delegation to the executive. The exercise of this judgement is the responsibility of the Board and involves consideration of processes and assumptions as well as outcomes. It also involves the creation of a sensitive interface for the views of shareholders and other stakeholders to be given appropriate consideration when reaching these judgements.To assist this, the Board has created a new position of Board Associate (described on page 68) to enhance the voice of employees in the Board’s deliberations.The Executive Team is required to provide the information to the Board that the Board needs to enable it to exercise its judgement. It must also evidence appropriate process. There is a very ﬁ ne distinction between the approval of processes and their deﬁ nition. Only exceptionally would the Board intervene to initiate or deﬁ ne.The Board also sets the tone for the Company. The way in which it conducts itself, its att itude to ethical matt ers, its deﬁ nition of success, and the assessment of appropriate risk, all deﬁ ne the atmosphere within which the Executive Team works. The Board has ultimate responsibility for ensuring an appropriate culture in the Company to act as a backdrop to the way in which the Company behaves towards all stakeholders.Good corporate governance is not about adhering to codes of practice (although adherence may constitute a part of the evidence of good governance) but rather about the exercise of a mindset to do what is right. One of the challenges facing any Board is the way in which the non-executive and the executive directors interact. It is clear that they each have the same legal responsibility but it is generally unrealistic to expect Executive Directors to speak individually with the same freedom as the Non-executive Directors. Equally, Executive Directors who just “toe the executive line” in contradiction to their own views may not be eﬀ ectively contributing to good governance. A well-functioning Board needs to ﬁ nd the right balance between hearing the collective executive view, being aware of the natural internal tensions in an executive team and allowing independent input from the Non-executive Directors.One of the consequences of both increasing the watchdog role of the Board and ﬁ nding this balance between individuality and team behaviour is driving more and more Boards to have fewer and fewer executive directors. In our circumstances, the reduced Board size works eﬀ ectively and an appropriate balance is struck.Notwithstanding the tensions created by many external expectations, which may be wholly or in part unrealistic, a successful Board should, ideally, be composed of a diverse group of respected, experienced and competent people who coalesce around a common purpose of promoting the long-term success of the Company, provide a uniﬁ ed vision of the deﬁ nitions of success and appropriate risk, endeavour to support management (i.e. those who honestly criticise at times but encourage all the time) and who create conﬁ dence in all stakeholders in the integrity of the business.Donald BrydonChairmanChairman’s introduction to corporate governanceEnabling our strategic ambition Compliance with the UK Corporate Governance Code (April 2016) (“the Code”) Throughout the ﬁ nancial year ended 30 September 2017 and to the date of this report, Sage has complied with the provisions of the Code. The Code is publicly available at the website of the UK Financial Reporting Council at www.frc.org.uk. This corporate governance section of the Annual Report & Accounts describes how we have applied the principles of the Code.63The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsDonald Brydon (72)ChairmanAppointed to the Board6 July 2012Experience:Donald Brydon had a 20-year career with Barclays Group, during which time he was Chairman and Chief Executive of BZW Investment Management, followed by 15 years with the AXA Group, including the posts of Chairman and Chief Executive of AXA Investment Managers and Chairman of AXA Framlington.He has formerly chaired the London Metal Exchange, Amersham plc, Taylor Nelson Sofres plc, the ifs School of Finance, Smiths Group plc, Royal Mail plc and EveryChild. Donald has also served as Senior Independent Director of Allied Domecq plc and Scott ish Power plc. Areas of expertise:Donald brings to the Board his wealth of experience gained as Chairman of companies across a wide range of sectors. Since being appointed as Chairman of Sage, Donald has overseen comprehensive changes to the composition of the Board and Committ ees and navigated the Company and Board through signiﬁ cant change. Other current appointments: –London Stock Exchange Group Plc – Chairman –Medical Research Council – ChairmanKey to committ eesAAudit and Risk Committ eeNNomination Committ eeRRemuneration Committ eeNBoard of DirectorsKnowledge and experienceDrummond Hall (68)Senior Independent Non-executive DirectorAppointed to the Board1 January 2014Experience:Drummond Hall was previously Chief Executive of Dairy Crest Group plc from 2002 to 2006, having joined the company in 1991. Prior to this the majority of his career was spent with Procter and Gamble, Mars and Pepsi Co. Drummond was a Non-executive Director of Mitchells & Butlers plc from July 2004 to January 2010 and Chairman from June 2008 to November 2009.Areas of expertise:Drummond brings a wealth of experience gained across a number of customer-focused blue-chip businesses in the UK, Europe and the US. His strong appreciation of customer service and marketing brings deep insight into Sage as we focus on ways to expand our markets and delight our customers with our technology and service levels. Drummond was appointed Senior Independent Non-executive Director on 28 February 2017.Other current appointments: –WH Smith plc – Senior Independent Non-executive Director –First Group plc – Senior Independent Non-executive DirectorANRSteve Hare (56)Chief Financial Oﬃ cer – Executive DirectorAppointed to the Board3 January 2014Experience:Prior to joining Sage, Steve Hare was Operating Partner and Co-Head of the Portfolio Support Group at the private equity ﬁ rm Apax Partners, which he joined in 2009. Before his work at Apax Partners, he built over 10 years’ experience leading the ﬁ nance function for three listed UK companies culminating as CFO for FTSE 100 company Invensys plc from 2006 to 2009. Between 2004 and 2006 Steve was Group Finance Director for Spectris plc, the FTSE 250 precision instrumentation and controls company, and from 1997 to 2003 he was with Marconi plc, serving as CFO from 2001.Steve qualiﬁ ed as a chartered accountant in 1985 with Ernst & Whinney, now part of Ernst & Young LLP.Areas of expertise:Steve has signiﬁ cant ﬁ nancial, operational and transformation experience which includes driving change programmes in a number of his previous roles. This experience allows him to ensure Sage continues to perform strongly whilst delivering the recent transformation and positioning Sage for continued growth.ANeil Berkett (62)Independent Non-executive DirectorAppointed to the Board5 July 2013Experience:Neil Berkett has over 30 years’ experience in a wide range of highly competitive consumer industries. Most recently, he was Chief Executive of Virgin Media Group from March 2008 to June 2013, having joined ntl, Virgin Media’s predecessor, as Chief Operating Oﬃ cer in September 2005. Before ntl he was Managing Director, Distribution, at Lloyds TSB plc. His previous roles include Chief Operating Oﬃ cer at Prudential Assurance Company Ltd UK, Head of Retail at St George Bank, Senior General Manager at the Australian division of Citibank Limited, Chief Executive at Eastwest Airlines Australia and Financial Controller at ICL Australia.Areas of expertise:Neil has signiﬁ cant experience in leading change within organisations whilst retaining the focus on customer experience. He is able to bring this insight and knowledge to the transformation at Sage and our customer-focused strategy.Other current appointments: –Guardian Media Group – ChairmanRThe Sage Group plc | Annual Report & Accounts 201764RChanges to the BoardRuth Markland and Inna Kuznetsova stood down from the Board aft er the Annual General Meeting on 28 February 2017. Soni Jiandani was appointed with eﬀ ect from 28 February 2017, and Cath Keers was appointed with eﬀ ect from 1 July 2017.Stephen Kelly (55)Chief Executive Oﬃ cer – Executive DirectorAppointed to the Board5 November 2014Experience:Stephen Kelly has over 30 years’ leadership experience in the Small & Medium Business and technology sectors. He has previously served as Chief Executive Oﬃ cer of two high-growth, public soft ware companies: NASDAQ-listed Chordiant Soft ware, Inc. from 2001 to 2005 and LSE-listed Micro Focus International plc from 2006 to 2010. In 2012 he was appointed Chief Operating Oﬃ cer for the UK Government where he was the most senior executive responsible for the UK Government’s Eﬃ ciency & Reform agenda, including Digital, Commercial,IT and Small & Medium Business strategies.Areas of expertise:Stephen brings to the Board over 30 years’ leadership experience in high-growth technology businesses ranging from start-ups to listed multi-national companies, in the UK and USA. His passion for entrepreneurs and technology, and the role they play in driving economic prosperity, lies at the heart of the transformation we are driving at Sage.Soni Jiandani (51)Independent Non-executive DirectorAppointed to the Board28 February 2017Experience:An engineer by background, Soni Jiandani has over 25 years’ experience in the technology industry, including 22 years at Cisco where she held the position of SVP, Marketing. During her time at Cisco, she led a team which was responsible for establishing multi-billion dollar revenue streams in the Switching, Storage Networking and Server markets. She was also part of the team that established many successful, company-funded start-ups which were subsequently acquired (spin-ins) which provided access to adjacent markets. Prior to joining Cisco, Soni held marketing executive positions at UB Networks and Excelan. Areas of expertise:Soni has extensive experience in marketing and driving industry transformation through market disruption. Her background of bringing innovative technologies to market is a valuable addition to the Board’s skills and experience.NJonathan Howell (55)Independent Non-executive DirectorAppointed to the Board15 May 2013Experience:Jonathan Howell is currently Group Finance Director of Close Brothers Group plc, joining in February 2008, and previously held the same position at the London Stock Exchange Group plc from 1999. Jonathan has also been a Non-executive Director of EMAP plc and Chairman of FTSE International. The early part of his career was at Price Waterhouse where he qualiﬁ ed as a chartered accountant.Areas of expertise:Jonathan’s signiﬁ cant ﬁ nancial and accounting experience, coupled with his role as Chairman of the Audit and Risk Committ ee, allow him to provide substantial insight into the Group’s ﬁ nancial reporting and risk management processes. Other current appointments: –Close Brothers Group plc – Group Finance Director.ARCath Keers (52)Independent Non-executive DirectorAppointed to the Board1 July 2017Experience:Cath started her retail career with Thorn EMI and, aft er marketing and business development roles at Sky TV, Avon and Next, joined the BT Group in 1996, holding a number of commercial roles, including Marketing Director O2, Chairman of Tesco Mobile and Customer Director O2, where she was in charge of refocusing the organisation’s customer strategy. Areas of expertise:Cath brings a wealth of digital and customer experience insights to the Board, together with a deep understanding of leveraging sales and marketing activity to build successful brands. Other current appointments: –Royal Mail plc – Independent Non-executive Director; –TalkTalk Telecom Group plc – Independent Non-executive Director; –Liverpool Victoria Friendly Society Limited – Independent Non-executive Director; and –Ustwo Fampany Ltd – Chairman.65The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsExecu�iveCommiteeFromleftorightSanjayAlmeida,VickiBradin,BlairCrump,AmandaCusdin,SteveHare,StephenKelly,RonMcMurtrieandKlaus-MichaelVogelbergTheSageGroupplc|AnnualReport&Accounts201766Stephen Kelly (55)Chief Executive Oﬃ cer, Board of DirectorsFor Stephen Kelly’s skills and experience see page 65.Steve Hare (56)Chief Financial Oﬃ cer, Board of DirectorsFor Steve Hare’s skills and experience see page 64.Klaus-Michael Vogelberg (52)Chief Technology Oﬃ cerResponsible for Sage’s technology strategy and soft ware architecture, Klaus-Michael is Chief Technology Oﬃ cer. From 2004 to 2007 he was Research and Development Director for Sage UK and Ireland. Klaus-Michael joined us when Sage acquired the German KHK Soft ware group in 1997, where he was Research and Development Director and a partner.A soft ware entrepreneur, Klaus-Michael set up his ﬁ rst business aged 19 while studying aeronautical engineering and national economics.Ron McMurtrie (52)Chief Marketing Oﬃ cer (Interim)Ron McMurtrie joined Sage in 2017 and leads marketing across the Company, inspiring long-term relationships through creativity and innovation.Ron aligns the strategic direction of product, brand, digital marketing and communications, and oversees key functional areas for new customer acquisition, building customers for life, and advancing Sage’s cloud strategy.Before joining Sage, Ron was global Chief Marketing Oﬃ cer at Recall, an information management company, leading worldwide marketing strategy and operations. Previously, Ron has over 20 years’ experience in similar roles for brands including VCE – the joint venture between Cisco, EMC and VMware – First Data, Verizon and MCI. Ron is a multi-dimensional leader with P&L and personnel responsibility spanning direct sales, marketing, enterprise consulting and professional services in private and public-sector markets.Vicki Bradin (39)General Counsel and Company SecretaryVicki joined Sage in June 2016 and became General Counsel and Company Secretary in October 2016. Vicki previously worked for FTSE 250 soft ware company Misys, where she was Associate General Counsel and had responsibility for mergers and acquisitions, litigation, risk, intellectual property and more. Aft er graduating from Nott ingham University, Vicki qualiﬁ ed as a solicitor in the City of London. Vicki spent her early career working as a corporate lawyer in global and "magic circle" law ﬁ rms before moving in-house working in large multinationals and UK public limited companies, helping grow and transform businesses whilst managing their regulatory and litigation risk.Blair Crump (55)PresidentBlair joined Sage as President in August 2016 from PROS Holdings, where he had been COO since February 2014. Previously, he led Salesforce.com’s Global Enterprise business, reporting to CEO and co-founder Marc Benioﬀ . Prior to that, he was Group President at Verizon Business, responsible for Worldwide Sales & Consulting. He began his career in 1983 with MCI as its ﬁ rst sales representative in New York City where he worked for over 20 years before Verizon acquired the company in 2006. Blair holds a Bachelor’s Degree in Economics from the Wharton School at the University of Pennsylvania.Amanda Cusdin (40)Chief People Oﬃ cer (Interim)Amanda became interim Chief People Oﬃ cer in October 2017, having joined Sage in March 2015. Amanda has 18 years’ of HR experience across several global FTSE organisations in a variety of sectors where she focused on supporting executive leaders to drive change and transformation. During her career to date Amanda has built extensive experience across the Americas, Asia and Europe. She has led speciﬁ cally in M&A, growth in new geographies and working across cultures and matrix organisations. Amanda has also specialised in talent development to executive level.Amanda has a Bachelor’s degree in History from the University of Warwick and postgraduate qualiﬁ cations in Human Resources Management.Sanjay Almeida (44)Chief Product Delivery Oﬃ cerSanjay joined Sage as Chief Product Delivery Oﬃ cer in October 2017, responsible for the product strategy and delivery of Sage’s full suite of products. Sanjay joined Sage from SAP, where he had been Senior Vice President and Chief Product Oﬃ cer of the company’s Ariba business since October 2015. Prior to this, Sanjay spent ten years at Concur Technologies, before the company was acquired by SAP. Here he held senior positions in Research & Development, before being made Senior Vice President of Global Product Management and Strategy.Sanjay has an MBA in General Management from the Kellogg School of Management, Northwestern University.67The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsThe role of the Board at Sage is to provide strategic leadership and eﬀ ective oversight of the Group’s activities. In order to achieve this, the Board receives regular reports from the CEO and CFO, and each meeting's business aligns to an annual agenda which provides time to discuss broader themes and initiatives. In particular, this year the Board has focused on: –The Group’s long-term strategy, and reviewing progress against strategic objectives; –Considering Sage’s business culture, and embedding our Values and Behaviours; –Our principal risks, risk appetite, and the manner in which the changing external environment may aﬀ ect Sage’s strategy; –Our product portfolio, and our strategy for delivering new and innovative products together with continuous improvements in product quality; –Mergers and acquisitions, including the acquisition of Sage People and Intacct and the divestment of the US Payments business; and –Succession planning, both at Board and Executive Committ ee level, and talent development.The Board’s activities and focus during the year are described in more detail on page 72. Board composition and independenceThe Board composition is set out on pages 64 to 65. These pages also include details of the Directors’ skills and experience. The Directors have a range of experience and can bring independent judgement to bear on issues of strategy, performance, resources and standards of conduct. This experience and judgement is considered vital to our success. It is the balance of skills, experience, independence and knowledge of our Directors which ensures the duties and responsibilities of the Board and its committ ees are discharged eﬀ ectively. The Board has spent signiﬁ cant time over the past year sourcing suitable replacements for Ruth Markland and Inna Kuznetsova, who both retired at the AGM in February 2017. Their replacements, Soni Jiandani and Cath Keers, were selected for their knowledge and experience in those areas identiﬁ ed as being of importance to Board balance, such as technology sector expertise. You can read more about the nominations process in our Nomination Committ ee report on page 82.The Board monitors the independence of its Non-executive Directors, particularly those who have given long service. Having reviewed the current Board, the Non-executive Directors are all considered to be independent. Donald Brydon was considered independent at the date of his appointment.Drummond Hall accepted the appointment of Senior Independent Director upon the retirement of Ruth Markland. Drummond joined the Board in 2014 and is Chairman of the Remuneration Committ ee.The Board also considered the Chairman’s role and determined that Donald Brydon has appropriate time and resource to devote to his role as Chairman of Sage. All directors are subject to election or re-election by shareholders at each Annual General Meeting.Board in action: Atlanta engagement visitIn May 2017, Drummond Hall visited our Atlanta CBC and Sage Summit as part of his engagement activities. The visit started with a site tour and walk around the sales ﬂ oor, then a series of meetings with the local senior management team which were themed around Sage's strategic pillars.At Sage Summit, Drummond participated as a judge at the Big Give Live Philanthropitch, a social impact competition that provides high potential non-proﬁ t organisations with access to human and ﬁ nancial capital. Three non-proﬁ ts whose missions align with the Sage Foundation's priority funding areas pitched to the Summit audience and judging panel for the chance to win up to $15,000 in funding. Later that day, Drummond joined customer and Partner roundtable activities, providing the opportunity to get closer to our US operations through the voice of the customer and to understand the needs of our US Partners.Visits such as these have many beneﬁ ts. They help our directors see parts of the business up close and meet Sage colleagues from sales through to senior management, with the chance to challenge and question the organisation in a constructive way. Equally, our colleagues, customers and partners see and value the eﬀ ort we are making to engage with them and understand their challenges and opportunities. Board AssociateIn 2017, the Board took the innovative step of appointing a Board Associate from amongst a selection of high-performing nominees. All nominees were considered by the Board and shortlisted candidates were interviewed by the Chairman and at least one other NED. Non-executive Director Amy Lawson, EVP Communications, took up the position in September 2017. Amy will att end all Board meetings for one year as an observer and a contributor, bringing a new voice and dynamic to the Board table, whilst allowing colleague insight into the workings of the Boardroom. Amy plans to share her experiences with colleagues, and has already published a blog post on Your Sage with her thoughts on the role of the Board, how colleagues can strengthen their understanding of Sage’s strategy, and what that means for them.Corporate governance reportThe Sage Group plc | Annual Report & Accounts 201768DiversityThe Board has due regard for the beneﬁ ts of diversity in its membership and strives to maintain the right diversity balance including gender, age and professional background, whilst ensuring that appointments reﬂ ect the most appropriate candidates. The Chairman seeks to ensure that the composition of the Board includes individuals with deep knowledge and experience, bringing a wide range of perspectives to the business.The Board, as at the date of this Annual Report & Accounts, comprises 25% women (2015: 25%).Board and Committ ee meetings and att endanceDirectorBoardAudit & Risk Committ eeNomination Committ eeRemuneration Committ eeDonald Brydon113/144/44/42/2Stephen Kelly13/14–––Steve Hare14/14–––Drummond Hall14/14–5/57/7Jonathan Howell214/144/43/37/7Neil Berkett 314/144/43/36/7Soni Jiandani49/10–1/2–Cath Keers51/3––1/3Inna Kuznetsova64/42/22/32/2Ruth Markland74/42/22/32/21. Donald Brydon served on the Remuneration Committ ee until 28 February 2017, and was not in att endance at the Board meeting which dealt with his re-appointment.2. Jonathan Howell served on the Nomination Committ ee until 28 February 2017.3. Neil Berkett served on the Nomination Committ ee until 28 February 2017.4. Soni Jiandani was appointed on 28 February 2017.5. Cath Keers was appointed on 1 July 2017.6. Inna Kuznetsova served on all committ ees until her resignation on 28 February 2017.7. Ruth Markland served on all committ ees until her resignation on 28 February 2017.The Board meets not less than six times per year. During FY17, it met six times in person, with a further eight telephone meetings dealing with matt ers arising in between scheduled meetings, such as acquisitions.Induction and professional developmentDuring 2017, Sage welcomed its ﬁ rst new Non-executive Directors since 2014. We therefore took the opportunity to refresh our induction programme, to ensure that the new Non-executive Directors could develop a full understanding of how Sage works. Each new Director was provided with a tailored programme, including meetings with management, external advisers and fellow Board members and brieﬁ ngs on all aspects of Sage’s activities. You can read more about Soni Jiandani’s experience of her induction in her ﬁ rst non-executive role in a FTSE-listed plc on page 83 of the Nomination Committ ee report.To assist the Board in undertaking its responsibilities, training is available to all Directors and training needs are assessed as part of the Board evaluation procedure. In addition to training and updates on industry and corporate governance developments, in 2017 we implemented a formal Director engagement programme. Directors were asked which areas of the business they would most like to understand in more depth, and they took part in visits to several locations including Newcastle, Dublin, Spain and Atlanta, where they met with local management teams, customers and partners and were provided with site tours. Directors were able to gain greater understanding and insight into particular issues faced by the business in those regions or business areas. Feedback from those involved was positive, with Directors feeling that they had been provided with an opportunity to improve the breadth and depth of their knowledge of Sage and its people, and senior management welcoming the chance to engage on an individual level with the Directors. Some Directors also att ended Sage Summit, which this year took on a roadshow approach across multiple locations. At Summit, the Directors also had the opportunity to directly engage with Sage partners and customers in att endance, as well as colleagues represented at the events. Read more about Sage Summit on page 44. All Directors have access to the advice and services of the Company Secretary who ensures that Directors take independent professional advice when it is judged necessary in order to discharge their responsibilities eﬀ ectively.Conﬂ icts of interestThe Board operates a policy to identify and, where appropriate, manage conﬂ icts or potential conﬂ icts of interest. At each Board meeting, the Board considers a register of interests and potential conﬂ icts of Directors and gives, when appropriate, any necessary approvals. There are safeguards which will apply when Directors decide whether to authorise a conﬂ ict or potential conﬂ ict, with only those Directors who have no interest in the matt er taking the decision. No conﬂ icts of interest have been identiﬁ ed during the year. Male 75% Female 25% Executive 25% Non-executive 75% 0-3 years 37.5% 3-6 years 62.5% 6+ years 0%TenureGenderExecutive/Non-executive69The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsOur governance frameworkCorporate governance report continuedBoard (see pages 64 to 65 for the Board’s composition)Our Board provides leadership to the business as a whole to drive it forward for the beneﬁ t, and having regard to the views, of its shareholders and other stakeholders.Beneath the Executive Committ ee there exists a clearly deﬁ ned organisational management structure and a governance framework consisting of sub-committ ees, each of which reports directly or indirectly into one of the Committ ees referenced above. These sub-committ ees operate within deﬁ ned terms of reference and in accordance with Sage’s suite of global governance policies, which include Finance, IT, Procurement, Legal and HR policies as well as Sage’s Code of Conduct. All decisions made by individuals or by committ ee and which involve ﬁ nancial spend or an associated risk, are governed by Sage’s Delegation of Authority matrix (DOA). The DOA is structured to ensure that day-to-day operational decisions can be taken eﬃ ciently, whilst driving higher-risk and high-value commitments for approval through the appropriate channels. By maintaining this structure we gain assurance that our operations are being run eﬀ ectively and that decisions are made in line with our commitment to always do business the right way.The terms of reference of each Committ ee, which are reviewed on an annual basis, can be found on our website www.sage.com/board-committ ees. Key Delegates authority Reports back on progressRisk management and internal controlsThe Board retains overall responsibility for sett ing Sage’s risk appetite and for risk management and internal control systems.In accordance with section C.2.3 of the Code, the Board is responsible for reviewing their eﬀ ectiveness and conﬁ rms that: –There is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company; –The systems have been in place for the year under review and up to the date of approval of the Annual Report and Accounts; –They are regularly reviewed by the Board; and –The systems accord with the FRC guidance on risk management, internal control and related ﬁ nancial and business reporting. There were no instances of signiﬁ cant control failing or weakness in the year.You can read more about our risk management and internal controls systems in our Strategic Report on pages 59 to 61 and the associated work of the Audit and Risk Committ ee on page 76 to 81.The Board –sets Sage’s risk appetite –has overall responsibility for risk management and internal controls systems –ensures processes are in place to identify and manage the Group’s principal risksChief Executive Oﬃ cer –responsible for management of the Group as a whole –delivers strategic objectives within the Board’s stated risk appetiteExecutive Committ ee (see page 66 for the Executive Committ ee’s composition) – develops and implements strategy, operational plans, budgets, policies and procedures, monitoring operating and ﬁ nancial performance; assessing and controlling risks; prioritising and allocating resources; and monitoring competitive forces in each area of operation under the direction of the CEONomination Committ ee –reviews the composition of the Board and plans for its progressive refreshing with regard to balance and structure as well as succession planning –considers wider elements of succession planning below Board level, including diversityRemuneration Committ ee –determines the framework, policy and levels of remuneration and makes recommendations to the Board on the remuneration of the Chief Executive Oﬃ cer, Chairman, Executive Directors, the Company Secretary and senior executives –oversees the creation and implementation of all-employee share plansAudit and Risk Committ ee –oversees the Group’s ﬁ nancial reporting, risk management and internal control procedures and the work of its internal and external auditorsThe Sage Group plc | Annual Report & Accounts 201770As Chairman I am responsible for leading the Board in challenging and agreeing the strategy proposed by the Chief Executive Oﬃ cer. My role as Chairman also carries a particular responsibility to monitor and assess Sage’s corporate governance practices and the overall eﬀ ectiveness of the Board.To ensure a proper dialogue with Directors, I hold meetings with the Non-executive Directors without the Executive Directors to assess their views. In addition, the Non-executive Directors meet without me being present to appraise my performance. These meetings without me present are chaired by the Senior Independent Director.I also ensure that shareholder engagement is discussed at each meeting of the Board and that all shareholders have access to the Non-executive Directors, through a request to the Chairman or the Company Secretary.My responsibilities as Chief Executive Oﬃ cer include: –The design, development and agreement of strategy with the Board; –Delivering the Board’s strategy through the Executive Committ ee; and –Managing the overall performance of Sage, concentrating on revenue and proﬁ tability. I also identify acquisitions and monitor competitive forces, as well as ensuring an eﬀ ective and motivated leadership team. I chair the Executive Committ ee and maintain a close working relationship with the Chairman.My role as Senior Independent Director is: –To support the Chairman in the delivery of his objectives; –To provide an additional point of contact for shareholders, including those who may wish to raise issues with the Board, other than through the Chairman; and –Together with the other independent Non-executive Directors, to evaluate the performance of the Chairman.In my role as Company Secretary, I am available to all Directors to provide advice and assistance, and I am responsible for providing governance advice to the Board. I ensure Board procedures are complied with, that applicable rules and regulations are followed and act as secretary to the Board and all of the committ ees. I also ensure minutes of all meetings are circulated to all Directors as well as facilitate the induction of new Directors and assist with professional development as required. 1. The roles of the Chairman and the Chief Executive Oﬃ cer are quite distinct from one another and are clearly deﬁ ned in writt en terms of reference for each role. These terms of reference are available on our website www.sage.com/company/about-sage/leadership/board-of-directors.Board rolesDonald Brydon, ChairmanResponsible for leading the Board, monitoring its eﬀ ectiveness and governanceStephen Kelly, Chief Executive Oﬃ cerResponsible for the formulation of strategy and running of the GroupDrummond Hall, Senior Independent DirectorActs as a sounding board for the Chairman and discusses any concerns with shareholders that cannot be resolved through the normal channels of communication Vicki Bradin, Company SecretaryEnsures good information ﬂ ows to the Board and its committ ees and between senior management and Non-executive Directors71The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsHow the Board operatesIn order for the Board and Committ ees to operate at their best, it is essential that they receive, in a timely fashion, papers which are clear, focused and relevant. During FY17, focus has been given to improving the template paper structure and oﬀ ering guidance to authors and presenters to help them bett er understand the Board’s information needs. Papers are circulated electronically via a secure portal, giving directors ample time to consider and digest their contents. Directors can also use the portal to make annotations to papers, and store and share relevant content for reference at Board meetings. Regular att endance at Board meetings by key executives ensures that the Board has the opportunity to discuss the risks and opportunities within our business with leaders from across the Group. It also helps foster a culture of ownership and accountability within the Executive Leadership Team and ensures that the Board are able to build strong relationships over time with those individuals. Corporate governance report continuedThe Board has formally adopted a schedule of matt ers reserved to it for decision. This schedule was last reviewed at the September 2017 Board meeting and is available via our website www.sage.com/matt ers-reserved.The Board’s activities throughout the year are underpinned by our external reporting calendar and our internal business planning processes. A rolling annual agenda ensures that all important topics receive suﬃ cient att ention. Standing items such as cybersecurity, KPIs and ﬁ nancial updates provide the Board with a consistent view of progress during the year, whilst sessions on other topics allow deeper insight.Full-year results announcement, Annual Report & Accounts, Succession Planning, Board objectives, CybersecurityQ1 2017Strategy day, Review of Sage Values and Code of Conduct, Sage Foundation presentation, AGM, Corporate Governance reform, Site engagement visitsQ2 2017Half-year results announcement, Site engagement visits, US Payments sale, Communications strategy, Board Associate appointmentQ3 2017Strategy pulse-check, Acquisition of Intacct, UKI operations presentation, Product demo, FY18 Budget, Talent pipeline review, Culture review, Modern Slavery statementQ4 20172017 Board Activities The Sage Group plc | Annual Report & Accounts 201772How the Board spent the yearRelations with shareholdersCommunication with shareholders is given high priority. A full Annual Report & Accounts is sent to all shareholders who wish to receive one and all information on Sage’s activities, published ﬁ nancial results and the Annual Report & Accounts can be found on our website. There is regular dialogue with individual institutional shareholders and there are presentations to analysts aft er our announcement of the year-end and half-year results.At each meeting, the Board receives an update on presentations to investors and communications from shareholders to ensure that the Directors have an understanding of their views. The Annual General The Board has adopted a writt en set of objectives for the ﬁ nancial year, against which it informally assesses progress at each meeting. A formal review takes places as part of the annual Board evaluation process.Meeting is used to communicate with private and institutional investors and the Board welcomes their participation. Sage has operated several all-employee share schemes over the years, and yet has had historically low levels of employee shareholder att endance at the AGM. In 2017, a group of 20 att endees drawn from amongst our Newcastle colleagues, including our apprentice population, were invited to att end the AGM. They were provided with a short brieﬁ ng beforehand, explaining the purpose of the AGM, the order of business and what to expect. Feedback was positive, and we hope that with the introduction in 2017 of the Sage Save & Share Plan, future AGMs may feature greater employee shareholder participation.Board focusSage Strategic PillarsActions taken in FY17CultureOne SageCustomer for Life –Commissioned a culture review led by CPO which included a Group-wide employee engagement survey, output to inform FY18 objectivesSuccession planningOne SageCapacity for Growth –Two new NED appointments –Annual Talent Review of senior leadership pipelineCompetitive advantageWinning in the Market –Acquisitions of Intacct and Fairsail (now Sage People)Growth strategy (overall)Capacity for Growth –Board Strategy Day in January 2017Strategic technologyRevolutionise Business –Acquisition of Compass, a highly innovative analytics and benchmarking platform, providing Sage's small business customers with high-quality analytics and real-time actionable insight, using the power of big dataUSA growth strategyWinning in the MarketCustomer for Life –Acquisition of Intacct –Divestment of US Payments businessStrategic partnershipsWinning in the MarketRevolutionise Business –Partnerships with GoCardless and Stripe –Sage accounting soft ware ﬁ rst to have a live banking feed with LloydsProduct qualityCustomer for Life –Increased use of APIsPrincipal risksCapacity for Growth –Annual review of principal risks –Regular updates on risk management and assurance from the Audit & Risk Committ eeCorporate governanceOne Sage –Regular Board updates –Appointment of Board Associate –Engagement with Government corporate governance reforms through BEIS and FRC73The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsThe Board evaluation processCorporate governance report continuedBoard evaluation 2016/17In FY17, the Secretariat reviewed a number of online evaluation tools on behalf of the Chairman, and selected a tool which provided a comprehensive suite of question banks and clear, engaging, reporting functionality. The question banks were tailored into six questionnaires, covering the Board, each of the Committ ees, the Chairman and individual Directors. Questions were designed to be as speciﬁ c to Sage as possible and to enable the respondents to rate each question element on a sliding scale, as well as focusing in on the elements of each topic that they felt could be improved on or which they would like to discuss more. Free text comment boxes allowed them to expand on these thoughts as they saw ﬁ t. All the Directors, the Company Secretary and a selection of regular meeting participants were invited to respond to the questionnaires.The evaluation included the following topics: –Board composition and the dynamics of Board discussions; –Strategy: line of sight and the quality of information ﬂ ows; –Succession planning: Board and senior management; –Meeting logistics: timing, preparation and content of Board packs; –Eﬀ ectiveness of the Chairman and each of the Committ ee chairmen; and –Individual Director performance and development opportunities.In September 2017, the Board received and discussed a full report on the results of the evaluation. Conclusions from this year’s review The overall conclusion from this year’s evaluation was that the Board and its committ ees are working well and operating eﬀ ectively. Several key themes were identiﬁ ed, which have been fed into the Board’s objectives for FY18. As with any Board whose ambition is to be world-class, the Directors continue to seek to improve and evolve their standards of performance. The Board will remain focused on the key strategic priorities for the Company and measuring progress against them with increased granularity. It will devote time to succession planning and reviewing the skills needed within the Board to support the strategy, as well as focusing more on understanding the working culture within Sage and how best to embed Sage’s stated values and behaviours within the context of this culture. The Chairman will lead on delivering these objectives with support from the CEO and the Company Secretary. Actions for 2017/2018 The Board has set new objectives for itself for FY18, taking account of the ﬁ ndings from the evaluation. These will be reported on in the FY18 Annual Report. Other areas of focus will include: –Ensuring the Directors get suﬃ cient time to engage with the talent pipeline within the business; –Enabling Directors to increase their understanding of the wider technology environment; –Building on the work undertaken in 2017 to improve the Directors’ engagement plans and their continuing professional development; and –Driving further improvements in the quality of the information that the Board receives.Principles of evaluationThe UK Corporate Governance Code stipulates that boards should conduct a formal and rigorous review of their performance annually, and an externally facilitated review at least every three years. In recent years, the Board has taken the view that the changes to Board composition and the fundamental transformation of Sage’s business warranted a more regular external evaluation, and so it has conducted an external evaluation biennially. Last year, the Board used an independent third party to evaluate its performance and that of its committ ees and individual members. It was facilitated by Fﬁ on Hague of Independent Board Evaluation (IBE). The review included observing two Board and committ ee meetings in April and July 2016 and conducting in-depth interviews with each Board member against a tailored agenda in June 2016. In addition, detailed interviews were also conducted with other members of the Executive Committ ee and senior managers within the Company, as well as external advisers who work closely with the Board and committ ees. Feedback was provided when the Board met in September 2016 and each Committ ee was provided with a separate report. Individual director reports were also provided to the Chairman, and the Senior Independent Director led the review of the Chairman’s performance. The conclusions from that year’s report formed the basis of the Board’s objectives for FY17, and provided valuable insight into potential areas for improvement as the Board strives to provide world-class leadership and oversight of the Group.The Sage Group plc | Annual Report & Accounts 201774Information included in the Directors’ reportCertain information, fulﬁ lling certain requirements of the Corporate Governance Statement, can be found in the Directors’ report and is incorporated into this Corporate Governance section by reference.For reference, relevant sections of the Directors’ report are: –Substantial shareholdings –Deadlines for voting rights –Repurchase of shares –Amendment of the Company’s Articles of Association –Appointment and replacement of Directors –Powers of the DirectorsBy order of the BoardVicki BradinCompany Secretary 21 November 2017Intacct acquisitionWith a focus on growing Sage’s share of the cloud market, particularly in North America, any strategic acquisitions need to fulﬁ l a number of criteria. The Board’s role in mergers and acquisitions is to challenge and test management’s assumptions and leverage their particular skills and experience in this area.The journey towards adding Intacct to the Sage family started over a year prior to completion, with initial meetings between the respective management teams to determine whether there might be a strategic and cultural ﬁ t. IDC predicts that by 2020, over 50% of ﬁ nancial soft ware in the scale-up segment will be in the cloud and the rate of growth in the US is large. In FY18 alone it is expected to grow by $400m, more than the entire value of the UK cloud ﬁ nancial management market. However, the market still remains fragmented with many legacy, on-premise vendors – this was the time for Sage to act. There is also a shift away from large, monolithic, hard to implement ERP systems, towards best-of-breed integrated solutions such as Sage Intacct and Sage Live. The acquisition represented an amazing opportunity to capitalise on both of these market trends. By January 2017, the M&A Committ ee had provided an in-principle approval and ﬁ nancial advisers had been engaged. With a deal of this size and importance to Sage, thorough due diligence was critical. The Board were kept apprised of progress, with regular project updates from the CEO, CFO and wider deal team at each Board meeting from January 2017 onwards. Throughout this process Board members contributed to the strategic discussion, seeking clear evidence to support the argument that this acquisition was the logical next step in Sage’s strategy and would enhance its ability to grow at scale. The Board’s responsibility does not stop with completion of an acquisition. Throughout 2018, the Board will continue to monitor and assess the progress of Sage Intacct’s integration, and the long-term value creation we aim for it to create.Intacct75The Sage Group plc | Annual Report & Accounts 2017GovernanceStrategic reportGovernanceFinancial statementsAudit and Risk Committ ee Membership:Meetings att endedJonathan Howell (Chairman)4/4Neil Berkett 4/4Donald Brydon4/4Inna Kuznetsova (until 28 February 2017)2/2Ruth Markland (until 28 February 2017)2/2Jonathan HowellChairman of the Audit and Risk Committ eeAudit and Risk Committ ee Corporate governance report continuedDear shareholder,I am pleased to present the annual report of the Audit and Risk Committ ee (“the Committ ee”) for 2017. This report explains the Committ ee’s responsibilities and shows how it has delivered on them during the year. Key activities undertaken by the Committ ee during the year include keeping under review and considering the impact of the business transformation on risk assessment, the ongoing eﬀ ectiveness of internal controls, and the appropriateness of the Group’s going concern, viability assessment, ﬁ nancial reporting and accounting judgements.The Committ ee operates in accordance with the principles of the Financial Reporting Council’s (“FRC”) UK Corporate Governance Code (“the Code”) and the associated recommendations set out in the FRC’s Guidance on Audit Committ ees, as revised in 2016.Role of the Committ eeThe Committ ee is an essential element of Sage’s overall governance framework. The Board has delegated to the Committ ee the oversight of Sage’s ﬁ nancial reporting, risk management and internal control procedures, and of the work of Internal Audit and the external auditor. These responsibilities are deﬁ ned in the Committ ee’s terms of reference, the latest version of which was updated during the year and reviewed and approved by the Committ ee in September 2017.CompositionThe Code requires that the Committ ee has at least one member with recent and relevant ﬁ nancial expertise and experience in accounting and auditing. The Board is satisﬁ ed that the Chairman meets these requirements, being a qualiﬁ ed chartered accountant and the Group Finance Director at Close Brothers Group plc. In addition, the Board considers that the Committ ee has the necessary competence and broad experience relevant to the sector in which Sage operates as required by the Code. Neil Berkett and Drummond Hall are both former Chief Executives with extensive experience of leading businesses that, like Sage, are customer focused. This understanding of the challenges presented by the Group’s transformation and customer-focused strategy enables them to contribute strongly to the Committ ee’s activities. Further details of the background, knowledge and experience of the Chairman and each of the Committ ee members can be found on pages 64 to 65 of this report.Activities during the yearThe Committ ee met four times over the course of the year in line with its terms of reference. All Committ ee members att ended every meeting, and were joined at each meeting by the Chief Financial Oﬃ cer, the Vice President (”VP”) Risk and Assurance and the Executive Vice President (“EVP“) Finance (Control and Operations). The Chairman of the Board and Chief Executive Oﬃ cer were also present at all four meetings. The Chairman reported to the Board on key matt ers arising aft er each of these meetings. At each meeting, the Committ ee met with the external auditor, and at certain meetings the VP Risk and Assurance, without management being present.“ We are committed to ensuring that Sage continues to apply rigorous risk management procedures across the Group as new processes and behaviours become embedded.”The Sage Group plc | Annual Report & Accounts 201776At each meeting, the Committ ee receives and considers: –scheduled ﬁ nance updates on ﬁ nancial reporting, including signiﬁ cant reporting and accounting matt ers; –scheduled risk updates, including quarterly risk dashboards outlining both principal and any escalated local risks. The Committ ee also received summary reports and supplementary brieﬁ ngs from Sage Risk and management on selected principal risks and other “in-focus” reviews; –summary reports of escalated incidents and instances of whistleblowing, together with management actions; –progress against the plan and results of Internal Audit’s activities, including Internal Audit and management reports on internal control including ﬁ nancial, compliance and operational matt ers, and the implementation of management actions to address identiﬁ ed control weaknesses; and –updates on delivery of the external audit plan and reports from the external auditor on the Group’s ﬁ nancial reporting and observations made on the internal ﬁ nancial control environment in the course of their work.During the year the Committ ee also received updates on the legal and regulatory frameworks relevant to its areas of responsibility, including the Bribery Act and the responsibilities of Directors. Speciﬁ c items addressed by the Committ ee at each of its meetings since the 2016 Annual Report and Accounts were as follows:Financial management and reporting –Treasury strategy and controlsRisk management and internal controls –Risk Report –Internal Audit update –2017 principal risks update –Fraud risk assessmentInternal Audit –Review of eﬀ ectiveness of Internal Audit –Approval of Internal Audit CharterIncident management and whistleblowing –Incident and whistleblowing updateOther matt ers –Committ ee Terms of Reference, –Auditor Independence PolicyFinancial reporting –Half year ﬁ nancial reporting matt ers –Interim ﬁ nancial statements and results announcement –Tax strategy and risk assessmentRisk management and internal controls –Risk Report –Internal Audit update –Update on European Financial Shared Service Centre (“In-Focus” review) –Data protection regulations (“In-Focus” review) –Conﬂ icts of interests (“In-Focus” review) –Risk Management PolicyIncident management and whistleblowing –Whistleblowing Policy –Incident and whistleblowing updateExternal Audit –2017 Audit Plan –Interim Review ReportFebruary 2017April 2017Financial reporting –Year-end ﬁ nancial reporting matt ers –Going concern and long-term viability assessment –2017 Annual Report and Accounts and results announcement –Update on ﬁ nancial controlsRisk management and internal controls –Risk Report –Internal Audit update –Draft 2018 principal risks refreshInternal Audit –Control environment eﬀ ectiveness reviewIncident management and whistleblowing –Whistleblowing updateExternal Audit –Year-end Audit Results ReportOther matt ers –Companies Act 2006: Director Duties –Regulatory changes updateFinancial reporting –Signiﬁ cant reporting and accounting matt ers –Review of developments in IFRS –Draft version of the 2017 Annual Report and Accounts –IFRS 15 implementation project updateRisk management and internal controls –Risk and Compliance report –Internal Audit update –Update on Financial Shared Service Centres –Draft Viability statement –Legal and regulatory framework – Bribery Act update –Review of ‘Information Management and Protection (including cyber)’ risk –Payments risk, compliance and assurance strategyInternal Audit –Plan for 2018External Audit –Audit Update ReportOther matt ers –Committ ee Terms of Reference –Tax Strategy –Treasury PolicySeptember 2017November 2017The activities of the Committ ee are explained further in the rest of this report.Outside these formal meetings, the Chairman meets regularly with the Chief Financial Oﬃ cer, the external auditor, the VP Risk and Assurance and the EVP Finance. Additionally, the Chairman att ended the April meeting of the Global Risk Committ ee.77The Sage Group plc | Annual Report & Accounts 2017GovernanceStrategic reportFinancial statementsCorporate governance report continuedSigniﬁ cant reporting and accounting matt ersThe Committ ee considered how the following signiﬁ cant accounting and ﬁ nancial reporting matt ers were addressed in preparing the Group’s ﬁ nancial statements.The Group sells its products in diﬀ erent ways around the world. Assessment of whether the Group’s revenue recognition policies are appropriate and consistently applied continues to be a key focus of the Committ ee given the ongoing transition in business model to selling soft ware as a service, the increased focus on recurring revenue through soft ware subscriptions and the growth in the level of sales made via business partners and other intermediaries.The revenue recognition accounting policy is set out in note 3.1 to the ﬁ nancial statements and is referenced in the Group’s signiﬁ cant accounting judgements.The Committ ee continued to monitor the application of the Group’s revenue recognition accounting policy and received reports from management on the processes in place to conﬁ rm adherence to the policy. The Committ ee considered whether the work undertaken supported that the policy was being applied on a consistent basis throughout the Group. The Committ ee also received reports from the external auditor on its ﬁ ndings. As part of this, the Committ ee considered the appropriateness of the accounting for a number of sales arrangements where the accounting was complex.The Committ ee discussed and challenged management’s conclusions, satisfying itself that a consistent approach had been applied to determine revenue recognised in 2017.In addition, the Committ ee received progress updates for the project to implement IFRS 15 Revenue from Contracts with Customers. The expected areas of impact of the new standard are explained in note 1 to the ﬁ nancial statements. The Committ ee will continue to monitor the project closely as it progresses over the course of 2018. The ﬁ rst year of reporting under the new standard will be the year ending 30 September 2019.The assessment of the recoverability of goodwill remains an area of focus for the Committ ee given the quantum of the Group’s goodwill balances and the evolution of Sage’s business model.The Committ ee has considered the appropriateness of the cash generating units (“CGUs”) tested for impairment and the judgements and assumptions applied in calculating their recoverable amounts.A summary of the key assumptions used in the impairment test is set out in note 6.1 to the ﬁ nancial statements.The Committ ee reviewed and considered a report prepared by management that set out detailed analysis of the key inputs to forecast future cash ﬂ ows, including discount rates and growth rates, used in calculating recoverable amounts on a value in use basis. The report also explained the rationale for combining Singapore and Malaysia into a single CGU following the changes to the way the businesses were being managed. The Committ ee considered the appropriateness of the assumptions used and also reviewed the impact of a sensitivity analysis applying downside scenarios. From information provided in the report and discussion with management, the Committ ee obtained appropriate assurance that the change to the CGUs was appropriate and an impairment to the carrying value of goodwill was not required. In addition, the Committ ee received and considered a report from the external auditor sett ing out its procedures and conclusion in this area.The Committ ee also considered if there were any reasonably possible changes in assumptions that would result in a material impairment and therefore require further disclosure in the ﬁ nancial statements. The Committ ee was satisﬁ ed that no such disclosures were required.Financial reporting, including signiﬁ cant reporting and accounting matt ersAt each meeting the Committ ee received scheduled ﬁ nance updates from the EVP Finance, including information on developments in reporting and accounting matt ers. The Committ ee considered how these matt ers were addressed in preparing the Group’s ﬁ nancial statements. Those matt ers which the Committ ee was particularly focused on are set out below. The Committ ee also assessed the overall quality of ﬁ nancial reporting through review and discussion of the interim and annual ﬁ nancial statements. The Committ ee also received updates on the strategies and policies of the Group’s Treasury and Tax functions and their approach to risks and controls in their areas of operation. Revenue RecognitionGoodwill impairment testingIn performing its review, the Committ ee considered the work, judgements and conclusions of management and the group ﬁ nance team. The Committ ee also received reports from the external auditor sett ing out its view on the accounting treatments included in the ﬁ nancial statements, based on its review of the interim ﬁ nancial statements and its audit of the annual consolidated ﬁ nancial statements. The Committ ee’s review included assessing the appropriateness of the accounting policies and practices, conﬁ rming compliance with ﬁ nancial reporting standards and relevant statutory requirements, and reviewing the adequacy of disclosures in the ﬁ nancial statements. As part of this activity, the Committ ee reviews and considers, at least annually, reports from management in respect of uncertain tax positions and provisions and the deferred tax position. In the current year, the Committ ee also reviewed management’s assessment of the Group’s operating and reportable segments following the change in management structure implemented from 1 October 2016.The Sage Group plc | Annual Report & Accounts 201778Following the completion of each of these transactions, the Committ ee was satisﬁ ed that the accounting policies, judgements and estimates applied to these transactions, and the disclosures made about them in the ﬁ nancial statements, were appropriate.The Committ ee also advised the Board on whether the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess Sage’s position and performance, business model and strategy. In reaching its conclusion, the Committ ee considered going concern, reviewed the Annual Report and Accounts as well as the results of processes performed by management to provide assurance to support the fair presentation of the Group’s ﬁ nancial statements. These included an analysis of how the key events in the year had been described in the Annual Report and Accounts and representations received from country management teams on a range of ﬁ nancial controls. The Committ ee also considered the perspective of the external auditor.In addition, the Committ ee reviewed the process undertaken by management to assess the Group’s longer-term viability in order to allow the Directors to make the Group’s viability statement. The Committ ee considered, and provided input into, the determination of the period over which viability should be assessed, and which of the Group’s principal risks and combinations thereof should be modelled for sensitivity analysis of liquidity and solvency. It reviewed the results of management’s scenario modelling and the reverse stress testing of these models.The Group’s viability statement can be found on page 58.Signiﬁ cant costs were incurred on the Group‘s major business transformation activities during 2017 to transform the Group to the new operating model. These have included internal transformations to create People Services (HR) and IT centres of excellence as well as further rationalis ation of the Group’s property portfolio. In Finance, there has been further implementation of the X3 system across the Group and the migration of more operations into the European Financial Shared Service Centre. The recognition of further costs during the year reﬂ ects the phased nature of the implementation process and is consistent with the scale of the overall project. The recognition and measurement of such costs and their presentation as non-recurring items has been a key area of focus for the Committ ee.The Group’s accounting policy for non-recurring items is summarised in note 3.6 to the ﬁ nancial statements.Management provided updates during the year of the amounts charged as non-recurring costs, including analysis of material elements of the costs. The net costs incurred in 2017 were £73m. The Committ ee also received reports from the external auditor on its ﬁ ndings.The Committ ee considered the appropriateness of the measurement, recognition and presentation of these costs and satisﬁ ed itself that the position taken was reasonable and in accordance with the Group’s established accounting policy. Where provisions were recognised for transformation costs, the Committ ee reviewed the basis on which management had concluded that the qualiﬁ cation and recognition criteria for restructuring provisions had been met in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The Committ ee’s review conﬁ rmed that the costs are appropriately presented as non-recurring items in the current year as they are one-time costs directly related to a major transformational restructuring. In future, the costs of implementing further eﬃ ciencies and simpliﬁ cation in the business will be “business as usual” and will not be presented as non-recurring items unless appropriate under the criteria i n the Group’s policy for such costs to be presented separately.During the year the Group undertook a number of business acquisition and disposal transactions. The application of certain aspects of accounting policies to these transactions requires judgement and estimation. A summary of the accounting policies applied is set out in note 16 together with disclosures for each of the transactions.The Committ ee received reports from management explaining the accounting applied to business acquisitions and disposals and the disclosures required. The Committ ee concentrated particularly on the judgements and estimations applied to the following signiﬁ cant transactions and considered whether they were appropriate.Acquisition of Sage People Limited (formerly Fairsail Limited)Management reported to the Committ ee the basis on which the acquisition was accounted for, including the identiﬁ cation and measurement of intangible assets acquired in the transaction. In addition to the valuation of i ntangible assets, the Committ ee considered the appropriateness of the revaluation of the investment of the Group’s initial stake in the company and the resultant gain recorded in the income statement of £13m. Acquisition of Intacct CorporationFollowing acquisition of Intacct o n 3 August 2017, management presented the provisional acquisition accounting to the Committ ee. This consisted of an assessment re lated to the fair value of consideration transferred as well as the valuation of assets and liabilities acquired. The Committ ee considered the appropriateness of the valuation of consideration transferred including the accounting for share options which were granted to the vendors of Intacct. Consideration was also given to the approach used to value the intangible assets acquired, including the work being performed by an external valuation expert. Disposal of the North American Payments businessIn advance of the disposal of the North American Payments business which completed in the second half, management presented an analysis to the Committ ee which outlined why the business wa s to be classiﬁ ed as an asset held for sale on the Group’s balance sheet at 31 March 2017 and classiﬁ ed as a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The Committ ee considered the judgem ents made in this assessment which included the determination that the business was a “major line of business”. Following the disposal of the busin ess, management presented an analysis of the calculation of the proﬁ t on disposal of £25m. The Committ ee considered the appropriateness of this calculation including the valuation of proceeds received. Non-recurring items (Business transformation)Signiﬁ cant transactions79The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsRisk Management and Internal ControlsThe Committ ee, on behalf of the Board, monitors and reviews the Company’s internal control and risk management systems, reviewing their eﬀ ectiveness. This monitoring includes all material controls, including ﬁ nancial, operational and compliance controls, assessing that any corrective action is taken where necessary, and that the systems are ﬁ t for purpose.During the year, the Committ ee carried out the following: –Reviewed the principal risks, the associated risk appetites and metrics, and challenged and conﬁ rmed its alignment to the achievement of Sage’s strategic objectives. At each meeting the Committ ee considered the ongoing overall assessment of each risk and management actions and mitigations in place and planned. This review was supported through consideration of quarterly risk dashboards outlining both principal and any escalated local risks. –Received and considered minutes of the Global Risk Committ ee including its performance in maturing and embedding risk and the suitability of its composition. –Detailed In-Focus reviews on selected principal risks and other relevant and important issues (see In-Focus Reviews section below). –Reviewed, considered and concluded upon an assessment of the eﬀ ectiveness of risk management as well as reviewing summary reports from Sage Compliance on the Group adherence to policies, including Code of Conduct, Data Protection, Anti-Bribery and Corruption and Anti-Money Laundering. –Received reports from Internal Audit and management on internal control and monitored the implementation of management actions to address identiﬁ ed control weaknesses. The Committ ee also satisﬁ ed itself that management’s response to any ﬁ nancial reporting or internal ﬁ nancial control issues identiﬁ ed by the external auditor was appropriate. –Reviewed at each Committ ee meeting escalated incidents and instances of whistleblowing and associated management actions, and also assessed whether they demonstrated a signiﬁ cant failing or weakness in internal controls (see Incident Management, Fraud and Whistleblowing section below).In-Focus ReviewsThe Committ ee also uses in-depth reviews to consider selected principal risks and other relevant, current and important issues. During the year the Committ ee undertook a review of the Group’s Principal Risk “Information Management and Protection (including cyber)” in order to understand and challenge its reported status, mitigating actions, and the progress made in the management of the risk. The Committ ee also received supplementary brieﬁ ngs and updates on the Shared Service Centres, enabling it to monitor progress of the consolidation of General Ledgers for certain processes into X3. In addition, the Committ ee considered Sage Assurance reports on the eﬀ ectiveness of the control environment, internal control observations from the external auditor and an update on the implications of, and planned response to, the upcoming General Data Protection Regulations to understand and challenge our approach. In addition, the Committ ee received papers on Conﬂ icts of Interest, sett ing out Sage’s compliance obligations, and colleague conﬂ ict of interest register for consideration and approval, and on the Company response to the management of risk in ‘emerging markets’.Incident Management, Fraud and WhistleblowingThe Committ ee considered the suitability and alignment of the Incident Management and Whistleblowing policies, and conﬁ rmed their appropriateness in facilitating appropriate disclosure to senior executive management and the Committ ee. The Committ ee also received an assessment of the Group’s fraud risk during the year. At each meeting the Committ ee received a summary report of escalated incidents and instances of whistleblowing, together with management actions. As part of this reporting process, the Committ ee is notiﬁ ed of all whistleblowing matt ers raised, including those that relate to ﬁ nancial reporting, the integrity of ﬁ nancial management, and alleged fraud, bribery or corruption.Following its review of the Company’s internal control systems, the Committ ee considered whether any matt er required disclosure as a signiﬁ cant failing or weakness in internal control during the year. Internal AuditInternal Audit is delivered by Sage Assurance.The Internal Audit Charter outlines the objectives, authority, scope and responsibilities of Internal Audit. The Charter, performance against it, and the eﬀ ectiveness of Internal Audit, is reviewed by the Committ ee on an annual basis, and this was undertaken at the Committ ee’s February meeting. The Committ ee also considers and evaluates the level of Internal Audit resource, its quality, experience and expertise, to ensure it is appropriate to provide the required level of assurance over the principal risks, processes and controls throughout the Group.The Committ ee reviewed and approved the nature and scope of the work of Internal Audit , and the Internal Audit plan was approved by the Committ ee at the beginning of the ﬁ nancial year, along with any subsequent quarterly updates.Progress against the plan and the results of Internal Audit’s activities, including the quality and timeliness of management responses, is monitored at each meeting, with signiﬁ cant issues identiﬁ ed within Internal Audit reports considered in detail by the Committ ee.During the year, an assessment of Internal Audit was carried out by the VP Risk and Assurance, based upon the criteria and methodology of the PwC assessment in 2015, which evaluated Internal Audit against IIA standards. This review considered progress against recommended areas for improvement from this evaluation, along with progress made against the pillars of the Assurance Strategy. The assessment concluded that signiﬁ cant progress continued to be made and that Internal Audit remains eﬀ ective and meets the needs of the Group. This report was presented to the Committ ee, its ﬁ ndings discussed, and the Committ ee endorsed this conclusion.The Committ ee considered the approach and ﬁ ndings of the assessment, including the development of a data analytics strategy and the alignment of assurance activity with business initiatives such as ‘Excellence in Controls’, and endorsed the areas of continued focus.External auditor – Ernst & Young (“EY”)The Committ ee reviews and makes a recommendation to the Board with regard to the re-appointment of the external auditor. In making this recommendation, the Committ ee considers auditor eﬀ ectiveness, including its independence, objectivity and scepticism, and the application of, and compliance with, the Auditor Independence Policy, in particular with regard to any non-audit services. The Committ ee also considers business relationships with the external auditor which primarily relate to the procurement of Sage soft ware.Corporate governance report continuedThe Sage Group plc | Annual Report & Accounts 201780Further consideration is given to partner rotation and any other factors which may impact the Committ ee’s judgement regarding the external auditor.This has been EY’s third year as Sage’s external auditor following the formal tender process conducted in 2014. The current audit partner is Alison Duncan and she has been in the role for all three years.The Committ ee conﬁ rms that Sage has complied with the Statutory Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Responsibilities) Order 2014 with regard to the requirement for formal tendering every ten years.The Committ ee monitored the eﬀ ectiveness, objectivity and independence of the external auditor during the year. The Committ ee based its conclusion on its own observations and interactions with the external auditor, and consideration of a number of areas: –Experience and expertise of the auditor in its direct communication with, and support to, the Committ ee; –Content, quality of insights and added value of the auditor’s reports; –Scope, approach to and fulﬁ lment of the agreed external audit plan; –Robustness and perceptiveness of the auditor in its handling of key accounting and audit judgements; and –The interaction between management and the auditor.The Committ ee’s own assessment of the eﬀ ectiveness of the external auditors was supplemented by a report from management evaluating the eﬀ ectiveness of the external auditor. Management’s report included a summary of the ﬁ ndings of a survey of key Sage colleagues which assessed the quality of the auditor’s reporting to, and interaction with, the various ﬁ nance teams across the Group. Management concluded that the working relationship between ﬁ nance functions and auditors across the Group was eﬀ ective and the audit had been carried out in an independent, professional, organised and constructive manner.At each Committ ee meeting, Committ ee members met privately with the external auditor to provide additional opportunity for open dialogue and feedback from the external auditor without management being present. In addition to these private meetings the Chairman meets regularly with the external auditor to facilitate eﬀ ective and timely communication. Further, the Committ ee received a report from EY evaluating its independence and a formal statement of independence as the external auditor.Having considered all of the above, the Committ ee has recommended to the Board that a resolution to reappoint EY be proposed at the 2018 AGM and the Board has accepted and endorsed this recommendation.Non-audit servicesThe Auditor Independence Policy (“Policy”) speciﬁ es the role of the Committ ee in reviewing and approving non-audit services in order to ensure the ongoing independence of the external auditor. A summary of non-audit fees paid to the external auditor is provided to the Committ ee on a quarterly basis.The Policy was in place throughout the ﬁ nancial year and reﬂ ects the Financial Reporting Council (FRC) Revised Ethical Standard 2016, Revised Guidance for Audit Committ ees 2016 and UK Corporate Governance Code 2016 in relation to the provision of non-audit services by the external auditor.The Policy states that Sage will not use the external auditor for non-audit services. However, in certain circumstances, and as permitt ed by the Ethical Standard, non-audit services may be provided by the external auditor with pre-approval by the Committ ee unless clearly trivial. This is provided that the approval process set out in The Auditor Independence Policy is adhered to and that potential threats to independence and objectivity have been assessed and safeguards applied to eliminate or reduce these threats to an appropriate level.The Committ ee considered the application of the Policy with regard to non-audit services and conﬁ rms it was properly and consistently applied during the year.The Policy also requires that the ratio of audit fees to non-audit fees must be within Sage’s pre-determined ratio, and non-audit fees for the year must not exceed 70% of the average of the external audit fees billed over the previous three years. In 2017, the ratio of non-audit fees to audit fee was 6% principally reﬂ ecting the fee paid for the half year interim review. A breakdown of total audit and non-audit fees charged by the external auditor for the year under review is shown in note 3 to the ﬁ nancial statements.Evaluation of the performance of the Committ eeThe Audit and Risk Committ ee evaluation for 2016/17 was completed as part of the overall performance evaluation of the Board. An explanation of how this was conducted and the items identiﬁ ed for greater att ention, focus and potential improvement is set out on page 74. The Committ ee has considered this in the context of the matt ers that are applicable to the Audit and Risk Committ ee. Jonathan HowellChairman of the Audit and Risk Committ ee21 November 201781The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsNomina�ionCommiteeCorporategovernancereportcontinuedNomina�ionCommiteemembershipandmee�ingatendance:Mee�ingsatendedDonaldBrydon(Chairman)4/4Jona�hanHowell(ro�a�edoff28February2017)3/3NeilBerket(ro�a�edoff28February2017)3/3DrummondHall5/5SoniJiandani(appoin�ed28February2017)1/2Ru�hMarkland(resigned28February2017)2/3InnaKuzne�sova(resigned28February2017)2/3“Theappoin�men�of�wonewnon-execu�ivesbringsafreshperspec�iveandnewskillsandexperience,�oenhance�hediversi�yof�heBoard.”DonaldBrydonCommiteepurposeandresponsibili�iesDiversi�yCommiteemee�ingsChairmanof�heNomina�ionCommiteeThepurposeof�heCommiteeis�oreview�hecomposi�ion,skillsandInconsideringappoin�men�s�o�heBoardand�oseniorexecu�iveexperienceof�heBoardand�oplanfori�sprogressiverefreshing,wi�hposi�ions,i�is�hepolicyof�heCommitee�oevalua�e�heskills,regard�obalanceands�ruc�ure.TheCommiteealsoconsidersissuesofexperienceandknowledgerequiredwi�hdueregardfor�hebenefi�ofsuccession.TheChairman'so�hersignifican�commi�men�sarede�aileddiversi�y(includinggenderdiversi�y)on�heBoardanda�senioronpage64.managemen�level,and�omakeanappoin�men�accordingly.TheBoardand�heCommiteehaveno�ed�herecommenda�ionsof�heHamp�on-AlexanderReviewinNovember2016�oincreasefemaleboardThisyear�heCommitee’smainac�ivi�ywasfocusedonreplacing�worepresen�a�ion�oa�leas�33%by2020.Sagehasvolun�arilysubmitedou�goingDirec�ors;Ru�hMarklandandInnaKuzne�sova.Thegenderdiversi�yda�a�o�heHamp�on-AlexanderReviewfor�hesecondCommiteealsoconsideredBoardsuccessionplanningmoregenerally.yearrunning.I�ispleasing�obeable�orepor��ha�30%ofSage’sseniorInaddi�ion�o�heformalCommiteemee�ings�herewerefrequen�managemen�popula�ionisnowfemale.During2018,�heCommiteewillinformalexchanges.consider�heParkerReviewCommitee'sfinalrepor�one�hnicdiversi�yandi�s"Beyondoneby'21"recommenda�ion.Wewillconsiderno�onlyTheCommitee’sannualevalua�ionwasconduc�edin�ernallyandhowwecanensuresufficien�considera�ionisgiven�o�hee�hnicoriginconcluded�ha��heCommiteecon�inues�ofunc�ioneffec�ivelyinoffu�ureBoardcandida�es,bu�alsohowourPeoplefunc�ionaddressesrespec�ofi�scorepurpose.However,during2018,considera�ionwillbee�hnicdiversi�yinourhiringprac�icesandseniormanagemen��alen�given�owhe�her�heCommiteecanalso�akeamores�ruc�uredroleinpipeline.Fur�herde�ailsondiversi�yareprovideda�page42.widermatersofexecu�ivesuccession.TheSageGroupplc|AnnualRepor�&Accoun�s201782Management succession and talent pipelineThe Committ ee has continued to work to put appropriate succession plans in place in order to ensure the right mix of skills and experience of Board members now and in the future. In addition, the Board recognises the need for talent to be nurtured within executive and management levels and across the Group as a whole. Following on from 2016’s comprehensive talent review, the Board continued to focus on strengthening the pipeline of executive talent in the Company. In July 2017, the Board received an update on progress against actions identiﬁ ed from the 2016 review, and discussed the eﬀ ectiveness of initiatives such as the Leading@Sage development programme, which was introduced to 2000 Sage colleagues during 2017. The Chairman and the CEO, with assistance from the Chief People Oﬃ cer, will continue to work on managing succession arrangements for the Executive Directors. Board changesRuth Markland and Inna Kuznetsova stood down from the Board at the Annual General Meeting on 28 February 2017. On Ruth’s departure, Drummond Hall took on the position of Senior Independent Director. In our 2016 Annual Report, we reported that the Committ ee had reviewed the Board’s composition with respect to both skills and diversity and as a consequence engaged a specialist ﬁ rm, Sciteb, to conduct a search for potential candidates for non-executive roles. Sciteb undertakes no other business for the Company. A number of potential candidates were identiﬁ ed, but Soni Jiandani's background in driving industry transformation through market disruption and her extensive technology experience made her an exceptional candidate and she was appointed with eﬀ ect from 28 February. Cath Keers was appointed with eﬀ ect from 1 July. An external search agency was not used in Cath's appointment. The Committ ee concluded, following formal interviews conducted by the whole Committ ee and other Board members and noting the strength of her digital and customer experience, that Cath Keers would be an appropriate candidate for the role of Non-executive Director on the Board. Donald BrydonChairman of the Nomination Committ ee21 November 2017 Focus on Induction: Soni JiandaniQ: How important was a thorough induction for you?A: It’s important to be able to make a valuable contribution straight away, and to get a deep understanding of the Group is key to that. My induction programme has helped me to ensure that I am armed with the information I need to navigate a new environment.Q: What skills do you bring to the Board table?A: I have spent many years in Silicon Valley, working with large multinationals as well as smaller start-ups, with a wealth of product marketing experience. I hope I am bringing with me that innovation mindset and a view of the US technology industry in particular.Q: How will you be contributing as a member of the Nomination Committ ee?A: I will be looking to ensure that we have eﬀ ective conversations about what the future composition of the Board and executive management looks like. We must remember that the business landscape is changing rapidly, and we want to stay ahead of the curve with the skills and experience we look for.83The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsRemunerationCommitteemembership:��DrummondHall,ChairmanInnaKuznetsova(untilDonaldBrydon(until2828February2017)February2017)RuthMarkland(untilNeilBerkett28February2017)JonathanHowellCathKeers(from1July2017)ChairmanoftheRemunerationCommitteethisunderpin.Asaresult,theCommitteetookthedecisionnottopaybonusonfinancialmeasuresdespiteayearofstrongperformanceoverall.ItismypleasuretopresenttheDirectors’RemunerationReportfortheWhilstthiswasatoughdecision,itmaintainstheintegrityofouryearended30September2017.remunerationpolicyanditslinktoourguidingprincipleofhighWeaimtobeentirelytransparentinourremunerationpracticesandperformanceagainststrategicbusinessgoals.TheExecutiveDirectorsprovideshareholderswiththeinformationneededtomakeinformedachievedtheirstrategicobjectives,whichledto19%ofthemaximumdecisionsaboutourcompany.WeareproposingnochangestoourpolicybonuspayingoutfortheChiefExecutiveOcerand19%fortheChiefforFY18.OurguidingprinciplecontinuestobeoneofdevelopingahighFinancialOcer.Moredetailsonthebonusoutcomearesetoutonperformanceculturethroughclearlinkageofindividuals’remunerationtopage93.ourstrategicbusinessKPIs.PerformanceSharePlan(PSP)awardsgrantedin2015werebasedonorganicrevenuegrowth,earningspersharegrowthandrelativeTSROurmainobjectiveistodeterminetheframework,broadpolicyandlevelsperformancemeasuredoverthethree-yearperiodto30September2017.ofremunerationfortheGroup’sChiefExecutiveOcer,theGroup’sChiefOverall,theCommitteedeterminedthat66.1%ofthemaximumnumberofFinancialOcer,theChairmanoftheCompanyandotherexecutivesassharesunderawardwillvestinJanuary2018.Furtherdetailissetdeemedappropriate.Thisframeworkincludes,butisnotlimitedto,outonpage94.establishingstretchingperformance-relatedelementsofrewardandisintendedtopromotethelong-termsuccessoftheCompany.WeachieveTheCommitteehasintroducedatwo-yearholdingperiodforPSPawardsthisthrough:grantedtoExecutiveDirectorsfromFY18.TheholdingperiodwillapplyProvidingrecommendationstotheBoard,withinagreedtermsofuponvestingoftheawards.reference,onSage’sframeworkofexecutiveremunerationWehaveadjustedthePSPtargetstoreflecttheupdateddefinitionofDeterminingthecontractterms,remunerationandotherbenetsfororganicrevenuewhichincludesIntacctandFairsail(SagePeople)fromeachoftheExecutiveDirectors,includingperformanceshareawards,FY18.TheadjustmentsalsoappyltoawardsgrantedinFY16andFY17,performance-relatedbonusschemes,pensionrightsandcompensationreflectingtheextenttowhichthereviseddefinitionoforganicmeasurespaymentswillcontributetoperformanceovereachthree-yearperiod.WebelievethisMonitoringremunerationforseniorexecutivesbelowBoardlevelprovidestherightincentiveformanagementtoconsidertheperformanceoftheacquiredbusinessesandfacilitatesthecomparisonoflong-termApprovingshareawardsperformancetoreportedactualsaswellasmaintainingappropriatelevelsofstretchintargets.TheCommitteeissatisfiedthattheadjustedtargetsThe2017bonuswasbasedonorganicrevenuegrowthandthesatisfactionaremateriallyneithereasiernormoredifficulttoachieve.Moreinformationofunderpinsrelatingtounderlyingoperatingmarginandrecurringissetoutonpage95.revenuegrowth(80%ofbonus)andpersonalstrategicmeasures(20%).ForFinally,Ilookforwardtoengagingwithourshareholdersonbehalfoftheyearended30September2017,organicrevenuesgrew6.6%,whichtheBoardinareviewofourremunerationpolicybeforeitissubmittedcontinuestherecentgrowthtrendofthebusiness,andmarginwas27%,toabindingshareholdervoteatthe2019AGM,whenourcurrentsatisfyingmarketguidanceissuedatthebeginningoftheyear.However,policyexpires.recurringrevenuegrowthat9%fellshortofthestretchingtargetwesetforDrummondHallObjectivesandresponsibilitiesLookingforwardtoFY18KeyremunerationoutcomesforFY17Dearfellowshareholder,��“In�hecon�ex�ofayearofs�rongperformanceandoverallgrow�h,�heCommi��ees�illfacedsome�oughdecisionson�heremunera�ionofourseniorexecu�ives.Wehavemain�ained�hein�egri�yofourremunera�ionpolicy,whichweregardaskey�odrivingsuperiorlevelsofperformancelinked�os�ra�egicbusinessgoals.”Remunera�ionCommiteeDirectors’remunerationreportTheSageGroupplc|AnnualRepor�&Accoun�s201784 Remuneration Committee meetings held in FY17 No one other than a member of the Committee is entitled to be present at its meetings. The Chairman of the Board and the Chief Executive O(cid:400)cer may attend meetings as required, except where his own performance or remuneration is discussed. No Director is involved in deciding his or her own remuneration. The Committee is required, in accordance with its terms of reference, to meet at least four times per year. During this (cid:392)nancial year, the Committee met seven times, where it discussed the following key matters: April 2017 July 2017 September 2017 Consideration of the views of our shareholders (cid:177)(cid:3)Reviewed the feedback of our shareholders in the run up to the AGM and assessed their voting and the appropriateness of our remuneration policy and implementation principles FY17progress review(cid:177)(cid:3)Reviewed the Company’s progress against incentive performance metrics for ‘in-flight’ plans FY18 planning (cid:177)(cid:3)Reviewed the Committee’s terms of reference (cid:177)(cid:3)Reviewed incentive plan structure and targets for FY18 Acquisition (cid:177)(cid:3)Adopted the Sage Share Option Plan for the Intacct acquisition and agreed the terms of the rollover of unvested share options FY18planning(cid:177)(cid:3)Approved the Executive Directors’ incentive plan structures and targets for FY18 including the adjustment of PSP targets to reflect the impact of the acquisitions of Intacct and Sage People (cid:177)(cid:3)Approved the introduction of a two-year holding period for Executive Directors’ PSP awards Appointing executive talent (cid:177)(cid:3)Approved the remuneration package for the Chief Product Delivery Officer November 2016 February 2017 FY16 year-endreview(cid:177)(cid:3)Approved share awards for FY17 (cid:177)(cid:3)Reviewed the performance of the Group for the year, and the performance of the Executive Directors in order to determine bonus outcomes (cid:177)(cid:3)Reviewed the long-term performance of the Group over the last three years in order to determine vesting levels for the PSP granted in 2014 (cid:177)(cid:3)Set Executive Directors’ salaries for 2017 (cid:177)(cid:3)Approved the Directors’ Remuneration Report Review of trends in executive remuneration(cid:177)(cid:3)Reviewed remuneration market trends and corporate governance developments 85The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsThis section provides a high-level introduction to remuneration at Sage. Further details can be found within the report at the noted page. The key elements of our remuneration policy are summarised below. Element of Remuneration Policy Purpose Application of Element in FY18 for CEO Application of Element in FY18 for CFO Base salary Enables Sage to attract and retain Executive Directors of the calibre required to deliver the Group’s strategy £810,000 (0% increase) £522,000 (0% increase) Pension Provides a competitive post-retirement benefit, in a way that manages the overall cost to the Company 25% of base salary 25% of base salary Benefits Provide a competitive and cost-effective benefits package to executives to assist them in carrying out their duties effectively Car allowance, medical insurance, costs of travel, accommodation and subsistence for the Directors and their partners on Sage-related business if required Car allowance, medical insurance, costs of travel, accommodation and subsistence for the Directors and their partners on Sage-related business if required Annual bonus Rewards and incentivises the achievement of annual financial and strategic targets A minimum of one-third deferral into shares is compulsory, with the remainder delivered in cash Maximum 125% of base salary Maximum 125% of base salary Performance Share Plan (PSP) Supports achievement of our strategy by targeting performance under our key financial performance indicators. Vesting is after three years, and awards are subject on vesting to a holding period for two years before being released Face value of 250% of base salary Face value of 250% of base salary All-employee share plans Provides an opportunity for Directors to voluntarily invest in the Company Eligible to participate up to the tax-efficient limit of £500 per month Eligible to participate up to the tax-efficient limit of £500 per month Chairman and non-Executive Director fees Provide an appropriate reward to attract and retain high-calibre individuals See page 99 of this report for a list of non-Executive Director fees Shareholding guidelines The shareholding requirement for Directors is 200% of base salary and achievement of this is expected within a maximum of five years from the time the Director became subject to the policy Shareholding at 30 September 2017 is 219% of base salary Shareholding at 30 September 2017 is 227% of base salary Remuneration principlesAlignment with the wider GroupAlignment with shareholdersAtt ract and RetainMotivate and RewardRemuneration at a glanceDirectors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 201786 Delivering our remuneration principles in 2018 Our remuneration policy, which was approved by shareholders at the 2016 AGM, underpins the delivery of these four key remuneration principles. At the heart of this policy is a relatively straightforward remuneration arrangement for our most senior executives comprising base salary and bene(cid:392)ts, an annual bonus plan and a long-term incentive plan (the Performance Share Plan (PSP)). Our remuneration principles Delivering our remuneration principles in 2018 Attract and retain We o(cid:391)er competitive rates of pay and bene(cid:392)ts to attract and retain the best people in a competitive international market which includes private-equity backed organisations as well as listed companies. No changes are proposed in 2018 to our maximum level of performance-related pay under either the annual bonus plan or the PSP. The CEO and CFO will not receive a salary increase in 2018. Motivate and reward Remuneration at Sage is designed to create a strong performance-oriented environment for the taking of appropriate risks and rewards achievement of our Company strategy and business objectives. 2018 annual bonusAs outlined in the Strategic Report, organic revenue growth remains the key strategic measure of performance during the coming year and the Committee has therefore determined that in 2018 the key bonus measure shall continue to be Group organic revenue growth (80% of overall bonus). This measure aligns to the updated definition of organic revenue growth as detailed on page 34. Strategic measures continue to be linked to executives’ VSGM1 goals, which are derived from the process explained in the 2016 Strategic Report on page 27, and make up the remaining 20% of bonus. Payout under the organic revenue growth measure will be dependent upon the satisfaction of two underpin conditions which are unchanged from 2017: the first based on underlying operating profit margin, to protect our profitability, and the second, recurring revenue growth, to drive our movement to a high-quality subscription model. Recurring revenue growth continues to be one of the two main measures under the PSP. 2018 PSP awards There are no changes to the performance measures for PSP awards. An adjustment to the targets to reflect acquisitions during financial year 2017 has been made; this is explained in further detail on pages 95 and 99. The PSP operates as follows: (cid:177)(cid:3)Half of the 2018 PSP award will be subject to a performance measure based on relative TSR performance. This measure will help to ensure management’s continued focus on overall Group growth and delivery of shareholder value. (cid:177)(cid:3)Half of the 2018 PSP award will be subject to a performance measure based on recurring revenue growth. This continues the close alignment with our medium-term strategic priorities, to grow our subscription-based services and acquire new customers. (cid:177)(cid:3)For any of the recurring revenue growth element of the 2018 PSP award to vest, two underpin performance conditions based on EPS growth and organic revenue growth will also need to be achieved. Alignment with the wider Group Pay and employment conditions elsewhere in the Group are considered when determining executive base salary and bonus reviews. The remuneration policy for executives re(cid:393)ects the overriding remuneration philosophy and principles of the wider Group, including but not limited to the principles on which salaries are reviewed and the structure of performance-related incentive plans. Details of pay arrangements for Executive Directors are set out in the Annual Remuneration Report on pages 92 to 103. Alignment with shareholders The interests of our senior management team are aligned with those of shareholders by having a significant proportion of remuneration performance-based and delivered through shares, together with a significant shareholding requirement. Our existing pay structure for Executive Directors and other senior management is heavily weighted towards share-based performance-related pay which is designed to align executive and shareholder interests. The following practices will continue in 2018: Malus/clawback All incentives awarded to Executive Directors and Executive Committee members are subject to malus and clawback provisions. Details of the implementation of those provisions are set out in the Directors’ Annual Remuneration Report and policy. Compulsory bonus deferral All Executive Directors are compulsorily required to defer one-third of their bonus into Sage shares. The deferral period is three years with effect from 2018, as approved by shareholders in the 2016 AGM. Shareholding requirement The shareholding requirement for Directors is 200% of base salary and Directors are expected to achieve the guideline within a maximum period of (cid:392)ve years from when they (cid:392)rst become subject to the guideline. Holding period The Committee has introduced a two-year holding period for PSP awards granted to Executive Directors from FY18. The holding period will apply upon vesting of the awards. Note: 1.(cid:3)“VSGM” stands for “Vision, Strategy, Goals and Measures”. Goal setting begins with the CEO and cascades down through leadership. Senior management goals are aligned to strategic pillars and shared throughout Sage87The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsSinglefigurefortotalremunerationsummary:Thereportisintwosections:ThisreportcomplieswiththerequirementsoftheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)Regulations(pages89to91).2008asamendedin2013,theprovisionsoftheUKCorporateGovernanceCode(April2016)andtheListingRules.ThissectionsetsoutdetailsofhowourexistingremunerationTherewillbenoshareholdervotefortheremunerationpolicyandanpolicywasimplementedfortheyearended30September2017advisoryvoteontheAnnualRemunerationReport.andhowweintendthepolicytoappylfortheyearending30September2018.ChairmanoftheRemunerationCommittee2016TotalDirector£’000Note:1.Thesinglefiguretotalin2016isupdatedthisyearinaccordancewiththeLargeandMedium-sizedCompaniesandGroups(AccountsandReports)Regulations2008asamendedin2013.Forfurtherdetail,seethefootnotetotheSingleFigureofRemunerationtableonpage92below.2017Total£’000ExecutiveDirectorsNon-ExecutiveDirectorsSKelly1,723SHare3,030DHBrydon397RMarkland75NBerkett60DHall76JHowell77IKuznetsova60SJiandani–CKeers–3,3362,181397316083772535151�RemunerationdisclosureDrummondHall��TheDirectors’remunerationpolicyTheDirectors’AnnualRemunerationReport(pages92to103).Directors’remunerationreportcontinuedTheSageGroupplc|AnnualReport&Accounts201788 Purpose of this section: –(cid:3)Provides detail of the key elements of our remuneration policy The current policy report was approved by shareholders at the 2016 AGM and can be found on our website (www.sage.com). The remuneration policy will undergo a full review during calendar year 2018 and be presented for shareholder approval at the 2019 AGM. Remuneration policy table The table below sets out our remuneration policy. Alignment with strategy/purpose Operation Maximum opportunity Performance measures Base salary Supports the recruitment and retention of Executive Directors of the calibre required to deliver the Group’s strategy. Rewards executives for the performance of their role. Set at a level that allows fully (cid:393)exible operation of our variable pay plans. Normally reviewed annually, with any increases applied from January. When determining base salary levels, consideration is given to the following: (cid:177)(cid:3)Pay increases for other employees in major operating businesses of the Group (cid:177)(cid:3)The individual’s skills and responsibilities (cid:177)(cid:3)Pay at companies of a similar size and international scope to Sage, in particular those within the FTSE 100 (excluding the top 30) (cid:177)(cid:3)Corporate and individual performance Ordinarily, salary increases will be in line with increases awarded to other employees in major operating businesses of the Group. However, increases may be made above this level at the Committee’s discretion to take account of individual circumstances such as: (cid:177)(cid:3)Increase in scope and responsibility (cid:177)(cid:3)Increase to re(cid:393)ect the individual’s development and performance in role (e.g. for a new appointment where base salary may be increased over time rather than set directly at the level of the previous incumbent or market level) (cid:177)(cid:3)Alignment to market level Accordingly, no monetary maximum has been set. None, although overall performance of the individual is considered by the Remuneration Committee when setting and reviewing salaries annually. Pension Provide a competitive post- retirement bene(cid:392)t, in a way that manages the overall cost to the Company. De(cid:392)ned contribution plan (with Company contributions set as a percentage of base salary). An individual may elect to receive some or all of their pension contribution as a cash allowance. 25% of base salary for all Executive Directors. No element other than base salary is pensionable. None. Bene(cid:392)ts Provide a competitive and cost-e(cid:391)ective bene(cid:392)ts package to executives to assist them to carry out their duties e(cid:391)ectively. The Group provides a range of bene(cid:392)ts which may include a car bene(cid:392)t (or cash equivalent), private medical insurance, permanent health insurance, life assurance and (cid:392)nancial advice. Additional bene(cid:392)ts may also be provided in certain circumstances which may include relocation expenses, housing allowance and school fees. Other bene(cid:392)ts may be o(cid:391)ered if considered appropriate and reasonable by the Committee. Set at a level which the Remuneration Committee considers: (cid:177)(cid:3)Appropriately positioned against comparable roles in companies of a similar size and complexity in the relevant market (cid:177)(cid:3)Provides a su(cid:400)cient level of bene(cid:392)t based on the role and individual circumstances, such as relocation As the costs of providing bene(cid:392)ts will depend on a Director’s individual circumstances, the Remuneration Committee has not set a monetary maximum. None. Remuneration policy89The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements Remuneration policy table continued Alignment with strategy/purpose Operation Maximum opportunity Performance measures Annual bonus Rewards and incentivises the achievement of annual (cid:392)nancial and strategic targets. An element of compulsory deferral provides a link to the creation of sustainable long-term value. Measures and targets are set annually and payout levels are determined by the Remuneration Committee after the year end based on performance against those targets. The Remuneration Committee may, in exceptional circumstances, amend the bonus payout should this not, in the view of the Committee, re(cid:393)ect overall business performance or individual contribution. A minimum of one-third of any annual bonus earned by Executive Directors is delivered in deferred share awards, with the remainder delivered in cash. The length of the deferral period will be determined by the Remuneration Committee before the grant of an award. 125% of salary. (cid:177)(cid:3)80% of the bonus will be determined by measure(s) of Group (cid:392)nancial performance. (cid:177)(cid:3)20% of the bonus will be based on pre-determined (cid:392)nancial, strategic or operational measures appropriate to the individual Director. The measures that will apply for the (cid:392)nancial year 2018 are described in the Directors’ Annual Remuneration Report. Performance Share Plan (PSP) Motivates and rewards the achievement of long-term business goals. Supports the creation of shareholder value through the delivery of strong market performance aligned with the long-term business strategy. Supports achievement of our strategy by targeting performance under our key (cid:392)nancial performance indicators. Awards vest dependent upon the achievement of performance conditions measured over a period of at least three years. Following the end of the performance period, the performance conditions will be assessed and the percentage of awards that will vest will be determined. The Committee may decide that the shares in respect of which an award vests are delivered to participants at that point or that awards will then be subject to an additional holding period before participants are entitled to receive their shares. A holding period will normally last for two years, unless the Committee determines otherwise. The Remuneration Committee has discretion to decide whether and to what extent the performance conditions have been met, and if an event occurs that causes the Committee to consider that an amended or substituted performance condition would be more appropriate and not materially less di(cid:400)cult to satisfy, the Committee may amend or substitute any performance condition. Awards vest on the following basis: (cid:177)(cid:3)Target performance: 20% of the maximum shares awarded (cid:177)(cid:3)Stretch performance: 80% of the maximum shares awarded (cid:177)(cid:3)Exceptional performance: 100% of the shares awarded With straight-line vesting between each level of performance. Current annual award levels (in respect of a (cid:392)nancial year of the Company) for Executive Directors are 250% of base salary at the time of grant. Overall individual limit of 300% of base salary under the rules of the plan. The Committee retains the discretion to make awards up to the individual limit under the PSP and, as stated in previous remuneration reports, would expect to consult with signi(cid:392)cant investors if awards were to be made routinely above current levels. Performance is assessed against two independently measured metrics which are equally weighted: (cid:177)(cid:3)50% recurring revenue growth (cid:177)(cid:3)50% relative TSR performance against the FTSE 100 (excluding (cid:392)nancial services and extracting companies) At its discretion, the Committee may elect to add additional underpin performance conditions to one or both of the above metrics. Details of the targets that will apply for awards granted in 2018 are set out in the Directors’ Annual Remuneration Report. All-employee share plans Provides an opportunity for Directors to voluntarily invest in the Company. UK-based Executive Directors are entitled to participate in a UK tax-approved all-employee plan, The Sage Group Savings-Related Share Option Plan, under which they make monthly savings over a period of three or (cid:392)ve years linked to the grant of an option over Sage shares with an option price which can be at a discount of up to 20% of the market value of shares on grant. This scheme closed for new invitations in 2016 and a new UK tax-approved all-employee plan, The Sage Save and Share Plan, launched in May 2017. Similar to the previous plan, Executive Directors make monthly savings over a period of three years linked to the grant of an option over Sage shares with an option price which can be at a discount of up to 20% of the market value of shares on grant. Options may be adjusted to re(cid:393)ect the impact of any variation of share capital. An overseas-based Executive Director is entitled to participate in The Sage Save and Share Plan if operated in their jurisdiction. UK participation limits are those set by the UK tax authorities from time to time. Currently this is £500 per month. Limits for participants in overseas schemes are determined in line with any local legislation. None. Directors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 201790Alignmentwithstrategy/purposeOperationMaximumopportunityPerformancemeasuresChairmanandnon-ExecutiveDirectorfeesProvideanappropriaterewardtoattractandretainhigh-calibreindividuals.Non-ExecutiveDirectorsdonotparticipateinanyincentivescheme.Feesarereviewedperiodically.Setatalevelwhich:None.Thefeestructureisasfollows:ReectsthecommitmentandcontributionTheChairmanispaidasingle,consolidatedfeethatisexpectedfromtheChairmanandTheNon-executiveDirectorsarepaidabasicnon-ExecutiveDirectorsfee,plusadditionalfeesforchairmanshipIsappropriatelypositionedagainstofBoardCommitteesandtotheSeniorcomparablerolesincompaniesofasimilarIndependentDirectorsizeandcomplexityintherelevantmarket,FeesarecurrentlypaidincashbuttheparticularlycompaniesofasimilarsizeandCompanymaychoosetoprovidesomeinternationalscopetoSage,inparticularofthefeesinsharesthosewithintheFTSE100(excludingthetop30)TheChairmanhastheuseofacaranddriver.OverallfeespaidtoDirectorswillremainNon-ExecutiveDirectorsmaybeeligibleforwithinthelimitstatedinourarticlesofbenetssuchascompanycar,useofsecretarialsupport,healthcareorotherbenetsthatmayassociation,currently£1m.beappproriateincludingwheretraveltotheActualfeelevelsaredisclosedintheCompany’sregisteredoceisrecognisedasDirectors’AnnualRemunerationReportataxablebenet,inwhichcaseaNon-executivefortherelevantnancialyear.mayreceivethegrossed-upcostsoftravelasabenet.��Notes:–AnnualbonusperformancemeasureshavebeenselectedtoprovideanappropriatebalancebetweenincentivisingDirectorstomeetprotabilityandothernancialtargetsfortheyearandachievestrategicoperationalobjectives.ThemeasuresandtargetsareselectedeveryyearbytheCommittee.–PerformanceSharePlan:recurringrevenuegrowthisakeymeasureofthesuccessoftheexecutionofourlong-termstrategy.TSRisconsideredakeymeasureforanumberofourshareholdersandprovidesfurtheralignmentwithvaluecreatedforshareholders.–AwardsgrantedunderthedeferredbonusplanandthePSPmay:(a)bemadeintheformofconditionalawardsornil-costoptionsandmaybesettledincash;(b)incorporatetherighttoreceiveanamount(incashorshares)equaltothedividendswhichwouldhavebeenpaidorpayableonthesharesthatvestintheperioduptovesting(or,wherePSPawardsaremadesubjecttoaholdingperiod,theendoftheholdingperiod).ThisamountmaybecalculatedassumingthedividendswerereinvestedintheCompany’ssharesonacumulativebasis;and(c)beadjustedintheeventofanyvariationoftheCompany’ssharecapital,demerger,delisting,specialdividend,rightsissueorothereventwhichmay,intheopinionoftheRemunerationCommittee,aectthecurrentorfuturevalueoftheCompany’sshares.–Provisionstowithhold(malus)orrecover(clawback)sumspaidundertheannualbonusandPSPintheeventofmaterialnegativecircumstances,suchasmaterialmisstatementintheCompany’sauditedresults,seriousreputationaldamageorsignicantnanciallosstotheCompany(asaresultoftheparticipant’smisconduct),anerrorinassessingtheperformancemetricsrelatingtotheawardortheparticipant’sgrossmisconduct,areincorporatedintoboththePSPanddeferredbonusplan.TheseprovisionsmayapplyuptothreeyearsfromthedateaPSPawardvests/isreleasedoraminimumoftwoyearsfromthedateacashbonusispaidoradeferredshareawardisgranted.–WhileourremunerationpolicyfollowsthesameprinciplesacrosstheGroup,packagesoeredtoemployeesreectdierencesinmarketpracticeinthedierentcountriestheGroupoperatesinandalsodierencesinsizeofrole.–AllDirectorssubmitthemselvesforre-electionannually.–TheRemunerationCommitteeintendstohonouranycommitmentsenteredintowithcurrentorformerDirectorsontheiroriginalterms,includingoutstandingincentiveawards,whichhavebeendisclosedinpreviousremunerationreportsand,whererelevant,areconsistentwithapreviouspolicyapprovedbyshareholders.AnysuchpaymentstoformerDirectorswillbesetoutintheRemunerationReportasandwhentheyoccur.–TheRemunerationCommitteereservestherighttomakeanyremunerationpaymentsandpaymentsforlossofoce(includingexercisinganydiscretionsavailabletoitinconnectionwithsuchpayments)notwithstandingthattheyarenotinlinewiththepolicysetoutabovewherethetermsofthepaymentwereagreed:(i)beforethedatetheCompany’srstremunerationpolicyapprovedbyshareholdersinaccordancewithsection439AoftheCompaniesActcameintoeect;(ii)beforethepolicysetoutabovecameintoeect,providedthatthetermsofthepaymentwereconsistentwiththeshareholder-approvedremunerationpolicyinforceatthetimetheywereagreed;or(iii)atatimewhentherelevantindividualwasnotaDirectoroftheCompanyand,intheopinionoftheRemunerationCommittee,thepaymentwasnotinconsiderationfortheindividualbecomingaDirectoroftheCompany.Forthesepurposes“payments”includestheRemunerationCommitteesatisfyingawardsofvariableremunerationand,inrelationtoanawardovershares,thetermsofthepaymentare“agreed”atthetimetheawardisgranted.–TheRemunerationCommitteemaymakeminoramendmentstothepolicy(forregulatory,exchangecontrol,taxoradministrativepurposesortotakeaccountofachangeinlegislation)withoutobtainingshareholderapprovalforthatamendment.��91TheSageGroupplc|AnnualReport&Accounts2017StrategicreportFinancialstatementsGovernance Purpose of this section: –(cid:3)Provides remuneration disclosures for executive and Non-executive Directors –(cid:3)Details financial measures for bonus and PSP –(cid:3)Illustrates Company performance and how this compares to executive pay –(cid:3)Outlines implementation of remuneration policy for executive and Non-executive Directors for 2018 Single (cid:392)gure for total remuneration (audited information) The following table sets out the single (cid:392)gure for total remuneration for Executive Directors for the (cid:392)nancial years ended 30 September 2016 and 2017. (a) Salary/fees1 £’000 (b) Bene(cid:392)ts2£’000 (c) Bonus3£’000 (d) Pension4 £’000 (e) PSP awards5£’000 Total6£’000 Director 2017 2016 20172016 20172016 20172016 2017 2016 20172016 Executive Directors S Kelly 805 790 5250 194686 201197 2,084 – 3,3361,723S Hare 519 505 10391125442 130126 1,304 1,8642,1813,030Non-Executive Directors D H Brydon 360 360 3737–– –– – – 397397 R Markland 31 75 –– –– –– – – 3175 N Berkett 60 60 –– –– –– – – 6060 D Hall 83 76 –– –– –– – – 8376 J Howell 77 77 –– –– –– – – 7777 I Kuznetsova 25 60 –– –– –– – – 2560 S Jiandani 35 – –– –– –– – – 35– C Keers 15 – –– –– –– – – 15– Notes: 1.(cid:3)Details of salary progression since 2015 for the current Executive Directors are summarised in the Statement of implementation of remuneration policy in the following (cid:392)nancial year on page 98. Current fees for the Chairman and non-Executive Directors are set out on page 99. 2.(cid:3)Bene(cid:392)ts provided to the Executive Directors included: car bene(cid:392)ts or cash equivalent, private medical insurance, permanent health insurance, life assurance, (cid:392)nancial advice and where deemed to be a taxable benefit, the grossed-up costs of travel, accommodation and subsistence for the Directors and their partners on Sage-related business if required. A portion of Steve Hare’s benefits relate to the grossed-up cost of his travel to Sage’s London office which, since 1 April 2015, has been deemed a taxable benefit as a result of the enhanced amount of time he has been required to spend in London attending to Sage matters. Donald Brydon receives a company car bene(cid:392)t. 2016 benefit values have been updated to reflect tax gross-ups which were not previously stated. 3.(cid:3)Bonus payable in respect of the (cid:392)nancial year including any deferred element at face value at date of award. Further information about how the level of 2017 award was determined is provided in the additional disclosures below. 4.(cid:3)Pension emoluments for both Executive Directors were equal to 25% of base salary. Both elected to receive them as a cash allowance. 5.(cid:3)The 2017 PSP value is based on the PSP award granted in 2015 which is due to vest in January 2018. Both Stephen Kelly’s and Steve Hare’s awards included in the single figure table have the same performance conditions. The value is based on the number of shares vesting in 2018 multiplied by the average price of a Sage share between 30 June and 29 September 2017 (the last trading day of the year), which was 689.6p, plus dividend equivalents accrued. 49% of the value can be attributed to the increase in share price between the grant and vesting dates. Steve Hare's 2014 PSP for 2016 has been updated. The change in value is as a result of changes in the share price reported in 2016 in line with the methodology set out in the reporting regulations (709.2p) and the share prices actually achieved at vesting (643.0p and 681.1p), and a change in the anticipated dividend equivalents payable after the end of the reporting year from 23,168 to 20,602. Stephen Kelly did not have a 2014 PSP award. 6.(cid:3)Total remuneration for Directors in 2017 was £6,241,246 compared to £5,498,000 in 2016 (updated). Directors’ annual remuneration reportThe Sage Group plc | Annual Report & Accounts 201792 Additional disclosures for single (cid:392)gure for total remuneration table Annual bonus 2017 The bonus targets for FY17 were set by reference to the strategy for FY17, in particular the achievement of organic revenue growth taking into account the Company’s annual budget and consensus in determining the payout curve. The actual target ranges for 2017 for the (cid:392)nancial performance measures have not been disclosed as this is considered by the Board to be commercially sensitive information, bearing in mind that many of our competitors are unlisted companies who do not provide this level of disclosure. An indication of where actual performance fell within each range is given in the table below. Retrospective disclosure of the target ranges will be made in next year’s Remuneration Report once the information is no longer considered commercially sensitive by the Board. Bonus measure % Weighting Threshold Potential Performance outcome as a % of maximum bonus Organic revenue growth 80 Achievement of 6.6% for FY17 which, but for the non-achievement of the recurring revenue growth underpin, would have resulted in 46% of the maximum bonus becoming payable. The actual payout for this element was zero. Strategic measures (see Directors’ personal strategic objectives table below) 20 Stephen Kelly’s achievement of strategic objectives for FY17 led to 19% of the maximum bonus becoming payable. Steve Hare’s achievement of strategic objectives for FY17 led to 19% of the maximum bonus becoming payable. Overall assessment Stephen Kelly received a bonus equal to 24% of salary (19% of the maximum). One-third of the total bonus was deferred into Sage shares for two years under the compulsory bonus deferral requirement in the 2016 remuneration policy. Steve Hare received a bonus equal to 24% of salary (19% of the maximum). One-third of the total bonus was deferred into Sage shares for two years under the compulsory bonus deferral requirement in the 2016 remuneration policy. Note: Organic revenue growth is de(cid:392)ned on page 185. Payment of a bonus for organic revenue growth was subject to the achievement of two underpin conditions: Group recurring revenue growth and Group underlying operating margin. The margin underpin was met, but the recurring revenue growth underpin was not, resulting in no payout for the organic revenue growth measure. Executive Directors’ personal strategic objectives Executive Directors’ personal strategic objectives were set by the Committee at the beginning of the financial year, consistent with the key deliverables within the annual budget. Targets for strategic objectives are considered to be commercially sensitive and are not disclosed. However, details of metrics that were taken into account by the Committee in coming to its assessment of this measure are set out below: Stephen Kelly, CEO Stephen Kelly was set goals on improving customer experience, building our cloud proposition, expanding our presence in the enterprise market, the mitigation of principal risks and achieving greater operational simplicity and efficiency. In determining the amount of bonus payable for personal strategic objectives, the Committee took into account: (cid:177)(cid:3)The improvement in Sage’s Net Promoter Score by 39% year-on-year (cid:177)(cid:3)The 36% increase in Annual Contract Value (ACV) for Sage One and fourfold increase in average ACV for Sage Live, with revenues for Sage Live increasing by over 800% (cid:177)(cid:3)A revenue growth rate of 21% in the Enterprise market (cid:177)(cid:3)Reduction in the risk score against Sage’s principal risks (cid:177)(cid:3)A reduction in the run rate of overall G&A expense by 360 bps to below 14% of revenue, demonstrating greater efficiency in the way Sage operates. Overall, the Committee determined that Stephen Kelly’s performance had been strong and that a bonus of 19% of maximum would be payable. Steve Hare, CFO Steve Hare was set goals on increasing operational efficiencies, making targeted acquisitions, improving Sage’s control environment and achieving greater simplicity and efficiency. In determining the amount of bonus payable for personal strategic objectives, the Committee took into account: (cid:177)(cid:3)The successful establishment of finance service centres in Newcastle, Johannesburg and Atlanta, resulting in transaction processing from four countries being successfully transferred into the European Shared Service Centre and a 15% reduction in the cost of the finance function. (cid:177)(cid:3)The completion of two cloud-related acquisitions in Sage People and Intacct whilst achieving Sage’s commitment to achieve 27% underlying operating margin and an acceleration in the performance of the acquired businesses under Sage ownership. (cid:177)(cid:3)Improvement in the control environment – approximately 100 key controls standardised as part of our Excellence in Controls (EIC) initiative. (cid:177)(cid:3)A reduction in the run rate of overall G&A expense by 360 bps to below 14% of revenue, demonstrating greater efficiency in the way Sage operates. Overall, the Committee determined that Steve Hare’s performance had been strong and that a bonus of 19% of maximum would be payable. Disclosure of 2016 bonus targets The target ranges for (cid:392)nancial measures used to determine the 2016 bonus were not disclosed in last year’s Annual Report & Accounts as this was considered by the Board to be commercially sensitive information. The Committee’s current policy of retrospective disclosure to be made after a period of one year has been applied again this year. The table below therefore sets out the target ranges for the (cid:392)nancial measures that were used to determine the 2016 bonus.93The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsBonus measure % weighting Threshold performance Target performance Stretch performance Actual performance % of maximum bonus payable Recurring revenue growth1 80% 8% (24% of bonus payable) 10% (56% of bonus payable) 11% (80% of bonus payable) 9.8% 53% Strategic measures 20% The assessment of strategic measures was disclosed on page 90 of the 2016 Annual Report (Between 2.4% and 20% of bonus payable) CEO: 16% CFO: 16% Total CEO 69% of maximum bonus (87% of salary) CFO 69% of maximum bonus (87% of salary) Notes: 1.(cid:3)As reported in page 82 of the 2016 Annual Report, Recurring Revenue growth included processing revenue, this is de(cid:392)ned on page 170 of the 2016 Annual Report. Additionally, three underpins had to be achieved for any bonus relating to recurring revenue growth to pay out. All the underpins were met: Group organic revenue growth was 6.1% (satisfying the target of 6%), Group underlying operating margin was 27.2% (satisfying the target of 27%) and subscription growth was 34% (satisfying the target of 28%). PSP awards Awards granted under the PSP in 2015 (excluding Stephen Kelly’s recruitment award, which vests in 2021) vest depending on performance against three equally weighted measures, measured over three years, from 1 October 2014 to 30 September 2017: (cid:177)(cid:3)One-third organic revenue growth with a margin underpin (cid:177)(cid:3)One-third EPS growth (cid:177)(cid:3)One-third relative TSR performance against the FTSE 100 (excluding (cid:392)nancial services and extracting companies) For each measure, three levels of performance are de(cid:392)ned below, with straight-line vesting between each level of performance: target, stretch and exceptional. Measure Between target and stretch Between stretch and exceptional EPS growth (CAGR) Between 6% and 12% Between 12% and 15% (or above) Relative TSR Between median and upper quartile Between upper quartile and upper decile (or above) Organic revenue growth (CAGR) Between 4% and 8% Between 8% and 10% (or above) 20% of the award vests for the achievement of target, with 80% of the award vesting for the achievement of stretch 80% of the award vests for the achievement of stretch, with 100% of the award for the achievement of exceptional performance For the organic revenue growth measure to vest, margin at 30 September 2017 must be at least the level at the beginning of the performance period. The TSR vesting percentage may only exceed 80% (Stretch level) if performance against either the EPS target or the organic revenue growth target is also at Stretch level. Measure Achieved Vesting EPS growth (CAGR) 10.1% 20.4% Relative TSR 94th percentile 26.7% Organic revenue growth (CAGR) 6.5% 19.0% Total 66.1% A change in accounting policy for revenue recognition was introduced in financial year 2015, the basis of which is explained on page 44 of our 2015 Annual Report. This change in policy, which occurred mid-way through the performance cycle, affects the calculation of both organic revenue and EPS. Organic revenue and EPS growth over the three-year performance period of this PSP award has therefore been calculated on an amalgamated basis comprising growth for 2015 assessed on the prior accounting basis plus growth for 2016 and 2017 assessed on the revised accounting basis. This approach was adopted by the Committee in order that the basis of calculation for each year remains consistent with the financial measures and targets communicated to employees and the market at the start of that particular year. The Committee has determined that this basis of calculation does not make the growth targets materially more or less difficult to satisfy than when they were originally set. In assessing 2017 performance, the Committee has determined that the most appropriate basis for assessing performance against underlying EPS growth is to exclude part-year contributions from SPS, Sage People and Intacct in 2017 and, in the case of SPS, whole-year performance in the comparative base year of 2016. This ensures that management are neither penalised nor rewarded on the timing of these transactions completed during the financial year. The Committee believes that this approach ensures that management time transactions using sound judgement and not with a view to maximising their incentive outcomes. It will review the impact of future acquisitions and disposals on incentives on a case-by-case basis. The Committee also determined that the margin underpin condition had been met, allowing the portion of the award relating to organic revenue measure to vest. Directors’ annual remuneration report continuedDirectors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 201794Relative TSRRecurring revenueTSR ranking% of award vestingThis portion of the award lapsesRecurring revenue growth (CAGR) % of award vestingHave both underpin conditions been met? –EPS growth CAGR of 8.0% p.a. –Organic revenue growth CAGR of 6.7% p.a.Median 10%Upper quartile 40%Upper decile 50% 50% 50% of award of award NoYes8.7% p.a. 10%10.7% p.a. 40%12.7% p.a. 50% PSP awards granted in FY17 Awards were granted under the PSP on 14 December 2016 at a market value of £6.265 to selected senior employees, including the Executive Directors, in the form of conditional share awards. In alignment with our business strategy for FY17, performance conditions for awards granted in FY17 are: The following key points are highlighted in relation to the performance measures: (cid:177)(cid:3)Recurring revenue growth as a medium-term performance condition provides close alignment with our medium-term strategic priorities to grow our subscription-based services and acquire new customers. The recurring revenue growth targets for FY17 awards are consistent with our ambition for the three-year period FY16-18. The targets have been adjusted to reflect the updated definition of organic revenue which from FY18 includes Intacct and Fairsail (Sage People). The impact of the acquisitions has been pro-rated across the FY17 PSP to reflect the proportionate contribution of the acquired businesses over the performance period. The EPS underpin remains unchanged, which aligns to our commitment to maintain our margin following the acquisitions. The Committee is satisfied that the adjusted targets are not materially easier or more difficult to achieve. The same adjustment has been made proportionally to the FY16 PSP (granted March 2016), where the recurring revenue and organic revenue targets have been increased by 0.3% p.a. Continued focus on overall Group growth and delivery of shareholder value is achieved by: (cid:177)(cid:3)50% of the awards being determined by relative TSR performance; (cid:177)(cid:3)Requiring the achievement of two broader underpin conditions (based on EPS and organic revenue growth) before the recurring revenue growth element of the PSP awards can vest. The targets for these underpin conditions (8.0% p.a. EPS and 6.7% p.a. organic revenue growth) are consistent with delivery of a successful transitional phase. More specifically, they ensure that the transition to a subscription model is achieved whilst maintaining overall growth in revenues and earnings (i.e. subscription growth will need to more than offset the decline in licence growth). Awards will vest, subject to satisfaction of those performance conditions, on the third anniversary of the date of grant. Type of award Maximum number of sharesFace value (£)1Face value (% of salary) Threshold vesting(% of award)End of performance periodStephen Kelly Performance shares 323,224£2,025,000 250% 20%30 September 2019Steve Hare 208,300£1,305,000 250% 20%30 September 2019Notes: 1.(cid:3)The face value of the awards has been calculated using the market value (middle market quotation) of a Sage share on 14 December 2016 of £6.265.95The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsChange in remuneration of Chief Executive O(cid:400)cer compared to Group employees The table below shows the percentage change in total remuneration of the Chief Executive O(cid:400)cer with a comparator group of all UK employees over the same time period. Sage has employees based all around the world, some of whom work in countries with comparatively higher inflation than the UK; therefore a comparison to Sage’s UK-based Group employees is more appropriate than to all employees. CEOAll UK employeesSalary1 0%7.2%Taxable bene(cid:392)ts2 5.3%-11.6%Annual incentive -72%-19%Notes: 1.(cid:3)The percentage change for UK colleagues shown is the 2016 annual pay review and promotions/market adjustments during 2017. This is consistent with the basis of the disclosure in previous reports. 2.(cid:3)The increase in Stephen Kelly’s taxable benefits is set out in the single figure of remuneration table above. Taxable benefits for colleagues relate to the reduction in the cost of health insurance premiums compared to 2016. Historical executive pay and Company performance The table below summarises the Chief Executive O(cid:400)cer single (cid:392)gure for total remuneration, annual bonus payout and PSP vesting as a percentage of maximum opportunity for the current year and previous eight years. CEO 200920102011201220132014 2015 20162017CEO single (cid:392)gure of remuneration (in £’000) Stephen Kelly1 ––––– 1,521 1,7233,336Guy Berruyer2 –2,9351,1961,6701,616 108–Paul Walker3 1,7972,196–––– ––Annual bonus payout (as % maximum opportunity) Stephen Kelly ––––– 67%69%19%Guy Berruyer –66%21%72%55% 0%–Paul Walker 38%83%–––– ––PSP vesting (as % of maximum opportunity) Stephen Kelly ––––– ––66%Guy Berruyer –61%0%0%0% 64%–Paul Walker 74%26%–––– ––Notes: 1.(cid:3)Stephen Kelly was appointed CEO on 5 November 2014. 2.(cid:3)Guy Berruyer stepped down from the position of CEO on 5 November 2014. 3.(cid:3)Paul Walker resigned as CEO on 1 October 2010. Directors’ annual remuneration report continuedDirectors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 201796 Historical Group performance against FTSE 100 The graph below shows the Total Shareholder Return of the Group and the FTSE 100 over the last nine years. The FTSE 100 index is the index against which the TSR of the Group should be measured because of the comparable size of the companies which comprise that index. Note: This graph shows the value, by 30 September 2017, of £100 invested in The Sage Group plc on 30 September 2008 compared with the value of £100 invested in the FTSE 100 index. The other points plotted are the values at intervening (cid:392)nancial year ends. Payments to past Directors (audited information) In the year ending 30 September 2017, no payments were made to past Directors, either in respect of loss of office or otherwise. Relative importance of spend on pay The charts below show the all-employee pay cost (as stated in the notes to the accounts), pro(cid:392)t before tax and returns to shareholders by way of dividends and share buyback for 2016 and 2017. The information shown in this chart is based on the following: (cid:177)(cid:3)Underlying PBT – Underlying pro(cid:392)t before income tax taken from the table on page 119, adding back discontinued operations on page 172. Underlying PBT has been chosen as a measure of our operational profitability (cid:177)(cid:3)Returns to shareholders – Total dividends taken from note 15.5 on page 168; share buyback taken from consolidated statement of changes in equity on page 122 (cid:177)(cid:3)Total employee pay – Total sta(cid:391) costs from note 3.3 on page 135, including wages and salaries, social security costs, pension and share-based payments 4714051617+667896721617+1171451617+12Ordinary dividends921617+7Shares repurchased for discretionary share plansUnderlying PBT (£m)Returns to shareholders (£m)Total employee pay (£m)157Sage FTSE 100 Index Value (£)010020030040050030-Sep-1730-Sep-1630-Sep-1530-Sep-1430-Sep-1330-Sep-1230-Sep-1130-Sep-1030-Sep-0930-Sep-0897The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsStatement of implementation of remuneration policy in the following (cid:392)nancial year This section provides an overview of how the Committee is proposing to implement our remuneration policy in 2018. Base salary An annual salary review was carried out by the Committee in November 2017. Following that review, the Committee approved the following: Salary 1 January 2018Salary 1 January 2017 Salary 1 January 2016Stephen Kelly £810,000 (0% increase)£810,000 (2.5% increase) £790,000 (0% increase)Steve Hare £522,000 (0% increase)£522,000 (2.5% increase) £509,200 (3% increase)Pension and bene(cid:392)ts As in FY17, the Executive Directors will receive a pension provision worth 25% of salary as a contribution to a de(cid:392)ned contribution plan and/or as a cash allowance. They will also receive a standard package of other bene(cid:392)ts and where deemed necessary the costs of travel, accommodation and subsistence for the Directors and their partners on Sage-related business, consistent with that in FY17. In addition, the Company will continue to cover the cost of Steve Hare’s travel and accommodation for days on which he attends to Sage matters in the Company’s London offices. Annual bonus Key features of the Executive Directors’ annual bonus plan for 2018 are as follows: (cid:177)(cid:3)The maximum annual bonus potential will remain unchanged at 125% of salary (cid:177)(cid:3)One-third of any bonus earned will be deferred into shares for three years under The Sage Group Deferred Bonus Plan (cid:177)(cid:3)Annual bonuses awarded in respect of performance in 2018 will be subject to potential withholding (malus) or recovery (clawback) if speci(cid:392)ed “trigger events” occur within three years of the payment/award of the annual bonus. “Trigger events” will comprise a material misstatement of the audited results, error in calculation of the bonus payout, serious reputational damage or signi(cid:392)cant (cid:392)nancial loss as a result of an individual’s misconduct or gross misconduct which could have warranted an individual’s summary dismissal The annual bonus for 2018 for Executive Directors will be determined as detailed below: As a percentage of maximum bonus opportunity: Measure CEOCFOOrganic revenue growth1 80%80%Strategic goals 20%20%Note: 1.(cid:3)Payout is dependent upon the satisfaction of the underpin conditions of underlying operating profit margin and recurring revenue growth. The selection of measures and targets takes into account the Company’s strategic priorities, its internal budgeting and consensus. The organic revenue growth measure is based on the updated definition of organic revenue set out on page 34. Targets are not disclosed because they are considered by the Board to be commercially sensitive. Many of our competitors are unlisted companies and not required to disclose their targets; our disclosure could provide our competitors with a considerable advantage. It is intended for retrospective disclosure to be made after a period of one year. Performance Share Plan (PSP) The Chief Executive O(cid:400)cer and Chief Financial O(cid:400)cer will be amongst the participants in the PSP award to be granted in December 2017. Awards will be of shares worth 250% of salary at the date of grant. Vesting of these awards will be subject to satisfaction of the following performance conditions measured over the three (cid:392)nancial years to 30 September 2020. A holding period to the PSPs granted for the financial year FY18 will apply for two years from the vesting date. No further performance conditions attach to the awards during the holding period.Directors’ annual remuneration report continuedDirectors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 201798 Relative TSR performance condition (50% of award) TSR ranking % of award vestingBelow target Below median 0%Target Median 10%Stretch Upper quartile 40%Exceptional Upper decile 50%TSR performance comprises share price growth and dividends paid. Sage’s TSR performance will be measured relative to the TSR of the constituents of the FTSE 100, excluding (cid:392)nancial services and extracting companies. Recurring revenue growth performance condition (50% of award) Recurring revenue growth (CAGR)% of award vesting*Below target <9% p.a.0%Target 9% p.a.10%Stretch 11% p.a.40%Exceptional 13% p.a.50%Recurring revenue is revenue earned from customers for the provision of a good or service, where risks and rewards are transferred to the customer over the term of a contract, with the customer being unable to continue to bene(cid:392)t from the full functionality of the good or service without ongoing payments. Notes: * For any of this portion of the PSP awards to vest, two underpin conditions also both need to be met: (cid:177)(cid:3)Organic revenue growth of 7% p.a. (CAGR) needs to be achieved over the performance period (cid:177)(cid:3)Group EPS growth of 8% p.a. (CAGR) needs to be achieved over the performance period (cid:177)(cid:3)As noted earlier in the report, the recurring and organic revenue targets have been adjusted upwards to take account of the updated definition of organic measures PSP awards granted in 2018 will be subject to potential withholding (malus) or recovery (clawback) if speci(cid:392)ed trigger events occur prior to the third anniversary of the release date of an award. “Trigger events” in respect of PSP awards will comprise a material misstatement of the audited results, error in calculation of the extent of PSP vesting, serious reputational damage or signi(cid:392)cant (cid:392)nancial loss as a result of an individual’s misconduct or gross misconduct which could have warranted an individual’s summary dismissal or a material failure of risk management. Non-Executive Director remuneration The table below shows the fee structure for non-Executive Directors for 2018. Non-executive fees are determined by the full Board except for the fee for the Chairman of the Board which is determined by the Remuneration Committee. Non-executive fees will next be reviewed by the Remuneration Committee in 2018. 2018 fees Chairman of the Board all-inclusive fee £360,000 Basic Non-Executive Director fee £60,000 Senior Independent Director additional fee £10,0001Audit and Risk Committee Chairman additional fee £17,000 Remuneration Committee Chairman additional fee £17,000 1.(cid:3)On appointment as Senior Independent Director, Drummond Hall elected to receive an additional fee of £10,000 to reflect the responsibilities and additional time commitment of the Senior Independent Director. The fee is lower than the previous fee of £15,000 and reflects the fact that he also receives a fee as Remuneration Committee Chairman. 99The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsDirectors’ shareholdings and share interests (audited information) The required shareholding for Executive Directors is 200% of salary; this has been e(cid:391)ective from the 2016 AGM. Executive Directors are expected to build up the required shareholding within a (cid:392)ve-year period of joining the Board. As at 30 September 2017, Stephen Kelly held shares worth 219% of salary, and Steve Hare held shares worth 227% of salary, including unvested deferred shares net of tax. The values for Executive Directors are derived from interests in shares valued using the average market price of a share between 30 June and 29 September 2017 (the last trading day of the financial year), which was 689.6p, and the executive’s basic salary on 30 September 2017. Interests in shares The interests of each person who was a Director of the Company as at 30 September 2017 (together with interests held by his or her connected persons) were: Director Ordinary shares at 30 September 2017 numberOrdinary shares at 30 September 2016 numberD H Brydon 78,02468,0241 N Berkett 47,99947,999D Hall 10,00010,000S Hare 146,4820J Howell 31,00031,000S Kelly 237,346212,346C Keers 0N/AS Jiandani 0N/ATotal 550,851369,369Notes: 1.(cid:3)Donald Brydon’s shareholding at 30 September 2016 has been restated, as announced through the Regulatory News Service on 9 February 2017. – There have been no changes in the Directors’ holdings in the share capital of the Company, as set out in the table above, between 30 September 2017 and the date of this report. – Details of the Executive Directors’ interests in outstanding share awards under the PSP, deferred shares and all-employee plans are set out below. All-employee share options (audited information) UK-based Executive Directors were entitled to participate in The Sage Group Savings-Related Share Option Plan (SRSOP), which is now closed for new invitations, and in addition to the new all-employee share plan, The Sage Save and Share Plan, on the same terms as other UK-based employees. See page 166 for more detail. In the year under review, Stephen Kelly and Steve Hare did not participate in this scheme as their existing contributions to the SRSOP are at the HMRC-approved contribution limit. The outstanding all-employee share options granted to each Director of the Company are as follows: Director Exercise price per share Shares under option at 1 October 2016 number Granted during the year numberExercised during the year numberLapsed during the year numberShares under option at 30 September 2017 number Date exercisableS Kelly 456p 6,578 –––6,578 1 August 2020 -31 January 2021S Hare 317p 9,463 –––9,463 1 August 2019- 31 January 2020Total 16,041 –––16,041 Notes: (cid:177)(cid:3)No performance conditions apply to options granted under this Plan. For the 2015 SRSOP grant, the exercise price was set at 456.0p, a 20% discount to the average share price of 570.0p on 18, 19 and 20 May 2015. For the 2014 SRSOP, the exercise price was set at 317p, a 20% discount to the average share price on 15, 16 and 19 May 2014 of 396.25p. (cid:177)(cid:3)The market price of a share of the Company at 29 September 2017 (the last trading day of the financial year) was 698.5p (mid-market average) and the lowest and highest market price during the year was 599.0p and 756.0p respectively. Directors’ annual remuneration report continuedDirectors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 2017100 Performance Share Plan (audited information) The outstanding awards granted to each Executive Director of the Company under the Performance Share Plan are as follows: Director Grant date Under award 1 October 2016 numberAwarded during the year numberVested during the year numberLapsed during the year number Under award 30 September 2017 numberVesting dateS Kelly 14 December 2016 323,224–– 323,22414 December 2019 2 March 2016 327,909 327,9092 March 2019 12 January 2015 426,842––– 426,84212 January 2018 12 January 2015 213,421––– 213,42112 January 2021 968,172323,224–– 1,291,396S Hare 14 December 2016 –208,300–– 208,30014 December 2019 2 March 2016 211,356 211,3562 March 2019 12 January 2015 267,127––– 267,12712 January 2018 10 March 2014 286,088–(182,897)(103,191) –4 August 2017 20 January 2014 116,873–(74,717)(42,156) –20 January 2017 881,444208,300(257,614)(145,347) 686,783Total 1,849,616531,524(257,614)(145,347) 1,978,179Notes: (cid:177)(cid:3)No variations were made in the terms of the awards in the year. (cid:177)(cid:3)The market price of a share on 14 December 2016, the date of the awards made in the year ended 30 September 2017, was 626.5p. (cid:177)(cid:3)The performance conditions for awards granted in January 2015 are set out on page 94. The performance conditions applicable to awards that were granted on 2 March 2016 and 14 December 2016 are explained on page 95. (cid:177)(cid:3)For Stephen Kelly’s award that vests in January 2021, Sage’s TSR must have been at least 15% (CAGR) over the performance period. If this underpin condition is met, the award will vest based on Sage’s relative TSR performance over the performance period as set out on page 86 of the 2015 Annual Report. (cid:177)(cid:3)The performance conditions for Steve Hare’s awards that vest during 2017 are set out on page 91 of the 2016 Annual Report. The vesting date for Steve Hare’s award that was due to vest on 10 March 2017 was delayed to 4 August 2017 due to the imposition of dealing restrictions. Deferred shares (audited information) The outstanding awards granted to each Executive Director of the Company under The Sage Group Deferred Bonus Plan are as follows: Director Grant date Under award at 1 October 2016 numberAwarded during the year numberVested during the year numberLapsed during the year number Under award at 30 September 2017 numberVesting dateS Hare 12 January 201511,047––– 11,04712 January 2018 9 December 201513,673–– 13,6739 December 2018 14 December 201623,528–– 23,52814 December 2018S Kelly 36,503–– 36,50314 December 2018Total 24,72060,031–– 84,751Notes: (cid:177)(cid:3)Awards are not subject to further performance conditions once granted. The market price of a share on 14 December 2016, the date of the awards made in the year ended 30 September 2017, was 626.5p. (cid:177)(cid:3)No variations were made in the terms of the awards in the year. There are limits on the number of newly issued and treasury shares that can be used to satisfy awards under the Group’s employee share schemes in any 10-year period. The limits and the Group’s current position against those limits as at 16 November 2017 (the last practicable date prior to publication of this document) are set out below. The Company has previously satis(cid:392)ed all awards under the Performance Share Plan through the market purchase of shares or transfer of treasury shares and will continue to consider the most appropriate approach, based on the relevant factors at the time. Limit Current position5% of Group’s share capital can be used for discretionary share schemes 1.96%10% of Group’s share capital can be used for all share schemes 2.76% 101The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsExternal appointments Executive Directors are permitted, where appropriate and with Board approval, to take Non-executive Directorships with other organisations in order to broaden their knowledge and experience in other markets and countries. Fees received by the Directors in their capacity as Directors of these companies are retained, re(cid:393)ecting the personal responsibility they undertake in these roles. The Board recognises the signi(cid:392)cant demands that are made on Executive and non-Executive Directors and has therefore adopted a policy that no Executive Director should hold more than two directorships of other listed companies. The Board encourages Executive Directors to limit other directorships to one listed company. Except in exceptional circumstances where approved in advance by the Chairman of the Committee, if an Executive Director holds non-executive positions at more than one listed company then only the fees from one such company will be retained by the Director. Neither of the Executive Directors currently holds an appointment of this nature. No formal limit on other board appointments applies to non-Executive Directors under the policy but prior approval (not to be unreasonably withheld) from the Chairman on behalf of the Board is required in the case of any new appointment. In the case of the Chairman, prior approval of the Nomination Committee is required on behalf of the Board. Unexpired term of contract table Director Date of contractUnexpired term of contract on 30 September 2017, or on date of contract if laterNotice period under contractExecutive Directors S Kelly 5 November 201412 months12 months from the Company and/or individualS Hare 3 January 201412 months12 months from the Company and/or individualNon-Executive Directors N Berkett 1 July 20161 year 9 months6 months from the Company or 1 month from individualD H Brydon 6 July 20172 years 9 months6 months from the Company and/or individualJ Howell 15 May 20161 year 8 months6 months from the Company or 1 month from individualD Hall 1 January 20172 years 3 months1 month from the Company or 1 month from individualS Jiandani 28 February 20172 years 5 months1 month from the Company or 1 month from individualC Keers 1 July 20172 years 9 months1 month from the Company or 1 month from individualConsideration by the Directors of matters relating to Directors’ remuneration The following Directors were members of the Remuneration Committee when matters relating to the Directors’ remuneration for the year were being considered: (cid:177)(cid:3)Ruth Markland (cid:177)(cid:3)Drummond Hall (Chair) (cid:177)(cid:3)Donald Brydon (cid:177)(cid:3)Jonathan Howell (cid:177)(cid:3)Neil Berkett (cid:177)(cid:3)Inna Kuznetsova (cid:177)(cid:3)Cath Keers The Committee received assistance from Sandra Campopiano (former Chief People O(cid:400)cer), Tina Clayton (Executive Vice President, Reward & Recognition), and Vicki Bradin (General Counsel and Company Secretary) and other members of management, who may attend meetings by invitation, except when matters relating to their own remuneration are being discussed. Directors’ annual remuneration report continuedDirectors’ remuneration report continuedThe Sage Group plc | Annual Report & Accounts 2017102ExternaladvisersStatementofshareholdingvotingDrummondHallTheRemunerationCommitteecontinuestoreceiveadvicefromDeloitteLLP,anindependentrmofremunerationconsultantsappointedbytheCommitteeafterconsultationwiththeBoard.Duringtheyear,Deloitte’sexecutivecompensationadvisorypracticeadvisedtheCommitteeondevelopmentsinmarketpractice,corporategovernance,institutionalinvestorviewsandinthedevelopmentoftheCompany’sincentivearrangements.TotalfeesforadviceprovidedtotheCommitteeduringtheyearwere£75,800.TheCommitteeissatisedthattheadviceithasreceivedhasbeenobjectiveandindependent.DeloitteisafoundingmemberoftheRemunerationConsultantsGroupandadherestoitsCodeinrelationtoexecutiveremunerationconsultingintheUK.OtherpartsofDeloittehaveprovidedtaxadvice,speciccorporatenancesupportinthecontextofmergerandacquisitionactivityandunrelatedcorporateadvisoryservices.ThetablebelowsetsouttheresultsofthevoteontheRemunerationpolicyatthe2016AGMandreportatthe2017AGM:ChairmanoftheRemunerationCommittee21November2017��VotesforVotesagainstNumber%Number%VotescastVoteswithheldRemunerationpolicy767,613,44297.4320,268,8972.57787,882,3392,910,738Remunerationreport737,778,77990.9073,884,7449.10811,663,523419,256103TheSageGroupplc|AnnualReport&Accounts2017StrategicreportFinancialstatementsGovernanceThe Directors present their report together with the audited consolidated financial statements for the year ended 30 September 2017. The Annual Report & Accounts contains statements that are not based on current or historical fact and are forward-looking in nature. Please refer to the “Disclaimer” on page 107. Strategic report The information that fulfils the reporting requirements relating to the following matters can be found on the following pages of the Strategic report: Subject matter Page Future developments 17 – Chief Executive’s review Greenhouse gas emissions 48-49 – Environment section Viability statement 58 – Principal risks Corporate governance statement The Disclosure Guidance and Transparency Rules (“DTR”) require certain information to be included in a corporate governance statement in the Directors’ report. This information can be found in the Corporate governance report on pages 68 to 83, which is incorporated into this Directors’ report by reference and, in the case of the information referred to in DTR 7.2.6, in this Directors’ report. Disclosure of information under Listing Rule 9.8.4 Information on allotments of shares for cash pursuant to the Group employee share schemes can be found on page 163 within the notes to the Group financial statements. Results and dividends The results for the year are set out from page 119. Full details of the proposed final dividend payment for the year ended 30 September 2017 are set out on page 39. The Board is proposing a final dividend of 10.20p per share following the payment of an interim dividend of 5.22p per share on 2 June 2017. The proposed total dividend for the year is therefore 15.42p per share. Going concern After making enquiries, the Directors have a reasonable expectation that Sage has adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. In reaching this conclusion, the Directors have had due regard to the following: –(cid:3)The cash generated from operations, available cash resources and committed bank facilities and their maturities, which, taken together, provide confidence that Sage will be able to meet its obligations as they fall due. Further information on the available cash resources and committed bank facilities is provided in Note 14 to the financial statements –(cid:3)The financial position of Sage, its cash flows, financial risk management policies and available debt facilities, which are described in the financial statements, and Sage’s business activities, together with the factors likely to impact its future growth and operating performance, which are set out in the Strategic Report on pages 1 to 62. Viability statement The full viability statement, and the associated explanations made in accordance with provision C.2.2 of the UK Corporate Governance Code can be found on page 58. Research and development During the year, we incurred a cost of £179m (2016: £144m) in respect of research and development. Please see page 134 for further details. Political donations No political donations were made in the year. Directors and their interests A list of Directors, their interests in the ordinary share capital of the Company, their interests in its long-term performance share plan and details of their options over the ordinary share capital of the Company are given in the Directors’ remuneration report on page 100. No Director had a material interest in any significant contract, other than a service contract or contract for services, with the Company or any of its operating companies at any time during the year. The names of all persons who, at any time during the year, were Directors of the Company can be found on pages 64 to 65. As at the date of this report, indemnities (which are qualifying third-party indemnity provisions under the Companies Act 2006) are in place under which the Company has agreed to indemnify the Directors of the Company to the extent permitted by law and by the Company’s articles of association, in respect of all liabilities incurred in connection with the performance of their duties as a Director of the Company or its subsidiaries. Copies of these indemnities are available for review at the Company’s registered office. Employment policy The Group continues to give full and fair consideration to applications for employment made by disabled persons, having regard to their respective aptitudes and abilities. The policy includes, where practicable, the continued employment of those who may become disabled during their employment and the provision of training and career development and promotion, where appropriate. The Group has continued its policy of employee involvement by making information available to employees on matters of concern to them. Colleagues regularly receive updates on the financial and economic factors affecting the Group. Many colleagues are stakeholders in the Company through participation in share option schemes and a long-term performance share plan. Further details of colleague engagement are given on pages 41 to 43. Directors’ reportThe Sage Group plc | Annual Report & Accounts 2017104 Substantial shareholdings At 30 September 2017, the Company had been notified, in accordance with the DTRs, of the following interests in its ordinary share capital: Name Ordinary shares % of capital Nature of holdingStandard Life Aberdeen 81,048,985 7.50% Direct and indirectBlackRock Inc 63,526,140 588% IndirectLindsell Train Limited 56,347,354 5.21% DirectAviva Investors 54,870,660 5.08% Direct and indirectInformation provided to the Company under the DTRs is publicly available via the regulatory information service and on the Company website. Share capital The Company’s share capital is as set out on page 163. The Company has a single class of share capital which is divided into ordinary shares of 1 4/77p each. Rights and obligations attaching to shares Voting In a general meeting of the Company, subject to the provisions of the articles of association and to any special rights or restrictions as to voting attached to any class of shares in the Company (of which there are none): –(cid:3)On a show of hands, a qualifying person (being an individual who is a member of the Company, a person authorised to act as the representative of a corporation or a person appointed as a proxy of a member) shall have one vote, except that a proxy has one vote for and one vote against a resolution if the proxy has been appointed by more than one member and has been given conflicting voting instructions by those members, or has been given discretion as to how to vote –(cid:3)On a poll, every member who is present in person or by proxy shall have one vote for every share of which he or she is the holder No member shall be entitled to vote at any general meeting or class meeting in respect of any shares held by him or her if any call or other sum then payable by him or her in respect of that share remains unpaid. Currently, all issued shares are fully paid. Deadlines for voting rights Full details of the deadlines for exercising voting rights in respect of the resolutions to be considered at the Annual General Meeting to be held on 28 February 2018 will be set out in the Notice of Annual General Meeting. Dividends and distributions Subject to the provisions of the Companies Act 2006, the Company may, by ordinary resolution, declare a dividend to be paid to the members, but no dividend shall exceed the amount recommended by the Board. The Board may pay interim dividends, and also any fixed rate dividend, whenever the financial position of the Company, in the opinion of the Board, justifies its payment. All dividends shall be apportioned and paid pro-rata according to the amounts paid up on the shares. Liquidation If the Company is in liquidation, the liquidator may, with the authority of a special resolution of the Company and any other authority required by the statutes (as defined in the articles of association): –(cid:3)Divide among the members in specie the whole or any part of the assets of the Company; or –(cid:3)Vest the whole or any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority, shall think fit. Transfer of shares Subject to the articles of association, any member may transfer all or any of his or her certificated shares by an instrument of transfer in any usual form or in any other form which the Board may approve. The Board may, in its absolute discretion, decline to register any instrument of transfer of a certificated share which is not a fully paid share (although not so as to prevent dealings in shares taking place on an open and proper basis) or on which the Company has a lien. The Board may also decline to register a transfer of a certificated share unless the instrument of transfer is: (i) left at the office, or at such other place as the Board may decide, for registration; and (ii) accompanied by the certificate for the shares to be transferred and such other evidence (if any) as the Board may reasonably require to prove the title of the intending transferor or his or her right to transfer the shares. The Board may permit any class of shares in the Company to be held in uncertificated form and, subject to the articles of association, title to uncertificated shares to be transferred by means of a relevant system and may revoke any such permission. Registration of a transfer of an uncertificated share may be refused where permitted by the statutes (as defined in the articles of association). Repurchase of shares The Company obtained shareholder authority at the last Annual General Meeting (28 February 2017) to buy back up to 108,009,614 ordinary shares. The minimum price which must be paid for each ordinary share is its nominal value and the maximum price set out in the resolution is the higher of 105% of the average of the middle market quotations for an ordinary share as derived from the London Stock Exchange Daily Official List for the five business days immediately before the purchase is made and the amount stipulated by article 5(1) of the Buy-back and Stabilisation Regulation 2003, as amended (in each case exclusive of expenses). Share repurchases are used from time to time as a method to control the Group’s leverage and decisions are made against strict price, volume and returns criteria that are agreed by the Board and regularly reviewed. 105The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsIn the year under review, the Company made no share repurchases. The Employee Benefit Trust purchased a total of 1,376,583 ordinary shares of 1 4/77p at a weighted average price of 6.80p per share. In the year under review no treasury shares were cancelled. Total share awards of 2,450,345 were made out of shares held by the Employee Benefit Trust. Amendment of the Company’s articles of association Any amendments to the Company’s articles of association may be made in accordance with the provisions of the Companies Act 2006 by way of special resolution. Appointment and replacement of Directors Directors shall be not less than two and no more than 15 in number. Directors may be appointed by the Company by ordinary resolution or by the Board. A Director appointed by the Board holds office only until the next Annual General Meeting and is then eligible for election by the shareholders. The Board may from time to time appoint one or more Directors to hold employment or executive office for such period (subject to the Companies Act 2006) and on such terms as they may determine and may revoke or terminate any such appointment. Under the articles of association, at every Annual General Meeting of the Company, every Director shall retire from office (but shall be eligible for election or re-election by the shareholders). The Company may by special resolution (or by ordinary resolution of which special notice has been given) remove, and the Board may, by unanimous decision remove, any Director before the expiration of his or her term of office. The office of Director shall be vacated if: (i) he or she resigns; (ii) he or she has become physically or mentally incapable of acting as a director and may remain so for more than three months and the Board resolves that his or her office is vacated; (iii) he or she is absent without permission of the Board from meetings of the Board for six consecutive months and the Board resolves that his or her office is vacated; (iv) he or she becomes bankrupt or makes an arrangement or composition with his or her creditors generally; (v) he or she is prohibited by law from being a director; or (vi) he or she is removed from office pursuant to the articles of association. Powers of the Directors The business of the Company will be managed by the Board which may exercise all the powers of the Company, subject to the provisions of the Company’s articles of association, the Companies Act 2006 and any ordinary resolution of the Company. Shares held in the Employee Benefit Trust The trustee of The Sage Group plc Employee Benefit Trust (“EBT”) has agreed not to vote any shares held in the EBT at any general meeting. If any offer is made to shareholders to acquire their shares the trustee will not be obliged to accept or reject the offer in respect of any shares which are at that time subject to subsisting awards, but will have regard to the interests of the award holders and will have power to consult them to obtain their views on the offer. Subject to the above the trustee may take action with respect to the offer it thinks fair. Significant agreements The following significant agreements contain provisions entitling the counterparties to exercise termination or other rights in the event of a change of control of the Company: –(cid:3)Under a note purchase agreement dated 20 May 2013 relating to US$50 million senior notes, Series D, due 20 May 2018, US$150 million senior notes, Series E, due 20 May 2020, US$150 million senior notes, Series F, due 20 May 2023 and US$50 million senior notes, Series G, due 20 May 2025 between Sage Treasury Company Ltd and the note holders and guaranteed by the Company, on a change of control of the Company, the Company will not take any action that consummates or finalises a change of control unless at least 15 business days prior to such action it shall have given to each holder of notes written notice containing and constituting an offer to prepay all notes on a date specified in such offer which shall be a business day occurring subsequent to the effective date of the change of control which is not less than 30 days or more than 60 days after the date of the notice of prepayments. Where a holder of notes accepts the offer to prepay, the prepayment shall be 100% of the principal amount of the notes together with accrued and unpaid interest thereon and shall be made on the proposed prepayment date. No prepayment under a change of control shall include any premium of any kind. –(cid:3)Under a dual tranche US$551 million and €218 million five-year multi-currency revolving credit facility agreement dated 26 June 2014 between, amongst others, Sage Treasury Company Limited and Lloyds Bank plc (as facility agent) and guaranteed by the Company, on a change of control, if any individual lender so requires and after having consulted with Sage Treasury Company Limited in good faith for not less than 30 days following the change of control, the facility agent shall, by not less than 10 business days’ notice to Sage Treasury Company Limited, cancel the commitment of that lender and declare the participation of that lender in all outstanding loans, together with accrued interest and all other amounts accrued under the finance documents, immediately due and payable, whereupon the commitment of that lender will be cancelled and all such outstanding amounts will become immediately due and payable. –(cid:3)Under a note purchase agreement dated 26 January 2015 relating to €55 million senior notes, Series H, due 26 January 2022, €30 million senior notes, Series I, due 26 January 2023 and US$200 million senior notes, Series J, due 26 January 2025 between Sage Treasury Company Limited and the note holders and guaranteed by the Company, on a change of control of the Company, the Company will not take any action that consummates or finalises a change of control unless at least 15 business days prior to such action it shall have given to each holder of notes written notice containing and constituting an offer to prepay all notes on the date specified in such offer which shall be a business day occurring subsequent to the effective date of the change of control which is not less than 30 days or more than 60 days after the date of notice of prepayments. Where a holder of notes accepts the offer to prepay, the prepayment shall be 100% of the principal amount of the notes together with accrued and unpaid interest thereon and any applicable net loss and, in each case, including the deduction of any applicable net gain and shall still be made on the proposed payment date. No prepayment under a change of control shall include any premium of any kind.Directors’ report continuedThe Sage Group plc | Annual Report & Accounts 2017106 –(cid:3)Under a US$390m term loan credit facility agreement dated 25 July 2017 between, amongst others, Sage Treasury Company Limited and HSBC Bank plc (as facility agent) and guaranteed by the Company, on a change of control, if any individual lender so requires and after having consulted with Sage Treasury Company Limited in good faith for not less than 30 days following the change of control, the agent shall, by not less than 10 business days’ notice to Sage Treasury Company Limited, cancel the commitment of that lender and declare the participation of that lender in all outstanding loans, together with accrued interest and all other amounts accrued under the finance documents, immediately due and payable, whereupon the commitment of that lender will be cancelled and all such outstanding amounts will become immediately due and payable. Under the terms of all four agreements above, a “change of control” occurs if any person or group of persons acting in concert gains control of the Company. –(cid:3)The platform reseller agreement dated 31 January 2015 relating to the Company’s strategic arrangements with Salesforce.com EMEA Limited contains a change of control right enabling Salesforce to terminate the agreement in the event there is a change of control in favour of a direct competitor of Salesforce.com EMEA Limited. The agreement contains post termination requirements upon Salesforce to support a transition for up to a specified period. –(cid:3)In respect of the platform reseller agreement with Salesforce.com EMEA Limited, “change of control” occurs where a corporate transaction results in the owners of the subject entity owning less than 50% of the voting interests in that entity as a result of the corporate transaction. Financial risk management The Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk are shown in note 14 to the financial statements. Our approach to risk management generally and our principal risks can be found on pages 52 to 61 of the Strategic Report. Disclaimer The purpose of this Annual Report & Accounts is to provide information to the members of the Company. The Annual Report & Accounts has been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company, its Directors and employees, agents or advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. The Annual Report & Accounts contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report & Accounts and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report & Accounts should be construed as a profit forecast. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report & Accounts, including the Directors’ Remuneration Report and the Group and parent Company financial statements, in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and the parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group and the Company for that period. In preparing these financial statements the Directors are required to: –(cid:3)Select suitable accounting policies and then apply them consistently –(cid:3)Make judgements and estimates that are reasonable and prudent –(cid:3)State whether IFRS as adopted by the EU, and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent Company financial statements respectively –(cid:3)Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group’s financial statements, Article 4 of the International Accounting Standards Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 107The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsDirectors’ statement The Directors as at the date of this report, whose names and functions are listed in the Board of Directors on pages 64 to 65, confirm that: –(cid:3)To the best of their knowledge, the Group’s financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group –(cid:3)To the best of their knowledge, the Directors’ report and the Strategic report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces Each Director as at the date of this report further confirms that: –(cid:3)So far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware –(cid:3)The Director has taken all the steps that he or she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. In addition, the Directors as at the date of this report consider that the Annual Report & Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s position and performance, business model and strategy. By Order of the Board Vicki Bradin Company Secretary 21 November 2017 The Sage Group plc Company number 2231246 Directors’ report continuedThe Sage Group plc | Annual Report & Accounts 2017108Contents Group ﬁ nancial statementsIndependent auditor’s report to the members of The Sage Group plc 110Group ﬁ nancial statementsConsolidated income statement119Consolidated statement of comprehensive income120Consolidated balance sheet121Consolidated statement of changes in equity122Consolidated statement of cash ﬂ ows123Notes to the Group ﬁ nancial statements Supplementary notes to the Group ﬁ nancial statements.1. Basis of preparation and critical accounting estimates and judgements124Results for the year2. Segment information1283. Proﬁ t before income tax1334. Income tax expense1385. Earnings per share139Operating assets and liabilities6. Intangible assets1427. Property, plant and equipment1468. Investment in an associate1489. Working capital14810. Provisions15111. Post-employment beneﬁ ts15212. Deferred income tax154Net debt and capital structure13. Cash ﬂ ow and net debt15714. Financial instruments16015. Equity163Other notes16. Acquisitions and disposals16917. Related party transactions17318. Group undertakings174109The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsIndependent auditor’s report to the members of The Sage Group plcOpinionIn our opinion: –The Sage Group plc’s Group ﬁ nancial statements and parent Company ﬁ nancial statements (the “ﬁ nancial statements”) give a true and fair view of the state of the Group’s and of the parent Company’s aﬀ airs as at 30 September 2017 and of the Group’s proﬁ t for the year then ended; –the Group ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; –the parent Company ﬁ nancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and –the ﬁ nancial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group ﬁ nancial statements, Article 4 of the IAS Regulation.We have audited the ﬁ nancial statements of The Sage Group plc which comprise:GroupParent companyConsolidated balance sheet as at 30 September 2017Company balance sheet as at 30 September 2017Consolidated income statement for the year then endedCompany statement of changes in equity for the year then endedConsolidated statement of comprehensive income for the year then endedCompany accounting policiesConsolidated statement of changes in equity for the year then endedRelated notes 1 to 7 to the ﬁ nancial statementsConsolidated statement of cash ﬂ ows for the year then endedRelated notes 1 to 18 to the ﬁ nancial statements, including a summary of signiﬁ cant accounting policiesThe ﬁ nancial reporting framework that has been applied in the preparation of the Group ﬁ nancial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The ﬁ nancial reporting framework that has been applied in the preparation of the parent Company ﬁ nancial statements is applicable law and United Kingdom Accounting Standards, including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the ﬁ nancial statements section of our report below. We are independent of the Group and parent Company in accordance with the ethical requirements that are relevant to our audit of the ﬁ nancial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulﬁ lled our other ethical responsibilities in accordance with these requirements.We believe that the audit evidence we have obtained is suﬃ cient and appropriate to provide a basis for our opinion.Conclusions relating to principal risks, going concern and viability statementWe have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw att ention to: –the disclosures in the Annual Report set out on page 52 that describe the principal risks and explain how they are being managed or mitigated; –the Directors’ conﬁ rmation set out on page 52 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; –the Directors’ statement set out on page 104 in the ﬁ nancial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identiﬁ cation of any material uncertainties to the entity’s ability to continue to do so over a period of at least 12 months from the date of approval of the ﬁ nancial statements; –whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or –the Directors’ explanation set out on page 58 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing att ention to any necessary qualiﬁ cations or assumptions.The Sage Group plc | Annual Report & Accounts 2017110Overview of our audit approachKey audit matt ers –Revenue recognition –Intacct acquisition – provisional valuation of acquired intangible assets (NEW in 2017) –Carrying value of goodwill –Classiﬁ cation of restructuring costs as non-recurring, as a result of the Group’s business transformationAudit scope –We performed an audit of the complete ﬁ nancial information of six components and audit procedures on speciﬁ c balances for a further ﬁ ve components. –The components where we performed full or speciﬁ c audit procedures accounted for 98% of adjusted Proﬁ t before tax * for both continuing and discontinued operations and 89% of Revenue.Materiality –Overall Group materiality of £21.4m which represents 5% of adjusted Proﬁ t before tax* for both continuing and discontinued operations.* Proﬁ t before tax for continuing and discontinued operations adjusted for non-recurring items as deﬁ ned in the ‘Our application of materiality’ section of this reportKey audit matt ers Key audit matt ers are those matt ers that, in our professional judgement, were of most signiﬁ cance in our audit of the ﬁ nancial statements of the current period and include the most signiﬁ cant assessed risks of material misstatement (whether or not due to fraud) that we identiﬁ ed. These matt ers included those which had the greatest eﬀ ect on: the overall audit strategy, the allocation of resources in the audit; and directing the eﬀ orts of the engagement team. These matt ers were addressed in the context of our audit of the ﬁ nancial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matt ers.RiskOur response to the riskKey observations communicated to the Audit and Risk Committ ee Revenue recognition Refer to the Audit and Risk Committ ee Report (page 78); and notes 2.1 and 3.1 of the Group ﬁ nancial statements The Group has reported continuing revenues of £1,715m (2016: £1,439m). We focused on the recognition of revenue as the timing of revenue recognition and its presentation in the income statement are subject to inherent complexities in the soft ware industry.We identiﬁ ed three speciﬁ c risks of fraud and error in respect of improper revenue recognition given the nature of the Group’s products and services as follows: –Inappropriate cut-oﬀ and deferral of revenue; –Inappropriate accounting for complex one-oﬀ arrangements; changes to existing products and new products or services; and –Inappropriate allocation of revenue between the components of bundled products. There is no change in the risk proﬁ le in the current year.At each full and speciﬁ c scope audit location with signiﬁ cant revenue streams: –We performed walkthroughs of each signiﬁ cant class of revenue transactions and assessed the design eﬀ ectiveness of key controls. For three components we tested the operating eﬀ ectiveness of controls. –For products and services where the risks and rewards are transferred over a period of time, we tested a sample of transactions to ensure that the amount of revenue was accurately calculated based on the state of completion of the contract and recognised in the appropriate period. –Our procedures in relation to inappropriate accounting for complex one-oﬀ arrangements, changes to existing products and new products or services ensured that the policies adopted were appropriate and in accordance with the requirements of IFRS. –For bundled products, we tested on a sample basis, that (1) the calculation of the fair value att ributed to each element of the bundle was reasonable, and (2) that the allocation of any discount was consistent with the relative fair value of each element of the bundle. –We performed other substantive, transactional testing and data analysis procedures to validate the recognition of revenue throughout the year. Where practicable, at component level we performed testing over full populations of transactions using data analysis. –We performed testing of journal entries to identify any instances of revenue being recorded via journals and, where relevant, to establish whether a service had been provided or a sale had occurred in the ﬁ nancial year to support the revenue recognised.We also considered the adequacy of the Group’s disclosure of the accounting policies for revenue recognition in notes 1 and 3.1 respectively.At each full and speciﬁ c scope audit location with signiﬁ cant revenue streams (eight components) we performed the audit procedures set out above which covered 89% of the Group’s revenue. We also performed review procedures in seven locations, which covered a further 8% of the Group’s revenue.Based on the procedures performed, we did not identify any evidence of material misstatement in the revenue recognised in the year nor in amounts deferred at 30 September 2017.111The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsIndependent auditor’s report to the members of The Sage Group plc continuedRiskOur response to the riskKey observations communicated to the Audit and Risk Committ ee Intacct acquisition -provisional valuation of acquired intangible assets (NEW in 2017)Refer to the Audit and Risk Committ ee Report (page 79); and note 16.1 of the Group ﬁ nancial statements On 3 August 2017, the Group acquired Intacct Corporation for £627m.We focused on this area given the Group has recognised intangible assets relating to customer relationships (£97m), technology (£44m) and Brand (£1m) as part of the provisional purchase price allocation. Signiﬁ cant judgement is involved in assessing the preliminary fair values of intangible assets. These valuations directly impact the amount of goodwill recognised on acquisition and are based on valuation techniques built, in part, on assumptions around the future performance of the business.The purchase price allocation exercise will be ﬁ nalised in the year ending 30 September 2018.We walked through the controls over the valuation of the acquired intangible assets and understood management’s process to comply with IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement. With involvement of an EY business valuation specialist, we (1) assessed the competence, capabilities and objectivity of management’s specialists; and (2) evaluated and concluded on the results of management’s and its specialist’s procedures to determine the preliminary fair value of the intangible assets acquired. This included: –evaluating the completeness and existence of intangible assets recognised; –assessment of the valuation methodologies applied; –assessment of the key assumptions made by management, such as customer churn, royalty rates and discount rates, compared to our independently calculated range; –benchmarking the assumptions used with historic Sage acquisitions and other transactions in the sector; and –performing sensitivity analysis to understand the extent to which changes in key assumptions may give rise to a materially diﬀ erent valuation for the intangible asset.In addition, we assessed the prospective ﬁ nancial information utilised in the valuation models based on the viewpoint of a market participant as deﬁ ned by IFRS 13 Fair Value Measurement. This included evaluating the historical accuracy of forecasting, current performance and adjustments made to pre acquisition/due diligence forecast numbers.We considered the appropriateness of the related disclosures in note 16.1 in the Group ﬁ nancial statements with the requirements of IFRS 3. Audit procedures on the provisional valuation of the acquired intangible assets were performed by the Primary audit team.The provisional valuation of acquired intangible assets is appropriate.The required IFRS 3 disclosures for business combinations, including the provisional nature of the fair value of the assets and liabilities acquired, are disclosed in note 16.1 of the consolidated ﬁ nancial statements.The Sage Group plc | Annual Report & Accounts 2017112RiskOur response to the riskKey observations communicated to the Audit and Risk Committ ee Carrying value of goodwillRefer to the Audit and Risk Committ ee Report (page 78); and notes 1 and 6.1 of the Group ﬁ nancial statementsWe focused on this area due the size of the goodwill balance £2,023m (2016: £1,659m) and because the Directors’ assessment of the ‘value in use’ of the Group’s Cash Generating Units (“CGUs”) involves judgement about the future performance of the business and the discount rates applied to future cash ﬂ ow forecasts.In the year, goodwill of £523m was recognised in respect of Intacct and we have undertaken separate procedures in respect of this goodwill balance as part of our work on the provisional purchase price allocation.There is no change in the risk proﬁ le in the current year.We challenged management’s assumptions used in its models for assessing the recoverability of the carrying value of goodwill. We focused on the appropriateness of CGU identiﬁ cation, methodology applied to estimate recoverable values, discount rates, and forecast cash ﬂ ows. Speciﬁ cally: –We have validated that the CGUs identiﬁ ed, including the combination of Malaysia and Singapore into a single Asia CGU, are the lowest level at which management monitors goodwill. –We tested the methodology applied in the value in use calculation as compared to the requirements of IAS 36, Impairment of Assets, and the mathematical accuracy of management’s model. –We obtained an understanding of, and assessed the basis for, key underlying assumptions for the 2018 budget. –We have validated that the cash ﬂ ow forecasts used in the valuation are consistent with information approved by the Board and have evaluated the appropriateness of the use of these forecasts in light of the historical accuracy of management’s forecasts. –For the ﬁ ve CGUs with the largest goodwill balances or the lowest headroom, we challenged management on its cash ﬂ ow forecasts and the implied growth rates for 2018 and beyond by considering evidence available to support these assumptions and their consistency with ﬁ ndings from other areas of our audit. –The discount rates and long-term growth rates applied within the model were assessed by an EY business valuation specialist, including comparison to economic and industry forecasts where appropriate. –For all CGUs, we performed sensitivity analyses by stress testing key assumptions in the model with downside scenarios to understand the parameters that, should they arise, could lead to a diﬀ erent conclusion in respect of the carrying value of goodwill. –In respect of goodwill relating to Intacct, we evaluated whether there are any indicators that the fair value of the business is lower than the consideration paid to acquire the business. We compared the post-acquisition performance of Intacct to expectations set by management at the time of the acquisition. We considered the appropriateness of the related disclosures provided in note 6.1 in the Group ﬁ nancial statements.The entire goodwill balance was subject to full scope audit procedures by the Primary audit team with assistance from certain component audit teams on procedures over forecast ﬁ nancial information where relevant.Based on the results of our work, we agree with management’s conclusion that no impairment of goodwill is required in the current year. We agree with management that no reasonably possibly change in assumptions would result in a material impairment in any Cash Generating Unit and hence no additional sensitivity disclosures are required in note 6.1 of the Group ﬁ nancial statements. 113The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsIndependent auditor’s report to the members of The Sage Group plc continuedRiskOur response to the riskKey observations communicated to the Audit and Risk Committ ee Classiﬁ cation of restructuring costs as non-recurring, as a result of the Group’s business transformationRefer to the Audit and Risk Committ ee Report (page 79); and note 3.6 of the Group ﬁ nancial statementsWe focused on this area as costs of £73m have been classiﬁ ed as non-recurring on the basis that they relate to the Group’s business transformation and consequently are excluded from the Group’s underlying results. As such, the audit team focused its procedures on the following risks: –Inappropriate classiﬁ cation of costs as non-recurring; –Inconsistent treatment of non-recurring items from year to year; and –Inappropriate quantiﬁ cation of non-recurring items and recognition of amounts in an incorrect accounting period.There is no change in the risk proﬁ le in the current year. –We assessed whether the constituent costs are recorded in line with the Group’s policy as summarised in note 3.6 and that the policy has been applied consistently with prior years. –We tested a sample of costs classiﬁ ed as non-recurring to verify that they are directly att ributable to the business transformation and are recorded at the correct amount and in the appropriate period. –We considered the level of transparency of the disclosures provided in note 3.6 in the Group ﬁ nancial statements with reference to both the Financial Reporting Council’s (‘FRC’) 2013 guidance to directors on the use of exceptional items and the key messages reported in the FRC’s Corporate Reporting Thematic Review on Alternative Performance Measures (APMs) published in November 2017.Component teams at eight locations performed audit procedures on people related reorganisation costs, external consultant spend and on certain net property exit costs. The Primary audit team performed audit procedures on the remaining business transformation costs.Based on the procedures performed, we did not identify any evidence of material misstatement of business transformations costs. The classiﬁ cation of these costs as non-recurring was in accordance with the Group’s disclosed accounting policy and reﬂ ects that they relate to a publically announced global business transformation, with the amounts and the two-year expense timeline reﬂ ective of the scale of the transformation activities, and have been consistently disclosed in the Group ﬁ nancial statements.In the prior year, the key audit matt er included within our auditor’s report in relation to non-recurring restructuring costs as a result of the Group’s business transformation, also included a risk in relation to changes in ﬁ nance systems and processes as a result of the commencement of the Group’s ﬁ nance transformation. This included the implementation of the Group’s X3 ERP system for certain processes in the UK and South Africa and the establishment of Financial Shared Services Centres (“FSSC”) in those locations. In the current year, the operations of the FSSCs continued to stabilise and the migration of France, Portugal and Belgium on to X3 and into the FSSC in the UK for certain processes was not assessed by the team to have the greatest eﬀ ect on the overall audit strategy, the allocation of resources in the audit, and directing the eﬀ orts of the engagement team.An overview of the scope of our audit Tailoring the scopeOur assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated ﬁ nancial statements. We take into account size, risk proﬁ le, the organisation of the Group and eﬀ ectiveness of Group-wide controls, changes in the business environment and other factors such as prior year external audit ﬁ ndings and recent Internal Audit results when assessing the level of work to be performed at each entity.In assessing the risk of material misstatement to the Group ﬁ nancial statements, and to ensure we had adequate quantitative coverage of signiﬁ cant accounts in the ﬁ nancial statements, of the 24 reporting components of the Group, we selected 11 components covering entities within the United Kingdom and Ireland, France, North America, Spain, Germany, Brazil and South Africa which represent the principal business units within the Group.Of the 11 components selected, we performed an audit of the complete ﬁ nancial information of six components (“full scope components”) which were selected based on their size or risk characteristics. For the remaining ﬁ ve components (“speciﬁ c scope components”), we performed audit procedures on speciﬁ c accounts within that component that we considered had the potential for the greatest impact on the signiﬁ cant accounts in the ﬁ nancial statements either because of the size of these accounts or their risk proﬁ le. For the remaining 13 components, audit procedures were undertaken as set out in note 4 below to respond to any potential risks of material misstatement to the Group ﬁ nancial statements.The Sage Group plc | Annual Report & Accounts 201711420172016Reporting componentsNumber% Group adjusted Proﬁ t before tax*% Group RevenueSee noteNumber% Group adjusted Proﬁ t before tax% Group RevenueFull scope668%59%1,2668%58%Speciﬁ c scope530%30%2,3631%32%Full and speciﬁ c scope coverage1198%89%1299%90%Remaining components132%11%4341%10%Total Reporting components24100%100%46100%100%* Proﬁ t before tax for continuing and discontinued operations adjusted for non-recurring items as deﬁ ned in the ‘Our application of materiality’ section of this reportNotes1. Three of the six full scope components relate to the parent Company and other corporate entities whose activities include the Group’s treasury management and consolidation adjustments. The Group audit risks in relation to both Intacct acquisition – provisional valuation of acquired intangible assets and the carrying value of goodwill were subject to audit procedures by the Primary audit team on the entire balances with assistance from certain component audit teams where relevant.2. The Group audit risk in relation to revenue recognition was subject to full audit procedures at each of the full and speciﬁ c scope locations with signiﬁ cant revenue streams. 3. The audit scope of these components may not have included testing of all signiﬁ cant accounts of the component but will have contributed to the coverage of signiﬁ cant accounts selected for testing by the Primary audit team. 4. The remaining 13 components contributed a net 2% of adjusted Proﬁ t before tax* and the contribution of these components ranged from 4% to (5)% of the Group’s adjusted Proﬁ t before tax*. We instructed a component team to undertake speciﬁ ed procedures over certain cash balances at one location. For seven components, including Australia, Singapore and Sage People, we performed review scope procedures. For the remaining components, the Primary audit team performed other procedures, including analytical review procedures and testing of consolidation journals, intercompany eliminations and foreign currency translation recalculations to respond to any potential risks of material misstatement to the Group ﬁ nancial statements.Changes from the prior year The change in the total number of reporting components from 46 to 24 reﬂ ects the integration of 25 legal entities, previously reported as separate components, into the Corporate Centre component. There is no change from prior year in the scope of the audit work performed. One speciﬁ c scope reporting location in 2016 is now reported within the UK full scope reporting component.Involvement with component teams In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the Primary audit engagement team, or by component auditors from other EY global network ﬁ rms operating under our instruction. Of the six full scope components, audit procedures were performed on three of these directly by the Primary audit team and three by component audit teams. For the ﬁ ve speciﬁ c scope components, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that suﬃ cient audit evidence had been obtained as a basis for our opinion on the Group as a whole.The Primary audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor, or another group audit partner, would visit all full and selected speciﬁ c scope audit locations. During the current year’s audit cycle, visits were undertaken at least once by the Primary audit team to the component teams in the UK, France, Brazil, North America, and South Africa. These visits involved discussing the audit approach with the component team and any issues arising from their work, reviewing key audit working papers on the Group risk areas, and meeting with local management to discuss the component’s business performance and matt ers relating to the local ﬁ nance organisation including the internal ﬁ nancial control environment. EY San Francisco was the existing auditor of Intacct Corporation prior to its acquisition by Sage. The Primary audit team instructed our EY component team at that location to undertake speciﬁ ed audit procedures on the opening balance sheet at 3 August 2017 and review procedures over the two-month post acquisition trading performance of the business to year end. The Primary audit team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group ﬁ nancial statements.115The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsIndependent auditor’s report to the members of The Sage Group plc continuedOur application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the eﬀ ect of identiﬁ ed misstatements on the audit and in forming our audit opinion. During the course of our audit, we reassessed initial materiality and the only change in the ﬁ nal materiality from our original assessment at planning was to reﬂ ect the actual reported performance of the Group in the year.Performance materialityThe application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2016: 50%) of our planning materiality, namely £10.7m (2016: £9.5m). Our performance materiality percentage has remained at 50% to reﬂ ect the risk associated with the Group-wide business transformation, and speciﬁ cally the ongoing changes across the ﬁ nance organisation that commenced during the prior year, and which included in 2017 for France, Portugal and Belgium the implementation of their respective X3 ERP system for certain processes and the stabilisation of the Financial Shared Services Centres established in both the UK and South Africa during 2016.Audit work at component locations for the purpose of obtaining audit coverage over signiﬁ cant ﬁ nancial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £1.1m to £6.0m (2016: £0.9m to £5.2m). Reporting thresholdAn amount below which identiﬁ ed misstatements are considered as being clearly trivial.We agreed with the Audit and Risk Committ ee that we would report to them all uncorrected audit diﬀ erences in excess of £1.1m (2016: £1.0m), which is set at 5% of materiality, as well as diﬀ erences below that threshold that, in our view, warranted reporting on qualitative grounds.We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.Other information The other information comprises the information included in the Annual Report as set out on the Financial highlights page and on pages 2-108, other than the ﬁ nancial statements and our auditor’s report thereon. The Directors are responsible for the other information.Our opinion on the ﬁ nancial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. StartingbasisContinuing operations proﬁ t before tax of £342mDiscontinued operations proﬁ t before tax of £29mTotal proﬁ t before tax of £371mAdjustmentsAdjustments to exclude non-recurring items: –Business transformation costs of £73m –Gain on disposal of subsidiary of £3m –Gain on remeasurement of existing investment in associate of £13mMateriality –Totals £428m –Materiality of £21.4m (5% of materiality basis)MaterialityThe magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to inﬂ uence the economic decisions of the users of the ﬁ nancial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.We determined materiality for the Group to be £ 21.4 million (2016: £19.1 million), which is 5% (2016: 5%) of Proﬁ t before tax for both continuing and discontinued operations adjusted for non-recurring items reported by the Group. We believe that Proﬁ t before tax for both continuing and discontinued operations adjusted for non-recurring items provides us with the most relevant performance measure to the stakeholders of the entity. Non-recurring items are set out in note 3.6 of the Group’s ﬁ nancial statements. The Sage Group plc | Annual Report & Accounts 2017116In connection with our audit of the ﬁ nancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁ nancial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the ﬁ nancial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.We have nothing to report in this regard.In this context, we also have nothing to report in regard to our responsibility to speciﬁ cally address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: –Fair, balanced and understandable set out on page 108 – the statement given by the Directors that they consider the Annual Report and ﬁ nancial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or –Audit and Risk Committ ee reporting set out on page 76 – the section describing the work of the Audit and Risk Committ ee does not appropriately address matt ers communicated by us to the Audit and Risk Committ ee; or –Directors’ statement of compliance with the UK Corporate Governance Code set out on page 63 – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions speciﬁ ed for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.Opinions on other matt ers prescribed by the Companies Act 2006In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.In our opinion, based on the work undertaken in the course of the audit: –the information given in the Strategic report and the Directors’ report for the ﬁ nancial year for which the ﬁ nancial statements are prepared is consistent with the ﬁ nancial statements; and –the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.Matt ers on which we are required to report by exceptionIn the light of the knowledge and understanding of the Group and the parent Company and its environment obtained in the course of the audit, we have not identiﬁ ed material misstatements in the Strategic report or the Directors’ report.We have nothing to report in respect of the following matt ers in relation to which 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 ﬁ nancial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or –certain disclosures of Directors’ remuneration speciﬁ ed by law are not made; or –we have not received all the information and explanations we require for our audit.Responsibilities of DirectorsAs explained more fully in the Directors’ responsibilities statement set out on page 107, the Directors are responsible for the preparation of the ﬁ nancial statements and for being satisﬁ ed that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁ nancial statements, the Directors are responsible for assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matt ers related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.Auditor’s responsibilities for the audit of the ﬁ nancial statements Our objectives are to obtain reasonable assurance about whether the ﬁ nancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂ uence the economic decisions of users taken on the basis of these ﬁ nancial statements. 117The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsExplanation as to what extent the audit was considered capable of detecting irregularities, including fraudThe objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the ﬁ nancial statements due to fraud; to obtain suﬃ cient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identiﬁ ed during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows: –We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most signiﬁ cant frameworks which are directly relevant to speciﬁ c assertions in the ﬁ nancial statements are those that relate to the reporting framework (IFRS, FRS 102, the Companies Act 2006 and UK Corporate Governance Code) and the relevant tax compliance regulations in the jurisdictions in which the Group operates. –We understood how the Group is complying with those legal and regulatory frameworks by making enquiries of management, Internal Audit, those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of Board minutes and papers provided to the Audit and Risk Committ ee. –We assessed the susceptibility of the Group’s ﬁ nancial statements to material misstatement, including how fraud might occur, by meeting with management from various parts of the business to understand where it considered there was susceptibility to fraud. We also considered performance targets and their propensity to inﬂ uence on eﬀ orts made by management to manage earnings. We considered the programmes and controls that the Group has established to address risks identiﬁ ed, or that otherwise prevent, deter and detect fraud; and how senior management monitors those programmes and controls. Where the risk was considered to be higher, we performed audit procedures to address each identiﬁ ed fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the ﬁ nancial statements were free from fraud or error.Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identiﬁ ed in the paragraphs above. Our procedures involved: journal entry testing, with a focus on manual consolidation journals and journals indicating large or unusual transactions based on our understanding of the business; enquiries of Legal Counsel, Group management, Internal Audit, country management at all full and speciﬁ c scope management; and focused testing, as referred to in the key audit matt ers section above. In addition, we completed procedures to conclude on the compliance of the disclosures in the Annual Report and Accounts with the requirements of the relevant accounting standards, UK legislation and the UK Corporate Governance Code 2016.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 matt ers we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitt ed 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. A further description of our responsibilities for the audit of the ﬁ nancial statements is located on the Financial Reporting Council’s website at htt ps://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.Other matt ers we are required to address Following the recommendation of the Audit and Risk Committ ee, we were appointed as auditor by the shareholders and signed an engagement lett er on 19 October 2017. We were appointed by the Company at the AGM on 28 February 2017 to audit the ﬁ nancial statements for the year ended 30 September 2017 and subsequent ﬁ nancial periods. The period of total uninterrupted engagement including previous renewals and reappointments is three years, covering the years ended 30 September 2015, 30 September 2016 and 30 September 2017.The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent Company and we remain independent of the Group and the Parent company in conducting the audit. The audit opinion is consistent with the additional report to the Audit and Risk Committ ee. Alison Duncan (Senior statutory auditor)for and on behalf of Ernst & Young LLP, Statutory AuditorLondon21 November 2017Notes:1. The maintenance and integrity of The Sage Group plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matt ers and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the ﬁ nancial statements since they were initially presented on the website.2. Legislation in the United Kingdom governing the preparation and dissemination of ﬁ nancial statements may diﬀ er from legislation in other jurisdictions.Independent auditor’s report to the members of The Sage Group plc continuedThe Sage Group plc | Annual Report & Accounts 2017118 Note Underlying2017£mAdjustments(note 3.6)2017£mStatutory 2017 £m Underlying as reported *2016Restated£mAdjustments(note 3.6)2016Restated£mStatutory2016Restated£mRevenue 2.1, 3.1 1,720(5)1,715 1,439–1,439Cost of sales (114)–(114) (91)–(91)Gross profit 1,606(5)1,601 1,348–1,348Selling and administrative expenses (1,139)(114)(1,253) (955)(126)(1,081)Operating profit 2.2, 3.2, 3.3, 3.6467(119)348 393(126)267Share of loss of an associate 8–(1)(1) – (1)(1)Gain on remeasurement of existing investment in an associate 3.6–13 13 –––Finance income 3.5 2810 235Finance costs 3.5 (27)(1)(28) (23)(6)(29)Profit before income tax 442(100)342 372(130)242Income tax expense 4 (115)30(85) (92)38(54)Profit for the year – continuing operations 327(70)257 280(92)188Profit on discontinued operations 16.3182543 20–20Profit for the year 345(45)300 300(92)208 Profit attributable to: Owners of the parent 345(45)300 300(92)208 Earnings per share attributable to the owners of the parent (pence) From continuing operations –(cid:3)Basic 530.28p23.86p 25.90p17.43p–(cid:3)Diluted 530.18p23.78p 25.75p17.33pFrom continuing and discontinued operations –(cid:3)Basic 5 31.90p27.80p 27.84p19.28p–(cid:3)Diluted 5 31.79p27.71p 27.67p19.16pNote: * Underlying as reported is at 2016 reported exchange rates. Consolidated income statementFor the year ended 30 September 2017119The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements Note 2017 £m2016£mProfit for the year 300208Other comprehensive income/(expense): Items that will not be reclassified to profit or loss: Actuarial gain/(loss) on post-employment benefit obligations 11, 15.4 4(2)Deferred tax charge on actuarial gain/(loss) on post-employment benefit obligations 4, 15.4 (1)– 3(2)Items that may be reclassified to profit or loss: Deferred tax credit on foreign currency movements 4, 15.3 23Exchange differences on translating foreign operations 15.3 (26)117Exchange differences recycled through income statement on sale of foreign operations 15.3, 16.3 (32)– (56)120 Other comprehensive (expense)/income for the year, net of tax (53)118 Total comprehensive income for the year 247326 Total comprehensive income for the year attributable to: Owners of the parent 247326 Consolidated statement of comprehensive incomeFor the year ended 30 September 2017The Sage Group plc | Annual Report & Accounts 2017120 Note2017£m 2016£mNon-current assets Goodwill 6.12,0231,659Other intangible assets 6.2 274109Property, plant and equipment 7133123Fixed asset investment 16.315–Investment in an associate 8–9Other financial assets 23Deferred income tax assets 12 6158 2,5081,961Current assets Inventories 9.1 32Trade and other receivables 9.2 466420Current income tax asset 148Cash and cash equivalents (excluding bank overdrafts) 13.3 231264Assets classified as held for sale 16.4 11 715695 Total assets 3,2232,656 Current liabilities Trade and other payables 9.3 (337)(350)Current income tax liabilities (18)(21)Borrowings 13.4(55)(43)Provisions 10(37)(38)Deferred income 3.1(585)(536)Liabilities classified as held for sale 16.4(1)– (1,033)(988) Non-current liabilities Borrowings 13.4 (914)(535)Post-employment benefits 11 (22)(25)Deferred income tax liabilities 12(46)(13)Provisions 10(31)(29)Trade and other payables (5)(8)Deferred income 3.1(4)(5) (1,022)(615) Total liabilities (2,055)(1,603)Net assets 1,1681,053 Equity attributable to owners of the parent Ordinary shares 15.1 1212Share premium 548544Other reserves 15.3131187Retained earnings 477310 Total equity 1,1681,053The consolidated financial statements on pages 119 to 176 were approved by the Board of Directors on 21 November 2017 and are signed on their behalf by: S Hare (cid:18)(cid:346)(cid:349)(cid:286)(cid:296)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:75)(cid:296)(cid:296)(cid:349)(cid:272)(cid:286)(cid:396)(cid:3)Consolidated balance sheetAs at 30 September 2017121The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements Attributable to owners of the parentNoteOrdinary shares £mShare premium £m Other reserves £m Retained earnings £mTotal equity £mAt 1 October 2016 12544 187 3101,053Profit for the year –– – 300300Other comprehensive income/(expense): Exchange differences on translating foreign operations 15.3–– (26) –(26)Exchange differences recycled through income statement on sale of foreign operations 15.3– – (32) –(32)Deferred tax credit on foreign currency movements 4, 15.3–– 2 –2Actuarial gain on post-employment benefit obligations 11, 15.4–– – 44Deferred tax charge on actuarial loss on post-employment obligations 4, 15.4–– – (1)(1)Total comprehensive income for the year ended 30 September 2017 –– (56) 303247Transactions with owners: Employee share option scheme: –(cid:3)Proceeds from shares issued –4 – –4–(cid:3)Value of employee services, net of deferred tax 15.4–– – 99–(cid:3)Value of employee services on acquisition 16.1–– – 2121Purchase of treasury shares 15.4–– – (9)(9)Dividends paid to owners of the parent 15.5–– – (157)(157)Total transactions with owners for the year ended 30 September 2017 –4 – (136)(132)At 30 September 2017 12548 131 4771,168 Consolidated statement of changes in equity For the year ended 30 September 2016 Attributable to owners of the parentNoteOrdinary shares £mShare premium £m Other reserves £m Retained earnings £mTotal equity £mAt 1 October 2015 12541 67 242862Profit for the year –– – 208208Other comprehensive income/(expense): Exchange differences on translating foreign operations 15.3–– 117 –117Deferred tax credit on foreign currency movements 4, 15.3–– 3 –3Actuarial loss on post-employment benefit obligations 11, 15.4–– – (2)(2)Deferred tax credit on actuarial loss on post-employment obligations 4. 15.4–– – ––Total comprehensive income for the year ended 30 September 2016 –– 120 206326Transactions with owners: Employee share option scheme: –(cid:3)Proceeds from shares issued –3 – –3–(cid:3)Value of employee services, net of deferred tax 15.4–– – 99Purchase of treasury shares 15.4–– – (2)(2)Dividends paid to owners of the parent 15.5–– – (145)(145)Total transactions with owners for the year ended 30 September 2016 –3 – (138)(135)At 30 September 2016 12544 187 3101,053 Consolidated statement of changes in equityFor the year ended 30 September 2017The Sage Group plc | Annual Report & Accounts 2017122 Note2017 £m2016Restated £mCash flows from operating activities Cash generated from continuing operations 13.1 403360Interest paid (24)(21)Income tax paid (102)(92)Operating cash flows generated from discontinued operations 16.32538Net cash generated from operating activities 302285 Cash flows from investing activities Acquisitions of subsidiaries, net of cash acquired 16.1(693)(6)Proceeds on settlement of debt investment 7–Purchases of intangible assets 6.2 (22)(8)Purchases of property, plant and equipment 7(30)(23)Purchase of investment in an associate –(10)Interest received 3.522Disposal of discontinued operations 16.3 158–Net cash used in investing activities (578)(45) Cash flows from financing activities Proceeds from issuance of ordinary shares 43Purchase of treasury shares (9)(2)Finance lease principal payments –(1)Proceeds from borrowings 66269Repayments of borrowings (275)(189)Movements in cash held on behalf of customers 5(4)Borrowing costs (1)(2)Dividends paid to owners of the parent 15.5(157)(145)Financing cash flows generated from discontinued operations 16.3 4(8)Net cash generated from/(used in) financing activities 233(279) Net decrease in cash, cash equivalents and bank overdrafts (before exchange rate movement) (43)(39)Effects of exchange rate movement 13.2(4)36Net decrease in cash, cash equivalents and bank overdrafts (47)(3)Cash, cash equivalents and bank overdrafts at 1 October 13.2260263Cash, cash equivalents and bank overdrafts at 30 September 13.2213260 Consolidated statement of cash ﬂ owsFor the year ended 30 September 2017123The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements1BasisofpreparationandcriticalaccountingestimatesandjudgementsAccountingpoliciesapplicableacrossthefinancialstatementsareshownbelow.Accountingpoliciesthatarespecifictoacomponentofthefinancialstatementshavebeenincorporatedintotherelevantnote.TheconsolidatedfinancialstatementsofTheSageGroupplchavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(“IFRS”)asadoptedbytheEuropeanUnion(“EU”).Theconsolidatedfinancialstatementshavebeenpreparedunderthehistoricalcostconvention,exceptwhereadoptedIFRSrequireanalternativetreatment.Theprincipalvariationsfromthehistoricalcostconventionrelatetoderivativefinancialinstrumentswhicharemeasuredatfairvaluethroughprofitorloss.ThefinancialstatementsoftheGroupcomprisethefinancialstatementsoftheCompanyandentitiescontrolledbytheCompany(itssubsidiaries)preparedattheendofthereportingperiod.TheaccountingpolicieshavebeenconsistentlyappliedacrosstheGroup.TheCompanycontrolsanentitywhenitisexposed,orhasrights,tovariablereturnsfromitsinvolvementwiththeentityandhastheabilitytoaffectthosereturnsthroughitspowerovertheentity,whichisusuallyfromdateofacquisition.Theprioryearconsolidatedincomestatement,consolidatedstatementofcashflowsandtheirrelatednoteshavebeenrestatedforthepresentationofdiscontinuedoperations.Forfurtherinformationondiscontinuedoperationsseenote16.InlinewiththerequirementsofIFRS5‘Non-currentassetsheldforsaleanddiscontinuedoperations’,thestatementoffinancialpositionhasnotbeenrestated.TherearenoIFRS,IASamendmentsorIFRICinterpretationseffectiveforthefirsttimethisfinancialyearthathavehadamaterialimpactontheGroup.TheGroup’sbusinessactivities,togetherwiththefactorslikelytoaffectitsfuturedevelopment,performanceandposition,aresetoutintheStrategicreportonpages1to61.Aftermakingenquiries,theDirectorshaveareasonableexpectationthattheGrouphasadequateresourcestocontinueinoperationfortheforeseeablefuture,foraperiodofnotlessthan12monthsfromthedateofthisreport.Accordingly,theycontinuetoadoptthegoingconcernbasisinpreparingtheconsolidatedfinancialstatements,inaccordancewiththosepartsoftheCompaniesAct2006applicabletocompaniesreportingunderIFRS.Theconsolidatedfinancialstatementsarepresentedinsterling,whichisthefunctionalcurrencyoftheparentCompanyandthepresentationcurrencyfortheconsolidatedfinancialstatements.Foreigncurrencytransactionsarerecordedattheratesofexchangeprevailingonthedatesofthetransactions.Foreigncurrencymonetaryitemsaretranslatedattheratesprevailingattheendofthereportingperiod.Non-monetaryitemsthataremeasuredintermsofhistoricalcostinaforeigncurrencyarenotretranslated.Exchangedifferencesarisingonthesettlementsofmonetaryitemsandontheretranslationofmonetaryitemsareincludedinprofitorlossfortheperiod,exceptforforeigncurrencymovementsonintercompanybalanceswheresettlementisnotplannedorlikelyintheforeseeablefuture,inwhichcasetheyarerecognisedinothercomprehensiveincome.Foreignexchangemovementsonexternalborrowingswhicharedesignatedasahedgeofthenetinvestmentinitsrelatedsubsidiariesarerecognisedinthetranslationreserve.TheassetsandliabilitiesoftheGroup’ssubsidiariesoutsideoftheUKaretranslatedintosterlingusingperiod-endexchangerates.Incomeandexpenseitemsaretranslatedattheaverageexchangeratesfortheperiod.Wheredifferencesarisebetweentheserates,theyarerecognisedinothercomprehensiveincomeandthetranslationreserve.Whenaforeignoperationispartiallydisposedoforsold,exchangedifferencesthatwererecordedinothercomprehensiveincomearerecycledintheincomestatementaspartofthegainorlossonsale,withtheexceptionofexchangedifferencesrecordedinequitypriortothetransitiontoIFRSon1October2004,inaccordancewithIFRS1,“First-timeAdoptionofInternationalFinancialReportingStandards”.BasisofpreparationNeworamendedaccountingstandards.GoingconcernForeigncurrenciesBasisofpreparationandcriticalaccountingestimatesandjudgementsTheSageGroupplc|AnnualReport&Accounts2017124CriticalaccountingestimatesandjudgementsThepreparationoffinancialstatementsrequirestheuseofaccountingestimatesandassumptionsbymanagement.Italsorequiresmanagementtoexerciseitsjudgementintheprocessofapplyingtheaccountingpolicies.Wecontinuallyevaluateourestimates,assumptionsandjudgementsbasedonavailableinformation.Theareasinvolvingahigherdegreeofjudgementorcomplexityaredescribedbelow.Thejudgementsandmanagement’srationaleinrelationtotheseaccountingestimatesandjudgementsareassessedandwherematerialinvalueorinrisk,arediscussedwiththeAuditandRiskCommittee.Approximately40%oftheCompany’srevenueisgeneratedfromsalestopartnersratherthantoendusers.ThekeyjudgementinaccountingforthethreeprincipalwaysinwhichourbusinesspartnersareremuneratedisdeterminingwhetherthebusinesspartnerisacustomeroftheGroupinrespectoftheinitialproductsale.ThekeycriteriainthisdeterminationiswhetherthebusinesspartnerhaspaidforandtakenontherisksandrewardsofownershipofthesoftwareproductfromSage.Atthispointthebusinesspartnerisabletosellonthelicencetotheenduseratapriceofitsdeterminationandconsequentlybearsthecreditriskoftheonwardsale.WherethebusinesspartnerisacustomerofSage,therearetwowaysinwhichtheycanberemunerated.Firstly,therearediscountsgrantedasadiscountfromthelistprice.ThesediscountsarenegotiatedbetweentheCompanyandthebusinesspartnerpriortothesaleandinvoicesareraised,andrevenuebookedisbasedonthediscountedprice.Secondly,therearefurtherdiscountsgiventobusinesspartnersforsubsequentrenewalsorincreasedsalestotheenduser.Thesediscountsarerecognisedasadeductionfromtheincrementalrevenueearned.WherethebusinesspartnerisnotacustomerofSageandtheirpartinthesalehassimplybeenintheformofareferral,theyareremuneratedintheformofacommissionpayment.Thesepaymentsaretreatedasacostwithinsellingandadministrativecosts.Anadditionalareaofjudgementistherecognitionanddeferralofrevenueonbundledproducts,forexamplethesaleofaperpetuallicencewithanannualmaintenanceandsupportcontract.Whenproductsarebundledtogetherforthepurposeofsale,theassociatedrevenue,netofallapplicablediscounts,isallocatedbetweentheconstituentpartsofthebundleonarelativefairvaluebasis.TheGrouphasasystematicbasisforallocatingrelativefairvaluesinthesesituations,baseduponpublishedlistprices.Therearetwokeyjudgementareasinrelationtogoodwillimpairment.Thefirstistheongoingappropriatenessofthecash-generatingunits(“CGUs”)forthepurposeofimpairmenttesting.InthecurrentyearCGUswereassessedinthecontextoftheGroup’sevolvingbusinessmodel,theSagestrategyandtheshifttoglobalproductdevelopment.Managementcontinuestomonitorgoodwillatacountryorregionlevelandproductcashflowsarestillpredominantlygeneratedbytheexistingproductbasewithineachcountryandregion.Therefore,itwasdeterminedthattheexistingCGUsbasedongeographicalareaofoperationremainappropriateexceptfortheCGUsforSingaporeandMalaysia.Theoperationalmanagementstructureforthesetwocountrieshaschangedwitheffectfrom1October2016sothattheyarenowmanagedasasinglebusinessservinganumberofAsianmarkets.Asaresult,SingaporeandMalaysiahavebeencombinedintoasingleCGU(Asia)forthisyear’simpairmentassessment.TheotherkeyjudgementarearelatestotheassumptionsappliedincalculatingthevalueinuseoftheCGUsbeingtestedforimpairment.Thekeyassumptionsappliedinthecalculationrelatetothefutureperformanceexpectationsofthebusiness–averagemedium-termrevenuegrowthandlong-termgrowthrate–aswellasthediscountratetobeappliedinthecalculation.Thesekeyassumptionsusedinperformingtheimpairmentassessmentaredisclosedinnote6.1.TheGrouprecognisescertainprovisionsandaccrualsinrespectoftaxwhichinvolveadegreeofestimationanduncertaintywherethetaxtreatmentcannotfinallybedetermineduntilaresolutionhasbeenreachedbytherelevanttaxauthority.Thisapproachresultedinproviding£25masat30September2017(2016:£19m).ThecarryingamountissensitivetotheresolutionofissueswhichisnotalwayswithinthecontroloftheGroupanditisoftendependentontheefficiencyofthelegalprocessesintherelevanttaxingjurisdictionsinwhichtheGroupoperates.Issuescantakemanyyearstoresolveandassumptionsonthelikelyoutcomehavethereforebeenmadebymanagement.Thenatureoftheassumptionsmadebymanagementwhencalculatingthecarryingamountsrelatestotheestimatedtaxwhichcouldbepayableasaresultofdecisionswithtaxauthoritiesinrespectoftransactionsandeventswhosetreatmentfortaxpurposesisuncertain.Inmakingtheestimates,management’sjudgementwasbasedonvariousfactors,including:thestatusofrecentandcurrenttaxauditsandenquiries;theresultsofpreviousclaims;andanychangestotherelevanttaxenvironments.Whenmakingthisassessment,weutiliseourspecialistin-housetaxknowledgeandexperienceofsimilarsituationselsewheretoconfirmtheseprovisions.Thesejudgementsalsotakeintoconsiderationspecialisttaxadviceprovidedbythirdpartyadvisersonspecificitems.RevenuerecognitionGoodwillimpairmentTaxprovisions–––��125TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements1BasisofpreparationandcriticalaccountingestimatesandjudgementscontinuedBusinesscombinationsFutureaccountingstandardsWhentheGroupcompletesabusinesscombination,theconsiderationtransferredfortheacquisitionandtheidentifiableassetsandliabilitiesacquiredarerecognisedattheirfairvalues.Theamountbywhichtheconsiderationexceedsthenetassetsacquiredisrecognisedasgoodwill.Theapplicationofaccountingpoliciestobusinesscombinationsinvolvesjudgementandtheuseofestimates.Duringtheyear,theGroupmadetwosignificantbusinesscombinationsinwhichitacquiredSageIntacct(formerlyIntacctCorporation)andSagePeople(formerlyFairsailLimited).Theaspectsofthesetransactionsthatrequiredparticularjudgementweretheidentificationofacquiredintangibleassetsthatmetthecriteriaforrecognitioninbothtransactions.EstimateswererequiredinthemeasurementoftheintangibleassetsrecognisedforbothacquisitionsandofdeferredincomeforSageIntacct.TheGroupengagedexternalexpertstosupporttheseassessments.Managementconcludedthattheintangibleassetsacquiredthatqualifiedforrecognitionseparatelyfromgoodwillwerecustomerrelationships,technologyand,additionallyforIntacct,brands.Thefairvaluesofcustomerrelationshipsweredeterminedusingtheexcessearningsmethod,technologyandbrandsusingtherelieffromroyaltymethod,anddeferredincomeusingabottom-upapproach.Thesevaluationtechniquesrequireanumberofkeyassumptionsincludingrevenueforecastsandtheapplicationofanappropriatediscountratetostatefuturecashflowsattheirpresentvalue.Thetotalfairvalueofintangibleassets(excludinggoodwill)acquiredwithIntacctandSagePeoplewas£179m.DeferredincomeacquiredwithIntacctwasmeasuredat£18m.Fullanalysesoftheconsiderationtransferred,assetsandliabilitiesacquiredandgoodwillrecognisedinbusinesscombinationsaresetoutinnote16.Thenotealsoincludesanexplanationoftheaccountingpolicyapplied.AmountsrecognisedforIntacctat30September2017areprovisionalduetotheproximityoftheacquisitiondatetothedateofapprovaloftheAnnualReport,andwillbefinalisedduringthecomingyear.TheDirectorsalsoconsideredtheimpactontheGroupofnewandrevisedaccountingstandards,interpretationsoramendments.ThefollowingrevisedandnewaccountingstandardsmayhaveamaterialimpactontheGroup.TheyarecurrentlyissuedbutnoteffectivefortheGroupfortheyearended30September2017:IFRS9,“FinancialInstruments”;IFRS15,“RevenuefromContractswithCustomers”;andIFRS16,“Leases”.IFRS9willbeeffectivefortheGroupstarting1October2018andwillreplacethecurrentrequirementsofIAS39‘FinancialInstruments:RecognitionandMeasurement’.Themainchangesintroducedbythenewstandardarenewclassificationandmeasurementrequirementsforcertainfinancialassets,anewexpectedlossmodelfortheimpairmentoffinancialassets,revisionstothehedgeaccountingmodelandamendmentstodisclosures.Thechangesaregenerallytobeappliedretrospectively.IFRS15willbeeffectivefortheGroupstarting1October2018.Thestandardpermitsachoiceoftwopossibletransitionmethodsfortheinitialapplicationoftherequirementsofthenewstandard:(1)retrospectivelytoeachpriorreportingperiodpresentedinaccordancewithIAS8(AccountingPolicies,ChangesinAccountingEstimatesandErrors),or(2)retrospectivelywiththecumulativeeffectofinitiallyapplyingthestandardrecognisedonthedateofinitialapplication,being1October2018fortheGroup(the“cumulativecatch-up”approach).TheGroupcurrentlyhasnotselectedthetransitionmethodforapplyingthenewstandard.TheGroupisintheprocessofdevelopingitsfutureIFRS15revenuerecognitionpoliciesandadjustingtherelevantbusinessprocessestoadoptthesenewpolicies.AprojecthasbeenestablishedacrossSage’smainmarkets.Thisprojectcoversthedevelopmentofnewrevenuerecognitionpoliciesaswellastheidentificationofaspectsofprocesses,datarequirementsandsystemsthatneedtobeaddressedinordertoappylIFRS15.–––��BasisofpreparationandcriticalaccountingestimatesandjudgementscontinuedTheSageGroupplc|AnnualReport&Accounts2017126Aspartofthiseffort,severaldifferencesbetweencurrentaccountingpoliciesandthefutureIFRS15basedpolicies(asfarasthesehavealreadybeendeveloped)havebeenidentified.Basedontheanalysesperformedsofar,thesedifferencesinclude:IFRS15introducesanewconceptofperformanceobligations.Thiswillrequirechangestothewaythetransactionpriceisallocatedtoseparatelyidentifiablecomponentsofabundlewithinacontractwhichcanimpactthetimingofrecognisingrevenue.Arevisedrecognitionpatternisexpectedforcertainon-premisesoftwaresubscriptioncontracts,whichcombinethedeliveryofsoftwareandsupportserviceandtheobligationtodeliver,inthefuture,unspecifiedsoftwareupgrades.Undercurrentpolicies,theGrouprecognisestheentirepriceonastraight-linebasisoverthesubscriptionterm.Incontrast,underIFRS15,aportionofthetransactionpricewillberecognisedupondeliveryoftheinitialsoftwareattheoutsetofthearrangement.IFRS15requirestheestablishmentofstandalonesellingpricestobeusedasthebasisfortheapportionmentofthetransactionpricetoseparateperformanceobligations.Thisisanewconceptcomparedtocurrentrequirementsandcanimpacttimingofrecognisingrevenue.TheGroupwillhavetoassesswhethertorecogniserevenuegrossornetforbusinesspartnerarrangementsattheperformanceobligationlevelratherthanatcontractlevel.TheGroupiscurrentlyalreadycapitalisingcoststoobtainacontractwhererevenueisrecognisedovertime.ThecapitalisationamountisexpectedtoincreaseunderIFRS15duetoabroaderdefinitionofwhatqualifiesforcapitalisationascoststoobtainacontract.Inadditiontotheeffectsonourconsolidatedincomestatement,theGroupexpectschangestotheconsolidatedbalancesheet(inparticular,duetotherecognitionofcontractassets/contractliabilities,thedifferentiationbetweencontractassetsandtradereceivables,andanimpactinretainedearningsfromtheinitialadoptionofIFRS15)andadditionalquantitativeandqualitativedisclosuresinthenotestothefinancialstatements.ThequantitativeimpactofIFRS15ontheGroup’sFY19financialstatementscannotcurrentlybereasonablyestimated,asthefollowinghavenotyetbeenfinalised:Decisiononatransitionmethod;CompletionoftheanalysisofthevolumeofcontractsthatwillbeaffectedbythedifferentpolicychangesuponadoptionofIFRS15;Establishstandalonesellingprices;orEstimationofthepotentialchangesinbusinesspracticesthatmayresultfromtheadoptionofthenewpolicies.TheGroupwillcontinuetoassessalltheimpactsthattheapplicationofIFRS15willhaveonitsfinancialstatementsintheperiodofinitialapplication,whichwillalsosignificantlydependonitsbusinessandgo-to-marketstrategyintheaccountingyearending30September2019andbeyond.Theimpacts,ifmaterial,willbedisclosed,includingstatementsonwhetherandhowtheGroupplanstoapplyanyofthepracticalexpedientsavailableinthestandard.IFRS16willchangeleaseaccountingmainlyforlessees,andwillreplacetheexistingstandardIAS17.Anassetfortherighttousetheleaseditemandaliabilityforfutureleasepaymentswillberecognisedforallleases,subjecttolimitedexemptionsforshort-termleasesandlow-valueleaseassets.Thecostsofleaseswillberecognisedintheincomestatementsplitbetweendepreciationoftheleaseassetandafinancechargeontheleaseliability.Thisissimilartotheexistingaccountingforfinanceleases,butsubstantivelydifferenttotheexistingaccountingforoperatingleasesunderwhichnoleaseassetorleaseliabilityisrecognisedandrentalspayablearechargedtotheincomestatementonastraight-linebasis.Note3.4detailstheGroup’scurrentoperatingleasecommitments.TheGroupplanstoadoptthesestandardsinlinewiththeireffectivedates.IFRSs9and15willbeadoptedforthefinancialyearcommencing1October2018,andIFRS16forthefinancialyearcommencing1October2019.TheGroupiscontinuingitsassessmentoftheimpactthattheapplicationofthesestandardswillhaveontheGroup’sfinancialstatements,butitremainstooearlytodeterminehowsignificantanyeffectonactualfinancialresultsandfinancialpositionmightbe.–––––––––��127TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements2SegmentinformationThisnoteshowshowGrouprevenueandGroupoperatingprofitaregeneratedacrossthethreereportablesegmentsinwhichweoperate,beingNorthernEurope,CentralandSouthernEuropeandNorthAmerica.TheGroup’soperationsinAfricaandtheMiddleEast,Asia(includingAustralia)andLatinAmericadonotmeetthequantitativethresholdsfordisclosureasreportablesegmentsunderIFRS8,andsoarepresentedtogetherintheanalysesanddescribedasInternational.Thisisexplainedfurtherbelow.Foreachgeographicalregion,revenueandoperatingprofitarecomparedtoprioryearinordertounderstandthemovementsintheyear.Thiscomparisonisprovidedforstatutory,underlyingandorganicrevenueandoperatingprofit.StatutoryresultsreflecttheGroup’sresultspreparedinaccordancewiththerequirementsofIFRS.“Underlying”and“underlyingasreported”arenon-GAAPmeasures.Adjustmentsaremadetostatutoryresultstoarriveatanunderlyingresultwhichisinlinewithhowthebusinessismanagedandmeasuredonaday-to-daybasis.Adjustmentsaremadeforitemsthatareindividuallyimportantinordertounderstandthefinancialperformance.Ifincluded,theseitemscoulddistortunderstandingoftheperformancefortheyearandthecomparabilitybetweenperiods.Managementappliesjudgementindeterminingwhichitemsshouldbeexcludedfromunderlyingperformance.Seenote3.6fordetailsoftheseadjustments.Inaddition,theprioryearunderlyingvaluesaretranslatedatcurrentyearexchangerates,sothatexchangerateimpactsdonotdistortcomparisons.Prioryearunderlyingvaluesatprioryearexchangeratesare“underlyingasreported”;prioryearandcurrentyearvaluesatcurrentyearexchangeratesare“underlying”.Organicisanon-GAAPmeasure.Thecontributionsofcurrentandprioryearacquisitions,disposalsandassetsheldforsaleofstandalonebusinessesareremovedsothatresultscanbecomparedtotheprioryearonalike-for-likebasis.Acquisitionsanddisposalswhichoccurredclosetothestartoftheopeningcomparativeperiodwherethecontributionimpactwouldbeimmaterialarenotadjusted.Inaddition,thefollowingreconciliationsaremadeinthisnote.Revenuepersegmentreconciledtotheprofitfortheyearaspertheincomestatement.Statutoryoperatingprofitreconciledtounderlyingoperatingprofitpersegment(detailingtheadjustmentsmade).–––––��ResultsfortheyearTheSageGroupplc|AnnualReport&Accounts2017128AccountingpolicyInaccordancewithIFRS8,“OperatingSegments”,informationfortheGroup’soperatingsegmentshasbeenderivedusingtheinformationusedbythechiefoperatingdecisionmaker.TheGroup’sExecutiveCommitteehasbeenidentifiedasthechiefoperatingdecisionmakerinaccordancewiththeirdesignatedresponsibilityfortheallocationofresourcestooperatingsegmentsandassessingtheirperformance,throughtheQuarterlyBusinessReviewschairedbythePresidentandChiefFinancialOfficer.TheExecutiveCommitteeusesorganicandunderlyingdatatomonitorbusinessperformance.Operatingsegmentsarereportedinamannerwhichisconsistentwiththeoperatingsegmentsproducedforinternalmanagementreporting.Witheffectfrom1October2016,theGroupwasorganisedintosevenkeyoperatingsegments:NorthernEurope,CentralEurope,SouthernEurope,NorthAmerica,AfricaandtheMiddleEast,Asia(includingAustralia)andLatinAmerica.Thestructurereflectedchangesmadetointroduceaflatter,morefocusedstructuretoallowtheGrouptogetclosertoitscustomers.SinceAugust2017,thenewlyacquiredIntacctbusinesshasbeenmanagedseparatelyasanadditionaloperatingsegment,referredtoasNorthAmericaIntacct.Priortothesechanges,theorganisationstructurereflectedfouroperatingsegments(Europe,NorthAmerica,BrazilandAfricaandAustralia,MiddleEastandAsia)andthreereportablesegments.ForreportingunderIFRS8fortheyearended30September2017,theGrouphasthreereportablesegments.Thesesegmentsandtheirmainoperatingterritoriesorbusinessesareasfollows:NorthernEurope(UKandIreland)CentralandSouthernEurope(Germany,Switzerland,Poland,FranceandPortugal)NorthAmerica(theUS,CanadaandNorthAmericaIntacct)TheremainingoperatingsegmentsofAfricaandtheMiddleEast,AsiaandLatinAmericadonotmeetthequantitativethresholdsforpresentationasseparatereportablesegmentsunderIFRS8,andsoarepresentedtogetheranddescribedasInternational.TheyincludetheGroup’soperationsinSouthAfrica,UAE,Australia,Singapore,MalaysiaandBrazil.ThereportablesegmentsreflecttheagggreationoftheoperatingsegmentsforCentralEuropeandSouthernEurope,andalsoofthoseforNorthAmerica(excludingIntacct)andNorthAmericaIntacct.Ineachcase,theaggregatedoperatingsegmentsareconsideredtosharesimilareconomiccharacteristicsbecausetheyhavesimilarlong-termgrossmarginsandoperateinsimilarmarkets.CentralEuropeandSouthernEuropebothoperateprincipallywithintheEUandthemajorityoftheirbusinessesareincountrieswithintheeuroarea.NorthAmerica(excludingIntacct)andNorthAmericaIntacctsharethesameNorthAmericangeographicalmarket.Segmentinformationfortheyearended30September2016hasbeenrestatedtoreflecttheaboveorganisationstructureanddiscontinuedoperationsasdetailedinnote16.3.TheUKisthehomecountryoftheparent.Thetablesoverleafshowasegmentalanalysisoftheresultsforcontinuingoperations.Therevenueanalysisinthetableoverleafisbasedonthelocationofthecustomerwhichisnotmateriallydifferentfromthelocationwheretheorderisreceivedandwheretheassetsarelocated.Revenuecategoriesaredefinedinnote3.1.–––��Segmentreporting129TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements2 Segment information continued 2.1 Revenue by segment Year ended 30 September 2017 ChangeStatutory £mUnderlyingadjustments£mUnderlying£mOrganicadjustments £mOrganic £m StatutoryUnderlyingOrganic Recurring revenue by segment Northern Europe 292–292(5)287 12.1%11.5%9.4%Central and Southern Europe 450–450(1)449 18.2%5.8%6.0%North America 3885393(15)378 25.9%13.3%9.2%International 201–201(1)200 40.2%14.8%15.1%Recurring revenue 1,33151,336(22)1,314 21.8%10.5%9.0%Software and software related services (“SSRS”) revenue by segment Northern Europe 39–39–39 (2.7%)(4.0%)(4.0%)Central and Southern Europe 130–130–130 19.6%7.0%7.2%North America 72–72(1)71 1.7%(9.6%)(10.6%)International 60–60(1)59 15.2%(4.1%)(4.6%)SSRS revenue 301–301(2)299 10.8%(1.1%)(1.4%)Processing revenue by segment Northern Europe 37–37–37 5.5%4.2%4.2%Central and Southern Europe ––––– (100.0%)(100.0%)(100.0%)North America 32–32–32 15.0%2.3%2.3%International 14–14–14 31.3%6.8%6.8%Processing revenue 83–83–83 10.7%1.9%1.9%Total revenue by segment Northern Europe 368–368(5)363 9.6%8.9%7.3%Central and Southern Europe 580–580(1)579 18.2%5.8%6.0%North America 4925497(16)481 21.0%8.6%5.3%International 275–275(2)273 33.4%9.7%9.7%Total revenue 1,71551,720(24)1,696 19.2%7.8%6.6% Year ended 30 September 2016 Statutory and underlying as reported£mImpact of foreign exchange £m Underlying £m Organicadjustments£mOrganic£mRecurring revenue by segment Northern Europe 2611 262 –262Central and Southern Europe 38145 426 (2)424North America 30839 347 –347International 14332 175 (1)174Recurring revenue 1,093117 1,210 (3)1,207Software and software related services (“SSRS”) revenue by segment Northern Europe 401 41 –41Central and Southern Europe 10913 122 (1)121North America 709 79 –79International 5310 63 (1)62SSRS revenue 27233 305 (2)303Processing revenue by segment Northern Europe 35– 35 –35Central and Southern Europe 11 2 –2North America 274 31 –31International 112 13 –13Processing revenue 747 81 –81Total revenue by segment Northern Europe 3362 338 –338Central and Southern Europe 49159 550 (3)547North America 40552 457 –457International 20744 251 (2)249Total revenue 1,439157 1,596 (5)1,591Results for the year continuedThe Sage Group plc | Annual Report & Accounts 20171302.2 Operating profit by segment Year ended 30 September 2017 Change Statutory £m Underlying adjustments £mUnderlying £mOrganic adjustments £mOrganic £m Statutory Underlying OrganicOperating profit by segment Northern Europe 135 251605165 26.2%22.6%25.8%Central and Southern Europe 129 33162(1)161 121.4%14.8%15.2%North America 65 441094113 (14.2%)(5.6%)(2.1%)International 19 1736–36 (27.6%)(19.4%)(18.7%)Total operating profit 348 1194678475 30.3%8.2%10.3% Year ended 30 September 2016 Statutory £mUnderlying adjustments £mUnderlyingasreported £mImpact of foreign exchange £m Underlying £mOrganicadjustments£m Organic£mOperating profit by segment Northern Europe 107221292 131–131Central and Southern Europe 596612516 141(1)140North America 752710214 116–116International 2611377 44–44Total operating profit 26712639339 432(1)431The results by segment from continuing operations were as follows: Year ended 30 September 2017 NoteNorthernEurope£mCentral andSouthernEurope £mNorth America £m Total reportable segments£mInternational£mGroup £mRevenue 368580492 1,4402751,715Segment statutory operating profit 13512965 32919348Share of loss of an associate (1)Gain on remeasurement of existing investment in an associate 3.6 13Finance income 3.5 10Finance costs 3.5 (28)Profit before income tax 342Income tax expense 4 (85)Profit for the year – continuing operations 257Reconciliation of underlying operating profit to statutory operating profit NorthernEurope£mCentral andSouthernEurope £mNorth America £m Total reportable segments£mInternational £mGroup£mUnderlying operating profit 160162109 43136467Amortisation of acquired intangible assets (note 3.6) (4)(5)(9) (18)(4)(22)Other acquisition-related items (note 3.6) (6)–(21) (27)–(27)Non-recurring items (note 3.6) (15)(28)(14) (57)(13)(70)Statutory operating profit 13512965 32919348 131The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements2 Segment information continued 2.2 Operating profit by segment continued The results by segment from continuing operations were as follows: Year ended 30 September 2016 NoteNorthernEurope£mCentral andSouthernEurope £mNorth America £m Total Reportable segments £m International£mGroup £mRevenue 336491405 1,232 2071,439Segment statutory operating profit 1075975 241 26267Share of loss of an associate (1)Finance income 3.5 5Finance costs 3.5 (29)Profit before income tax 242Income tax expense 4 (54)Profit for the year – continuing operations 188Reconciliation of underlying operating profit to statutory operating profit NorthernEurope£mCentral andSouthernEurope £mNorth America £m Total reportable segments £m International £mGroup£mUnderlying operating profit 129125102 356 37393Amortisation of acquired intangible assets (note 3.6) (1)(5)(6) (12) (5)(17)Other acquisition-related items (note 3.6) –– (1) (1) –(1)Non-recurring items (note 3.6) (21)(61)(20) (102) (6)(108)Statutory operating profit 1075975 241 262672.3 Analysis by geographic location Management deems countries which generate more than 10% of total Group revenue to be material. Additional disclosures have been provided below to show the proportion of revenue from these countries. Revenue by individually significant countries 2017 £m2016 £mUK 343320France 278247USA 414344Other individually immaterial countries 680528 1,7151,439Management deems countries which contribute more than 10% to total Group non-current assets to be material. Additional disclosures have been provided below to show the proportion of non-current assets from these countries. Non-current assets presented below excludes deferred tax assets, post-employment benefit assets and financial instruments. Non-current assets by geographical location 2017 £m2016 £mUK 387272France 244239USA 1,4551,011Other individually immaterial countries 359378 2,4451,900 Results for the year continuedThe Sage Group plc | Annual Report & Accounts 20171323ProfitbeforeincometaxThisnotesetsouttheGroup’sprofitbeforetax,bylookinginmoredetailatthekeyoperatingcosts,includingabreakdownofthecostsincurredasanemployer,researchanddevelopmentcosts,thecostoftheexternalauditoftheGroup’sfinancialstatementsandfinancecosts.ThisnotealsosetsouttheGroup’srevenuerecognitionpolicy.Inaddition,thisnoteanalysesthefutureamountspayableunderoperatingleaseagreements,whichtheGrouphasenteredintoasattheyearend.Thesecommitmentsarenotincludedasliabilitiesintheconsolidatedbalancesheet.Thisnotealsoprovidesabreakdownofanymaterialrecurringandnon-recurringcoststhathavebeenreportedseparatelyonthefaceoftheincomestatement.Revenueismeasuredatthefairvalueoftheconsiderationreceivedorreceivableandrepresentsamountsreceivedorreceivableforgoodsandservicesprovidedinthenormalcourseofbusiness,netofdiscounts,VATandothersales-relatedtaxes.TheGroupreportsrevenueunderthreerevenuecategoriesandthebasisofrecognitionforeachcategoryisdescribedbelow:Whenproductsarebundledtogetherbeforebeingsoldtothecustomer,itisnecessarytoapplytherecognitioncriteriatotheseparatelyidentifiablecomponentsofasingletransactioninordertoreflectthesubstanceofthetransaction.Theassociatedrevenueisallocatedbetweentheconstituentpartsofthebundleonarelativefairvaluebasis.Whencustomersareoffereddiscountsonbundledproductsand/orservices,thecombineddiscountisallocatedtotheconstituentelementsofthebundle,baseduponpublicallyavailablelistprices.3.1RevenueAccountingpolicyCategoryandExamplesAccountingTreatmentRecurringrevenueSoftwareandsoftware-relatedservicesProcessingrevenueRecurringrevenueisrevenueearnedfromcustomersfortheprovisionofagoodorservice,whereSubscriptioncontractsrisksandrewardsaretransferredtothecustomeroverthetermofacontract,withthecustomerbeingunabletocontinuetobenefitfromthefullfunctionalityofthegoodorservicewithoutMaintenanceandsupportcontractsongoingpayments.Subscriptionrevenueisrevenueearnedfromcustomersfortheprovisionofagoodorservice,wheretheriskandrewardsaretransferredtothecustomeroverthetermofacontract.Intheeventthatthecustomerstopspaying,theylosethelegalrighttousethesoftwareandtheCompanyhastheabilitytorestricttheuseoftheproductorservice.(Alsoknownas‘Paytoplay’).Subscriptionrevenueandmaintenanceandsupportrevenuearerecognisedonastraight-linebasisoverthetermofthecontract(includingnon-specifiedupgrades,whenincluded).Revenuerelatingtofutureperiodsisclassifiedasdeferredincomeonthebalancesheettoreflectthetransferofriskandreward.PerpetualsoftwarelicencesandspecifiedupgradesrevenuearerecognisedwhenthesignificantPerpetualsoftwarelicencesrisksandrewardsofownershiprelatingtothelicencehavebeentransferredanditisprobablethattheeconomicbenefitsassociatedwiththetransactionwillflowtotheGroup.ThisiswhenthegoodsUpgradestoperpetuallicenceshaveleftthewarehousetobeshippedtothecustomerorwhenelectronicdeliveryhastakenplace.ProfessionalservicesOtherproductrevenue(whichincludeshardwareandstationery)isrecognisedastheproductsareTrainingshippedtothecustomer.HardwareandstationeryOtherservicesrevenue(whichincludesthesaleofprofessionalservicesandtraining)isrecognisedwhendelivered,orbyreferencetothestageofcompletionofthetransactionattheendofthereportingperiod.Thisassessmentismadebycomparingtheproportionofcontractcostsincurredtodatetothetotalexpectedcoststocompletion.ProcessingrevenueisrevenueearnedfromcustomersfortheprocessingofpaymentsorwhereSagePaymentprocessingservicescolleaguesprocessourcustomers’payroll.PayrollprocessingservicesProcessingrevenueisrecognisedatthepointthattheserviceisrenderedonapertransactionbasis.133TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements3 Profit before income tax continued 3.2 Operating profit Accounting policy Cost of sales includes items such as third party royalties, transaction and credit card fees related to the provision of payment processing services and the cost of hardware and inventories. These also include the third party costs of providing training and professional services to customers. All other operating expenses incurred in the ordinary course of business are recorded in selling and administrative expenses. The following items have been included in arriving at operating profit from continuing operations Note 2017 £m2016 £mStaff costs 768651Cost of inventories recognised as an expense (included in cost of sales) 9.1 79Depreciation of property, plant and equipment 7 2222Amortisation of intangible assets 6.2 3628Impairment of property, plant and equipment 7 –6Gain on disposal of subsidiary 3.6 (3)–Other operating lease rentals payable 2428M&A activity-related items 3.6 221The Group within both continuing and discontinued operations incurred £179m (2016: £144m) of research and development expenditure in the year, of which £154m (2016: £129m) relates to total Group staff costs included above. See note 6.2 for the research and development accounting policy. The Group also incurred £73m (2016: £110m) of transformation costs. See note 3.6 for a detailed explanation of these costs. Services provided by the Group’s auditor and network firms During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditor at costs as detailed below: 2017 £m2016 £mFees payable to the Group’s auditor for the audit of the Plc’s companies and the consolidated accounts 21Fees payable to the Group’s auditor for the audit of the Company’s subsidiaries 22Fees payable to the Group’s auditor for audit-related assurance services ––Total audit and audit related services 43Tax compliance services ––Tax advisory services ––Other non-audit services ––Total fees 43A summary of the Board’s policy in respect of the procurement of non-audit services for the Group’s auditor is set out on page 81. Results for the year continuedThe Sage Group plc | Annual Report & Accounts 20171343.3 Employees and Directors Average monthly number of people employed (including Directors) 2017 number2016 numberBy segment: Northern Europe 2,9342,766Central and Southern Europe 4,4294,595North America 2,6272,569International 3,8053,811 13,79513,741 Staff costs (including Directors on service contracts) Note2017 £m2016 £mWages and salaries 674572Social security costs 9380Post-employment benefits 111212Share-based payments 15.2108 789672Average monthly number of people employed and staff costs are for the whole Group and therefore include both continuing and discontinued operations. Key management compensation 2017 £m2016 £mSalaries and short-term employee benefits 57Post-employment benefits – 1Share-based payments 33 811Key management personnel are deemed to be members of the Executive Committee as shown on page 66. The key management figures given above include the Executive Directors of the Group. 3.4 Operating lease commitments Accounting policy Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. 20172016Total future minimum lease payments under non-cancellable operating leases falling due for payment as follows: Property, vehicles, plant and equipment £m Property, vehicles, plant and equipment £mWithin one year 2834Later than one year and less than five years 9394After five years 3737 158165The Group leases various offices and warehouses under non-cancellable operating lease agreements. These leases have various terms, escalation clauses and renewal rights. The Group also leases vehicles, plant and equipment under non-cancellable operating lease agreements. 135The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements3 Profit before income tax continued 3.5 Finance income and costs Accounting policy Finance income and costs are recognised using the effective interest method. Finance costs are recognised in the income statement simultaneously with the recognition of an increase in a liability or the reduction in an asset. Derivative financial instruments are measured at fair value through profit or loss. Foreign currency movements on intercompany balances are recognised in the profit and loss account unless settlement is not planned or likely in the foreseeable future, in which case they are recognised in other comprehensive income. 2017 £m2016 £mFinance income: Interest income on short-term deposits 22Foreign currency movements on intercompany balances 1–Fair value adjustments to debt-related financial instruments 73Finance income 105 Finance costs: Finance costs on bank borrowings (7)(3)Finance costs on US senior loan notes (19)(19)Fair value adjustments to debt-related financial instruments (1)–Amortisation of issue costs (1)(1)Foreign currency movements on intercompany balances –(6)Finance costs (28)(29) Finance costs – net (18)(24)3.6 Adjustments between underlying and statutory results Accounting policy The business is managed and measured on a day-to-day basis using underlying results. To arrive at underlying results, certain adjustments are made for items that are individually important and which could, if included, distort the understanding of the performance for the year and the comparability between periods. Management applies judgement in determining which items should be excluded from underlying performance. Recurring items These are items which occur regularly but which management judge to have a distorting effect on the underlying results of the Group. These items relate mainly to fair value adjustments on financial instruments and merger and acquisition (“M&A”) related activity, although other types of recurring items may arise. M&A activity by its nature is irregular in its impact and includes amortisation, adjustments to acquired deferred income and acquisition and disposal-related costs, including integration costs relating to an acquired business and acquisition-related remuneration. Foreign currency movements on intercompany balances that are charged through the income statement are excluded from underlying so that exchange rate impacts do not distort comparisons. Recurring items are adjusted each year irrespective of materiality to ensure consistent treatment. Non-recurring items These are items which are non-recurring and are adjusted on the basis of either their size or their nature. These items can include, but are not restricted to, gains and losses on the disposal of assets, impairment charges and reversals, and restructuring-related costs. As these items are one-off or non-operational in nature, management considers that they would distort the Group’s underlying business performance. Results for the year continuedThe Sage Group plc | Annual Report & Accounts 2017136RecurringNon-recurringTotal201620162016£m£m£mRecurringNon-recurringTotal201720172017£m£m£mM&Aactivity-relateditemsAmortisationofacquiredintangibles1717–Gainondisposalofsubsidiary–––Adjustmenttoacquireddeferredincome–––OtherM&Aactivity-relateditems11–OtheritemsLitigation-relateditems–(2)(2)Businesstransformationcosts–11011018108126Fairvalueadjustments(3)–(3)Gainonremeasurementofexistinginvestmentinanassociate–––Amortisationofacquiredintangibles11–Foreigncurrencymovementsonintercompanybalances6–62210813022–22–(3)(3)5–52222–––––73734970119(6)–(6)–(13)(13)11–(1)–(1)4357100TotaladjustmentsmadetooperatingprofitTotaladjustmentsmadetoprofitbeforeincometaxRecurringitemsNon-recurringitemsAcquiredintangiblesareassetswhichhavepreviouslybeenrecognisedaspartofbusinesscombinations.Theseassetsarepredominantlybrands,customerrelationshipsandtechnologyrights.Furtherdetailsincludingspecificaccountingpoliciesinrelationtotheseassetscanbefoundinnote6.2.Theadjustmenttoacquireddeferredincomerepresentstheadditionalrevenuethatwouldhavebeenrecordedintheyearhaddeferredincomenotbeenreducedaspartofthepurchasepriceallocationadjustmentmadeforbusinesscombinations.Afurther£12mwillariseinFY18.OtherM&Aactivity-relateditemsrelatetocompletedtransactioncostsandincludeadvisory,legal,accounting,valuationandotherprofessionalorconsultingservicesaswellasacquisition-relatedremunerationanddirectlyattributableintegrationcosts.Themaincostsrelatetotheacquisitionsintheyear,seenote16.Thefairvalueadjustmentscomprisesa£7mcredit(2016:£nil)relatingtoafairvalueadjustmentoffinancialassetsoffsetbyachargeof£1m(2016:gainof£3m)inrelationtoanembeddedderivativeassetwhichrelatestocontractualtermsagreedaspartoftheUSprivateplacementdebt.AmortisationofacquiredintangiblesbelowoperatingprofitrelatestotheGroup’sshareoftheamortisationofintangibleassetsarisingontheacquisitionofaninvestmentinanassociateaccountedforundertheequitymethod.Foreigncurrencymovementsonintercompanybalancesof£1m(2016:chargeof£6m)occursduetoretranslationofintercompanybalancesotherthanthosewheresettlementisnotplannedorlikelyintheforeseeablefuture.Thebalancearisesinthecurrentyearduetofluctuationinexchangerates,predominatelythemovementinEuroandUSDollarcomparedtosterling.Netchargesinrespectofnon-recurringitemsamountedto£57m(2016:£108m).Chargesof£73mhavebeenincurredinthecurrentyearasaresultoftheimplementationofthebusinesstransformation.Thisiscomprisedofpeople-relatedreorganisationchargesof£32m(2016:£51m),netpropertyexitcostsof£14m(2016:£40m)andotherdirectlyattributablecosts,mainlyrelatingtoconsultancy,contractorandassetwritedowns,of£27m(2016:£19m).Thepeople-relatedreorganisationchargescompriseseverancecostsof£29m(2016:£44m)withtheremainingcostlargelyarisingfromretentionpayments,transitionandoverlapcostswhilstimplementingtheGroup’snewoperatingmodel.Thepropertyexitcostsconsistofnetleaseexitcostsfollowingconsolidationofofficespaceusedandimpairmentandaccelerateddepreciationofleaseholdimprovementassetsandotherrelatedassetsthatarenolongerinuseduetothepropertyexits.Theothercostsincludeexpenditurethatisdirectlyattributabletothebusinesstransformation,includingadvisory,legal,accounting,valuationandotherprofessionalorconsultingservices.Thesechargesareone-offinnatureanddirectlylinkedtothebusinesstransformationundertakeninthecurrentandprioryear.Nofurtherrelatednon-recurringcostsareexpectedtoariseinFY18andsubsequentfinancialyearsinrelationtothebusinesstransformation.Totalcashpaidinrelationtothebusinesstransformationstrategytotalled£72m(2016:£58m)intheyear.ThegainondisposalofsubsidiaryrelatestothesaleofSyska,seenote16.ThegainonremeasurementofexistinginvestmentinanassociaterelatestotheacquisitionofFairsail,seenote16.Seenote4forthetaximpactoftheseadjustments.137TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements4 Income tax expense This note analyses the tax expense for this financial year which includes both current and deferred tax. Current tax expense represents the amount payable on this year’s taxable profits and any adjustments relating to prior years. Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences between the carrying values of assets and liabilities and their respective tax bases. This note outlines the tax accounting policies, analyses the current and deferred tax expenses in the year and presents a reconciliation between profit before tax in the income statement multiplied by the UK rate of corporation tax and the tax expense for the year. Accounting policy The taxation expense for the year represents the sum of current tax payable and deferred tax. The expense is recognised in the income statement and statement of comprehensive income according to the accounting treatment of the related transaction. Current tax payable or receivable is based on the taxable income for the period and any adjustment in respect of prior periods. Current tax is calculated using tax rates that have been enacted or substantively enacted at the end of the reporting period. Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases (note 12). Analysis of expense in the year Note 2017 £m2016 £mCurrent income tax –(cid:3)Current tax on profit for the year 9877–(cid:3)Adjustment in respect of prior years (8)(16)Current income tax on continuing operations 9061Current income tax on discontinued operations 1313 10374 Deferred tax –(cid:3)Origination and reversal of temporary differences (7)(12)–(cid:3)Adjustment in respect of prior years 25Deferred tax 12 (5)(7) The current year tax expense is split into the following: Underlying tax expense 11592Tax credit on adjustments between the underlying and statutory operating profit (30)(38)Income tax expense on continuing operations 8554Income tax expense on discontinued operations 1313Income tax expense reported in income statement 9867The majority of the current tax adjustment in respect of prior years of £8m (2016: £16m) reflects the resolution of a number of historical tax matters, including settlements with a number of tax authorities and true-ups to prior year estimates. 2017 £m2016 £mTax on items credited to other comprehensive income Deferred tax charge on actuarial loss on post-employment benefit obligations 1–Deferred tax credit on foreign exchange movements (2)(3)Total tax on items credited to other comprehensive income (1)(3)Deferred tax charge relating to share options of £1m (2016: credit of £1m) has been recognised directly in equity. Results for the year continuedThe Sage Group plc | Annual Report & Accounts 2017138Thetaxfortheyearishigher(2016:higher)thantherateofUKcorporationtaxapplicabletotheGroupof19.5%(2016:20%).Thedifferencesareexplainedbelow:Theeffectivetaxrateonstatutoryprofitbeforetaxwas25%(2016:24%),whilsttheeffectivetaxrateonunderlyingprofitbeforetaxoncontinuingoperationswas26%(2016:25%).Thedifferencebetweenthestatutoryeffectivetaxrateandtheunderlyingtaxraterelatestonon-recurringitemswhicharedeductibleincountrieswithataxratehigherthantheUK.TheeffectivetaxrateishigherthantheUKcorporationtaxrateapplicabletotheGroupduetothegeographicprofileoftheGroup.Inaddition,thereisanobligationtoaccountforlocalbusinesstaxesinthecorporatetaxexpense.Theseadditionaltaxexpensesareoffsetbyinnovationtaxcreditsforregisteredpatentsandresearchanddevelopmentactivitieswhichareagovernmentincentiveinanumberofoperatingterritories.TheEuropeanCommissionhasannouncedthataninvestigationwillbeopenedintotheUK’scontrolledforeigncompany(“CFC”)rules.TheCFCruleslevyachargeonforeignentitiescontrolledbytheUKthataresubjecttoalowerrateoftax,howeverthereiscurrentlyanexemptionavailablefor75%ofthischargeiftheactivitiesbeingundertakenbytheCFCrelatetofinancing.TheECareinvestigatingwhetherthisexemptionisinbreachofEUStateAidrules.ThedetailedargumentsoftheECarenotyetavailableanditisunlikelythatafinaldecisiononthismatterwillbeavailablewithinthenextyear.Noprovisionforthispotentialliabilityhasbeenprovidedinthesefinancialstatementsasitisnotclearwhat,ifany,theultimatefinancialresultwillbe.Thisnoteshowshowearningspershare(“EPS”)iscalculated.EPSistheamountofpost-taxprofitattributabletoeachordinaryshare.DilutedEPSshowswhattheimpactwouldbeifallpotentiallydilutiveordinarysharesinrespectofexercisableshareoptionswereexercisedandtreatedasordinarysharesattheyearend.Thisnotealsoprovidesareconciliationbetweenthestatutoryprofitfigure,whichtiestotheconsolidatedincomestatementonpage119,andtheGroup’sinternalmeasureofperformance,underlyingprofit.Seenote3.6fordetailsoftheadjustmentsmadebetweenstatutoryandunderlyingprofit,andnote4forthetaximpactontheseadjustments.2017£m2016£mProfitbeforeincometaxfromcontinuingoperationsProfitbeforeincometaxfromdiscontinuedoperationsAttheeffectiveincometaxrateof25%(2016:24%)IncometaxexpensereportedintheincomestatementIncometaxattributabletodiscontinuedoperations3425639878(6)38(11)23(2)4(6)3(2)(3)–9885139824233Totalprofitbeforeincometax275StatutoryprofitbeforeincometaxmultipliedbytherateofUKcorporationtaxof19.5%(2016:20%)55Taxeffectsof:Adjustmentsinrespectofprioryears(11)Adjustmentsinrespectofforeigntaxrates23Non-taxableUSaccountinggainondisposal–UStaxgainondisposal–Non-deductibleexpensesandpermanentitems(1)Non-taxablegainonre-measurementofexistinginvestmentsinanassociate–Withholdingtax1Foreigntaxcredit(3)Localbusinesstax3Innovationtaxcredit(1)Recognitionoftaxlosses–Recognitionofamortisationclaims1675413675Earningspershare139TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements5 Earnings per share continued Accounting policy Basic earnings per share is calculated by dividing the profit for the year attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury shares, which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, exercisable at the end of the year. The Group has one class of dilutive potential ordinary shares. They are share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year. Reconciliations of the earnings and weighted average number of shares Underlying 2017Underlyingas reported 2016 Underlying 2016 Statutory 2017Statutory 2016Earnings attributable to owners of the parent – Continuing operations (£m) Profit for the year 327280 308 257188 Number of shares (millions) Weighted average number of shares 1,0801,077 1,077 1,0801,077Dilutive effects of shares 46 6 46 1,0841,083 1,083 1,0841,083Earnings per share attributable to owners of the parent – Continuing operations Basic earnings per share (pence) 30.2825.90 28.59 23.8617.43 Diluted earnings per share (pence) 30.1825.75 28.42 23.7817.33 Reconciliations of the earnings and weighted average number of shares Underlying 2017Underlyingas reported 2016 Underlying 2016 Statutory 2017Statutory 2016Earnings attributable to owners of the parent – Continuing and discontinued operations (£m) Profit for the year 345300 332 300208 Number of shares (millions) Weighted average number of shares 1,0801,077 1,077 1,0801,077Dilutive effects of shares 46 6 46 1,0841,083 1,083 1,0841,083Earnings per share attributable to owners of the parent – Continuing and discontinued operations Basic earnings per share (pence) 31.9027.84 30.82 27.8019.28 Diluted earnings per share (pence) 31.7927.67 30.64 27.7119.16 Reconciliations of the earnings and weighted average number of shares Statutory 2017Statutory2016Earnings attributable to owners of the parent – Discontinued operations (£m) Profit for the year 4320 Number of shares (millions) Weighted average number of shares 1,0801,077Dilutive effects of shares 46 1,0841,083Earnings per share attributable to owners of the parent – Discontinued operations Basic earnings per share (pence) 3.941.85 Diluted earnings per share (pence) 3.931.83 Results for the year continuedThe Sage Group plc | Annual Report & Accounts 20171402017Reconciliationofearnings–Continuingoperations£m2017Reconciliationofearnings–Continuinganddiscontinuedoperations£m2016£m2016£mEarnings–StatutoryprofitfortheyearattributabletoownersoftheparentAdjustments:NetadjustmentsEarnings–underlyingprofitfortheyear(beforeexchangemovement)NetexchangemovementEarnings–underlyingprofitfortheyear(afterexchangemovement)attributabletoownersoftheparentEarnings–StatutoryprofitfortheyearattributabletoownersoftheparentAdjustments:NetadjustmentsEarnings–underlyingprofitfortheyear(beforeexchangemovement)NetexchangemovementEarnings–underlyingprofitfortheyear(afterexchangemovement)attributabletoownersoftheparent25728(6)(3)(1)2273(13)(30)70327–––32730028(6)(30)(1)2273(13)(28)45345–––345188Amortisationofacquiredintangibleassetsandadjustmenttoacquireddeferredincome18Fairvalueadjustmentstodebt-relatedfinancialinstruments(3)Gainondisposalofsubsidiary–Foreigncurrencymovementsonintercompanybalances6OtherM&Aactivity-relateditems1Transformationcostsandlitigation-relateditems108Gainonremeasurementofexistinginvestmentinanassociate–Taxationonadjustments(38)92280Exchangemovement37Taxationonexchangemovement(9)28308208Amortisationofacquiredintangibleassetsandadjustmenttoacquireddeferredincome18Fairvalueadjustmentstodebt-relatedfinancialinstruments(3)Gainondisposalofsubsidiaries–Foreigncurrencymovementsonintercompanybalances6OtherM&A-relateditems1Transformationcostsandlitigation-relateditems108Gainonremeasurementofexistinginvestmentinanassociate–Taxationonadjustments(38)92300Exchangemovement43Taxationonexchangemovement(11)32332––––––––––––––––��Exchangemovementrelatestotheretranslationofprioryearresultstocurrentyearexchangeratesasshowninthetableonpage39withinthefinancialreview.141TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements6 Intangible assets This note provides details of the non-physical assets used by the Group to generate revenues and profits. These assets include items such as goodwill, and other intangible assets such as brands, customer relationships, computer software, in-process R&D and technology which have predominantly been acquired as part of business combinations. These assets are initially measured at fair value, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Goodwill represents the excess of the amount paid to acquire a business over the fair value of the identifiable net assets of that business at the acquisition date. This section also explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the carrying value of these assets. 6.1 Goodwill Accounting policy Goodwill arising from the acquisition of a subsidiary represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s total identifiable net assets acquired. Goodwill is carried at cost less accumulated impairment losses. Goodwill previously written off directly to reserves under UK GAAP prior to 1 October 1998 has not been reinstated and is not recycled to the income statement on the disposal of the business to which it relates. Goodwill is tested for impairment annually and when circumstances indicate that it may be impaired. Impairment is determined by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Goodwill is allocated to CGUs expected to benefit from the synergies of the combination and the allocation represents the lowest level at which goodwill is monitored. Note 2017£m2016 £mCost at 1 October 1,7731,526–(cid:3)Additions 16.1 593––(cid:3)Disposals 16.3 (189)––(cid:3)Exchange movement (41)247At 30 September 2,1361,773 Impairment at 1 October 11480–(cid:3)Exchange movement (1)34At 30 September 113114 Net book amount at 30 September 2,0231,659Goodwill additions relate to the acquisitions of Intacct Corporation (£523m) and Sage People Limited (formerly Fairsail Limited) (£70m). See note 16.1 for further details. Goodwill disposed related to North American Payments business. See note 16.3 for details.Operating assets and liabilitiesThe Sage Group plc | Annual Report & Accounts 2017142Cash Generating Units The following table shows the allocation of the carrying value of goodwill at the end of the reporting period by CGU: 2017 £m2016 £mFrance 222218UK & Ireland 251181Spain 128125Sage Pay Europe 2625Germany 3838Switzerland 3940Poland 77Portugal 66North America –(cid:3)Sage Business Solutions Division (SBS) 717741–(cid:3)Sage Intacct 516––(cid:3)Sage Payment Solutions Division (SPS) –193South Africa 3043Australia 2523Asia 1819 2,0231,659Singapore (2016: £5m) and Malaysia (2016: £14m) are now a single CGU referred to as “Asia” as these businesses are now operationally managed together serving a number of Asian markets. This is the level at which goodwill is monitored. Annual goodwill impairment tests The recoverable amount of a CGU is determined as the higher of its fair value less costs of disposal and its value in use. In determining value in use, estimated future cash flows are discounted to their present value. The Group performed its annual test for impairment on 30 June 2017. In all cases, the 2018 budget and the approved Group plan for the three years following the current financial year form the basis for the cash flow projections for a CGU. Beyond the three-year plan these projections are extrapolated using an estimated long-term growth rate. The key assumptions in the value in use calculations are the average medium-term revenue growth rates and the long-term growth rates of net operating cash flows. –(cid:3)The average medium-term revenue growth rates represent the compound annual revenue growth for the first five (2016: five) years. The average medium-term revenue growth rate applied to CGUs reflects the specific rates for each territory. –(cid:3)Long-term growth rates of net operating cash flows are assumed to be equal to the long-term growth rate in the gross domestic product of the country in which the CGUs operations are undertaken reflecting the specific rates for each territory. Range of rates used across the different CGUs 20172016–(cid:3)Average medium-term revenue growth rates* 4%-13%1%-14%–(cid:3)Long-term growth rates to net operating cash flows 1%-4%1.0%-3.5%Note: * Average medium-term revenue growth rate is calculated on value in use projections that exclude intercompany revenue. 143The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements6Intangibleassetscontinued6.1GoodwillcontinuedInaccordancewithIAS36,keyassumptionsforthevalueinusecalculationsaredisclosedforthoseCGUswheresignificantgoodwillisheld.ThesearedeemedbymanagementtobeCGUsholdingmorethan10%oftotalgoodwill.Thediscountrate,averagemedium-termrevenuegrowthrateandlong-termgrowthrateassumptionsusedforthevalueinusecalculationforthesignificantgoodwillCGUscoveredbytheannualimpairmenttestareshownbelow:TheGroupusesadiscountratebasedonalocalWeightedAverageCostofCapital(“WACC”)foreachCGU,appyglinlocalgovernmentyieldbondsandtaxratestoeachCGUonageographicalbasis.ThediscountrateappliedtoaCGUrepresentsapost-taxratethatreflectsthemarketassessmentofthetimevalueofmoneyattheendoftheQ32017andtherisksspecifictotheCGU.Thepost-taxdiscountratesappliedtoCGUswereintherangeof6.91%(2016:6.96%)to15.34%(2016:14.67%),reflectingthespecificratesforeachterritory.AsensitivityanalysiswasperformedforeachofthesignificantCGUsandmanagementconcludedthatnoreasonablypossiblechangeinanyofthekeyassumptionswouldcausethecarryingvalueofanyCGUtoexceeditsrecoverableamount.TheGroupperformeditsannualtestforimpairmenton30June2017.TherecoverableamountexceededthecarryingvalueforeachCGU.Subsequenttotheannualimpairmentteston30June2017,theGroupacquired100%ofthesharecapitalofIntacctCorporationresultinginsignificantgoodwillof£516mon30September2017.ManagementassessedwhethertherewouldbeanytriggeringeventorindicatorthatcouldleadtoanimpairmentofthegoodwillacquiredthroughtheIntacctCorporationacquisitionandconcludedthattherewerenoindicatorsthatthefairvalueofSageIntacctislowerthantheamountpaidbySage.Seenote16.1fordetails.ApproximatelocalLocaldiscountLong-termAveragemedium-discountrate(pre-tax)growthtermrevenue2017rate(post-tax)equivalentrategrowthrate*–––––––��UKIFranceNorthAmericaSBSUKI8.8%10.3%2.1%6.1%France8.0%11.4%1.8%6.3%NorthAmericaSBS9.0%14.1%1.9%7.4%NorthAmericaSPS9.0%14.3%1.9%1.3%8.6%10.0%2.1%6.8%8.1%10.8%1.7%5.5%9.2%14.4%1.9%6.4%−−−ApproximateLocallocaldiscountdiscountAveragemedium-raterate(pre-tax)Long-termtermrevenue2016(posttax)equivalentgrowthrategrowthrate*Note:*Averagemedium-termrevenuegrowthrateiscalculatedonvalueinuseprojectionsthatexcludeintercompanyrevenue.DiscountrateSensitivityanalysisImpairmentchargeSageIntacctOperatingassetsandliabilitiescontinuedTheSageGroupplc|AnnualReport&Accounts2017144 6.2 Other intangibles Accounting policy Intangible assets arising on business combinations are recognised initially at cost, which is their fair value at the date of acquisition. Subsequently they are carried at cost less accumulated amortisation and impairment charges. The main intangible assets recognised are brands, technology, in-process R&D, computer software and customer relationships. Amortisation is charged to the income statement on a straight-line basis over their estimated useful lives. The estimated useful lives are as follows: Brand names –(cid:3)1 to 20 years Technology/In process R&D (“IPR&D”) –(cid:3)3 to 7 years Customer relationships –(cid:3)4 to 15 years Computer software –(cid:3)2 to 7 years Other intangible assets that are acquired by the Group are stated at cost, which is the asset’s purchase price and any directly attributable costs of preparing the asset for its intended use, less accumulated amortisation and impairment losses if applicable. Software assets are amortised on a straight-line basis over their estimated useful lives, which do not exceed seven years. The carrying value of intangibles is reviewed for impairment whenever events indicate that the carrying value may not be recoverable. Internally-generated software development costs qualify for capitalisation when the Group can demonstrate all of the following: –(cid:3)The technical feasibility of completing the intangible asset so that it will be available for use or sale; –(cid:3)Its intention to complete the intangible asset and use or sell it; –(cid:3)Its ability to use or sell the intangible asset; –(cid:3)How the intangible asset will generate probable future economic benefits; –(cid:3)The existence of a market or, if it is to be used internally, the usefulness of the intangible asset; –(cid:3)The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; –(cid:3)Its ability to measure reliably the expenditure attributable to the intangible asset during development. Generally, commercial viability of new products is not proven until all high-risk development issues have been resolved through testing pre-launch versions of the product. As a result, technical feasibility is proven only after completion of the detailed design phase and formal approval, which occurs just before the products are ready to go to market. Accordingly, development costs have not been capitalised. However, the Group continues to assess the eligibility of development costs for capitalisation on a project-by-project basis. Costs which are incurred after the general release of internally-generated software or costs which are incurred in order to enhance existing products are expensed in the period in which they are incurred and included within research and development expense in the financial statements. Brands £mTechnology £mInternal IPR&D £m Computer software £mCustomer relationships £mTotal £mCost at 1 October 2016 411274 93147412–(cid:3)Additions ––– 22–22–(cid:3)Acquisitions 178– –106185–(cid:3)Disposal of subsidiaries –(8)– (1)(66)(75)–(cid:3)Disposals ––– (7)–(7)–(cid:3)Exchange movement –(2)– (1)–(3)At 30 September 2017 421954 106187534Accumulated amortisation at 1 October 2016 31964 62110303–(cid:3)Charge for the year 214– 13736–(cid:3)Disposal of subsidiaries –(8)– (1)(65)(74)–(cid:3)Disposals ––– (6)–(6)–(cid:3)Exchange movement ––– (1)21At 30 September 2017 331024 6754260 Net book amount at 30 September 2017 993– 39133274145The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements6 Intangible assets continued 6.2 Other intangibles continued Brands £mTechnology £mInternal IPR&D £m Computer software £m Customer relationships £mTotal £mCost at 1 October 2015 341066 71 120337–(cid:3)Additions –1– 7 –8–(cid:3)Acquisitions ––– – 66–(cid:3)Disposals ––(2) (1) –(3)–(cid:3)Exchange movement 720– 16 2164At 30 September 2016 411274 93 147412Accumulated amortisation at 1 October 2015 24736 40 90233–(cid:3)Charge for the year 29– 12 629–(cid:3)Disposals ––(2) – –(2)–(cid:3)Exchange movement 514– 10 1443At 30 September 2016 31964 62 110303 Net book amount at 30 September 2016 1031– 31 37109All amortisation charges in the year within both continuing and discontinued operations, prior to transfer to discontinued operations, have been charged through selling and administrative expenses. 7 Property, plant and equipment This note details the physical assets used by the Group to operate the business and generate revenues and profits. Assets areshown at their purchase price less depreciation, which is an expense that is charged over the useful life of these assets to reflect annual usage and wear and tear, and impairment. Accounting policy Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation on property, plant and equipment is provided on a straight-line basis to write down an asset to its residual value over its useful life as follows: Freehold buildings –(cid:3)50 years Long leasehold buildings and improvements –(cid:3)over period of lease Plant and equipment –(cid:3)2 to 7 years Motor vehicles –(cid:3)4 years Office equipment –(cid:3)2 to 7 years Freehold land is not depreciated. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. An item of property, plant and equipment is reviewed for impairment whenever events indicate that its carrying value may not be recoverable. Operating assets and liabilities continuedThe Sage Group plc | Annual Report & Accounts 2017146 Land and buildings £m Plant and equipment £mMotor vehicles and office equipment £mTotal £mCost at 1 October 2016 93 15756306–(cid:3)Additions – 191130–(cid:3)Acquisitions – 516–(cid:3)Disposals – (57)(9)(66)–(cid:3)Disposal of subsidiaries – (3)(1)(4)–(cid:3)Exchange movement – (1)–(1)At 30 September 2017 93 12058271 Accumulated depreciation at 1 October 2016 16 12839183–(cid:3)Charge for the year 1 14722–(cid:3)Disposals – (56)(8)(64)–(cid:3)Disposal of subsidiaries – (3)–(3)At 30 September 2017 17 8338138 Net book amount at 30 September 2017 76 3720133 Land and buildings £m Plant and equipment £mMotor vehicles and office equipment £mTotal £mCost at 1 October 2015 91 14454289–(cid:3)Additions – 16723–(cid:3)Disposals – (17)(12)(29)–(cid:3)Exchange movement 2 14723At 30 September 2016 93 15756306 Accumulated depreciation at 1 October 2015 14 11339166–(cid:3)Charge for the year 1 16522–(cid:3)Impairment – 516–(cid:3)Disposals – (17)(12)(29)–(cid:3)Exchange movement 1 11618At 30 September 2016 16 12839183 Net book amount at 30 September 2016 77 2917123Assets held under finance leases with a net book value of £nil (2016: £1m) are included in the above tables. Depreciation expenses relating to both continuing and discontinued operations of £22m (2016: £22m), prior to transfer to discontinued operations, and impairment of £nil (2016: £6m) have been charged through selling and administrative expenses (note 3.2). 147The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements8Investmentinanassociate9WorkingcapitalThisnotepresentsinformationabouttheGroup’sinvestmentinitsassociate,whichisanentityoverwhichtheGrouphassignificantinfluence.Significantinfluenceisthepowertoparticipateinthefinancialandoperatingpolicydecisionsoftheinvestee,butisnotcontrolorjointcontrolofthosepolicies.TheGroupdetermineswhetherithassignificantinfluencebasedonthevotingandanyotherrightsitholdsasaresultofitsinvestmentandalsoanycontractualarrangementsinplace.Normally,iftheGroupholdsover20%ofthevotingrightsofanentitywithouthavingcontrolorjointcontrolofthatentity,theinvestmentwillbetreatedasanassociateunlessitcanbeclearlydemonstratedthatthisisnotthecase.TheGroup’sinvestmentinitsassociateisaccountedforusingtheequitymethod.Undertheequitymethod,theinvestmentisinitiallymeasuredatcost.Subsequently,thecarryingamountisadjustedtorecognisechangesintheGroup’sshareofnetassetsoftheassociatesincetheacquisitiondate.Goodwillrelatingtotheassociateisincludedinthecarryingamountoftheinvestmentandisnottestedforimpairmentseparately.TheincomestatementreflectstheGroup’sshareoftheassociate’sprofitorlossaftertaxandanynon-controllinginterestsinthesubsidiariesoftheassociate.AnychangeintheGroup’sshareoftheassociate’sothercomprehensiveincomeispresentedaspartoftheGroup’sothercomprehensiveincome.Inaddition,whentherehasbeenachangerecogniseddirectlyintheequityoftheassociate,theGrouprecognisesitsshareofanysuchchanges,whenapplicable,inthestatementofchangesinequity.UnrealisedgainsandlossesresultingfromtransactionsbetweentheGroupandtheassociateareeliminatedtotheextentoftheinterestintheassociate.TheagggreateoftheGroup’sshareofprofitorlossoftheassociateisshownonthefaceoftheincomestatementoutsideoperatingprofit.ThefinancialstatementsoftheassociatearepreparedforthesamereportingperiodastheGroup.Whennecessary,adjustmentsaremadetobringtheaccountingpoliciesinlinewiththoseoftheGroup.Afterapplicationoftheequitymethod,theGroupdetermineswhetheritisnecessarytorecogniseanimpairmentlossonitsinvestment.Ateachreportingdate,theGroupdetermineswhetherthereisobjectiveevidencethattheinvestmentisimpaired.Ifthereissuchevidence,theGroupcalculatestheamountofimpairmentasthedifferencebetweentherecoverableamountoftheassociateanditscarryingvalue,andthenrecognisesthelossintheincomestatement.At30September2017,theGrouphadnoinvestmentsinassociates.At30September2016,theGroup’sinvestmentinanassociatecomprised100%oftheCOrdinarySharesofFairsailLimited(Fairsail).On17March2017,theGroupacquiredinabusinesscombinationtheremainingsharecapitalofFairsail,whichsubsequentlychangeditsnametoSagePeopleLimited.Detailsoftheacquisitiontransaction,includingthegainrecognisedontheremeasurementtofairvalueoftheGroup’sexistinginvestmentattheacquisitiondate,aresetoutinnote16.1.TheGroup’sshareofitsassociate’stotalcomprehensiveincomefortheperiod1October2016to17March2017wasalossof£1m(2016:£1mloss),comprisinglossesfromcontinuingoperations.ThecarryingamountoftheGroup’sinvestmentat30September2016was£9m.ThisnoteprovidestheamountsinvestedbytheGroupinworkingcapitalbalancesattheendofthefinancialyear.Workingcapitalismadeupofinventories,tradeandotherreceivablesandtradeandotherpayables.InventoriesmainlyconsistofwarehousestockofSageproducts,awaitingshipmenttobusinesspartnersordistributors.TradeandotherreceivablesaremadeupofamountsowedtotheGroupbycustomersandamountsthatwepaytooursuppliersinadvance.Tradereceivablesareshownnetofanallowanceforbadanddoubtfuldebts.Ourtradeandotherpayablesareamountsweowetooursuppliersthathavebeeninvoicedtousoraccruedbyus.Theyalsoincludetaxesandsocialsecurityamountsdueinrelationtoourroleasanemployer.Thisnotealsogivessomeadditionaldetailontheageandrecoverabilityofourtradereceivables,whichprovidesanunderstandingofthecreditriskfacedbytheGroupasapartofeverydaytrading.CreditriskisfurtherdisclosedintheDirectors’Report.AccountingpolicyOperatingassetsandliabilitiescontinuedTheSageGroupplc|AnnualReport&Accounts2017148 9.1 Inventories Accounting policy Inventories are stated at the lower of cost and net realisable value after making allowances for slow moving or obsolete items. Cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Cost is calculated using the first-in-first-out method. 2017£m2016£mMaterials 11Finished goods 21 32The Group consumed £7m (2016: £9m) of inventories, included in cost of sales, during the year. There was no material write-down of inventories during the current or prior year. 9.2 Trade and other receivables Accounting policy Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Amounts falling due within one year: 2017£m2016 £mTrade receivables 415363Less: provision for impairment of receivables (21)(21)Trade receivables – net 394342Other receivables 2442Prepayments and accrued income 4836 466420The Group’s credit risk on trade and other receivables is primarily attributable to trade receivables. The Group has no significant concentrations of credit risk since the risk is spread over a large number of unrelated counterparties. The Group considers the credit quality of trade and other receivables by geographical location. The Group considers that the carrying value of the trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets. Trade and other receivables (excluding prepayments and accrued income) by geographical location: 2017£m2016 £mNorthern Europe 126114Central and Southern Europe 168149North America 5564International 6957 418384 149The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements9 Working capital continued 9.2 Trade and other receivables continued Movements on the Group provision for impairment of trade receivables were as follows: 2017£m2016 £mAt 1 October 2118Increase in provision for receivables impairment 148Receivables written off during the year as uncollectable (7)(6)Unused amounts reversed (6)(1)Exchange movement (1)2At 30 September 2121In determining the recoverability of a trade receivable, the Group considers the ageing of each receivable and any change in the circumstances of the individual receivables. The Directors believe that there is no further provision required in excess of the provision for impairment of receivables. The creation and releases of the provision for impaired receivables have been included in selling and administrative expenses in the income statement. Amounts charged to the provision are generally written off when there is no expectation of recovering additional cash. At 30 September 2017, trade receivables of £30m (2016: £33m) were either partially or fully impaired. The ageing of these receivables was as follows: 2017£m2016 £mNot due ––Less than six months past due 714More than six months past due 2319 3033Trade receivables which were past their due date but not impaired at 30 September 2017 were £73m (2016: £53m). The ageing of these receivables was as follows: 2017£m2016 £mLess than six months past due 5446More than six months past due 197 7353The maximum exposure to credit risk at the end of the reporting period is the fair value of each class of receivables mentioned above. The Group held no collateral as security. The Directors estimate that the carrying value of trade receivables approximated their fair value. 9.3 Trade and other payables Accounting policy Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Trade and other payables can be analysed as follows: 2017 £m2016 £mTrade payables 3835Other tax and social security payable 4843Other payables 2837Cash held on behalf of customers (see note 13.3) 7584Accruals 148151 337350 Operating assets and liabilities continuedThe Sage Group plc | Annual Report & Accounts 2017150 10 Provisions This note provides details of the provisions recognised by the Group, where a liability exists of uncertain timing or amount. The main estimates in this area relate to legal exposure, employee severance, onerous leases and dilapidation charges. This section also explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the value of these liabilities. Accounting policy A provision is recognised only when all three of the following conditions are met: –(cid:3)The Group has a present obligation (legal or constructive) as a result of a past event; –(cid:3)It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and –(cid:3)A reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the present value of the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, i.e. the present value of the amount that the Group would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. Restructuring£mLegal £m Building £mOther£mTotal £mAt 1 October 2016 1912 33367–(cid:3)Additional provision in the year 114 7123–(cid:3)Provision utilised in the year (9)(2) (7)(1)(19)–(cid:3)Unused amounts reversed –(4) –(1)(5)–(cid:3)Exchange movement –– 112At 30 September 2017 2110 34368 Restructuring£mLegal £m Building £mOther£mTotal £mMaturity profile < 1 year 196 102371 – 2 years 21 7–42 – 5 years –3 11121> 5 years –– 6–6At 30 September 2017 2110 34368Restructuring provisions are for the estimated costs of Group restructuring activities, associated with the business transformation and relate mainly to employee severance. These provisions will be utilised as obligations are settled which is generally expected to be within one year. Legal provisions have been made in relation to ongoing disputes with third parties and other claims against the Group. The ageing of legal provisions is assessed regularly, based upon internal and external legal advice, as required. Building provisions relate to dilapidation charges and onerous lease commitments. The timing of the cash flows associated with building provisions is dependent on the timing of lease agreement termination. Other provisions comprise mainly those for the costs of warranty cover provided by the Group in respect of products sold to third parties. The timing of the cash flows associated with warranty provisions is spread over the period of warranty with the majority of the claims expected in the first year. 151The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements11Post-employmentbenefitsThisnoteexplainstheaccountingpoliciesgoverningtheGroup’spensionschemes,analysesthedeficitonthedefinedbenefitpensionschemeandshowshowithasbeencalculated.ThemajorityoftheGroup’semployeesaremembersofdefinedcontributionpensionschemes.Additionally,theGroupoperatestwosmalldefinedbenefitschemesinFranceandSwitzerland.Fordefinedcontributionschemes,theGrouppayscontributionsintoseparatefundsonbehalfoftheemployeeandhasnofurtherobligationstoemployees.Therisksassociatedwiththistypeofplanareassumedbythemember.ContributionspaidbytheGroupinrespectofthecurrentperiodareincludedwithintheincomestatement.Thedefinedbenefitschemeisapensionarrangementunderwhichparticipatingmembersreceiveapensionbenefitatretirementdeterminedbytheschemerules,salaryandlengthofpensionableservice.Theincomestatementchargeforthedefinedbenefitschemeisthecurrent/pastservicecostandthenetinterestcostwhichisthechangeinthenetdefinedbenefitliabilitythatarisesfromthepassageoftime.TheGroupunderwritesbothfinancialanddemographicrisksassociatedwiththistypeofplan.Obligationsunderdefinedcontributionschemesarerecognisedasanoperatingcostintheincomestatementasincurred.TheGroupalsooperatesasmalldefinedbenefitpensionschemeinSwitzerlandandotherpost-employmentbenefitschemesinFrance.TheassetsoftheseschemesareheldseparatelyfromtheassetsoftheGroup.UnderFrenchlegislation,theGroupisrequiredtomakeone-offpaymentstoemployeesinFrancewhoreachretirementagewhilestillinemployment.Thecostsofprovidingbenefitsundertheseschemesaredeterminedusingtheprojectedunitcreditactuarialvaluationmethod.Thecurrentservicecostandgainsandlossesonsettlementsandcurtailmentsareincludedinsellingandadministrativeexpensesintheincomestatement.PastservicecostsshouldberecognisedontheearlierofthedateoftheplanamendmentandthedatetheGrouprecognisesrestructuring-relatedcosts.Interestonthepensionplanassetsandtheimputedinterestonpensionplanliabilitiesareincludedwithinsellingandadministrativeexpensesintheincomestatement.Changesinthepost-employmentbenefitobligationduetoexperienceandchangesinactuarialassumptionsareincludedinthestatementofcomprehensiveincomeinfullintheperiodinwhichtheyarise.Theliabilityrecognisedinthebalancesheetinrespectofthedefinedbenefitpensionschemeisthepresentvalueofthedefinedbenefitobligationandfutureadministrationcostsattheendofthereportingperiod,lessthefairvalueofplanassets.Thedefinedbenefitobligationiscalculatedannuallybyindependentactuaries.Thepresentvalueofthedefinedbenefitobligationisdeterminedbydiscountingtheestimatedfuturecashoutflowsusinginterestratesofhigh-qualitycorporatebondsthataredenominatedinthecurrencyinwhichthebenefitswillbepaidandthathavetermstomaturityapproximatetothetermsoftherelatedpensionliability.Thecalculationofthedefinedbenefitobligationofadefinedbenefitplanrequiresestimationoffutureevents,forexamplesalaryandpensionincreases,inflationandmortalityrates.Intheeventthatfutureexperiencedoesnotbearouttheestimatesmadeinpreviousyears,anadjustmentwillbemadetotheplan’sdefinedbenefitobligationinfutureperiodswhichcouldhaveamaterialeffectontheGroup.Asensitivityanalysishasbeenperformedonthesignificantassumptions.Thesignificantassumptionsaredeemedtobethediscountrateandsalaryincreases,asthesearemostlikelytohaveamaterialimpactonthedefinedbenefitobligations.Theanalysishasbeenperformedbytheindependentactuaries.Accountingpolicy2017Pensioncostsincludedintheconsolidatedincomestatement£m2016Note£mDefinedcontributionschemes10Definedbenefitplans23.31210212OperatingassetsandliabilitiescontinuedTheSageGroupplc|AnnualReport&Accounts2017152 Defined benefit plans The most recent actuarial valuations of the post-employment benefit plans were performed by KPMG (France) and PwC (Switzerland) during the year for the year ended 30 September 2017. Weighted average principal assumptions made by the actuaries 2017%2016 %Rate of increase in pensionable salaries 2.02.0Discount rate 0.90.4Inflation assumption 2.02.0 Mortality rate assumptions made by the actuaries 2017years2016 yearsAverage life expectancy for 65-year-old male 2121Average life expectancy for 65-year-old female 2424Average life expectancy for 45-year-old male 4040Average life expectancy for 45-year-old female 4444 Amounts recognised in the balance sheet 2017 £m2016 £mPresent value of funded obligations (43)(46)Fair value of plan assets 2121Net liability recognised in the balance sheet (22)(25) Major categories of plan assets as a percentage of total plan assets £m 2017%£m2016%Bonds (quoted) 7 34840Equities (quoted) 7 33524Other (unquoted) 7 33736 21 10020100Expected contributions to post-employment benefit plans for the year ending 30 September 2018 are £1m (2016: expected contributions year ending 30 September 2017: £1m). Amounts recognised in the income statement 2017£m2016£mNet interest costs on obligation –– Current service cost (2)(2)Total included within staff costs – all within selling and administrative expenses (2)(2) Changes in the present value of the defined benefit obligation 2017£m2016 £mAt 1 October (46)(37)Exchange movement 2(6)Service cost (2)(2)Plan participant contributions (1)(1)Interest cost –– Benefits paid 22Actuarial gain – demographic assumptions –1Actuarial gain/(loss) – financial assumptions 2(4)Actuarial gain – experience –1At 30 September (43)(46) 153The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements11 Post-employment benefits continued Changes in the fair value of plan assets 2017£m2016 £mAt 1 October 2118Exchange movement (2)3Interest income ––Employer’s contributions 11Plan participant contributions 11Benefits paid (2)(2)Actuarial gain on plan assets 2– At 30 September 2121 Analysis of the movement in the balance sheet liability 2017£m2016 £mAt 1 October (25)(19)Exchange movement –(3)Total expense as recognised in the income statement (2)(2)Contributions paid 11Actuarial gain/(loss) 4(2)At 30 September (22)(25) Sensitivity analysis on significant actuarial assumptions 2017£m2016£mDiscount rate applied to scheme obligations +/- 0.5% pa 23Salary increases +/- 0.5% pa 1112 Deferred income tax Deferred income tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differencesin the carrying value of assets and liabilities and their respective tax bases. In this note we outline the accounting policies, movements in the year on the deferred tax account and the net deferred tax asset or liability at the year end. A deferred tax asset represents a tax reduction that is expected to arise in a future period. A deferred tax liability represents taxes which will become payable in a future period as a result of a current or an earlier transaction. Accounting policy Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates that have been enacted or substantively enacted at the end of the reporting period. Tax assets and liabilities are offset when there is a legally enforceable right and there is an intention to settle the balances net. Operating assets and liabilities continuedThe Sage Group plc | Annual Report & Accounts 2017154TheproposedUStaxreformbillwasreleasedon2November2017.Amongstotherdetailedprovisions,ifenactedinitscurrentform,thebillwouldreducetheUSFederaltaxrateto20%(fromitscurrentrateof35%),introduceinterestrestrictionsaswellaseliminatingcertaininnovationincentives.Asthishasnotyetbeenenacted,thepotentialimpactofthechangeshavenotbeenreflectedintheFY17deferredtaxbalances.On27September2017,theFrenchFinanceBill2018wasreleasedwhichannouncedagraduatedreductionofthecorporateincometaxrateto25%by2022,resultinginaneffectiverateof25.8%includingthesocialsurcharge.ThisFinanceBillwasnotsubstantivelyenactedatthebalancesheetdateandaccordinglyFrenchtaxbalancesexpectedtounwindfrom2018onwardshavenotbeenremeasured.Theimpactofthisamendmentisexpectedtobesmall.Deferredtaxassetshavebeenrecognisedinrespectoftaxlossesandothertemporarydifferencesgivingrisetodeferredtaxassetsbecauseitisprobablethattheseassetswillberecovered.Eachoftheseassetsarereviewedtoensurethereissufficientevidencetosupporttheirrecognition.Inparticular,therearetaxlossescarriedforwardinrespectofBrazilianentitiesgeneratingapotentialnettaxassetof£23m.Anelementofthisassethasbeenrecognisedinthefinancialstatements(£12m)withtheremainderoftheassetbeingunrecognised(£11m).Whilsttherelevantentitieshavesufferedalossinthecurrentperiod,thereissufficientsupportingevidenceoffutureprofitabilitywhichisavailabletoallowfortherecognitionofthisasset.Thisevidenceincludesdetailedfinancialprojectionsforeachindividualentityasadjustedfortaxsensitiveitems.Asnotedabove,apotentialdeferredtaxassetonlossesof£11m(2016:£15m)hasnotbeenrecognisedasitisnotexpectedthattheselosseswillberecoveredintheforeseeablefuture.AswellastheseBrazilianlosses,thereareotherunrecogniseddeferredtaxassetsof£6mwhicharenotexpectedtoberecoveredintheforeseeablefuture.Themovementsindeferredtaxassetsandliabilities(priortotheoffsettingofbalanceswithinthesamejurisdictionaspermittedbyIAS12,“IncomeTaxes”duringtheyearareshownbelow.Theoffsettingofthesebalancesisshownwithinthereclassificationlineofthenotesbelow.Deferredtaxassetsandliabilitiesareonlyoffsetwherethereisalegallyenforceablerightofoffsetandthereisanintentiontosettlethebalancesnet.Deferredtaxassetsandliabilitiescategorisedas“otherdeferredtax”of£34m(2016:£49m)includesvariousbalancesinrelationtoaccountingprovisions/accruals(asset£38m)(2016:£37m),goodwillamortisation(liability£30m)(2016:£18m),deferredrevenue(asset£16m)(2016:£19m)andothersundryamounts(asset£10m)(2016:£11m).2016Themovementonthedeferredtaxaccountisasshownbelow:£m2017£mAt1October27Incomestatementcredit7Acquisitionofsubsidiaries–Disposalofsubsidiaries–Exchangemovement6Othercomprehensiveincome/equitymovementindeferredtax545455(29)(6)2(2)15At30September155TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements12 Deferred income tax continued All underlying temporary differences arising from investments in subsidiaries and associates have been appropriately recognised where it is probable the temporary difference will reverse in the foreseeable future. Deferred tax assets Intangible assets £m Tax losses £m Other £mTotal £mAt 1 October 2016 (8) 5 6158Income statement credit 2 6 (3)5Reclassification to deferred tax liability 1 – (4)(3)Other comprehensive income/equity movement in deferred tax – – ––Exchange movement – 1 –1At 30 September 2017 (5) 12 5461 Deferred tax liabilities At 1 October 2016 (19) 18 (12)(13)Income statement credit/(debit) 6 (5) (1)–Reclassification from deferred tax asset (1) – 43Acquisition/disposal (53) 28 (10)(35)Other comprehensive income/equity movement in deferred tax – – (2)(2)Exchange movement 2 (2) 11At 30 September 2017 (65) 39 (20)(46) Net deferred tax asset at 30 September 2017 (70) 51 3415 Deferred tax assets Intangible assets £m Tax losses £m Other £mTotal £mAt 1 October 2015 (4) 3 3534Income statement credit 4 1 712Reclassification to deferred tax liability (7) – 5(2)Other comprehensive income/equity movement in deferred tax – – 55Exchange movement (1) 1 99At 30 September 2016 (8) 5 6158 Deferred tax liabilities At 1 October 2015 (13) 18 (13)(8)Income statement credit/(debit) 4 (4) (5)(5)Reclassification from deferred tax asset (7) 1 82Exchange movement (3) 3 (2)(2)At 30 September 2016 (19) 18 (12)(13) Net deferred tax (liability)/asset at 30 September 2016 (27) 23 4945 Operating assets and liabilities continuedThe Sage Group plc | Annual Report & Accounts 201715613 Cash flow and net debt This note analyses our operational cash generation, shows the movement in our net debt in the year, and explains what is included within our cash balances and borrowings at the year end. Cash generated from operations is the starting point of our cash flow statement on page 123. This section outlines the adjustments for any non-cash accounting items to reconcile our accounting profit for the year to the amount of cash we generated from our operations. Net debt represents the amount of cash held less borrowings, overdrafts, finance lease payments due and cash held on behalf of customers. Borrowings are mostly made up of fixed-term external debt which the Group has taken out in order to finance acquisitions in the past. 13.1 Cash flow generated from continuing operations Reconciliation of profit for the year to cash generated from continuing operations 2017£m2016 £mProfit for the year 257188Adjustments for: –(cid:3)Income tax 8554–(cid:3)Finance income (10)(5)–(cid:3)Finance costs 2829–(cid:3)Share of loss of an associate 11–(cid:3)Amortisation and impairment of intangible assets 3628–(cid:3)Depreciation and impairment of property, plant and equipment 2228–(cid:3)R&D tax credits (1)(1)–(cid:3)Equity-settled share-based transactions 118–(cid:3)Gain on re-measurement of existing investment in an associate (13)––(cid:3)Gain on disposal of subsidiary (3)––(cid:3)Exchange movement 1– Changes in working capital (excluding effects of acquisitions and disposals of subsidiaries): –(cid:3)Increase in inventories (1)––(cid:3)Increase in trade and other receivables (46)(51)–(cid:3)Increase in trade and other payables 445–(cid:3)Increase in deferred income 3236Cash generated from continuing operations 40336013.2 Net debt Reconciliation of net cash flow to movement in net debt (inclusive of finance leases) 2017£m2016 £mDecrease in cash in the year (pre-exchange movements) (20)(23)Cash (outflow)/inflow from movement in loans, finance leases and cash held on behalf of customers (396)133Change in net debt resulting from cash flows (416)110Acquisitions (9)(17)Disposals (3)–Non-cash movements –(1)Exchange movement 13(65)Movement in net debt in the year (415)27Net debt at 1 October (398)(425)Net debt at 30 September (813)(398)Net debt and capital structure157The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements 13 Cash flow and net debt continued 13.2 Net debt continued Analysis of change in net debt (inclusive of finance leases) At 1 October 2016 £mCash flow £mAcquisitions£mDisposal of subsidiaries £m Non-cash movements £m Exchange movement £mAt 30 September 2017 £mCash and cash equivalents 264(6)–(23) – (4)231Bank overdrafts (4)(14)–– – –(18)Cash, cash equivalents and bank overdrafts 260(20)–(23) – (4)213Loans due within one year (39)48(9)– (37) –(37)Loans due after more than one year (535)(435)–– 37 19(914)Cash held on behalf of customers (84)(9)–20 – (2)(75)Total (398)(416)(9)(3) – 13(813)Included in cash above is £75m (2016: £84m) relating to cash held on behalf of customers. This arises as a consequence of providing payment transaction processing and electronic fund transfer services. The balance represents cash in transit from third parties to Sage customers. Accordingly, a liability for the same amount is included in trade and other payables on the balance sheet and is classified within net debt. 13.3 Cash and cash equivalents (excluding bank overdrafts) Accounting policy For the purpose of preparation of the consolidated statement of cash flows and the consolidated balance sheet, cash and cash equivalents include cash at bank and in hand and short-term deposits with an original maturity period of three months or less. Bank overdrafts that are an integral part of a subsidiary’s cash management are included in cash and cash equivalents where they have a legal right of set-off and there is an intention to settle net, against positive cash balances, otherwise bank overdrafts are classified as borrowings. 2017 £m2016£mCash at bank and in hand 143126Cash held on behalf of customers 7584Short-term bank deposits 1354 231264In line with contractual obligations or Company practice, cash held on behalf of customers is held in separate bank accounts by the Group until such time as these amounts are paid. The credit risk on liquid funds is considered to be low, as the Board-approved Group treasury policy limits the value that can be invested with each approved counterparty to minimise the risk of loss. The Group policy is to place cash and cash equivalents with counterparties which are well established banks with high credit ratings where available. In some jurisdictions there is limited availability of such counterparties. At 30 September 2017, 79% (2016: 81%) of the cash and cash equivalents balance was deposited with financial institutions rated at least A3 by Moody’s Investors Service. The investment instruments utilised are money market funds, money market term deposits and bank deposits. The Group’s maximum exposure to credit risk in relation to cash and cash equivalents is their carrying amount in the balance sheet. Net debt and capital structure continuedThe Sage Group plc | Annual Report & Accounts 2017158 13.4 Borrowings Accounting policy Assets held under finance leases are initially recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of borrowing on an effective interest basis. Current 2017 £m2016£mBank overdrafts 184US senior loan notes – unsecured 3739 5543 Non-current 2017 £m2016£mBank loans – unsecured 429–US senior loan notes – unsecured 485535 914535Included in loans above is £951m (2016: £574m) of unsecured loans (after unamortised issue costs). These borrowings were utilised for acquisitions and managing the Group’s minimum leverage target of 1x net debt to EBITDA. In the table above, bank loans and loan notes are stated net of unamortised issue costs of £2m (2016: £2m). Unsecured bank loans attract an average interest rate of 1.5%. Loan valueBorrowings Year issuedInterest coupon Maturity2017 £m2016£mUS private placement –(cid:3)USD 50m loan note 20105.15% 11-Mar-17–39–(cid:3)USD 50m loan note 20132.60% 20-May-183739–(cid:3)USD 150m loan note 20133.08% 20-May-20112115–(cid:3)USD 150m loan note 20133.71% 20-May-23112115–(cid:3)USD 50m loan note 20133.86% 20-May-253739–(cid:3)EUR 55m loan note 20151.89% 26-Jan-224847–(cid:3)EUR 30m loan note 20152.07% 26-Jan-232626–(cid:3)USD 200m loan note 20153.73% 26-Jan-25150154There were £318m drawings (2016: nil) under the multi-currency revolving credit facility of £603m (2016: £614m) expiring on 26 June 2019, which consists both of US$551.0m (£411m, 2016: £425m) and of €218.0m (£192m, 2016: £189m) tranches. 159The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements14 Financial instruments This note shows details of the fair value and carrying value of short and long-term borrowings, trade and other payables, trade and other receivables, short-term bank deposits and cash at bank and in hand. These items are all classified as “financial instruments” under accounting standards. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to assist users of these financial statements in making an assessment of any risks relating to financial instruments, this note also shows the ageing of these items and analyses their sensitivity to changes in key inputs, such as interest rates and foreign exchange rates. An explanation of the Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk is set out in the financial risk management section at the end of this note. Accounting policy Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Group has transferred those rights and either has also transferred substantially all the risks and rewards of the asset or has neither transferred nor retained substantially all the risks and rewards of the asset but no longer has control of the asset. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires. 14.1 Fair values of financial instruments The carrying amounts of the following financial assets and liabilities approximate to their fair values: trade and other payables excluding tax and social security, trade and other receivables excluding prepayments and accrued income, short-term bank deposits and cash at bank and in hand. The fair value of borrowings differs from their carrying amounts due to their bearing interest at fixed rates which are currently higher than floating rates. The fair value of borrowings is determined by reference to interest rate movements on the US $ private placement market and therefore can be considered as a level 2 fair value as defined within IFRS 13. 2017 2016 NoteBook value £m Fair value £m Book value £mFair value£mLong-term borrowing 13.4(914) (924) (535)(559)Short-term borrowing 13.4(55) (56) (43)(44)The carrying amounts of trade receivables (note 9.2) and cash and cash equivalents (note 13.3) represents the Group’s maximum exposure to credit risk. The Group has a fixed asset investment in an unquoted equity instrument which is classified as an available-for-sale financial asset. The fair value of the instrument is considered to be equivalent to its nominal value as it currently pays a market rate of interest. This is a level 3 fair value as defined within IFRS 13. This investment was acquired during the year as part of the consideration received on the disposal of the Group’s North American Payments business. Further information is given in note 16.3. 14.2 Maturity of financial liabilities The maturity profile of the undiscounted contractual amount of the Group’s financial liabilities at 30 September was as follows: 2017 Borrowings £m Tradeand other payables excluding other tax and social security £mTotal £mIn less than one year 81 291372In more than one year but not more than two years 453 2455In more than two years but not more than five years 200 3203In more than five years 344 –344 1,078 2961,374 Net debt and capital structure continuedThe Sage Group plc | Annual Report & Accounts 2017160 14.2 Maturity of financial liabilities continued 2016 Borrowings £mTrade and other payables excluding other tax and social security£mTotal £mIn less than one year 63307370In more than one year but not more than two years 58462In more than two years but not more than five years 1613164In more than five years 4151416 6973151,012The maturity profile of provisions is disclosed in note 10. 14.3 Borrowing facilities The Group has the following undrawn committed borrowing facilities available at 30 September in respect of which all conditions precedent had been met at that date: 2017£m2016 £mExpiring in more than two years but not more than five years 285614The facilities have been arranged to help finance the expansion of the Group’s activities. All these facilities incur commitment fees at market rates. In addition, the Group maintains overdraft and uncommitted facilities to provide short-term flexibility and has also utilised the US private placement market. 14.4 Market risk sensitivity analysis Financial instruments affected by market risks include borrowings and deposits. The following analysis, required by IFRS 7, “Financial Instruments: Disclosures”, is intended to illustrate the sensitivity to changes in market variables, being sterling, US Dollar and Euro interest rates, and sterling/US Dollar and sterling/Euro exchange rates. The sensitivity analysis assumes reasonable movements in foreign exchange and interest rates before the effect of tax. The Group considers a reasonable interest rate movement in LIBOR to be 1%, based on interest rate history. Similarly, sensitivity to movements in sterling/US Dollar and sterling/Euro exchange rates of 10% are shown, reflecting changes of reasonable proportion in the context of movement in those currency pairs over the last year. Using the above assumptions, the following table shows the illustrative effect on the consolidated income statement and equity. 20172016Income (losses)/gains £m Equity (losses)/gains £mIncome (losses)/gains £mEquity (losses)/gains £m1% increase in market interest rates (1) (1)(1)(1)1% decrease in market interest rates 1 1––10% strengthening of sterling versus the US Dollar (3) (53)(7)(38)10% strengthening of sterling versus the Euro (10) (37)(6)(31)10% weakening of sterling versus the US Dollar 4 5974210% weakening of sterling versus the Euro 11 4173414.5 The minimum lease payments under finance leases The minimum lease payments under finance leases fall due as follows: 2017£m2016£mIn less than one year –1In more than one year but not more than five years –– –1Future finance charges on finance leases ––Present value of finance lease liabilities –1 161The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements14Financialinstrumentscontinued14.6HedgeaccountingAccountingpolicy14.7FinancialriskmanagementAproportionoftheGroup’sexternalUSDollardenominatedborrowings,andthetotalofitsEuro-denominatedborrowings,aredesignatedasahedgeofthenetinvestmentinitssubsidiariesintheUSandEurozone.Theportionofthegainorlossonaninstrumentusedtohedgeanetinvestmentinaforeignoperationwhichisdeterminedtobeaneffectivehedgeisrecognisedinothercomprehensiveincome.Theineffectiveportionisrecognisedimmediatelyinprofitorloss.Ondisposalofthenetinvestment,theforeignexchangegainsandlossesonthehedginginstrumentarerecycledtotheincomestatementfromequity.ThefairvaluesoftheGroup’sexternalUSDollarandEuro-denominatedborrowingsdesignatedasahedgeat30September2017wereUSD562mandEUR128m(2016:USD650mandEUR85m).TheseborrowingswereusedtohedgetheGroup’sexposuretotheUSDandEURforeignexchangeriskonitsinvestmentsinsubsidiariesintheUSandEurozone.OndisposaloftheNorthAmericanPaymentsbusiness,seenote16.3,therewasanexchangedifferencerelatedtohedgeinstrumentsrecycledthroughtheincomestatementinportiontothedisposednetinvestment.TheGroup’sexposuretoandmanagementofcapital,liquidity,credit,interestrateandforeigncurrencyriskaresummarisedbelow.TheGroup’sobjectiveswhenmanagingcapital(definedasnetdebtplusequity)aretosafeguardourabilitytocontinueasagoingconcerninordertoprovidereturnstoshareholdersandbenefitsforotherstakeholders,whileoptimisingreturnstoshareholdersthroughanappropriatebalanceofdebtandequityfunding.TheGroupmanagesitscapitalstructureandmakesadjustmentstoitwithrespecttochangesineconomicconditionsandourstrategicobjectives.TheGrouphassetalong-termminimumleveragetargetof1xnetdebttoEBITDAandwillworktomaintainthisgoingforward.TheGroupmanagesitsexposuretoliquidityriskbyreviewingcashresourcesrequiredtomeetbusinessobjectivesthroughbothshortandlong-termcashflowforecasts.TheCompanyhascommittedfacilitieswhichareavailabletobedrawnforgeneralcorporatepurposesincludingworkingcapital.TheTreasuryfunctionhasresponsibilityforoptimisingthelevelofcashacrossthebusiness.TheGroup’screditriskprimarilyarisesfromtradeandotherreceivables.TheGrouphasaverylowoperationalcreditriskduetothetransactionsbeingprincipallyofahighvolume,lowvalueandshortmaturity.TheGrouphasnosignificantconcentrationofoperationalcreditrisk,withtheexposurespreadoveralargenumberofcounterpartiesandcustomers.Thecreditriskonliquidfundsisconsideredtobelow,astheBoard-approvedGrouptreasurypolicylimitsthevaluethatcanbeinvestedwitheachapprovedcounterpartytominimisetheriskofloss.Allcounterpartiesmustmeetminimumcreditratingrequirements.TheGroupisexposedtointerestrateriskonfloatingratedepositsandborrowings.TheGroup'sborrowingscompriseprincipallyUSprivateplacementloannoteswhichareatfixedinterestrates,andthebankrevolvingcreditfacility,whichissubjecttofloatinginterestrates.At30September2017,theGrouphad£231m(2016:£264m)ofcashandcashequivalents.TheGroupregularlyreviewsforecastdebt,cashandcashequivalentsandinterestratestomonitorthisrisk.Interestratesondebtanddepositsarefixedwhenmanagementdecidesthisisappropriate.At30September2017,theGroup’sborrowingscomprisedUSprivateplacementloannotesof£522m(2016:£574m),whichhaveanaveragefixedinterestrateof3.26%(2016:3.40%);andunsecuredbankloansof£429m(2016:£nil),comprisingmainlythebankrevolvingcreditfacility,whichhaveanaveragefixedinterestrateof1.5%.AlthoughasubstantialproportionoftheGroup’srevenueandprofitisearnedoutsidetheUK,operatingcompaniesgenerallyonlytradeintheirowncurrency.TheGroupisthereforenotsubjecttoanysignificantforeignexchangetransactionalexposurewithinthesesubsidiaries.TheGroup’sprincipalexposuretoforeigncurrencyliesinthetranslationofoverseasprofitsintosterling;thisexposureisnothedged.TheGroup’sexternalEurodenominatedborrowingsandaproportionofitsUSDollarborrowingsaredesignatedasahedgeofthenetinvestmentinitssubsidiariesintheUSandEurozone.Theforeignexchangemovementsontranslationoftheborrowingsintosterlinghavethereforebeenrecognisedinthetranslationreserve.CertainoftheGroup’sintercompanybalanceshavebeenidentifiedaspartoftheGroup’snetinvestmentinforeignoperations.Foreignexchangeeffectsonthesebalancesthatremainonconsolidationarealsoreflectedinthetranslationreserve.TheGroup’sothercurrencyexposurescomprisethosecurrencygainsandlossesrecognisedintheincomestatement,reflectingothermonetaryassetsandliabilitiesoftheGroupthatarenotdenominatedinthefunctionalcurrencyoftheentityinvolved.At30September2017and30September2016,theseexposureswereimmaterialtotheGroup.CapitalriskLiquidityriskCreditriskInterestrateriskForeigncurrencyriskNetdebtandcapitalstructurecontinuedTheSageGroupplc|AnnualReport&Accounts2017162 15 Equity This note analyses the movements recorded through shareholders’equity that are not explained elsewhere in the financial statements, being changes in the amount which shareholders have invested in the Group. The Group utilises share award schemes as part of its employee remuneration package. Share option schemes for our employees include The Sage Group Performance Share Plan for Directors and senior executives and The Sage Group Savings-related Share Option Plan (the “SAYE Plan”) for all qualifying employees. The Group incurs costs in respect of these schemes in the income statement, which is set out below along with a detailed description of each scheme and the number of options outstanding. This note also shows the dividends paid in the year and any dividends that are to be proposed and paid post-year end. Dividends are paid as an amount per ordinary share held. 15.1 Ordinary shares Accounting policy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the owners of the Company until the shares are cancelled or reissued. Issued and fully paid ordinary shares of 14/77 pence each 2017 shares2017 £m 2016 shares2016 £mAt 1 October 1,119,480,36312 1,118,298,74812Shares issued 1,157,758– 1,181,615–At 30 September 1,120,638,12112 1,119,480,36312Issues of ordinary shares Under Executive Share Option Scheme, 199,466 14/77 p ordinary shares were issued during the year for aggregate proceeds of £1m. Under the Savings-related Share Option Scheme, 914,327 14/77 p ordinary shares were issued during the year for aggregate proceeds of £3m. 15.2 Share-based payments Accounting policy Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the shares that will eventually vest allowing for the effect of non market-based vesting conditions. Fair value is measured using the Black-Scholes or the Monte Carlo pricing models, based on observable market prices. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. All outstanding Sage Performance Share Plans (“PSPs”) are subject to some non-market performance conditions. These are organic revenue and EPS growth. The element of the income statement charge relating to market performance conditions is fixed at the grant date. At the end of the reporting period, the Group revises its estimates for the number of options expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The total charge for the year relating to employee share-based payment plans was £11m (2016: £8m), all of which related to equity-settled share-based payment transactions. Scheme 2017£m2016£mPerformance Share Plan 67Restricted Share Plan 21Share options 3–Total 118163The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements15Equitycontinued15.2Share-basedpaymentscontinuedTheSageGroupPerformanceSharePlanAwardspriorto2016Awardsfrom2016onwardsAnnualgrantsofperformanceshareswillnormallybemadetoexecutivedirectorsandseniorexecutivesacrosstheGroupafterthepreliminarydeclarationoftheannualresults.UnderthePerformanceSharePlan3,198,162(2016:3,410,056)awardsweremadeduringtheyear.Theseperformancesharesaresubjecttoaserviceconditionandthreeperformanceconditions.Performanceconditionsareweightedone-thirdontheachievementofanEPStarget,andone-thirdontheachievementofanorganicrevenuegrowthtarget.Theremainingone-thirdisbasedonaTSRtarget.TheEPSvestingpercentageisbasedoncompoundEPSgrowth.WherecompoundEPSgrowthisbetween6%and12%,theEPSvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween6.7%and26.7%,andwherecompoundEPSgrowthisbetween12%and15%,theEPSvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween26.7%and33.3%.TheorganicrevenuegrowthtargetisbasedontheCompany’scompoundannualorganicrevenuegrowth.Wheregrowthisbetween4%and8%theorganicrevenuegrowthvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween6.7%and26.7%,andwheretheCompany’scompoundorganicrevenuegrowthisbetween8%and10%,theorganicrevenuegrowthvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween26.7%and33.3%.Inorderfortheorganicrevenuegrowthtargetproportiontovest,theunderlyingoperatingprofitmargininthefinancialyearofvestingmustnotbelessthanthatoftheunderlyingoperatingprofitmarginforthefinancialyearinwhichtheawardisgranted.ThefinalthirdoftheawardistheperformancetargetrelatingtoTSRwhichmeasuressharepriceperformanceagainstadesignatedcomparatorgroup.WheretheCompany’sTSRisbetweenmedianandupperquartile,theTSRvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween6.7%and26.7%andwheretheCompany’sTSRisbetweenupperquartileandupperdecile,theTSRvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween26.7%and33.3%.TheTSRvestingpercentagemayonlyexceed26.7%(“stretch”level)ifperformanceagainsteithertheEPStargetortheorganicrevenuegrowthtargetisalsoat“stretch”level.Thecomparatorgroupforawardsgrantedpriorto2016isthecompaniescomprisedintheFTSE100Indexatthestartoftheperformanceperiod,excludingfinancialservicesandextractioncompanies.AwardswerevaluedusingtheMonteCarlooptionpricingmodel.Themarket-basedperformanceconditionwereincludedinthefairvaluecalculations,whichwerebasedonobservablemarketpricesatgrantdate.Alloptionsgrantedunderperformanceshareawardshaveanexercisepriceofnil.Theseperformancesharesaresubjecttoaserviceconditionandtwoperformanceconditions.PerformanceconditionsareweightedonehalfontheachievementofarevenuegrowthtargetandonehalfontheachievementofaTSRtarget.TherevenuegrowthtargetissubjecttotwounderpinperformanceconditionsrelatingtoEPSgrowthandorganicrevenuegrowth.TherevenuegrowthtargetisbasedontheCompany’scompoundannualrecurringrevenuegrowth.WheretheCompany’sannualrecurringrevenuegrowthisbetween8%and10%or10%and12%,theextenttowhichtheRevenuePerformanceConditionissatisfiedwillbecalculatedonastraight-lineproratabasisbetween10%and40%orbetween40%and50%respectively.NotwithstandingtheextenttowhichtheRevenuePerformanceConditionhasbeensatisfied,theRevenueTranchewillnotbereleasedandwilllapseontheBoard’sdeterminationthat(i)thecompoundgrowthoftheCompany’sunderlyingEPSoverthePerformancePeriodislessthan8%perannum;or(ii)thecompoundgrowthoftheCompany’sorganicrevenueoverthePerformancePeriodislessthan6%perannum.TheperformancetargetrelatingtoTSRmeasuressharepriceperformanceagainstadesignatedcomparatorgroup.WheretheCompany’sTSRisbetweenmedianandupperquartile,theTSRvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween10%and40%andwheretheCompany’sTSRisbetweenupperquartileandupperdecile,theTSRvestingpercentagewillbecalculatedonastraight-linepro-ratabasisbetween40%and50%.Thecomparatorgroupforawardsgrantedfrom2016onwardsisthecompaniescomprisedintheFTSE100Indexatthestartoftheperformanceperiod,excludingfinancialservicesandextractioncompanies.NetdebtandcapitalstructurecontinuedTheSageGroupplc|AnnualReport&Accounts2017164 Awards were valued using the Monte Carlo option pricing model. Performance conditions were included in the fair value calculations, which were based on observable market prices at grant date. All options granted under performance share awards have an exercise price of nil. The fair value per award granted and the assumptions used in the calculation are as follows: Grant date December2016August 2017September2017Share price at grant date £6.36£6.86£7.17Number of employees 84146Shares under award 2,823,124272,350102,688Vesting period (years) 322Expected volatility 21.6%21.0%20.9%Award life (years) 322Expected life (years) 322Risk-free rate 0.27%0.24%0.41%Fair value per award £4.17£4.38£4.64Grant date March 2016June 2016September2016Share price at grant date £6.04£6.04£7.47Number of employees 94911Shares under award 2,980,575175,487253,994Vesting period (years) 332Expected volatility 21.2%21.3%21.3%Award life (years) 332Expected life (years) 332Risk-free rate 0.47%0.32%0.06%Fair value per award £4.28£4.28£5.23The expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed award life. A reconciliation of award movements over the year is shown below: 20172016Number ‘000s Weighted average exercise price £Number ‘000sWeighted average exercise price £Outstanding at 1 October 10,035 –13,063–Awarded 3,198 –3,410–Forfeited (3,775) –(3,996)–Exercised (1,831) –(2,442)–Outstanding at 30 September 7,627 –10,035–Exercisable at 30 September – ––– 20172016 Weighted average remaining life yearsWeighted average remaining life yearsRange of exercise prices Expected ContractualExpectedContractualN/A 1.3 1.31.21.2 165The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements15 Equity continued 15.2 Share-based payments continued The Sage Group Restricted Share Plan The Group’s Restricted Share Plan is a long-term incentive plan used in limited circumstances and usually on a one-off basis, under which contingent share awards, other than the award made in December 2013, are usually made only with service conditions. Executive Directors are not permitted to participate in the plan and shares are purchased in the market to satisfy vesting awards. During the year 847,491 (2016: 91,653) awards were made. These awards only have service conditions and their fair values are equal to the share price on the date of grant, ranging from 630-717p. A reconciliation of award movements over the year is shown below: 2017 2016Number ‘000s Weighted average exercise price £ Number ‘000sWeighted average exercise price £Outstanding at 1 October 537 – 1,168–Awarded 847 – 92–Forfeited (215) – (389)–Exercised (429) – (334)–Outstanding at 30 September 740 – 537–Exercisable at 30 September – – –– 2017 2016 Weighted average remaining life years Weighted average remaining life yearsRange of exercise prices Expected Contractual ExpectedContractualN/A 1.2 1.2 1.71.7Share options Share options comprise The Sage Global Save and Share Plan (the “Save and Share Plan”) and acquisition options. The Save and Share Plan is a savings-related share option scheme for employees. For grants made in 2017, the Save and Share Plan was extended so that it was available to employees in the majority of countries in which the Group operates. Previously the Plan had been restricted to UK employees. The UK plan is an HMRC-approved savings-related share option scheme, and similar arrangements apply in other countries where they are available. The fair value of the options is expensed over the service period of three, five or seven years on the assumption that 5% of options will lapse over the service period as employees leave the Group. In the year, 2,209,518 (2016: none) options were granted under the terms of the Save and Share Plan. As part of certain acquisitions, the Group awards certain employees with options proportional to previously held options in the company acquired. This amounted to 6,580,801 options being granted in the year with exercise prices ranging from 22-681p. These awards only have service conditions with the fair value portion of the options relating to pre-acquisition services being included as part of the purchase consideration and the remaining fair value of options being expensed over the service period ranging from 1-48 months. Net debt and capital structure continuedThe Sage Group plc | Annual Report & Accounts 2017166 A reconciliation of award movements over the year is shown below: 20172016Number ‘000s Weighted average exercise price £Number ‘000sWeighted average exercise price £Outstanding at 1 October – –––Awarded 6,581 1.85––Forfeited (33) 1.39––Exercised (6) 1.33––Outstanding at 30 September 6,542 1.85––Exercisable at 30 September 379 1.87–– 20172016 Weighted average remaining life yearsWeighted average remaining life yearsRange of exercise prices Expected ContractualExpectedContractual22-681p 1.1 7.9––15.3 Other reserves Translation reserve £mMerger reserve £mTotal other reserves £mAt 1 October 2015 66167Exchange differences on translating foreign operations 117–117Deferred tax credit on foreign currency movements 3–3At 30 September 2016 12661187Exchange differences on translating foreign operations (26)–(26)Exchange differences recycled through income statement on sale of foreign operations (32)–(32)Deferred tax credit on foreign currency movements 2–2At 30 September 2017 7061131Translation reserve The translation reserve represents the accumulated exchange differences arising since the transition to IFRS from the following sources: –(cid:3)The impact of the translation of subsidiaries with a functional currency other than sterling; and –(cid:3)Exchange differences arising on hedging instruments that are designated hedges of a net investment in foreign operations, net of tax where applicable. Exchange differences arising prior to the IFRS transition were offset against retained earnings. Merger reserve Merger reserve brought forward relates to the merger reserve which was present under UK GAAP and frozen on transition to IFRS. 15.4 Retained earnings Retained earnings 2017£m2016£mAt 1 October 310242Profit for the year 300208Actuarial gain/(loss) on post-employment benefit obligations (note 11) 4(2)Deferred tax charge on actuarial loss on post-employment obligations (1)–Value of employee services net of deferred tax 99Value of employee services on acquisition 21–Purchase of treasury shares (9)(2)Dividends paid to owners of the parent (note 15.5) (157)(145)Total 477310 167The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements15Equitycontinued15.4Retainedearningscontinued15.5DividendsAccountingpolicyTreasurysharesPurchaseoftreasurysharesEmployeeShareTrustSharespurchasedundertheGroup’sbuybackprogrammearenotcancelledbutareretainedinissueandrepresentadeductionfromequityattributabletoownersoftheparent.DuringtheyeartheGrouppurchasednilshares(2016:nil)andgifted1,019,166shares(2016:nil)totheEmployeeShareTrust.At30September2017theGroupheld38,503,265(2016:39,522,431)oftreasuryshares.TheGroupholdstreasurysharesinatrustwhichwassetupforthebenefitofGroupemployees.TheTrustpurchasestheCompany’ssharesinthemarketorisgiftedthesebytheCompanyforuseinconnectionwiththeGroup’sshare-basedpaymentsarrangements.TheTrustholds961,715ordinarysharesintheCompany(2016:1,016,311)atacostof£6m(2016:£nil)andanominalvalueof£nil(2016:£nil).Duringtheyear,theTrustagreedtosatisfythevestingofcertainshareawards,utilisingatotalof2,450,345(2016:3,006,938)sharesheldintheTrust.Furthermore,theTrustreceivedadditionalfundsof£9m(2016:£2m)whichwereusedtopurchase1,376,583(2016:385,000)sharesinthemarket.ThecostsoffundingandadministeringtheschemearechargedtotheprofitandlossaccountoftheCompanyintheperiodtowhichtheyrelate.Themarketvalueofthesharesat30September2017was£7m(2016:£8m).DividendsarerecognisedthroughequitywhenapprovedbytheCompany’sshareholdersoronpayment,whicheverisearlier.Inaddition,theDirectorsareproposingafinaldividendinrespectofthefinancialyearended30September2017of10.20ppersharewhichwillabsorbanestimated£110mofshareholders’funds.Itwillbepaidon2March2018toshareholderswhoareontheregisterofmemberson9February2018.Thesefinancialstatementsdonotreflectthisdividendpayable.2016£m2017£mFinalInterimdividendpaidfortheyearended30September2016of9.35ppershare–(2016:finaldividendpaidfortheyearended30September2015of8.65ppershare)93dividendpaidfortheyearended30September2017of5.22ppershare–(2016:interimdividendpaidfortheyearended30September2016of4.80ppershare)52145101–56–157NetdebtandcapitalstructurecontinuedTheSageGroupplc|AnnualReport&Accounts201716816AcquisitionsanddisposalsThefollowingnoteoutlinesacquisitionsanddisposalsduringtheyearandtheaccompanyingaccountingpolicies.EachacquisitionordisposalduringtheyearisdiscussedandtheeffectsontheresultsoftheGrouparehighlighted.Additionaldisclosuresarepresentedfordisposalsandplanneddisposalsthatqualifyasbusinessesheldforsaleorforpresentationasdiscontinuedoperations.Acquisitions:Theacquisitionofsubsidiariesisaccountedforusingtheacquisitionmethod.Thecostofanacquisitionismeasuredastheagggreateoftheconsiderationtransferred,whichismeasuredatacquisitiondatefairvalue,andtheamountofanynon-controllinginterestsintheacquiree.Theacquiree’sidentifiableassets,liabilitiesandcontingentliabilitiesthatmeettheconditionsforrecognitionunderIFRS3,“BusinessCombinations”arerecognisedattheirfairvaluesattheacquisitiondate.AnycontingentconsiderationtobetransferredbytheGroupisrecognisedatfairvalueattheacquisitiondate.Subsequentchangestothefairvalueofthecontingentconsiderationthatisdeemedtobeanassetorliabilityisrecognisedintheincomestatement.Contingentconsiderationthatisclassifiedasequityisnotre-measured,anditssubsequentsettlementisaccountedforwithinequity.Goodwillrepresentstheexcessoftheconsiderationtransferred,theamountofanynon-controllinginterestintheacquireeandtheacquisitiondatefairvalueofanypreviousequityinterestintheacquireeoverthefairvalueoftheGroup’stotalidentifiablenetassetsacquired.If,afterreassessment,theGroup’sinterestinthenetfairvalueoftheacquiree’sidentifiableassets,liabilitiesandcontingentliabilitiesexceedsthecostofthebusinesscombination,thedifferenceisrecogniseddirectlyintheconsolidatedincomestatement.Anysubsequentadjustmenttoreflectchangesinconsiderationarisingfromcontingentconsiderationamendmentsisrecognisedintheconsolidatedincomestatement.Onanacquisition-by-acquisitionbasis,theGrouprecognisesanynon-controllinginterestintheacquireeeitheratfairvalueoratthenon-controllinginterest’sproportionateshareoftheacquiree’snetassets.Acquisition-relateditemssuchaslegalorprofessionalfeesareexpensedtotheincomestatementasincurred.TheGrouptreatstransactionswithnon-controllinginterestsastransactionswithequityownersoftheGroup.Thedifferencebetweenfairvalueofanyconsiderationpaidandtherelevantsharesacquiredofthecarryingvalueofnetassetsofthesubsidiaryisrecordedinequity.WheretheGroupentersintoputandcallarrangementsoversharesheldbyanon-controllinginterest,theGroupcontinuestorecognisethenon-controllinginterestuntiltheownershiprisksandrewardsofthosesharestransfertotheGroup.Businessesheldforsaleanddiscontinuedoperations:TheGroupclassifiestheassetsandliabilitiesofabusinessasheldforsaleiftheircarryingamountswillberecoveredprincipallythroughasaleofthebusinessratherthanthroughcontinuinguse.Theseassetsandliabilitiesaremeasuredattheloweroftheircarryingamountandfairvaluelesscoststosell.Thecriteriaforclassificationasheldforsalearemetonlywhenthesaleishighlyprobableandthebusinessisavailableforimmediatesaleinitspresentcondition.Actionsrequiredtocompletethesalemustindicatethatitisunlikelythatsignificantchangeswillbemadetotheplanorthatthedecisiontosellwillbewithdrawn.Managementmustbecommittedtothesaleandcompletionmustbeexpectedwithinoneyearfromthedateoftheclassification.Property,plantandequipmentandintangibleassetsarenotdepreciatedoramortisedonceclassifiedasheldforsale.Assetsandliabilitiesclassifiedasheldforsalearepresentedseparatelyascurrentitemsintheconsolidatedbalancesheet.AbusinessqualifiesasadiscontinuedoperationifitisacomponentoftheGroupthateitherhasbeendisposedof,orisclassifiedasheldforsale,and:representsaseparatemajorlineofbusinessorgeographicalareaofoperations;andispartofasingleco-ordinatedplantodisposeofaseparatemajorlineofbusinessorgeographicalareaofoperations.Discontinuedoperationsareexcludedfromtheresultsofcontinuingoperationsinboththecurrentandprioryearsandarepresentedasasingleamountintheconsolidatedincomestatementasprofitorlossondiscontinuedoperations.Accountingpolicy––��Othernotes169TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements16 Acquisitions and disposals continued 16.1 Acquisitions Acquisitions made during the current year Intacct Corporation On 3 August 2017, the Group acquired 100% of the share capital of Intacct Corporation (Intacct) for total consideration of £627m. Intacct is a leading provider of cloud Financial Management Solutions in North America and is incorporated in the USA. Acquiring Intacct strengthens the Group’s position as a leading cloud provider to customers throughout their development from start-up to global enterprise and in the short term provides a further platform for growth, with medium-term aspirations for geographical expansion. The combination of Sage and Intacct’s existing product portfolio, brand, resources and partners, will put the Group in prime position to establish itself as the leading provider of cloud Financial Management Solutions in North America in its chosen segments. Summary of acquisition £mPurchase consideration Cash 607Cost of replacement share-based payments 20 627Provisional fair value of identifiable net assets 104Goodwill 523Cost of replacement share-based payments consists of contingent share awards granted to employees of the acquired business under the Sage Group Restricted Share Plan in place of their existing unvested share option arrangements. The amount treated as consideration is the fair value of awards attributable to pre-acquisition service. Provisional fair value of identifiable net assets acquired £mIntangible assets 142Property, plant and equipment 5Cash 2Trade and other receivables 14Other financial assets 1Trade and other payables (10)Deferred income (18)Borrowings (9)Deferred tax liability (23)Provisional fair value of identifiable net assets acquired 104Goodwill 523Total consideration 627Provisional fair values have been determined as the initial accounting for acquired intangible assets and goodwill is incomplete because of the short period between the acquisition date and the approval of the Annual Report. Goodwill is expected to reflect benefits from the assembled workforce and growth opportunities through customer acquisition and cross-sell to the combined customer base. No goodwill is expected to be deductible for tax purposes. The outflow of cash and cash equivalents on the acquisition is as follows: £mCash consideration 607Cash and cash equivalents acquired (2)Net cash outflow 605As part of the purchase an additional £5m has been paid in relation to future services. Costs of £9m directly relating to the completion of the business combination have been included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items and relate to advisory, legal and other professional services. Arrangements have been put in place for retention payments to remunerate employees of Intacct for future services. The costs of these arrangements will be recognised in future periods over the retention period. The amount recognised to date of £4m is included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items. The consolidated income statement includes revenue of £8m and a loss after tax of £6m reported by Intacct for the period since the acquisition date. The revenue of the Group for the year ended 30 September 2017 would have increased by £78m and the profit would have reduced by £17m if Intacct had been included in the Group for the whole of the year. Other notes continuedThe Sage Group plc | Annual Report & Accounts 2017170 Sage People Limited (formerly Fairsail Limited) On 17 March 2017, the Group obtained control of Fairsail Limited (Fairsail) by acquiring the remaining share capital for a cash consideration of £89m and cost of replacement share-based payments of £1m. This brought the Group’s ownership interest to 100%. Subsequent to the acquisition, Fairsail changed its name to Sage People Limited. Sage People Limited is a leading Human Capital Management (HCM) cloud provider to mid-sized, multinational companies. It is a private entity incorporated in the UK and not listed on any public exchange. The Group became a minority shareholder in 2016 and subsequently launched a shared product, Sage People. Taking full ownership will build on the success of that product, and the resulting combined portfolio provides growth opportunities, particularly through new customer acquisition internationally, and cross-sell to the combined customer base. Summary of acquisition £mPurchase consideration Cash 89Cost of replacement share-based payments 1Fair value of previously held interest 20 110Fair value of identifiable net assets acquired (40)Goodwill 70Cost of replacement share-based payments consists of contingent share awards granted to employees of the acquired business under the Sage Group Restricted Share Plan in place of their existing unvested share option arrangements. The amount treated as consideration is the fair value of awards attributable to pre-acquisition service. The Group recognised a gain of £13m on the remeasurement to fair value of its existing investment in an associate. This gain is included on a separate line in the consolidated income statement. Fair value of identifiable net assets acquired £mIntangible assets 37Cash 10Trade and other debtors 3Trade and other payables (2)Deferred income (3)Deferred tax liability (5)Fair value of identifiable net assets acquired 40Goodwill 70Total consideration 110When the Group reported its results for the six months ended 31 March 2017, provisional fair values were used for accounting for the acquisition. Subsequently, the accounting has been finalised, resulting in an increase in the fair value of identifiable net assets acquired of £33m, with a corresponding decrease in the amount of goodwill. The increase in net assets acquired relates to the recognition of intangible assets of £37m, a deferred tax liability of £5m and a decrease in the liability for deferred income of £1m. Goodwill reflects benefits from the assembled workforce and growth opportunities through customer acquisition and cross-sell to the combined customer base. No goodwill is expected to be deductible for tax purposes. The outflow of cash and cash equivalents on the acquisition is as follows: £mCash consideration 89Cash and cash equivalents acquired (10)Net cash outflow 79Costs totalling less than £1m directly relating to the completion of the business combination have been included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items and relate to advisory, legal and other professional services. Immediately prior to the acquisition, the Group had recognised prepaid licences of £1m for products purchased from the acquired business by the Group prior to the acquisition. At the acquisition date, the Group recognised a loss equal to the carrying amount of the prepaid licences. The loss is included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items. Arrangements have been put in place for retention and performance-related payments to remunerate employees of the acquired business for future services. The costs of these arrangements will be recognised over the retention and performance periods. The amount recognised during the year is £2m. In the period since the acquisition date, the acquired business has reported revenue of £7m and a loss of £5m. The revenue of the Group for the year ended 30 September 2017 would have increased by £12m and the profit would have reduced by £7m if the acquired business had been included in the Group for the whole of the year. 171The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements16 Acquisitions and disposals continued 16.1 Acquisitions continued Startup Compass Inc. On 3 April 2017, the Group acquired 100% of the equity capital of Startup Compass Inc. (Compass), the provider of a highly innovative analytics and benchmarking platform, for cash consideration of £5m, of which £4m has been paid and £1m is deferred for up to two years. The value of net assets acquired was £5m, comprising intangible technology assets of £6m and a deferred tax liability of £1m. No goodwill was recognised. When the Group reported its results for the six months ended 31 March 2017, provisional fair values were used in the disclosure of the transaction as an event after the balance sheet date. The finalisation of the accounting has resulted in an increase in the fair value of identifiable net assets acquired of £5m attributable to intangible assets and deferred tax liabilities (£6m and £1m respectively), with a corresponding decrease in the amount of goodwill. The intangible assets acquired as part of the above acquisitions is analysed as follows: Brands £m Technology £m Customer relationships£mTotal£mIntacct Corporation (provisional) 1 44 97142Sage People Limited (formerly Fairsail Limited) – 28 937Startup Compass Inc. – 6 –6Total other intangible assets from the acquisition of subsidiaries (note 6.2) 1 78 10618516.2 Costs relating to business combinations in the year Costs directly relating to completion of the business combinations in the year of £10m (2016: £1m) have been included in selling and administrative expenses in the consolidated income statement. These acquisition-related items relate to completed transactions and include advisory, legal, accounting, valuation and other professional or consulting services. 16.3 Disposals and discontinued operations Disposals made during the current year Discontinued operation: North American Payments business On 1 August 2017, the Group completed the sale of the subsidiaries that formed its North American Payments business (Sage Payment Solutions, or SPS) to GTCR, LLC (GTCR), a leading private equity firm, for total proceeds of £196m, generating a gain on disposal of £25m. The assets and liabilities of SPS were presented as held for sale in the Group’s interim financial statements for the six months ended 31 March 2017, and the business has been presented as a discontinued operation as it is considered to represent a separate major line of business for the Group given the nature of its business and its contribution to the Group’s revenues. Profit from discontinued operations for the period from 1 October 2016 to disposal on 1 August 2017 and for the year ended 30 September 2016 is analysed as follows: Underlying2017£mAdjustments2017£mStatutory 2017 £m Underlying as reported 2016 £m Adjustments2016£mStatutory2016£mRevenue 119–119 130 –130Cost of sales (11)–(11) (12) –(12)Gross profit 108–108 118 –118Selling and administrative expenses (79)–(79) (84) –(84)Operating profit 29–29 34 –34Finance income ––– – ––Finance costs ––– (1) –(1)Profit before income tax 29–29 33 –33Income tax expense (11)–(11) (13) –(13)Profit after income tax 18–18 20 –20Gain on disposal of discontinued operations –2727 – ––Tax on disposal –(2)(2) – ––Profit on discontinued operations 182543 20 –20Cash flow from discontinued operations is analysed as follows: Cash flows from: 2017£m2016£mOperating activities 2538Net proceeds on disposal of business 158–Financing activities 4(8) 18730Other notes continuedThe Sage Group plc | Annual Report & Accounts 2017172 The assets and liabilities sold, and the gain on disposal, are analysed as follows: 2017£mAssets Goodwill 189Other intangible assets 1Property, plant and equipment 1Trade and other receivables 41Cash and cash equivalents (excluding bank overdrafts) 23Deferred tax assets 6Total assets 261Liabilities Trade and other payables (66)Other liabilities (1)Total liabilities (67)Net assets 194 Gain on disposal Cash consideration received 181Preferred equity consideration 15Gross consideration 196Transaction costs (7)Net consideration 189Net assets disposed (as above) (194)Cumulative foreign exchange differences reclassified from other comprehensive income to the income statement 32Gain on disposal of discontinued operations 27Preferred equity consideration comprises a senior preferred equity instrument in GTCR-Ultra Holdings, LLC, SPS’s indirect parent entity that is majority-owned by GTCR. The instrument will be held by Sage until paid in full ($20m face value plus any accrued interest thereon), or redeemed by GTCR either voluntarily in its discretion or mandatorily on a change of control of GTCR-Ultra Holdings LLC. This is presented in the balance sheet as a fixed asset investment within non-current assets. Other disposal On 6 April 2017, the Group sold its subsidiary Syska GmbH (Syska) for £2m. Net liabilities divested were £1m, resulting in a gain on disposal of £3m. The assets and liabilities of Syska were presented as held for sale in the Group’s interim financial statements for the six months ended 31 March 2017. Prior to disposal, the business formed part of the Group’s Central and Southern Europe reporting segment. This business is not accounted for as a discontinued operation. 16.4 Assets and liabilities held for sale The assets and liabilities held for sale relate to the Group’s subsidiary Sage XRT Brasil Ltda. The sale is expected to be finalised during the first part of the year ending 30 September 2018. The business forms part of the Group’s International reporting segment. Assets held for sale comprise trade and other receivables of £1m (2016: £1m) and liabilities held for sale comprise trade and other payables of £1m (2016: £nil). 17 Related party transactions This note provides information about transactions between the Group and its related parties. A group’s related parties include any entities over which it has control, joint control or significant influence, and any persons who are members of its key management personnel. The Group’s related parties are its subsidiary undertakings, its associated undertaking and its key management personnel, which comprises the Group’s Executive Committee members. The Group has taken advantage of the exemption available under IAS 24, “Related Party Disclosures”, not to disclose details of transactions with its subsidiary undertakings. Compensation paid to the Executive Committee is disclosed in note 3.3. No related party transactions occurred during the year. Supplier transactions occurred during the prior year between Sage South Africa (Pty) Ltd, one of the Group’s subsidiary companies, and Ivan Epstein, President, International and Executive Committee member. These transactions related to the lease of four properties in which Ivan Epstein has a minority and indirect shareholding. During the prior year £4m relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the year ended 2016. 173The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements17 Related party transactions continued Supplier transactions occurred during the prior year between Sage SP, S.L., one of the Group’s subsidiary companies, and Álvaro Ramírez, who held the role of President, Europe and Executive Committee member during the year. These transactions related to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the prior year £1m relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the year ended 2016. These arrangements were subject to independent review using external advisers to ensure all transactions were at arm’s length. 18 Group undertakings While we present consolidated results in these financial statements, our structure is such that there are a number of different operating and holding companies that contribute significantly to the overall result. Our subsidiaries are located around the world and each contributes to the profits, assets and cash flow of the Group. The entities listed below and on the following page are subsidiaries of the Company or Group. The Group percentage of equity capital and voting rights is 100% for all subsidiaries listed with all shares held being classed as ordinary. The results for all of the subsidiaries have been consolidated within these financial statements. Name Registered address CountryNameRegistered address CountryACCPAC UK Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage (UK) Ltd North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Apex Software International Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Alchemex (Pty) Ltd 23A Flanders Drive, Mount Edgecombe, Durban, 4321 South Africa Apex Software Systems Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Australia Holdings Pty Ltd Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia Australia Best Software Germany Berner Str. 23, D-60437, Frankfurt, Germany Germany Sage Bäurer AG Platz 10, Root D4, CH-6039, Switzerland Switzerland Computer Resources (Research) Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage bäurer GmbH Josefstraße 10, 78166 Donauerschingen Germany Computer Resources (Software) Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Brasil 3 Empreendimentos E Participações Ltda Rua Antônio Nagib Ibrahim, 350, part A, Água Branca, São Paulo, São Paulo, Postal Code 05036-060 Brazil Computer Resources (Supplies) Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Brasil Software S.A. Rodovia Luiz de Queiroz, without number, Nova Americana, Km 127,5, Americana, São Paulo Postal Code 13466-170 Brazil Computer Resources Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Brazilian Investment One Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Creative Purpose Sdn Bhd Suite B13A-4, Tower B, Level 13A, Northpoint Offices, Mid Valley City, No. 1 Medan Syed Putra Utara, 59200 Kuala Lumpur Malaysia Sage Brazilian Investment Two Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom eWare GmbH Behringstraße 24, 90482 Nürnberg, Germany Germany Sage Business Solutions Pty Ltd Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia Australia Handisoft Software Pty Ltd Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia Australia Sage CRM Solutions GmbH Emil-von-Behring-Straße 8-14, 60439 Frankfurt am Main Germany Intacct Development Romania SRL 21 Decembrie 1989 Blvd, no 77, The Office building, C section, 1st floor, 400604 Cluj-Napoca, Romania Romania Sage CRM Solutions Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Intacct Software Pvt Limited 3rd Floor, Esteem Arcade, 26/1, Race Course Road, Bangalore, 560 001 India Sage Enterprise Solutions Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom IntelligentApps Holdings Limited Providence House, East Hill Street, Nassau, Bahamas Bahamas Sage Euro Hedgeco 1 North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Interact UK Holdings Limited* North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Euro Hedgeco 2 North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Other notes continuedThe Sage Group plc | Annual Report & Accounts 2017174NameRegisteredaddressCountryNameRegisteredaddressCountryIOBInformaçõesRuaNagibIbrahim,350,ÁguaBranca,BrazilSageFarEastNorthPark,NewcastleuponTyne,UnitedObjetivasSãoPaulo,PostalCode05036-060InvestmentsLimitedNE139AAKingdomPublicaçõesJurídicasLtda.KCSGlobalHoldingsNorthPark,NewcastleuponTyne,UnitedSageGlobalServicesNumberOneCentralPark,IrelandLimitedNE139AAKingdom(Ireland)LimitedLeopardstown,Dublin18,IrelandKHKSoftwareAGPlatz10,RootD4,CH-6039,SwitzerlandSwitzerlandSageGlobalServicesNorthPark,NewcastleuponTyne,UnitedLimitedNE139AAKingdomMultisoftFinancialNorthPark,NewcastleuponTyne,UnitedSageGlobalServices27117thStreetNW,Suite1100Atlanta,UnitedSystemsLimitedNE139AAKingdomUS,IncGeorgia30363StatesPAIServices,LLC305FellowshipRoad,Suite300Mt.UnitedStatesSageGmbHStella-Klein-Löw-Weg15,1020WienAustriaLaurel,NewJersey08054PastelSoftwareNumberOneCentralPark,IrelandSageGmbHEmil-von-Behring-Straße8-14,60439Germany(Europe)LimitedLeopardstown,Dublin18,IrelandFrankfurtamMainPastelSoftwareNumberOneCentralPark,IrelandSageHiberniaNorthPark,NewcastleuponTyne,United(Ireland)LimitedLeopardstown,Dublin18,IrelandInvestmentsNo.1NE139AAKingdomLimitedProtxGroupLimitedNorthPark,NewcastleuponTyne,UnitedSageHiberniaNorthPark,NewcastleuponTyne,UnitedNE139AAKingdomInvestmentsNo.2NE139AAKingdomLimitedProtxLimitedNorthPark,NewcastleuponTyne,UnitedSageHiberniaLimitedNumberOneCentralPark,IrelandNE139AAKingdomLeopardstown,Dublin18,IrelandSageHiberniaNumberOneCentralPark,IrelandSageSoftwareEast1stFloorRelianceCentre,Woodvale,KenyaServicesLimitedLeopardstown,Dublin18,IrelandAfricaLimitedWestlands,Lr.1870/Ix/96,114&115,NairobiSageHoldingNorthPark,NewcastleuponTyne,UnitedSageSoftware27117thStreetNW,Suite1100Atlanta,UnitedCompanyLimited*NE139AAKingdomHoldings,Inc.Georgia30363StatesSageHoldingFranceAtriumDefense,ParislaDefense,10FranceSageSoftware(India)N-34,LowerGroundFloor,BlockM,IndiaSASPlacedeBelgique,92250,LeGarennePrivateLimitedRampuri,Kalkaji,NewDelhi110019,IndiaColombes,ParisSageHoldingsNorthPark,NewcastleuponTyne,UnitedSageSoftware27117thStreetNW,Suite1100Atlanta,UnitedLimitedNE139AAKingdomInternational,Inc.Georgia30363StatesSageIntacct,Inc.300ParkAvenue,Suite1400,SanJose,UnitedStatesSageSoftwareLtdNorthPark,NewcastleuponTyne,UnitedCA,95110NE139AAKingdomSageIrishFinanceNumberOneCentralPark,IrelandSageSoftwareMiddle116-120,Floor:01,Building:11,Dubai,UAEUnitedArabCompanyUnlimitedLeopardstown,Dublin18,IrelandEastFZ-LLCEmiratesCompanySageIrishNorthPark,NewcastleuponTyne,UnitedSageSoftware34NelsonMandelaAvenue,ArdecoNamibiaInvestmentsLLPNE139AAKingdomNamibia(Pty)LtdBuilding,1stFloor,KleinWindhoek,NamibiaSageIrishNorthPark,NewcastleuponTyne,UnitedSageSoftwareNigeriaPlot252EMuriOkunolaStreet,VictoriaNigeriaInvestmentsOneNE139AAKingdomLimitedIsland,Lagos.Limited*SageIrishNorthPark,NewcastleuponTyne,UnitedSageSoftwareNorth27117thStreetNW,Suite1100Atlanta,UnitedInvestmentsTwoNE139AAKingdomAmericaGeorgia30363StatesLimited*SageManagement&Emil-von-Behring-Straße8-14,60439GermanySageSoftwareSdnSuiteB13A-4,TowerB,Level13A,MalaysiaServicesGmbHFrankfurtamMainBhdNorthpointOffices,MidValleyCity,No.1MedanSyedPutraUtara,59200KualaLumpurSageOnePtyLevel11,TheZenithTowerB,821PacificAustraliaSageSoftware,Inc27117thStreetNW,Suite1100Atlanta,UnitedLimitedHwyChatswood2067AustraliaGeorgia30363StatesSageOnlineNorthPark,NewcastleuponTyne,UnitedSageSouthAfrica102WesternServiceRoad,GalloManorSouthAfricaHoldingsLimitedNE139AAKingdom(Pty)Ltd*Ext6,GalloManor,2191,SouthAfricaSageOverseasAtriumDefense,ParislaDefense,10FranceSagesp.zo.oAlejeJerozolimskie132,02-305Warsaw,PolandLimited(BranchPlacedeBelgique,92250,LeGarennePolandRegistration)Colombes,ParisSageOverseasPaseoCastellana53,MadridSpainSageSpain,S.L.C/Labastida,10-1228034,Madrid,SpainSpainLimitedSucursal175TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements18 Group undertakings continued Name Registered address CountryNameRegistered address CountrySage Overseas Limited. North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Technologies Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Pay (Dublin) Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Treasury Company Limited* North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Pay (GB) Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Treasury Ireland Unlimited Company Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Pay (Pty) Ltd Netcash Square, 64 Parklands Main Road, Cape Town, 7441, South Africa South Africa Sage US LLP North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Pay Europe Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage USD Hedgeco 1 North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Pay GmbH Emil-von-Behring-Straße 8-14, 60439 Frankfurt am Main Germany Sage USD Hedgeco 2 North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Pay Ireland Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Whitley Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Pay S.L.U. C/ Labastida, 10-12 28034, Madrid, Spain Spain Sage XRT Brasil Ltda Rua Leopoldo Couto Magalhães Junior, 146, 10th, floor, Itaim Bibi, São Paulo, São Paulo, Postal, Code 04542-000 Brazil Sage Payments (UK) Ltd. North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sagesoft North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage People Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Snowdrop Systems Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage People, Inc. 271 17th Street NW, Suite 1100 Atlanta, Georgia 30363 United StatesSnowdrop Systems Pty Ltd Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia Australia Sage Portugal – Software, S.A. Edifício Olympus II, Av. Dom Afonso Henriques 1462, 4450, Matosinhos, Portugal Portugal Softline Australia Holdings Pty Ltd Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia Australia Sage S.A. Rue Natalis 2, 4020 Liège, Belgium Belgium Softline Holdings USA, Inc. 6561 Irvine Centre Drive, Irvine, California, 92618 United States Sage SAS Atrium Defense, Paris la Defense, 10 Place de Belgique, 92250, Le Garenne Colombes, Paris France Softline Software Holdings Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Schweiz AG Platz 10, Root D4, CH-6039, Switzerland Switzerland Softline Software Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Services GmbH Karl-Heine-Straße 109-111, 04229, Leipzig Germany Softline Software USA, LLC 6561 Irvine Centre Drive, Irvine, California, 92618 United States Sage Singapore Holdings Pte. Ltd. 8 Commonwealth Lane, #04-01 Grande Building, Singapore 149555 Singapore Softline Software, Inc. 6561 Irvine Centre Drive, Irvine, California, 92618 United States Sage Software Tour Crystal 1, Niveau 9, Bd Sidi Mohammed Ben Abdellah, Casablanca, 20030, Morocco Morocco Sytax Sistemas S.A. Rua Antonio Nagib Ibrahim, 350, part B, PostalCode 05036-60, in the city of São Paulo, State of São Paulo Brazil Sage Software Asia Pte. Limited 8 Commonwealth Lane, #04-01 Grande Building, Singapore 149555 Singapore TAS Software Limited Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Software Australia Pty Ltd Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia Australia TAS Software Limited North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Software Botswana (Proprietary) Limited Plot 50371 Fairground Office, Park, Gaborone Botswana Tetra Limited* North Park, Newcastle upon Tyne, NE13 9AA United Kingdom Sage Software Canada Holdings Ltd. 300 Bay Street, Suite 400, Toronto, Ontario M5H 2R2 Canada Tonwomp Unlimited Company Number One Central Park, Leopardstown, Dublin 18, Ireland Ireland Sage Software Canada Ltd. 333 Bay Street, Suite 400, Toronto, Ontario M5H 2R2 Canada Ulysoft Immeuble Mélika, rez de chausse, rue Lac Windermere, Berges du Lac, 1053 Tunisia * Direct subsidiary (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Other notes continuedThe Sage Group plc | Annual Report & Accounts 2017176CompanyfinancialstatementsNotestotheCompanyfinancialstatementsCompanybalancesheet178Companystatementofchangesinequity179Companyaccountingpolicies180SupplementarynotestotheCompanyfinancialstatements.1.Dividends1822.Fixedassets:investments1823.Cashatbankandinhand1824.Debtors1825.Creditors:amountsfallingduewithinoneyear1836.Obligationsunderoperatingleases1837.Equity184ContentsCompanyfinancialstatements177TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements Note 2017 £m2016 £mFixed assets: investments 2 3,0883,088 Current assets Cash at bank and in hand 3 11Debtors – amounts due greater than one year £353m (2016: £349m) 4 968796 969797 Creditors: amounts falling due within one year Trade and other payables 5 (1,088)(1,015)Net current liabilities (119)(218) Total assets less current liabilities 2,9692,870 Net assets 2,9692,870 Capital and reserves Called up share capital 7.1 1212Share premium account 548544Other reserves 7.2 (107)(101)Profit and loss account 2,5162,415Total shareholders’ funds 2,9692,870The Company’s profit for the year was £229m (2016: £136m). The financial statements on pages 178 to 184 were approved by the Board of Directors on 21 November 2017 and are signed on their behalf by: S Hare (cid:18)(cid:346)(cid:349)(cid:286)(cid:296)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:75)(cid:296)(cid:296)(cid:349)(cid:272)(cid:286)(cid:396)(cid:3) Company balance sheetAt 30 September 2017The Sage Group plc | Annual Report & Accounts 2017178Attributable to owners of the parentCalled up share capital £mShare premium £m Other reserves £mProfit and loss account £mTotalequity £mAt 1 October 2016 12544 (101)2,4152,870Profit for the year –– –229229Total comprehensive income for the year ended 30 September 2017 –– –229229Transactions with owners: Employee share option scheme: –(cid:3)Proceeds from shares issued –4 ––4–(cid:3)Value of employee services, net of deferred tax –– –1111–(cid:3)Value of employee services on acquisition –– –2121Utilisation of treasury shares –– 3(3)–Purchase of treasury shares –– (9)–(9)Dividends paid to owners of the parent –– –(157)(157)Total transactions with owners for the year ended 30 September 2017 –4 (6)(128)(130)At 30 September 2017 12548 (107)2,5162,969 Attributable to owners of the parentCalled up share capital £mShare premium £m Other reserves £mProfit and loss account £mTotalequity £mAt 1 October 2015 12541 (102)2,4192,870Profit for the year –– –136136Total comprehensive income for the year ended 30 September 2016 –– –136136Transactions with owners: Employee share option scheme: –(cid:3)Proceeds from shares issued –3 ––3–(cid:3)Value of employee services, net of deferred tax –– –88Utilisation of treasury shares –– 3(3)–Purchase of treasury shares –– (2)–(2)Dividends paid to owners of the parent –– –(145)(145)Total transactions with owners for the year ended 30 September 2016 –3 1(140)(136)At 30 September 2016 12544 (101)2,4152,870 Company statement of changes in equity179The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsCompany accounting policies Statement of compliance These financial statements were prepared in accordance with Financial Reporting Standard 102 (FRS 102) “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. Basis of accounting These financial statements are prepared on the going concern basis, under the historical cost convention, and in accordance with the Companies Act 2006. A summary of the more important Company accounting policies, which have been consistently applied, is set out below. These accounting policies have been consistently applied to all periods presented. The Company is deemed a qualifying entity under FRS102, and so may take advantage of the reduced disclosures permitted under the standard. As a result, the following disclosures have not been provided: –(cid:3)a statement of cash flows and related disclosures under Section 7 Statement of Cash Flows and Section 3 Financial Statement Presentation paragraph 3.17(d); –(cid:3)disclosures about financial instruments under Section 11 Basic Financial Instruments paragraphs 11.41(b), 11.41(c), 11.41(e), 11.41(f), 11.42, 11.44, 11.45, 11.47, 11.48(a)(iii), 11.48(a)(iv), 11.48(b) and 11.48(c) and Section 12 Other Financial Instruments Issues paragraphs 12.26 (in relation to those cross-referenced paragraphs from which a disclosure exemption is available), 12.27, 12.29(a), 12.29(b), and 12.29A; this exemption is permitted as equivalent disclosures are included in the consolidated financial statements of The Sage Group plc; –(cid:3)disclosures about share-based payments under Section 26 Share-based Payment paragraphs 26.18(b), 26.19 to 26.21 and 26.23; this exemption is permitted as the Company is an ultimate parent, the share-based payment arrangements concern its own equity instruments, its separate financial statements are presented alongside the consolidated financial statements of The Sage Group plc and equivalent disclosures are included in those consolidated financial statements; and –(cid:3)key management personnel compensation in total under Section 33 Related Party Disclosures paragraph 33.7. Foreign currencies Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are converted into sterling at the rate prevailing at the dates of the transactions. All differences on exchange are taken to the profit and loss account. Investments Fixed asset investments are stated at cost less provision for any diminution in value. Any impairment is charged to the profit and loss account as it arises. Parent Company profit and loss account No profit and loss account is presented for the Company as permitted by section 408 of the Companies Act 2006. Details of the average number of people employed by the parent Company and the staff costs incurred by the Company are as follows. Average monthly number of people employed (including directors) 2017 number2016 numberBy segment: Northern Europe 305194 Staff costs (including directors on service contracts) 2017 £m2016 £mWages and salaries 109Social security costs 11Post-employment benefits ––Share-based payments 33 1413Staff costs are net of recharges to other Group companies. Auditors’ remuneration The audit fees payable in relation to the audit of the financial statements of the Company are £30,000 (2016: £30,000). Directors’ remuneration Details of the remuneration of Executive and Non-Executive Directors and their interest in shares and options of the Company are given in the audited part of the Directors’ Remuneration Report on pages 84 to 103. Share-based payments The Company issues equity-settled share-based payments to certain employees and employees of its subsidiaries. Equity-settled share-based payments granted to employees of the Company are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the shares that will eventually vest allowing for the effect of non market-based vesting conditions. Fair value is measured using the Black-Scholes or the Monte Carlo pricing models. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Company accounting policiesThe Sage Group plc | Annual Report & Accounts 2017180TheCompanyalsoprovidescertainemployeesandemployeesofitssubsidiarieswiththeabilitytopurchasetheCompany’sordinarysharesatadiscounttothecurrentmarketvalueatthedateofthegrant.Forawardsmadetoitsownemployees,theCompanyrecordsanexpense,basedonitsestimateofthediscountrelatedtosharesexpectedtovest,onastraight-linebasisoverthevestingperiod.Attheendofeachreportingperiod,theentityrevisesitsestimatesforthenumberofoptionsexpectedtovest.Itrecognisestheimpactoftherevisiontooriginalestimates,ifany,intheprofitandlossaccount,withacorrespondingadjustmenttoequity.Forawardsmadetosubsidiaryemployees,thefairvalueofawardsmadeisrecognisedbytheCompanyasanadditiontothecostofinvestmentintheemployingsubsidiary.Intergrouprechargestotheemployingsubsidiary,uptothefairvalueofawardsmadetoemployeesofthatsubsidiary,subsequentlyreversetheincreasetothecostofinvestment.Theproceedsreceivednetofanydirectlyattributabletransactioncostsarecreditedtosharecapital(nominalvalue)andsharepremiumwhentheoptionsareexercised.TheaccountingpolicyoftheCompanyforfinancialinstrumentsisthesameasthatshownintheGroupaccountingpolicies.TheCompanyistakingtheexemptionforfinancialinstrumentsdisclosure,becausedisclosuresareprovidedunderIFRS7‘FinancialInstruments:Disclosures’innote14totheGroupfinancialstatements.DividendsarerecognisedthroughequitywhenapprovedbytheCompany’sshareholdersoronpayment,whicheverisearlier.FinancialinstrumentsDividends181TheSageGroupplc|AnnualReport&Accounts2017StrategicreportGovernanceFinancialstatements1 Dividends 2017£m2016 £mFinal dividend paid for the year ended 30 September 2016 of 9.35p per share 101–(2016: final dividend paid for the year ended 30 September 2015 of 8.65p per share) –93 Interim dividend paid for the year ended 30 September 2017 of 5.22p per share 56–(2016: interim dividend paid for the year ended 30 September 2016 of 4.80p per share) –52 157145In addition, the Directors are proposing a final dividend in respect of the financial year ended 30 September 2017 of 10.20p per share which will absorb an estimated £110m of shareholders’ funds. It will be paid on 2 March 2018 to shareholders who are on the register of members on 9 February 2018. These financial statements do not reflect this dividend payable. The distributable reserves of The Sage Group plc at 30 September 2017 amounted to £2,283m (2016: £2,188m). The Company’s distributable reserves support 13 times this annual dividend. 2 Fixed assets: investments Equity interests in subsidiary undertakings are as follows: £mCost At 1 October 2016 3,224At 30 September 2017 3,224Provision for diminution in value At 1 October 2016 136At 30 September 2017 136Net book value At 30 September 2017 3,088At 30 September 2016 3,088The Directors believe that the carrying value of the investments is supported by their underlying net assets. Subsidiary undertakings, included in the Group financial statements for the year ended 30 September 2017, are shown in note 18 of the Group financial statements. All of these subsidiary undertakings are wholly-owned. All subsidiaries are engaged in the development, distribution and support of business management software and related products and services for small and medium-sized businesses. All operating subsidiaries’ results are included in the Group financial statements. The accounting reference date of all subsidiaries is 30 September, except for Brazilian subsidiaries which have an accounting reference date of 31 December due to Brazilian statutory requirements. 3 Cash at bank and in hand 2017 £m2016 £mCash at bank and in hand 114 Debtors 2017£m2016 £mPrepayments and accrued income 11Amounts owed by Group undertakings 967795 968796Of amounts owed by Group undertakings £353m (2016: £349m) is due greater than one year, on which interest is charged at 4.2% and is repayable in full on 21 October 2023 but may be repaid, in whole or in part in advance of this date at the option of the borrower. Notes to the Company ﬁ nancial statementsThe Sage Group plc | Annual Report & Accounts 2017182 5 Creditors: amounts falling due within one year 2017 £m2016 £mBank loans and overdrafts –3Amounts owed to Group undertakings 1,077969Accruals and deferred income 114US senior bank loans – unsecured –39 1,0881,015Included in loans above is £nil (2016: £39m) of unsecured external loans (after unamortised issue costs). The Company has US$nil (2016: US$50.0m) (£nil, 2016: £39m) of US senior loan notes, which were issued into the US private placement market in 2010. These notes matured in 2017 and carried interest coupons of 5.15% (2016: 5.15%). Amounts owed to Group undertakings are unsecured and attract a rate of interest of between 0.0% and 8.3% (2016: 0.0% and 8.3%). 6 Obligations under operating leases 20172016Total future minimum lease payments under non-cancellable operating leases falling due for payment as follows: Property, vehicles, plant and equipment £m Property, vehicles, plant and equipment £mWithin one year 11Later than one year and less than five years 71After five years 5– 132The Company leases various offices under non-cancellable operating lease agreements. These leases have various terms, escalation clauses and renewal rights. 183The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statements7 Equity 7.1 Called up share capital Issued and fully paid ordinary share of 14/77 pence each 2017 shares 2017 £m 2016shares2016 £mAt 1 October 1,119,480,363 12 1,118,298,74812Proceeds from shares issued 1,157,758 – 1,181,615–At 30 September 1,120,638,121 12 1,119,480,363127.2 Other reserves Treasury shares £m Merger reserve £m Capital redemption reserve £mTotal other reserves £mAt 1 October 2016 (164) 61 2(101)Utilisation of treasury shares 3 – –3Purchase of treasury shares (9) – –(9)At 30 September 2017 (170) 61 2(107) Treasury shares £m Merger reserve £m Capital redemption reserve £mTotal other reserves £mAt 1 October 2015 (165) 61 2(102)Utilisation of treasury shares 3 – –3Purchase of treasury shares (2) – –(2)At 30 September 2016 (164) 61 2(101)Treasury shares Purchase of treasury shares Shares purchased under the Group’s buyback programme are not cancelled but are retained in issue and represent a deduction from equity attributable to owners of the parent. During the year the Company purchased nil shares (2016: nil) and gifted 1,019,166 shares (2016: nil) to the Employee Share Trust. At 30 September 2017 the Group held 38,503,265 (2016: 39,522,431) of treasury shares. Employee Share Trust The Company holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the market or is gifted them by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 961,715 ordinary shares in the Company (2016: 1,016,311) at a cost of £6m (2016: £nil) and a nominal value of £nil (2016: £nil). During the year, the Trust agreed to satisfy the vesting of certain share awards, utilising a total of 2,450,345 (2016: 3,006,938) shares held in the Trust. Furthermore, the Trust received additional funds of £9m (2016: £2m) which were used to purchase 1,376,583 (2016: 385,000) shares in the market. The costs of funding and administering the scheme are charged to the profit and loss account of the Company in the period to which they relate. The market value of the shares at 30 September 2017 was £7m (2016: £8m). Notes to the Company ﬁ nancial statements continuedThe Sage Group plc | Annual Report & Accounts 2017184GlossaryMeasure /DescriptionWhy we use itUnderlyingPrior period underlying measures are retranslated at the current year exchange rates to neutralise the eﬀ ect of currency ﬂ uctuations.Underlying operating proﬁ t excludes:Recurring items: –Amortisation of acquired intangible assets and purchase price adjustments made to reduce deferred income arising on acquisitions; –M&A activity-related items; –Fair value adjustments on non-debt-related ﬁ nancial instruments and foreign currency movements on intercompany debt balances; and –Non-recurring items that management judge are one-oﬀ or non-operational.Underlying proﬁ t before tax excludes: –All the items above; and –Imputed interest; and –Fair value adjustments on debt-related ﬁ nancial instruments.Underlying proﬁ t aft er tax and earnings per share excludes: –All the items above net of tax.Underlying measures allow management and investors to compare performance without the potentially distorting eﬀ ects of foreign exchange movements, one-oﬀ items or non-operational items.By including part-period contributions from acquisitions, discontinued operations, disposals and assets held for sale of standalone businesses in the current and/or prior periods, the impact of M&A decisions on earnings per share growth can be evaluated.OrganicIn addition to the adjustments made for underlying measures, organic measures exclude the contribution from acquisitions, discontinued operations, disposals and assets held for sale of standalone businesses in the current and prior period. Acquisitions and disposals which occurred close to the start of the opening comparative period where the contribution impact would be immaterial are not adjusted.Organic measures allow management and investors to understand the like-for-like performance of the business.Underlying cash conversionUnderlying cash conversion is underlying cash ﬂ ow from operating activities divided by underlying operating proﬁ t. Underlying cash ﬂ ow from operating activities is statutory cash ﬂ ow from operating activities less net capital expenditure and adjusted for movements on foreign exchange rates, and non-recurring cash items.Underlying cash conversion informs management and investors about the cash operating cycle of the business and how eﬃ ciently operating proﬁ t is converted into cash.Underlying (as reported)Where prior period underlying measures are included without retranslation at current period exchange rates, they are labelled as underlying (as reported).This measure is used to report comparative ﬁ gures for external reporting purposes where it would not be appropriate to retranslate. For instance, on the face of primary ﬁ nancial statements.Underlying adjusted EPSThe underlying adjusted EPS excludes the impact of acquisitions and disposals.The underlying adjusted EPS measure allows management and investors to compare performance without the distorting eﬀ ects arising from acquisitions and disposals.Processing revenueProcessing revenue is revenue earned from customers for the processing of payments or where Sage colleagues process our customers’ payroll.Recurring revenueRecurring revenue is revenue earned from customers for the provision of a good or service, where risks and rewards are transferred to the customer over the term of a contract, with the customer being unable to continue to beneﬁ t from the full functionality of the good or service without ongoing payments. Recurring revenue includes both soft ware subscription revenue and maintenance and service revenue.Soft ware subscription revenueSubscription revenue is revenue earned from customers for the provision of a good or service, where the risk and rewards are transferred to the customer over the term of a contract. In the event that the customer stops paying, they lose the legal right to use the soft ware and the Company has the ability to restrict the use of the product or service. (Also known as ‘Pay to play’).Soft ware and soft ware related services (“SSRS”)SSRS revenue is for goods or services where the entire beneﬁ t is passed to the customer at the point of delivery. It comprises revenue for soft ware or upgrades sold on a perpetual license basis and soft ware related services, including hardware sales, professional services and training.Annual contract value (“ACV”)Annual contact value is the value of bookings that will be generated over the ensuing year under a given contract or contracts.Annual recurring revenue (“ARR”)Annual recurring revenue is the value of all components of recurring revenue, annualised for the ensuing year.185The Sage Group plc | Annual Report & Accounts 2017Strategic reportGovernanceFinancial statementsA&RCAudit and Risk Committ eeAAMEAAfrica Australia Middle East AsiaAGMAnnual General MeetingAPIApplication Program InterfaceASBAnnualised Subscriber BaseC4LCustomer For LifeCAGRCompound Annual Growth RateCBCCustomer Business CentreCDPCarbon Disclosure ProjectCFOChief Financial Oﬃ cerCGUCash Generating UnitCMDCapital Markets DayCRCorporate ResponsibilityCRMCustomer Relationship ManagementDEFRADepartment for Environment, Food & Rural Aﬀ airsDTRDisclosure Rules and Transparency RulesEBITDAEarnings Before Interest Taxes Depreciation and AmortisationEBTEmployee Beneﬁ t TrustEPSEarnings Per ShareERPEnterprise Resource PlanningESOSExecutive Share Operating SchemeEUEuropean Union FCFFree Cash FlowFY16Financial year ending 30 September 2016FY17Financial year ending 30 September 2017FY18Financial year ending 30 September 2018G&AGeneral and AdministrativeGACGlobal Accounting CoreGHGGreen House GasHRHuman ResourcesHCMHuman Capital ManagementIFRSInternational Financial Reporting StandardsISVIndependent Soft ware VendorKPIKey Performance IndicatorLSELondon Stock ExchangeLTIPLong Term Incentive PlanNPS Net Promoter ScorePBTProﬁ t Before TaxPSPPerformance Share PlanR&DResearch and DevelopmentS&MSales and MarketingSaaSSoft ware as a ServiceSSRSSoft ware & Soft ware Related ServicesTSRTotal Shareholder Return VSGMVision, Strategy, Goals, MeasuresWRVSWomen’s Royal Voluntary ServiceGlossary continuedThe Sage Group plc | Annual Report & Accounts 2017186Shareholder information onlineThe Sage Group plc’s registrars are able to notify shareholders by e-mail of the availability of an electronic version of shareholder information. Whenever new shareholder information becomes available, such as The Sage Group plc’s interim and full year results, Equiniti will notify you by e-mail and you will be able to access, read and print documents at your own convenience.To take advantage of this service for future communications, please go to www.shareview.co.uk, where full details of the shareholder portfolio service are provided. When registering for this service, you will need to have your 11 character shareholder reference number to hand, which is shown on your dividend tax voucher, share certiﬁ cate or form of proxy.Should you change your mind at a later date, you may amend your request to receive electronic communication by entering your shareview portfolio online and amending your preferred method of communication from “e-mail” to “post”. If you wish to continue receiving shareholder information in the current format, there is no need to take any action.This report is printed utilising vegetable based inks on Heaven 42 which is sourced from well managed forests independently certiﬁ ed according to the rules of the Forest Stewardship Council (FSC®). This report was printed by an FSC® certiﬁ ed and a carbon neutral printing company and Heaven 42 is manufactured at a mill that is certiﬁ ed to the ISO14001 and EMAS environmental standardsDesigned and produced by Black Sun PlcPrinted by Park Communications Shareholder informationAdvisersCorporate brokers and ﬁ nancial advisersCitigroup Global Markets, 33 Canada Square, Canary Wharf, London, E14 5LBSolicitorsAllen & Overy LLP, 1 Bishops Square, London, E1 6ADPrincipal BankersLloyds Bank plc, 25 Gresham Street, London, EC2V 7HNIndependent auditorsErnst & Young, 1 More London Place, London, SE1 2AF RegistrarsEquiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA www.shareview.co.ukTel: 0371 384 2859 (from outside the UK: +44 (0)121 415 7047) Fax: 0371 384 2100 (from outside the UK: +44 (0)1903 698403)Lines are open 8.30am to 5.30pm UK time, Monday to Friday.Information for investorsInformation for investors is provided on the internet as part of the Group’s website which can be found at: www.sage.com/investors.Investor enquiriesEnquiries can be directed via our website or by contacting our Investor Relations department:Tel: +44 (0)191 294 3457The Sage Group plcRegistered oﬃ ce: North ParkNewcastle upon Tyne, NE13 9AA.Registered in England Company number 2231246Financial calendarAnnual General Meeting Dividend paymentsFinal payable – year ended 30 September 20172 March 2018Interim payable – period ending 31 March 20181 June 2018Results announcementsInterim results – period ending 31 March 20182 May 2018Final results – year ending 30 September 201821 November 2018Our corporate website has more information about our business, products, investors, media, sustainability, and careers at Sage Group. Stay up to date at www.sage.comThe Sage Group plcNorth Park, Newcastle upon Tyne,NE13 9AA.Registered in England Company number 2231246 Sage is the global market leader for technology that helps businesses of all sizes manage everything from money to people – whether they're a start-up, scale-up or enterprise. Our mission is to free Business Builders from the burden of administration, so they can spend more time doing what they love; because when Business Builders do well, we all do.www.sage.com

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