Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
For the year ended 31 October 2020
1. General Information
AFH Financial Group PLC is a public limited company limited by shares incorporated in England and Wales under the Companies Act 2006 and is registered at AFH House, Buntsford Drive, Stoke Heath, Bromsgrove, Worcestershire, B60 4JE.
The Group is principally engaged in the provision of independent financial advice and investment management to the retail market.
This financial information has been prepared for the year ended 31 October 2020.
1.1 Principal accounting policies
(a) Basis of preparation
The consolidated financial information has been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Financial Reporting Standards Interpretation Committee Interpretations in conformity with the requirements of the Companies Act 2006.
The consolidated financial statements have been prepared under the historical cost convention.
The company financial statements have been prepared in accordance with Financial Reporting Standard 101 “Reduced Disclosure Framework” (“FRS 101”) and in accordance with the applicable provisions of the Companies Act 2006. Except for certain disclosure exemptions detailed below, the recognition, measurement and disclosure requirements of International Financial Reporting Standards have been applied to these financial statements and, where necessary, amendments have been made in order to comply with the Companies Act 2006 and The Large and Medium-sized Companies and Groups Regulations 2008/410 (‘Regulations’).
The company financial statements have been prepared under the historic cost convention.
The financial information has been prepared in Sterling.
The principal accounting policies adopted are set out below and have been applied consistently.
The company has taken advantage of the following exemptions in preparing these financial statements, as permitted by FRS101 paragraph 8:
(i) The requirement of IFRS 7 ‘Financial Instruments Disclosures’ relating to the disclosure of financial instruments and the nature and extent of risks arising from such instruments;
(ii) The requirement of IFRS 13 ‘Fair Value Measurement’ paragraph 91 to 99 relating to the fair value measurement disclosure of financial assets and financial liabilities that are measure at fair value;
(iii) The requirements of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ paragraph 30 and 31 relating to the disclosure of standards, amendments and interpretations in issue but not yet effective;
(iv) The requirement of IAS 1 ‘Presentation of Financial Statements’ paragraphs 134 to 136 relating to the disclosure of capital management policies and objectives;
(v) The requirements of IAS 7 ‘Statement of Cash Flows’ and IAS 1 ‘Presentation of Financial Statements’ paragraph 10(d); 111 relating to the presentation of a Cash Flow Statement;
(vi) The requirements of IAS 24 ‘Related Party Disclosures’ relating to the disclosure of key management personnel compensation and relating to the disclosure of related party transactions entered into between the company and other wholly-owned subsidiaries of the group.
(b) Going Concern
As at the time of the signing of the financial statements the global Covid-19 epidemic continues to impact the Group. Stock Markets have seen volatility and the impact of Government legislation impacting short term business confidence and companies’ ability to continue normal trading conditions. As noted in the CEO report, as a Group we have adapted during a difficult period and maintained the Group EBITDA margin while revenues remained relatively static. Most client assets are held diversified portfolios and the impact of the markets on recurring revenue has been considerably diluted.
The directors have considered the Group’s anticipated business activities, its cash flows and capital position for a period of 12 months from the date of these accounts. They believe that even in the current lockdown and without organic growth the group can continue to trade profitably and maintains sufficient facilities to cover its short and long-term liabilities. This assessment has been stress tested for lower than anticipated revenues.
Therefore, the directors are satisfied that the Group has adequate resources to for the foreseeable future and for this reason continue to adopt the Going Concern basis in preparing the financial information.
(c) Basis of consolidation
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All intra-Group balances, income and expenses and unrealised gains and losses resulting from intra-Group transactions are eliminated in full.
Control is achieved when the company has the power over the investee; is exposed or has rights to variable return from its involvement with the investee; and has the ability to use its power to affects its returns.
(d) Business combinations
Business combinations are accounted for using the acquisition method except for group reorganisations where the combination is on a share for share basis and the resulting business remains unchanged. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. A review is undertaken at the first anniversary, to adjust the provisional amounts recognised on acquisition to reflect new information obtained during the period about circumstances existing at the date of acquisition which if known would affected the measurement of the amounts recognised.
Any contingent consideration to be transferred, whether in cash or another financial instrument such as a convertible loan note, is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IFRS 3. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.
(e) Goodwill and Intangibles
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the separable assets, liabilities and contingent liabilities of the subsidiary or an interest in an associate undertaking recognised at the date of acquisition. Subsequent remeasurement to the goodwill is recorded against the future contingent consideration in the first year of acquisition where additional information on pre-existing facts and circumstances at the point of acquisition is obtained.
Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses on an annual basis. Any impairment is recognised immediately in the Statement of Comprehensive Income and is not subsequently reversed.
The single cash generating unit to which Goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the cash generating unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit.
The cost of intangible assets, excluding goodwill acquired in a business combination, is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets assessed as having finite lives are amortised over their useful economic life.
Where the contractual consideration for the intangible asset varies to the amount paid in the future periods, the difference is written off through Administrative Expenses in the Statement of Comprehensive Income.
Intangible assets assessed as having finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end.
Intangible assets are amortised over the following periods:
- Other intangibles – 10 years from the month of acquisition unless otherwise impaired.
- Acquired client portfolios – 20 years from the month of acquisition unless otherwise impaired.
The amortisation expense on intangible assets with finite lives is recognised within Administrative Expenses in the Statement of Comprehensive Income.
(f) Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment in value. Depreciation is provided on all property, plant and equipment at rates calculated to write each asset down to its estimated residual value over its expected useful life as follows:
- Computer and office equipment at 20-25% per annum on cost
- Fixtures and fittings at 20% per annum on cost
- Freehold land – no charge
- Freehold land improvement at 12.5% per annum on cost
- Right of use assets at the lower of lease term and useful economic life
Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the Statement of Comprehensive Income in the year the asset is disposed of. The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each financial year end.
Investments comprise investments in subsidiaries and joint ventures. These investments are stated at cost, less provision for impairment.
(h) Borrowing costs
Borrowing costs are recognised as an expense over the life of the instrument.
(i) Cash and cash equivalents
Cash and cash equivalents in the Statement of Financial Position comprise cash at banks and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the Statement of Cash Flow, cash and cash equivalents consist of cash and short-term deposits as defined above, net of outstanding bank overdrafts.
(j) Share based payments
Employees (including senior executives) of the Group receive remuneration in the form of share based payment transactions for services provided as consideration for equity instruments (“equity settled transactions”).
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted and is recognised as an expense over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). Fair value is determined using the Black Scholes pricing model.
The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The Statement of Comprehensive Income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.
(k) Revenue recognition
Revenue across the group is recognised in line with the requirements of IFRS 15 as contractual performance obligations are satisfied, as noted below by revenue stream. Revenue is measured at the fair value of the consideration received adjusted for clawbacks, allowance for impairment, discounts, rebates, and other sales taxes or duty.
— Initial Fee income
Fees are recognised as earned at the point when financial advice is provided.
— Ongoing Fee income
Fees are recognised as and when fees from the management of investments are earned.
— Investment management
Revenue is recognised as gross earned for the value of FUM held within the month.
— Protection income (indemnified)
Revenue is recognised as earned as the policy goes live and the fees from the policy are due. This income is recorded net of clawback provision.
— Protection income (non-indemnified)
Revenue is recognised as earned as the policy goes live and the fees from the policy are due collected irrespective of the payment profile. This income is recorded net of allowance for impairment.
— Other income
Income received in relation to the Government’s Coronavirus Job Retention Scheme is recognised as earned at the end of the relevant month in which the Furlough pay has been issued to the employees. The income is offset against the relevant Administrative expenses.
— Interest income
Revenue is recognised as interest accrues (using the effective interest method that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).
The taxation expense represents the sum of the current tax and deferred tax.
Tax payable is measured at the amount expected to be paid to or recovered from the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.
Tax relating to items recognised directly in equity is recognised in equity and not in the Statement of Comprehensive Income.
(m) Deferred tax
Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax balances are recognised for all taxable temporary differences, except where the deferred tax balance arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred income tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
(n) Sales tax
Revenues, expenses and assets are recognised net of the amount of sales tax, except:
- Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense as applicable; and
- Receivables and payables that are stated with the amount of sales tax included.
(o) Dividend recognition
Dividend distributions to the Company’s shareholders are recognised in the accounting period in which the dividends are declared and paid, or if earlier, in the accounting period when the dividend is approved by the Company’s shareholders at the Annual General Meeting.
(p) Changes in accounting policies
Standards, interpretations and amendments effective from 1 November 2019
At the date of authorisation of these financial statements, the following standards and interpretations relevant to the Group and which have not been applied in these financial statements, were in issue but were not yet effective. In some cases, these standards and guidance have not been endorsed for use in the European Union including at 30 September 2020, Covid 19-Related Rent Concessions (Amendment to IFRS 16 Leases). However, the FRC has confirmed that it will not pursue regulatory action where this amendment is applied before the date of adoption by the EU.
The directors are evaluating the impact that these standards will have on the financial statements of the Group.
IFRS 16 Adoption
The Group has adopted IFRS 16 from 1 November 2019 but it has not restated comparatives for the prior reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening Statement of Financial Position on 1 November 2019.
In adopting IFRS 16, the group has used the following practical expedients permitted by the standard:
- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
- reliance on previous assessments of whether leases are onerous;
- the accounting for operating leases, with a remaining lease term of less than 12 months as at 1 November 2019, as short-term leases;
- the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
- the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The group has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the group relied on its assessment made in applying IAS 17 and IFRIC 4, ‘Determining whether an Arrangement contains a Lease’.
On adoption of IFRS 16, the group recognised lease liabilities which had previously been classified as operating leases under the principles of IAS 17 Leases. The lessee’s incremental borrowing rate applied to the lease liabilities on 1 November 2019 was based on comparable loan interest rates in the relevant jurisdiction where the lease is operable.
The Liability value for the leases were measured at the amount equal to the outstanding value of the lease contracts meeting the IFRS16 criteria. The Group has used the prudent approach of displaying the full, non-discounted lease liability.
Right of use assets
Right-of-use assets for these leases were measured at the amount equal to the lease liability as at the IFRS16 adoption date. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. Right of use assets are depreciated over the lease term.
(q) Financial instruments
Loans and receivables
Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as `loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment.
Interest is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the debt instrument to the net carrying amount on initial recognition.
Impairment of financial assets
Financial assets, other than those at Fair value through profit and loss (FVTPL), are assessed for indicators of impairment at each reporting end date.
Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
Derecognition of financial assets
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership to another entity.
Other financial liabilities
Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability to the net carrying amount on initial recognition.
Derecognition of financial liabilities
Financial liabilities are derecognised when, and only when, the Group’s obligations are discharged, cancelled or expired.
Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.
Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a Going Concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
The Group monitors capital by maintaining or adjusting the capital structure by adjusting the amount of dividends paid to shareholders, issuing new shares and unsecured securities or selling assets to maintain financial resources.
The capital employed by the Group is composed of equity attributable to the shareholders and long term unsecured corporate bonds, as detailed in the Statement of Changes in Equity.
The capital structure of the Company consists of debt, cash and cash equivalents and equity comprising share capital, reserves and retained earnings. The Company reviews the capital structure annually and as part of this review considers that cost of capital and the risks associated with each class of capital.
Fair value estimation
The net book amount less impairment provision of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.
(r) Critical accounting judgements and key sources of estimation uncertainty
The application of the Group’s accounting policies requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about net book values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. If in the future such estimates and assumptions deviate from actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.
The areas where a higher degree of judgement or complexity arises, or where assumptions and estimates are significant to the Consolidated Financial Statements, are discussed below.
Impairment of client portfolios
An assessment is made at each reporting date as to whether there is any indication that the carrying value may be impaired. Where such an indication is identified the client portfolios are tested for impairment. This comprises an estimation of the fair value less cost to sell and the value in use of the acquired client portfolios. The key assumption used in arriving at a value in use is based on future expected earnings based on funds under management. Future earnings streams for each cash generating unit is then discounted over a finite period to calculate the fair value. The assumptions used by the Group have been determined by looking at valuations of similar businesses and the consideration paid in comparable transactions.
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating unit to which the goodwill has been allocated. In assessing value in use, the estimated future cash flows expected to arise from the cash-generating unit are discounted to their present value using the Group’s weighted average cost of capital adjusted for tax. Impairment of £2.1m was made during the year (2019: £nil) based upon the Directors’ review.
The Group has entered into certain acquisition agreements that provide for a contingent consideration to be paid. The Group recognised all amounts management anticipates will be paid in full under the relevant acquisition agreement taking into account the contractual performance targets. This requires management to make an estimate of the expected future cash flows from the acquired client portfolio for the calculation of the present value of those cash flows.
The contingent consideration is subject to an earn-out based on future turnover of acquisitions over a period up to a four year period. The carrying amount of contingent consideration provided for at 31 October 2020 is £19.3m (2019 – £37.9m).
The Group’s business model is to make acquisitions through the direct purchase of the customer contracts or via the acquisition of the share capital of legal entities.
Judgement is required by management in the interpretation of IFRS 3 for each share-based customer contract transaction.
The directors of the Group assess for each acquisition, in line with IFRS 3 Appendix B, whether the share transactions constitute business combinations’ or are in substance asset purchases. In making their judgement, the directors consider all factors within IFRS 3 Appendix B Paragraphs B7 through to B12.
After assessment, the directors conclude whether each transaction is an asset purchases or a business combination for financial reporting purposes.
The Directors continue to assess the impact of information gathered during the measurement period and where such information affects the facts and circumstances in existence at the acquisition date an adjustment is reflected under IFRS 3.
Cost of borrowing
The directors have reviewed the Group wide cost of borrowing to assess the valuation method of the CULS, by considering the cost of borrowing an equivalent facility without the convertible element attached. The directors believe that the cost of borrowing to be the same as the CULS due to the premium attached to the option in comparison to the share price at the date of issue. Therefore, the directors have treated the CULS as debt with no equity attached.
(s) Alternative performance measures
The Group reports two Alternative performance measures being:
- Underlying EBITDA – EBITDA adjusted for Share Based Payment costs and the impact of implementing IFRS 16.
- Underlying EBITDA adjusted for tax is underlying EBITDA less a current tax charge of 19%.
Included in the Interest element of EBITDA is all Group wide financing costs.
2. Revenue and segmental analysis
The Board of Directors is considered to be the chief operating decision maker of the Group.
Segmental statement of comprehensive income
The segments are set out within the strategic report on page 10. The following is an analysis of the Group’s revenue and results from continuing operations by reportable segment.
Segment revenue reported above represents only revenue generated from external customers. Intersegmental sales in the financial year were £1,272,986 for management recharges from head office to the Financial Advisory and Protection Divisions (2019: £1,093,343). There were also £571,373 (2019: £497,333) of intersegmental sales for the introduction of business between the Financial Advisory and Protection Divisions. These intersegmental revenues and costs have been removed on consolidation.
The Accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 1.
The following is an analysis of the Group’s Assets from continuing operations by reportable segment.
The total revenue of the Group for the year has been derived from its activities wholly undertaken in the United Kingdom.
No customer is defined as a major customer by revenue, contributing more than 10% of the Group revenues (2019 – none).
3. Operating Profit
Services provided by the Group’s auditors:
A summary of the audit and non-audit fees in respect of services provided by the Group’s auditors charged to operating profit is set out below:
* Taxation services no longer fall into scope of the Group’s auditors
Employee costs (including salaried directors) for the Group were as follows:
Wages and salaries are reported net of the Coronavirus Job Retention Scheme of £883,163.
The average number of employees (including directors) during the year were as follows:
Key management personnel are those people having authority and responsibility for planning, directions and controlling the activities of the Group. The board consider that the Directors comprise key management personnel of the Company. Their remuneration during the year was as follows: salaries including bonuses were £1,060,033 (2019: £1,548,000), pension contributions were £8,640 (2019: £14,500), benefits in kind were £8,221 (2019: 8,469) and share based payments were £106,805 (2019: £14,666)
Details of Directors’ remuneration including share based payments made to directors during the years ended 31 October 2020 and 31 October 2019 are disclosed in the Report of the Remuneration Committee on page 25.
The highest paid Director received remuneration of £581,549 (2019: £709,567)
6. Income tax expense
Reconciliation of profit before tax to total tax expense for the year:
7. Dividends – Company
It is the Board’s intention to maintain the 2020 level of dividend and will pay a first interim dividend of 3p on 16 February 2021 to shareholders on the register of members at the close of business on 29 January 2021, the ex‑dividend date is 28 January 2021, and pay a second interim dividend in July 2021. This second interim dividend will be reviewed in the light of the country being released from the current lockdown restrictions and the impact on trading during the first half of 2021.
The group is proposing, pending AGM approval, an interim dividend based on the reported results of 3p per share, which equates £1,289,445 based on the current shares in circulation.
8. Intangible assets
Goodwill and acquired client portfolios
Goodwill believed to have an indefinite useful life is carried at cost. The determination of whether goodwill is impaired requires an assessment of the value in use. The recoverable amount of goodwill on a value in use calculation is based on the discounted cash flows expected from the intangible assets of each acquisition, assuming a future growth rate of 3% in revenue generated cash flows, discounted at an asset specific rate of 3%, for a period of 10 years with no annuity. On this basis the directors believe the value of goodwill is not impaired at 31 October 2020.
The Directors have assessed those assets where an indicator of impairment is raised and applied appropriate sensitivity of the assumptions detailed above and consider that the indicator only exists due to the level of prudence already factored in to these assumptions. The impairment charge of £2.1m is offset against a £2.1m reduction in contingent consideration. The impairment is based on the directors’ detailed review of expected future cashflows of relevant CGU’s.
Due to the level of prudence already factored into the assumptions, it would require a significant adverse variance in any of these to reduce the fair value to a level where it matched the carrying value.
During the year ended 31 October 2020 two acquisitions were undertaken relating to acquired client portfolios. Consideration for these acquisitions amounted to £1.5m. Included within the total consideration are amounts relating to contingent consideration of £1.3m. The contingent consideration is subject to earn outs based on future turnover over a period up to a four-year period.
9. Tangible fixed assets
Property, plant and equipment
Included in freehold land and improvements is £460,000 of land that has an indefinite useful life.
The £460,000 of Freehold Land is secured against the mortgage disclosed in note 13.
Right of use assets
The Shares in group undertakings represent certain subsidiary companies and joint ventures that have not been consolidated into the Group on the grounds of being immaterial.
Fixed assets investments
In the opinion of the directors, the aggregate value of the company’s investment in subsidiary undertakings is not less than the amount included in the balance sheet.
Please see note 25 for the details supporting the shares in group undertakings.
11. Business Combinations
a. Acquisitions in the financial year ended 31 October 2020
There were no business combinations in the 2020 financial year.
b. Acquisitions in the financial year ended 31 October 2019
A review has been undertaken of the business combinations where the fair value of assets and liabilities, including goodwill, were not finalised at the date of acquisition due to pre-existing conditions. During the financial year we were able to determine the final value resulting in a remeasurement of £3.0m of which £2.0m related to one acquisition. Any remeasurements of assets and liabilities, including goodwill, have been remeasured in the financial year and recorded where appropriate.
12. Trade and other receivables
Included in trade receivables is £8,068,824 of debtors due in relation to non-indemnified income earnt collectable over a 4 year term (2019: £10,278,822) which is net of a £314,003 allowance for impairment (2019: £1,412,368)
£6,271,614 of this trade receivable is due in greater than 1 year and collected over the life of the policy (2019: £7,033,971). The effect of discounting the trade receivable due in greater than 1 year would be a reduction of £380,004 to net assets (2019: £440,418).
There are no bad or doubtful receivables.
The borrowings are recognised at amortised cost. There is no material difference between the fair value and the carrying value.
The 8% unsecured bond issued in August 2013 was settled in the year.
The mortgage is repayable by instalments over an 8-year period with an interest rate of 2.9% over LIBOR. £460,000 of Freehold Land is secured against this liability.
The 4% Convertible Unsecured Loan Stocks (CULS) were issued in July 2019 and are due for redemption or conversion in 5 years.
During the year, CULS with a value of £1.4m were purchased by the company, resulting in a profit of £155,512 recognised under Other operating income in the Statement of Profit & Loss.
The HSBC Facility agreement has a cap of £12m of which interest is charged at 2.75% over LIBOR. The facility is a revolving facility. Covenant reporting is undertaken quarterly with the Group adhering to these.
14. Trade and other payables
The effect off discounting the non-current contingent consideration would be a reduction in the carrying value of £121,036.
A remeasurement of contingent consideration was recorded within the year against the appropriate Goodwill/Intangible, see note 8 & 11.
15. Deferred tax
Deferred tax asset
The deferred tax asset is made up as follows:
16. Lease liabilities
Payments in the year in respect of right of use asset leases amounted to £779,374.
Lease contracts on property are generally reviewed every 5 years. More information on the transition to IFRS16 is found in note 1.
A provision is held within the protection division for cancelled policies ahead of the agreed terms. The provision is calculated on the actual run-rate of lost clients with 90% of clawbacks occurring in the first 12 months.
18. Share capital
On 7 November 2019, 1,995 Ordinary Shares were issued at £1.51 each to satisfy the exercise of Share Options with £1.41 per share transferred to the share premium account
On 7 November 2019, 2,424 Ordinary Shares were issued at £1.65 each to satisfy the exercise of Share Options with £1.55 per share transferred to the share premium account
On 7 November 2019, 11,668 Ordinary Shares were issued at £1.69 each to satisfy the exercise of Share Options with £1.59 per share transferred to the share premium account
On 31 January 2020, 5,800 Ordinary Shares were issued at £1.00 each to satisfy the exercise of Share Options with £0.90 per share transferred to the share premium account
On 31 January 2020, 4,848 Ordinary Shares were issued at £1.65 each to satisfy the exercise of Share Options with £1.55 per share transferred to the share premium account
On 31 January 2020, 29,520 Ordinary Shares were issued at £1.63 each to satisfy the exercise of Share Options with £1.53 per share transferred to the share premium account
On 31 January 2020, 2,660 Ordinary Shares were issued at £1.51 each to satisfy the exercise of Share Options with £1.41 per share transferred to the share premium account
On 29 February 2020, 8,903 Growth Shares were issued at £2.17 each to satisfy the exercise of Share Options with £2.07 per share transferred to the share premium account
On 28 March 2020, 88,115 Ordinary Shares were issued at £1.48 each to satisfy the exercise of Share Options with £1.38 per share transferred to the share premium account
On 28 March 2020, 1,216 Ordinary Shares were issued at £1.48 each to satisfy the exercise of Share Options with £1.38 per share transferred to the share premium account
On 31 May 2020, 1,459 Ordinary Shares were issued at £1.48 each to satisfy the exercise of Share Options with £1.38 per share transferred to the share premium account
On 31 May 2020, 3,891 Ordinary Shares were issued at £1.48 each to satisfy the exercise of Share Options with £1.38 per share transferred to the share premium account
On 31 July 2020, 6,000 Ordinary Shares were issued at £1.65 each to satisfy the exercise of Share Options with £1.55 per share transferred to the share premium account
On 31 July 2020, 606 Ordinary Shares were issued at £1.65 each to satisfy the exercise of Share Options with £1.55 per share transferred to the share premium account
On 31 July 2020, 1,845 Ordinary Shares were issued at £1.63 each to satisfy the exercise of Share Options with £1.53 per share transferred to the share premium account
On 31 July 2020, 665 Ordinary Shares were issued at £1.51 each to satisfy the exercise of Share Options with £1.41 per share transferred to the share premium account
On 31 July 2020, 12,000 Ordinary Shares were issued at £1.69 each to satisfy the exercise of Share Options with £1.59 per share transferred to the share premium account
On 31 July 2020, 3,690 Ordinary Shares were issued at £2.71 each to satisfy the exercise of Share Options with £2.61 per share transferred to the share premium account
On 6 July 2020, 7,296 Growth Shares were issued at £3.18 each to satisfy the exercise of Share Options with £3.08 per share transferred to the share premium account
Earnings per share
The calculation of earnings per share is based on the profit attributable to the equity holders for the year of £10,714,744 (2019 – £10,813,160) and weighted average number of shares in issue during the period of 42,894,332 (2019 – 42,495,124).
The calculation of Underlying EBITDA adjusted for tax per share is based on the Underlying EBITDA adjusted for tax of £15,258,227 (2019 – £13,954,788) and weighted average number of shares in issue during the period of 42,894,332 (2019 – 42,495,124).
The diluted earnings per share has been adjusted for the potential share issue relating to the share-based payments. The number of shares has been increased by the difference between the amount of shares that will be issued if all options are exercised and the number of shares that could be purchased for the same consideration at average market price.
There are no adjustments between the net profit attributable to equity holders of the parent and the Earnings from continued operations for the purpose of diluted earnings per share excluding discontinued operation.
Share-based payment transactions
During the year ended 31 October 2020, the Group has had thirty-eight share-based payment arrangements, which are described below.
All share-option schemes will vest after three years from the date of the grant subject to individual performance vesting conditions. However, options may be exercised early if the change of control vesting conditions described above occurs and will be exercised on a time apportioned basis. There are no cash settlement alternatives.
The provision for share-based payments has been calculated using a Black-Scholes pricing model. The variables used in the model throughout the period have been selected as follows:
An average risk free rate of interest 2.3% based on 10-year UK Treasury Bonds.
Volatility 30% to 50% based on the actual volatility of AFH shares and comparatives with similar sized companies in the same industry.
The grant price of all options was equal to or above the market price of the Company’s ordinary shares on the date of grant.
The estimated weighted average fair value of share options granted in the year, as set out above, is £nil (2019 – nil).
Further details of the share option schemes are as follows:
51,623 of the options outstanding at 31 October 2020 have an exercise price of £0.37 and a weighted average remaining contractual life of 0.6 years.
109,223 of the options outstanding at 31 October 2020 have an exercise price of £0.37 and a weighted average remaining contractual life of 0.6 years.
42,500 of the options outstanding at 31 October 2020 have an exercise price of £1 and a weighted average remaining contractual life of 1.7 years.
49,000 of the options outstanding at 31 October 2020 have an exercise price of £1 and a weighted average remaining contractual life of 1.7 years.
345,000 of the options outstanding at 31 October 2020 have an exercise price of £1 and a weighted average remaining contractual life of 3.2 years.
133,693 of the options outstanding at 31 October 2020 have an exercise price of £1.47 and a weighted average remaining contractual life of 3.7 years.
256,973 of the options outstanding at 31 October 2020 have an exercise price of £1.47 and a weighted average remaining contractual life of 3.7 years.
25,262 of the options outstanding at 31 October 2020 have an exercise price of £1.505 and a weighted average remaining contractual life of 4 years.
1,330 of the options outstanding at 31 October 2020 have an exercise price of £1.505 and a weighted average remaining contractual life of 4.3 years.
3,322 of the options outstanding at 31 October 2020 have an exercise price of £1.505 and a weighted average remaining contractual life of 4.4 years.
53,844 of the options outstanding at 31 October 2020 have an exercise price of £1.69 and a weighted average remaining contractual life of 5 years.
24,846 of the options outstanding at 31 October 2020 have an exercise price of £1.65 and a weighted average remaining contractual life of 5.1 years.
50,755 of the options outstanding at 31 October 2020 have an exercise price of £1.3 and a weighted average remaining contractual life of 5.1 years.
35,000 of the options outstanding at 31 October 2020 have an exercise price of £1.715 and a weighted average remaining contractual life of 5.2 years.
280,000 of the options outstanding at 31 October 2020 have an exercise price of £1.8 and a weighted average remaining contractual life of 5.3 years.
52,505 of the options outstanding at 31 October 2020 have an exercise price of £1.63 and a weighted average remaining contractual life of 6.2 years.
250,000 of the options outstanding at 31 October 2020 have an exercise price of £1.78 and a weighted average remaining contractual life of 6.3 years.
337,000 of the options outstanding at 31 October 2020 have an exercise price of £2.5 and a weighted average remaining contractual life of 7 years.
61,200 of the options outstanding at 31 October 2020 have an exercise price of £2.5 and a weighted average remaining contractual life of 7 years.
257,000 of the options outstanding at 31 October 2020 have an exercise price of £2.775 and a weighted average remaining contractual life of 7.1 years.
110,805 of the options outstanding at 31 October 2020 have an exercise price of £2.92 and a weighted average remaining contractual life of 7.2 years.
17,000 of the options outstanding at 31 October 2020 have an exercise price of £2.92 and a weighted average remaining contractual life of 7.2 years.
47,919 of the options outstanding at 31 October 2020 have an exercise price of £3.94 and a weighted average remaining contractual life of 8 years.
526,000 of the options outstanding at 31 October 2020 have an exercise price of £3.94 and a weighted average remaining contractual life of 8 years.
28,000 of the options outstanding at 31 October 2020 have an exercise price of £3.82 and a weighted average remaining contractual life of 8.1 years.
60,000 of the options outstanding at 31 October 2020 have an exercise price of £4.01 and a weighted average remaining contractual life of 8.1 years.
49,500 of the options outstanding at 31 October 2020 have an exercise price of £3.38 and a weighted average remaining contractual life of 8.2 years.
449,000 of the options outstanding at 31 October 2020 have an exercise price of £3.01 and a weighted average remaining contractual life of 9.1 years.
20,843 of the options outstanding at 31 October 2020 have an exercise price of £2.87 and a weighted average remaining contractual life of 9.1 years.
The share-based payment expensed recognised is set out below:
The nature and purpose of each of the reserves included within equity is as follows:
Share premium is the amount paid for shares issued in excess of the nominal value.
Treasury shares is the amount of paid up capital held by the company.
The merger reserve was created when the Group was formed on 23 June 2010, bringing AFH Financial Group and AFH Group Limited under a common ownership structure. The shareholders of AFH Group Limited exchanged for
shares in AFH Financial Group.
Share-based payment reserve
The share-based payment reserve is used to recognize the value of share-based payment transactions provided to employees, including key management personnel, as part of their remuneration.
20. Directors’ remuneration
Details of Directors’ remuneration including share based payments made to directors during the years ended 31 October 2020 and 31 October 2019 are disclosed in the Report of the Remuneration Committee on page 25.
21. Notes to the cash flow statement
Cash generated from operations
22. Financial instruments
Interest rate risk management
The Group have an exposure to interest rate risk arising on interest-bearing deposits.
The Board monitors its treasury at least monthly and seeks to obtain a commercial rate of return from AA or above rated UK institutions whilst not impacting on cash flow.
The possible movement in UK interest rates would not have a significant profit or loss.
Liquidity risk management
The Board monitors forecasts of the Group’s liquidity comprising undrawn borrowing facilities and cash and cash equivalents on the basis of expected cash flows. This is carried out in accordance with recommended accounting practice and limits set by the Group.
The Board reviews the Group’s liquidity at its monthly meetings. Board policy involves projecting cash flows and considering the level of liquid assets necessary to meet these requirements.
An analysis of the Group’s contracted maturities of financial liabilities is as follows:
There is no material difference between the fair value and carrying value for those financial liabilities held at amortised cost. The group is exposed to movements in LIBOR through the HSBC facility and mortgage. Given current market conditions management believe this exposure to be immaterial.
The Group has limited exposure to credit risk £314,003 of allowance for impairment which is estimated based on historical cancellations.
The Group’s maximum exposure to credit risk is represented by its trade receivables and cash balances, which are usually paid within 35 working days.
Aged trade receivables
Included in trade receivables is £8,068,824 of debtors due in relation to non-indemnified income earnt collectable over a 4 year term which is net of a £314,003 allowance for impairment. £6,271,614 of this trade receivable is due in greater than 1 year and collected over the life of the policy.
The Group operates different credit terms in different parts of the business. The balances represent number of days from the date of invoice. No impairments for bad or doubtful debts have been made. Given the credit terms across the different parts of the business, the balances outside of the current category are not deemed to be past due.
23. Related party transactions
There were no related party transactions during the 2020 financial year end. During the year ended October 2019 the Group acquired a client bank (intangible) from Price Pearson Wheatley for a total consideration of £45,900, of which £22,950 was paid within this financial year and the remaining £22,950 is payable within 12 months. The director, Mr J Wheatley, has a material interest in this company. As the amounts payable were to the company and not the director the amounts are not disclosed within the remuneration committee report.
24. Events subsequent to the Statement of Financial Position
On 15 January 2021 the HSBC facility has extended to £20m on unchanged terms. This additional facility has not been drawn.
Additional information for all subsequent events listed above is included on our announcement pages via our website. http://www.afhfinancialgroup.com/html/announcements.html
25. Group Companies
Listed below are the companies which are owned by the Group and all have a registered office of AFH House, Buntsford Drive, Bromsgrove, B60 4JE, England:
Please click below to download the full annual report as a PDF file.