Notes to the preliminary financial information

 

1.   GENERAL INFORMATION

 

Zinc Media Group plc and its subsidiaries (the Group) produce high quality television and cross-platform content.

 

Zinc Media Group plc is the Group's ultimate parent and is a public listed company incorporated in Scotland.  The address of its registered office is 4^th Floor, Saltire Court, 20 Castle Terrace, Edinburgh EH1 2EN.  Its shares are traded on the AIM Market of the London Stock Exchange plc (LSE:ZIN).

 

The financial statements are presented in Sterling (£), rounded to the nearest thousand.

 

2.   BASIS OF PREPARATION

 

This preliminary financial information does not constitute statutory accounts within the meaning of S434 of the Companies Act 2006 for the financial year ended 31 December 2021 or the 18 month period ending 31 December 2020.

 

The financial statements of the Group for the financial year ended 31 December 2021 have been prepared in accordance with UK-adopted-International Accounting Standards. The financial statements have been prepared primarily under the historical cost convention, with the exception of contingent consideration measured at fair value. Areas where other bases are applied are identified in the accounting policies below.

 

The Group's accounting policies have been applied consistently throughout the Group to all the periods presented, unless otherwise stated.

 

The preliminary financial information for the periods ended 31 December 2021 and 2020 has been extracted from the audited statutory accounts for the year ended 31 December 2021 and prepared on the same basis as the accounting policies adopted in those accounts. The statutory accounts for the year ended 31 December 2021 have yet to be delivered to the Registrar of Companies and have been prepared in accordance with UK-adopted-International Accounting Standards. 

 

Statutory accounts for the year ended 31 December 2021 will be delivered to the Registrar of Companies and sent to Shareholders shortly. 

 

The audit report on the statutory financial statements for the year ended 31 December 2021 is unqualified and does not include reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report  and does not contain any statement under Section 498(2) or (3) of the Companies Act 2006.

 

Statutory accounts for the year ended 31 December 2020 been filed with the Registrar of Companies.  The auditor's report on those accounts was unqualified and did not include reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report  and did not contain a statement under section 498(2) and (3) of the Companies Act 2006.

 

2.1) Going concern

 

The financial statements have been prepared on a going concern basis, which assumes that the Group will be able to meet its liabilities as they fall due for a period of at least 12 months from the date of signing of the financial statements. The Group is dependent for its working capital requirements on cash generated from operations, cash holdings, long-term debt and from equity markets.

 

The Directors believe the Group has sufficient cash resources.  As at 31 December 2021 the cash holdings of the Group were £5.6m and net cash was £2.2m. The Group also has an overdraft facility of £0.6m available. 

 

The Directors believe the Group has strong shareholder support, evidenced by shareholders investing £7.5m in new equity in recent years and the long-term debt holders, who are also major shareholders with 44% of the Group's shares, post year end having agreed to extending the repayment date of the Group's long-term debt from December 2022 to December 2024. 

 

Management have prepared forecasts and scenarios under which cashflows may vary and believe there are sufficient mitigating actions that can be employed to enable the Group to operate within its current level of financing for a period of at least 12 months from the date of signing of the financial statements. 

 

There are several factors which could materially affect the Group's cashflows, including the impact of any further Covid-19 related restrictions, the underlying performance of the business and uncertainty regarding the timing of receipts from customers.  The Directors have prepared scenario plans. The main variable is the run rate of new business, particularly in relation to commissions of television programmes. Whilst the sales pipeline is healthy the timing of new sales is hard to predict and the scenarios include revenues being 25% down on pre-Covid levels of 2019. The Directors have reviewed management's forecasts and scenarios under which cashflows may vary and remain confident that the Group will have sufficient cash resources for a period of at least 12 months from issuing the financial statements in these scenarios.    

 

In light of the forecasts, the support provided by the loan providers who are also significant shareholders, along with mitigating measures available to be used if needed, the Directors believe that the going concern basis upon which the financial statements have been prepared is reasonable.

 

2.2) Basis of consolidation

 

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2021. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee.

 

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

 

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

 

Non-controlling interests (NCI) represents the share of non-wholly owned subsidiaries' net assets that are not directly attributable to the shareholders of the Group.

 

2.3) Adoption of new and revised standards

 

New standards, interpretations and amendments effective from 1 January 2021

 

In the current period, the following standards and interpretations have been adopted which were effective for

periods commencing on or after 1 January 2021:

- Amendment to IFRS 16 Leases Covid-19 - Related Rent Concessions (effective 30 June 2020)

- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform

(effective 1 January 2021)

- Amendments to IFRS 4 Insurance Contracts - deferral of IFRS 9 (effective 1 January 2021)

The adoption of these amendments has not had a material impact on the financial statements.

New standards and interpretations that have not been early adopted

 

None of the new standards, amendments and interpretations, which are effective for periods beginning after 1 January 2022 and which have not been adopted early, are expected to have a significant effect on the consolidated financial statements of the Group.

 

3) ACCOUNTING POLICIES

 

3.1) Revenue

 

The Group recognises revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Group follow these steps:

 

1.   Identify the contract with the customer

2.   Identify the performance obligations in the contract

3.   Determine the transaction price

4.   Allocate the transaction price to the performance obligations in the contract

5.   Recognise revenue when (or as) the entity satisfies a performance obligation

 

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts and sales related taxes.

 

Revenue is recognised when the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity, the costs incurred or to be incurred can be measured reliably, and when the criteria for each of the Group's different activities has been met.

 

Where productions are in progress at the year end and where the revenue amounts invoiced exceed the value of work done the excess is shown as contract liabilities; where the revenue recognised exceed revenue invoiced the amounts are classified as contract assets. The contract asset is transferred to receivables when the entitlement to payment becomes unconditional. Where it is anticipated that a production will make a loss, the anticipated loss is provided for in full.

 

The accounting policies specific to the Group's key operating revenue categories are outlined below:

 

TV - production revenue

 

Production revenue from contracts with broadcasters comprises work carried out to produce and deliver television programmes and broadcaster licence fees. These are combined performance obligations because the production and licence are indistinct, and the licence is not the primary or dominant component of the combined performance obligation. The Group considers the combined performance obligation to be satisfied over time as it does not create an asset with an alternative use at contract inception and the Group has an enforceable right to payment for performance completed to date.

 

The Group recognises revenue over time by measuring the progress towards complete satisfaction of the performance obligation, in line with transferring control of goods or services promised to a customer.  The Group transfers control of the programme over time, and costs are incurred in line with performance completed. The percentage of completion is calculated as the ratio of the contract costs incurred up until the end of the period to the total estimated programme cost.

 

TV - distribution revenue

 

Distribution revenue comprises sums receivable from the exploitation of programmes in which the company owns rights and is received as advances and royalties.

 

Advances are fixed sums receivable at the beginning of exploitation that are not dependent on the sales performance of the programme.  They are recognised when all the following criteria have been met:

 

i)    an agreement has been executed by both parties; and

ii)    the programme has been delivered; and

iii)   the licence period has begun.

 

Royalty revenue is dependent on the sales performance of the programme and is recognised when royalty amounts are confirmed.

 

Zinc Communicate

 

The three types of revenue, which comprise distinct performance obligations, are:

 

1.   Publishing: advertising revenue is recognised on the date publications are dispatched to customers which is when control transfers.

 

2.   Online: revenue is recognised at the point of delivery or fulfilment for single/discrete services which is when control transfers.

 

3.   Content production: recognition of revenue is by reference to stage of completion of the specific transaction assessed based on the actual service provided as a proportion of the total services to be provided, which is done on the same basis as TV production revenue.

 

3.2) Government grants

 

Grants received as part of Government assistance to retain employees during the Covid-19 pandemic have been recognised in the Consolidated Statement of Comprehensive Income in the same period that the related employee cost has been recognised.

 

3.3) Property, plant and equipment

 

Property, plant and equipment are stated at cost net of depreciation and any provision for impairment.

 

Depreciation is calculated to write down the cost less estimated residual value of all property, plant and equipment by equal annual instalments over their expected useful lives. The rates generally applicable are:

 

Leasehold premises                  over the term of the lease

Office equipment                      10%-20% on cost

Computer equipment                 20%-33% on cost

Motor vehicles                          25% on cost

 

Useful economic lives are reviewed annually. Depreciation is charged on all additions to, or disposals of, depreciating assets in the year of purchase or disposal. Any impairment in values is charged to the income statement.

 

3.4) Intangible assets

 

Business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately, or which arise from legal rights regardless of whether those rights are separable.

 

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but tested annually for impairment.

 

Goodwill arising on acquisitions is attributable to operational synergies and earnings potential expected to be realised over the longer term.

 

The intangible assets other than goodwill are in respect of the customer relationships, brand and distribution catalogue acquired in respect of the acquisition of Reef Television and Tern Television Productions and in each case, are amortised over the expected life of the earnings associated with the asset acquired.

 

Brands, Customer relationships, Distribution catalogue               Over 7 years

Software                                                                                   Over 2 years

 

The distribution catalogue intangible asset arises on the acquisition of Tern Television Productions. It is amortised over 5 years and as at 31 December 2021 the remaining useful life was 2.5 years.

 

Brands and customer relationships relate to the acquisition of Reef Television and Tern Television Productions. They are amortised over a period of 7 years and as at 31 December 2021 there were 0.5 more years of useful life remaining for Reef Television and 2.5 years remaining for Tern Television Productions.

 

The software relates to a finance system that was purchased in 2020 and is used across the group.

 

3.5) Leased assets

 

For any new contracts the Group considers whether a contract is, or contains, a lease. A lease is defined as 'a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration'. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:

 

·      The contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group; and

 

·      The Group has the right to obtain substantially all the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract; and

 

·      The Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct 'how and for what purpose' the asset is used throughout the period of use.

 

At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

 

The group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.

 

At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group's incremental borrowing rate.

 

Lease payments included in the measurement of the lease liability are made up of fixed payments, variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised.

 

Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification.

 

When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or income statement if the right-of-use is already reduced to zero. The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in the income statement on a straight-line basis over the lease term.

 

3.6) Inventories

 

Inventories in TV comprise of costs on productions that are incomplete at the year-end less any amounts recognised as cost of sales.

 

Inventories in Zinc Communicate comprise:

 

·      Cumulative costs incurred in relation to unpublished titles or events, less provision for future losses, and are valued based on direct costs plus attributable overheads based on a normal level of activity. No element of profit is included in the valuation of inventories.

·      Inventories comprise costs of unsold publishing stock and costs on projects that are incomplete at the year-end less any amounts recognised as cost of sales.

 

3.7) Impairment of assets

 

For the purposes of assessing impairment, non-financial assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit level.

 

Goodwill is allocated to those cash generating units that are expected to benefit from the synergies of the related business combination and represent the lowest level within the Group at which management monitors the related cash flows. Goodwill and other individual assets or cash-generating units are tested for impairment annually or whenever events / changes in circumstances indicate that the carrying amount may not be recoverable.

 

An impairment loss is recognised for the amount by which the assets or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. Except for goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist.

 

3.8) Cash and cash equivalents

 

Cash and cash equivalents comprise cash balances and call deposits with maturity of less than three months.

 

3.9) Current and deferred taxation

 

Current tax is the tax currently payable based on taxable profit for the year.

 

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases.

 

Deferred tax is not recognised in respect of:

 

·      the initial recognition of goodwill that is not tax deductible; and

·      the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets.

 

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates and laws that are expected to apply to their respective year of realisation, provided they are enacted or substantively enacted at the reporting date.

 

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity.

 

3.10)     Financial instruments

 

Recognition of financial instruments

 

Financial assets and liabilities are recognised on the Group's Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.

 

Financial assets

 

Initial and subsequent measurement of financial assets

 

Cash and cash equivalents

 

Cash and cash equivalents comprise cash at bank and in hand and other short-term deposits held by the company with maturities of less than three months.

 

Trade and other receivables

 

Trade receivables are initially measured at fair value. Other receivables are initially measured at fair value plus transaction costs.  Receivables are subsequently measured at amortised cost using the effective interest rate method.

Impairment of trade receivables

 

For trade receivables, expected credit losses are measured by applying an expected loss rate to the gross carrying amount.  The expected loss rate comprises the risk of a default occurring and the expected cash flows on default based on the aging of the receivable.  The risk of a default occurring always takes into consideration all possible default events over the expected life of those receivables ("the lifetime expected credit losses").   Different provision rates and periods are used based on groupings of historic credit loss experience by product type, customer type and location.

 

Impairment losses and any subsequent reversals of impairment losses are adjusted against the carrying amount of the receivable and are recognised in profit or loss.

 

Financial liabilities and equity

 

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.  An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.

 

Initial and subsequent measurement of financial liabilities

 

Trade and other payables

 

Trade and other payables are initially measured at fair value, net of direct transaction costs and subsequently measured at amortised cost.

 

Loan notes

 

Loan notes are initially recognised at fair value, adjusted for transaction costs, and subsequently measured at amortised cost using the effective interest rate method.

 

Finance charges, including premiums payable on settlement and direct issue costs, are accounted for on an effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the year in which they arise.

 

Contingent consideration

 

The acquisition-date fair value of any contingent consideration is recognised as part of the consideration transferred by the Group in exchange for the acquiree. Changes in the fair value of contingent consideration that result from additional information obtained during the measurement period (maximum one year from the acquisition date) about facts and circumstances that existed at the acquisition date are adjusted retrospectively against goodwill. Other changes resulting from events after the acquisition date are recognised in profit or loss.

 

Equity instruments

 

Equity instruments issued by the Company are recorded at fair value on initial recognition net of transaction costs.

 

Derecognition of financial assets (including write-offs) and financial liabilities

 

A financial asset (or part thereof) is derecognised when the contractual rights to cash flows expire or are settled, or when the contractual rights to receive the cash flows of the financial asset and substantially all the risks and rewards of ownership are transferred to another party. 

 

When there is no reasonable expectation of recovering a financial asset it is derecognised ('written off').

 

The gain or loss on derecognition of financial assets measured at amortised cost is recognised in profit or loss.

A financial liability (or part thereof) is derecognised when the obligation specified in the contract is discharged, cancelled or expires.

 

Any difference between the carrying amount of a financial liability (or part thereof) that is derecognised, and the consideration paid is recognised in profit or loss.

 

3.11)     Employee benefits

 

Equity settled share-based payments

 

Where employees are rewarded using equity settled share-based payments, the fair values of employees' services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions.

 

All equity-settled share-based payments are ultimately recognised as an expense in the income statement with a corresponding credit to reserves.

 

If vesting periods apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are revised subsequently if there is any indication that the number of share options expected to vest differs from previous estimates.  Any cumulative adjustment prior to vesting is recognised in the current year. No adjustment is made to any expense recognised in prior years if share options that have vested are not exercised.

 

Retirement benefits

 

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due.

 

3.12)     Provisions

 

Provisions are recognised when: the group has a present legal or constructive obligation as result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.  Any increase in the provision due to the passage of time is recognised as interest expense.

 

3.13)     Foreign currencies

 

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the income statement.

 

3.14)     Significant judgements and estimates

 

The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below.

 

Revenue recognition

 

The main judgements regarding revenue recognition relate to TV production revenue.  The Group considers the production and licence elements to be a combined performance obligation to be satisfied and recognised over time.  This is explained in note 3.1.

 

Impairment of goodwill and intangible assets

 

The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate to calculate the present value of these cash flows. Actual outcomes could vary. See note 13 for details of how these judgements are made.

 

Deferred tax asset on losses

 

Judgements are made to determine deferred tax assets on losses. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised. Assessment of future taxable profit is performed at every reporting date. See note 22 for details of the deferred tax asset recognised at 31 December 2021.

 

3.15)     Segmental reporting

 

In identifying its operating segments, management follows the Group's service lines, which represent the main products and services provided by the Group. The activities undertaken by the TV segment include the production of television and radio content. The Zinc Communicate unit includes publishing and content production.

 

Each of these operating segments is managed separately as each service line requires different resources as well as marketing approaches. All inter-segment transfers are carried out at arm's length prices.

 

The measurement policies the Group uses for segment reporting under IFRS 8 are the same as those used in its financial statements.