Notes to the condensed consolidated financial statements

For the six months ended 30 September 2020

1. General information

Walker Crips Group plc ('the Company') is the Parent Company of the Walker Crips group of companies ('the Group').  The Company is a public limited company incorporated in England and Wales under the Companies Act 2006. The Company's registered office is at Old Change House, 128 Queen Victoria Street, London EC4V 4BJ.

2. Basis of preparation and significant accounting policies

Basis of preparation

The Group's consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS). These condensed financial statements are presented in accordance with IAS 34 Interim Financial Reporting. They do not include all disclosures that would otherwise be required in a complete set of financial statements, however, selected explanatory notes are included for events and transactions that are significant to an understanding of the Group's financial position and performance.

The condensed consolidated financial statements should be read in conjunction with the Group's audited financial statements for the year ended 31 March 2020. The interim financial information is unaudited and does not constitute statutory accounts as defined in section 434 of the Companies Act 2006.

The Group's financial statements for the year ended 31 March 2020 have been reported on by the auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not draw attention to any matters by way of emphasis. They also did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The interim financial information has neither been audited nor reviewed pursuant to guidance issued by the Audit Procedures Board.

The condensed consolidated financial statements have been prepared on the basis of the accounting policies and methods of computation set out in the Group's consolidated financial statements for the year ended 31 March 2020.

The interim condensed consolidated financial statements are presented in GBP sterling (£) and are rounded to the nearest thousand, unless stated otherwise.

The Directors have considered the guidance of the UK Financial Reporting Council and events relating to the spread of coronavirus (COVID-19) in preparing these interim condensed consolidated financial statements.

Going Concern

The Directors are satisfied that the Group has sufficient resources to continue in operation for a period of at least twelve months from the date of this report. Accordingly, the Directors continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

As at 30 September 2020, the Group had net assets of £22.3m (31 March 2020: £22.6m), net current assets of £9.1m (31 March 2020: £9.1m) and net cash and cash equivalents of £7.73 million after adjusting for the £76,000 furlough grant repaid post period end (31 March 2020: £8.61 million). The Group reported an operating loss of £374,000 for the period to 30 September 2020, inclusive of an exceptional cost of £102,000 (31 March 2020: operating profit of £1,092,000, inclusive of exceptional income of £375,000), and cash generated by operating activities of £5,000 (31 March 2020: cash generated by operating activities of £3,483,000).

The Directors consider the going concern basis to be appropriate following their assessment of the Group's financial position and its ability to meet its obligations as and when they fall due. In making the going concern assessment, the Directors have taken into account the following:

-     The capital structure and liquid resources of the Group;

-     Actual trading in the six-month period to 30 September 2020;

-     Its base case and stressed cash flow forecasts over the financial reporting periods ending 31 March 2021 and 31 March 2022;

-     Stress tests carried out, including reversed stress test scenarios to assess the Group's ability to withstand significant market-wide events; and

-     The principal risks facing the Group, including the potential financial and operational impact of COVID-19, and its systems of risk management and internal control.

Key assumptions that the Directors have made in preparing the base case cash flow forecasts are that:

-     Revenues reflect the impact of (i) continued low base rates of 10 basis points on income for managing client deposits and (ii) lower fee income expectation as a result of the lower UK equity market index levels.  Overall revenue growth expectation for future years set conservatively at 2% to 3.3%; and

-     Base case costs reflect only the actions Management has taken to date in response to the impact of COVID-19 on the business for the remainder of the present reporting year, with any further cost savings delayed until the year to 31 March 2022.

Key stress scenarios that the Directors have considered include:

-     A 'bear stress scenario' representing a further 10% fall in income compared to the base case scenario in reporting periods ending 31 March 2021 and 31 March 2022;

-     A 'severe stress scenario' representing a 20% fall in commission income and 15% fall in fee income compared to the base case for each forecast period; and

-     Both stress scenarios assume no mitigating actions.

Our reverse stress testing further indicates that revenues would have to decline by 26% and 31% respectively over the next 12 months compared to base case to reach our liquidity and pillar 1 regulatory capital ratio thresholds. These reverse stresses make no allowance for any mitigating actions available to the Group and the Directors consider them to be remote scenarios.

Actual trading for the six months to 30 September 2020 was ahead of the base case scenario noted above.  Although COVID-19 developments are fluid, the Directors believe that the stress conditions assessed demonstrate the Group's financial resilience and operating flexibility.  At the report date, the Directors were not aware of any material uncertainties that would cast doubt over the Group's ability to continue as a going concern.

Government grant

The Group, initially having taken advantage of the Government backed Coronavirus Job Retention Scheme (CJRS), post period-end decided to repay the grant in full.  The Directors took this decision following a review of work activities undertaken by furloughed staff, which resulted in some positions being made redundant, and as such believe it is correct to repay the grant.  The reported loss therefore does not include the grant. The initial cash receipt is recognised in the statement of cash flows as a financing activity and the repayment liability is recorded in the statement of financial position.

Taxation

The tax credit in the income statement represents the sum of the tax currently receivable and deferred tax.

The tax currently receivable is based on the taxable loss for the period. Taxable loss differs from net loss as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date. The amount of taxable loss in the current period has been estimated.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. 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 loss or profits will be available against which deductible temporary differences can be utilised.

The statement of financial position shows overall payable balances for tax liability and deferred tax liability despite an estimated receivable recognised in the six-month period to 30 September 2020. This is due to the impact of the income statement tax credit reducing the balance of the respective liabilities.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted by the statement of financial position date. Deferred tax is charged or credited directly to the income statement, except when it relates to items charged or credited to 'Other comprehensive income' in which case the deferred tax is also dealt with in other comprehensive income.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to do so and presented as a net number on the face of the statement of financial position.

Use of estimates and judgements

Estimates and judgements used in the preparation of these interim condensed consolidated financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable.

There have been no material revisions to the nature and amounts of estimates of numbers reported in prior periods. The effects of COVID-19 have not made any significant changes to various methodologies adopted by the Group in assessing judgments and estimates made in the preparation of these interim Condensed Consolidated Financial Statements.

Key sources of estimates and judgements that have a significant impact on the carrying values of assets and liabilities are discussed below:

-     Impairment of goodwill

The Group tests annually whether goodwill allocated to each of the cash generating units have suffered any impairment.  Impairment tests are carried out more frequently if there are events or changes in circumstances that indicate that the carrying amount of the asset may exceed the recoverable amount.

Determining whether goodwill is impaired requires an estimation of the fair value less costs to sell and the value-in-use of the cash-generating units to which goodwill has been allocated. The fair value less costs to sell involves estimation of values based on the application of earnings multiples and comparison to similar transactions. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and apply a discount rate in order to calculate present value. The assumptions and inputs involve judgements and create estimation uncertainty.

The last annual test was performed for the year ending 31 March 2020.  The carrying amount of goodwill at the statement of financial position date was £4.4 million (31 March 2020: £4.4 million).

-     Other intangible assets

Acquired client lists are capitalised based on current fair values. When the Group purchases client relationships from other corporate entities, a judgement is made as to whether the transaction should be accounted for as a business combination or a separate purchase of intangible assets. In making this judgement, the Group assesses the acquiree against the definition of a business combination in IFRS 3. Payments to newly recruited Investment Managers are capitalised when they are judged to be made for the acquisition of client relationship intangibles. The useful lives are estimated by assessing the historic rates of client retention, the ages and succession plans of the Investment Managers who manage the clients and the contractual incentives of the Investment Managers. The Directors conduct a review of indicators of impairment and also consider a life of up to twenty years to be both appropriate and in line with industry peers.

The Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

No intangible asset acquisitions were made in the period to 30 September 2020.

-     IFRS 16 "Leases"

IFRS 16 requires certain judgements and estimates to be made and those significant judgements are explained below:

-     Following a review of all leases, the Group has opted to use single discount rates for leases with reasonably similar characteristics. The discount rates used have had an impact on the right-of-use assets values, lease liabilities on initial recognition and lease finance costs included within the income statement and statement of financial position.

-     IFRS 16 defines a lease term as the non-cancellable period of a lease, together with the options to extend or terminate a lease, if the lessee is reasonably certain to exercise the lease options available at the time of reporting. Where a lease includes the option for the Group to extend the lease term, the Group has exercised the judgement, based on current information, that such leases will be extended to the full length available, and this is included in the calculation of the value of the right of use assets and lease liabilities on initial recognition and valuation at the reporting date.

Impact of accounting standards to be applied in future periods

There are a number of standards and interpretations which have been issued by the International

Accounting Standards Board that are effective for periods beginning subsequent to 31 December

2020 that the Group has decided not to adopt early. The Group does not believe these standards and interpretations will have a material impact on the financial statements once adopted.

Significant events and transactions

The World Health Organisation declared COVID-19 a global health emergency on 30 January 2020.  In response and in light of the expected economic downturn due to the COVID-19 pandemic, the Bank of England (BoE) reduced the base rate from 0.75% to 0.25% on 11 March 2020 and again to 0.1% on 19 March 2020. The cuts in base rate, as noted in Group's Annual Reports and Accounts, is expected to result in £1.5 million less annual income receivable by the Group.  For the six-month period to 30 September 2020, the impact of changes in the base rate resulted in £785,000 less income being recorded compared to the prior period. In turn, this has contributed to the drop in the proportion of non-broking income to total income (Note 7).

In the 6 months to 30 September 2020 the Group reported management fee income that is £516,000 lower than the prior year comparable period.  The fall in fee income, as anticipated, was partly caused by the previously noted exit of several investment managers in 2019 and partly by the drop in global financial market indices, resulting in lower assets under management values and therefore lower management fees. 

The volatility in the financial markets also played a part in boosting our broking income by £173,000 compared to the prior period as clients engaged in increased trading activity. 

3. Changes in significant accounting policies

The accounting policies applied in these interim Condensed Consolidated Financial Statements are consistent with those applied in the Group's Consolidated Financial Statements as at and for the year ended 31 March 2020.

4. Revenue and segmental analysis

For segmental reporting purposes, the Group currently has three operating segments:

-     Investment Management, being portfolio-based transaction execution and investment advice;

-     Wealth Management, being financial planning and pension advice; and

-     Software as a Service (SaaS), comprising provision of regulatory and admin software to regulated companies.

Walker Crips Investment Management's activities focus predominantly on investment management of various types of portfolios and asset classes.

Walker Crips Wealth Management provides advisory and administrative services to clients in relation to their financial planning, life insurance, inheritance tax and pension arrangements.

EnOC Technologies Limited (SaaS) provides the regulatory and admin software, software as a service, to regulated companies including all WCG's regulated entities.  Fees payable by subsidiary companies to EnOC Technologies Limited have been eliminated on consolidation.

These activities are the basis on which the Group reports its primary segment information. Unallocated corporate expenses are disclosed separately. Revenues between Group entities and reportable segments are excluded from the below analysis.

5. Earnings per share

The calculation of basic earnings per share for continuing operations is based on the post-tax loss for the period of £366,000 (2019: post-tax profit of £502,000) and on 42,577,328 (2019: 42,577,328) ordinary shares of 6 2/3p, being the weighted average number of ordinary shares in issue during the period. There is no dilution applicable to the current period.

6. Dividends

The interim dividend of 0.15 pence per share (2019: 0.60 pence per share) is payable on 23 December 2020 to shareholders on the register at the close of business on 11 December 2020. The associated ex-dividend date is 10 December 2020. The interim dividend has not been included as a liability in this interim report.

7. Total income

The Group's income can also be categorised as follows for the purpose of measuring a Key Performance Indicator; the ratio of non-broking income to total income. 

8. Commission payable

 Commissions and fees paid comprises:

9. Investment in associate and joint venture

Associate

The Group has a 33% (2019: nil) interest in its associate, Walker Crips Property Income Limited ("WCPIL"), a company incorporated and operating in the United Kingdom. The brought forward value of the Group's share of net assets in WCPIL was £1. The Board of WCPIL submitted management accounts to 30 September 2020 reporting a profit of £115,000 from which a dividend of £34,000 was paid in the period.

Joint venture

As reported in the 2020 Annual Report and Accounts, the Group acquired the remaining interest in the former joint venture, JWPCreers Wealth Management Limited, which is now a 100% owned subsidiary and has changed its name to Walker Crips Ventures Limited.

10.    Exceptional items

As a result of their materiality, the Directors have decided to disclose certain amounts separately in order to present results which are not distorted by significant non-recurring events.   

During the period to 30 September 2020, the Group as part of the restructuring programme made certain positions redundant.  The cost of the redundancy exercise is classified as exceptional due to its nature and materiality.

In the period to 31 March 2020, the Group, following arbitration proceedings, received £209,000 in respect of a disputed historic insurance claim that was expensed in prior periods.  In addition, cash consideration payable for acquired client relationships was re-assessed based on actual values and an exceptional credit recorded being the reversal of an over-estimation of £166,000.

11.    Tax

Tax is charged at 19% for the six months ended 30 September 2020 (30 September 2019: 19%) representing the best estimate of the average annual effective tax rate expected to apply for the full year, applied to the pre-tax income of the six-month period.

12.    Non-current investments - fair value through profit or loss

Investments at fair value through profit or loss

The Group's non-current investments comprise unregulated collective investment scheme (UCIS) investments (£40,000) and a life policy investment (£10,000).

The UCIS fair values are based upon the reported unit price as at 30 September 2020.

The fair value of the Group's life policy investment is based upon the life company's forecast terminal value.

13.    Current investments

Trading investments represent securities and collectives held in support of Group's structured investment and arbitrage activities.  The fair values of these securities are based on quoted market prices.

14.      Fair values

The following provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

-     Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. The trading investments fall within this category;

-     Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The Group does not hold financial instruments in this category; and

-     Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The Group's Investments held in non-current assets fall within this category.

Further IFRS 13 disclosures have not been presented here as the balance represents 2.305% (2019: 1.892%) of total assets.

The following tables analyse within the fair value hierarchy to the Group's Investments measured at fair value.

There have been no transfers of financial instruments between levels during the period.

Level 1 investments comprise the Group's principal proprietary holdings of listed investments, which are valued at the prices prevailing on the respective relevant stock exchanges at the period end.

Level 3 investments represent the fair value of UCIS and Life Policy investments, which have fair values determined by reference to prices supplied from the administrator and provider respectively.

In all cases, the unrealised gains or losses in the investments are recognised within revenue on the income statement.

15.      Cash generated from operations

*£542,000 cash outflow from working capital movement (30 September 2019: £41,000 outflow; 31 March 2020: £160,000 inflow).

16.    Contingent liability

Occasionally the Group receives complaints that are considered without merit, but the final outcome sometimes falls outside the Group's control. Where such claims are not covered by the Group's indemnity insurance, for example due to an excess or coverage dispute, a contingent liability arises. However, where in the view of the Directors a negative outcome is considered to be remote no disclosure has been made in these financial statements.

17.    Subsequent events

Since the reporting date, two advisers have decided to leave the Group on amicable terms, which will result in the transfer of £46.8 million of Assets Under Management and Administration. The transfer of clients and their assets will take place later this year. The future impact on the Group's performance to be a reduction in net income before operating costs of circa £70,000.

18.    Alternative performance measures ('APMs')

As explained in the 2020 Annual Report and Accounts, the Group reports APMs to facilitate readers' understanding of business performance. The tables below provide full reconciliations of the APMs to IFRS reported results

* Working capital movement of £542,000 per Note 15 further adjusted to eliminate the impact of the furlough grant repaid post period end

Directors' Responsibility Statement

The Directors confirm that to the best of their knowledge:

(a) The condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;

(b) The half yearly report from the Chairman (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R; and

(c) The half yearly report from the Chairman includes a fair review of the information required by DTR 4.2.8R as far as applicable.

On Behalf of the Board

Sean Lam

Chief Executive Officer

27 November 2020

Walker Crips Group plc