Annual Financial Report
Serco Group plc 2010 Annual Report and Accounts
The following documents have today been posted or otherwise made available to
shareholders:
1. 2010 Annual Report and Accounts
2. Notice of 2011 Annual General Meeting
3. Form of Proxy for the 2011 Annual General Meeting
In accordance with Listing Rule 9.6.1 a copy of each of these documents has
been uploaded to the National Storage Mechanism and will be available for
viewing shortly. The documents are also available on the Company's website at
www.serco.com.
Compliance with Disclosure and Transparency Rule 6.3.5 ("DTR 6.3.5") - Extracts
from the 2010 Annual Report and Accounts
The information below, which is extracted from the 2010 Annual Report and
Accounts, is included solely for the purpose of complying with DTR 6.3.5. It
should be read in conjunction with the Company's Full year results announcement
issued on 2 March 2011 (available at www.serco.com/investors). Together these
constitute the material required by DTR 6.3.5 to be communicated to the media
in unedited full text through a Regulatory Information Service. This material
is not a substitute for reading the full 2010 Annual Report and Accounts. All
page numbers and cross-references in the extracted information below refer to
page numbers in the 2010 Annual Report and Accounts.
For further information please contact Serco:
T +44 (0) 1256 745 900
Stuart Ford, Head of Investor Relations
Dominic Cheetham, Director of Corporate Communications
Directors' responsibilities
Alastair Lyons CBE - Chairman
Christopher Hyman CBE - Chief Executive
Andrew Jenner - Finance Director
Leonard Broese van Groenou - Non-Executive Director
Paul Brooks - Non-Executive Director
David Richardson - Non-Executive Director
We confirm to the best of our knowledge:
1. the Financial Statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings
included in the consolidation taken as a whole; and
2. the management report, which is incorporated into the Directors' Report,
includes a fair review of the development and performance of the business and
the position of the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and
uncertainties they face.
Principal risks and uncertainties
Serco has a well-established and embedded system of internal control, including
financial, operational and compliance controls and risk management, designed to
safeguard shareholders' investments and our assets and reputation.
The Board has overall responsibility for our internal control system and for
reviewing its effectiveness, and has delegated to management the implementation
of policies on risk and control.
Risk management is fundamental to how we manage the business. We have developed
robust systems and processes to identify and manage the key risks facing each
of our businesses and the Group as a whole, and all parts of the business have
appropriate risk and crisis management plans that meet defined policy
standards.
During the year we have implemented the recommendations resulting from the risk
management review completed in 2009. This has seen the establishment of the
Group Risk Management Committee, a formal Committee of the Executive Committee,
which provides governance and oversight of risk. Further, we have changed and
improved the approach to the assessment of risk as well as standardising and
enhancing the reporting format.
These enhancements to our risk management processes have been incorporated
within our risk management policies, systems and processes which conform to the
Combined Code's requirements and form part of the Serco Management System
(SMS). A comprehensive review of the SMS was completed in 2010. The revised SMS
has been approved and reissued by the Board.
Such systems and processes, however, can only be designed to mitigate, rather
than eliminate, the risk of failure to achieve business objectives, and can
only provide reasonable and not absolute assurance, against misstatement or
loss. The Board confirms that this process has been in place for the year under
review and up to the date of approval of the annual report and accounts.
Our approach to risk within the Serco Management System
The SMS sets out policy standards, systems and processes that identify, review
and report risks at all levels of our business and in the Group as a whole with
the aim of safeguarding our shareholders' investments and our assets and
reputation. At each level within our business, risk management processes
reflect the nature of the activities being undertaken and the business and
operational risks inherent in them, and therefore the level of control
considered necessary to protect our interests and those of our stakeholders.
These risk management processes were subject to comprehensive review during
2010, as part of a broader review of the SMS. This ensures that they reflect
the nature of the activities we undertake and the business and operational
risks inherent in them, and therefore the level of control we consider
necessary to protect our interests and those of our stakeholders.
These controls and processes fall into four main areas: Identification,
Assessment, Planning and Control, and Monitoring, so that we:
• identify business objectives that reflect the interests of all stakeholders,
and the risks associated with the achievement of these objectives
• regularly assess our exposure to risk, including through the regular
measurement of key risk indicators
• control and reduce risk as far as reasonably practicable or achievable
through cost-effective risk treatment options
• identify new risks as they arise and remove those risks that are no longer
relevant
Risk Identification
In identifying the potential risks associated with the achievement of our
business objectives, we consider both external factors arising from the
environment within which we operate, and internal risks arising from the nature
of our business, its controls and processes, and our management decisions.
Once identified, we document risks in risk registers, which are maintained at a
contract, business unit, programme, divisional and Group level. These risk
registers change as new risks emerge and existing risks diminish, so that the
registers reflect the current key risks. We review risk registers at least
quarterly and more frequently as required. The Group Risk Management Committee
reviews the Group risk register quarterly ahead of formal review by the Board.
Risk Assessment
We assess the potential effect of each identified risk on the achievement of
our business objectives and wider stakeholder interests. To do so, we use a
risk scoring system based on our assessment of the probability of a risk
materialising and the effect if it does. This is assessed from three
perspectives:
• the risk's significance to the achievement of our business objectives
• the risk's significance to society, including on public safety and the
environment, and
• our ability to influence, control and mitigate the risk.
Analysis of our key risks allows us to assess the probability of disruption to
our business objectives, and highlights critical areas that require management
attention. In 2010 an updated risk assessment matrix has been implemented,
providing improved clarity in the definition of probability assessment.
Risk Planning and Control
We assign each identified and assessed risk to a risk owner, who is responsible
for controlling and managing it and developing a robust and effective plan to
reduce or mitigate the risk. Risk owners are required to report to the Board on
specific risks. The Board may ask for additional information or request an
audit to provide additional assurance.
Risk reduction involves taking early management action to remove or reduce
identified risks before they can affect the contract or project. We consider
options to eliminate, reduce or control the risks as part of the risk
identification and analysis process.
Risk mitigation involves us identifying appropriate measures, including
contingency plans, to reduce the severity of the impact of the risks, should
they occur. This includes developing crisis management plans in response to
risks whose potential impact warrants a specific management process.
The SMS requires every contract to develop a risk management plan reflecting
assessed risks and supported by appropriate measures and contingency plans to
mitigate the impact of the risks.
Risk Monitoring
Changes in our external environment, internal structures, and management
decisions may all affect the nature and extent of the risks to which the Group
is exposed.
Our risk monitoring process therefore regularly monitors changes to our
business and the external environment, to ensure that we respond appropriately
to reduce the impact of emerging risks.
Principal risks
The Group risk register identifies the principal risks facing the business,
including those that are managed directly at a Group level. They are managed
through a formal process. This identifies the business objectives and the
interests of shareholders and other stakeholders that are likely, directly or
indirectly, to influence the business's performance and its value.
The Group's key stakeholders include, but are not limited to, shareholders,
customers, suppliers, staff, trade unions, government, regulators, banks and
insurers. The way we operate as a responsible company recognises the interests
of the community in areas such as social, environmental and ethical impact, as
described under Corporate Responsibility on pages 64 to 67.
The most significant risks relate to our reputation, and to operational and
financial performance. A number of our risks reflect social, environmental and
ethical issues, but these do not currently represent significant threats to our
strategy.
Summarised on the following pages are the key risks we have identified that
could have a material impact on our reputation, our operations, or our
financial performance.
We also have material investments in a number of joint ventures, where we have
joint control over management practices. Our representatives within these
companies ensure that their processes and procedures for identifying and
managing risk are appropriate and that internal controls exist and are
regularly monitored.
We keep reputational and emerging risks under active review and inform the
Board of changes. Emerging risks cover longer-term risks that could represent a
threat to our activities but which are not yet sufficiently defined to be
included as active risks. Examples of these risks include climate change and
changes in key markets.
Managing and mitigating risk
Our risk management process enables us to understand our operational risk
profile. While operational risk can never be eliminated, we endeavour to
minimise the impact by the consistent implementation of the SMS, ensuring that
appropriate infrastructure, controls, systems, staff and processes are in
place.
Some of our key management and control techniques defined in the SMS are set
out below:
• our operating processes fully reflect the principles of clear delegation of
authority and segregation of duties
• our Group Risk Management Committee meets quarterly to ensure that risks,
internal control and business assurance are effectively managed and reviewed
• comprehensive business review processes ensure we meet customer expectations,
regulatory requirements, and performance criteria including operational
effectiveness, investment returns, cash flow requirements and profitability
• we monitor and regularly review key performance indicators. These include
analysis of business performance and variances from plan, occupational health
and safety incidents, and error and exception reporting
• selective recruitment, succession planning and other human resource policies
and practices ensure that staff skills are aligned with Serco's current and
future needs
• we maintain insurance policies against losses arising from circumstances such
as damage or destruction of physical assets, theft, legal liability for
third-party loss and professional advice. We review the adequacy of our
insurance cover at regular intervals
• our Investment Committee meets regularly to ensure appropriate governance and
the management of risk associated with larger or higher risk bids,
acquisitions, disposals and areas of significant capital expenditure
• we apply robust project management and change implementation disciplines to
all major projects including new contract transitions, acquisitions, new
technology applications, change programmes and other major initiatives
• the Directors' Report describes our approach to health, safety and
environmental protection. Qualified and experienced staff in each business unit
provide advice and support on health, safety and environmental issues and
undertake regular audits
• we have safety specialists in our aviation, rail, defence, nuclear and marine
businesses who report to the Board and maintain and further develop the very
high standards expected in these industries
• the Chief Information Officer is responsible for ensuring that systems and
processes are in place to ensure the confidentiality, integrity and
availability of sensitive information and the associated information systems
that support our business activities
• our Ethics Committee has responsibility for the review of ethical issues that
may arise from our current and future activities
• the Company Secretary manages a confidential reporting service, to which
staff can report illegal, dangerous, dishonest or unethical activities. This
process was enhanced and relaunched at the end of 2010
• we have crisis and business continuity plans in place to manage crisis
events, both within divisions and the Group.
Internal Audit
An integral part of risk management is assurance that the controls identified
to manage risks are operating and effective. The Head of Internal Audit is
responsible for delivery of the assurance strategy, ensuring our assurance
programme remains aligned to test the key controls managing the Group's risks.
Internal audit is delivered at three levels across the business:
• Group internal audit
• Functional internal audit, and
• Divisional internal audit.
The Head of Internal Audit leads the Group internal audit programme, which is
independently delivered by KPMG LLP. Its findings are reported directly to the
Group Audit Committee. In addition to the audits conducted by KPMG, the Head of
Internal Audit supplements the programme by conducting periodic special reviews
as requested by the Serco Group plc Board or Executive Committee from time to
time.
The functional internal audit programme supplements the Group internal audit
programme. It addresses finance processes and controls, through a centrally
provided audit programme delivered by divisional management on a peer to peer
basis, as well as audit programmes completed by Group functional specialists
covering health, safety and environment, and IT systems & security policy
compliance.
In addition to these programmes, each operating division maintains a divisional
risk register, from which we develop a divisional internal audit programme.
This programme selects a number of contracts for review based on certain key
risks. These reviews are completed through a self-assessment programme focused
on testing the controls which manage and mitigate these key risks. Divisional
audit committees, which track and report on the progress of the divisional
internal audit programme, meet three times a year.
The Head of Internal Audit oversees the internal audit process, as well as
acting as the conduit for sharing best practice, and flagging emerging risks to
ensure each part of the business benefits from the wider scale of the Group's
assurance activity.
In addition to internal audit, many parts of our business are subject to other
reviews of their controls by third parties, including industry regulators, ISO
Standards, customers and other external audits. This third-party scrutiny
significantly increases the scope of auditing conducted across the Group each
year.
The Board confirms that the actions it considers necessary are being taken to
remedy the failings and weaknesses which it has determined to be significant
from its review of the internal controls across the Group. The Board confirms
that it has not been advised of material weaknesses in financial reporting as
part of the review of the internal control system.
Market Risks
Risk Significant change in Government policies, expenditure levels and
budgetary constraints
Description/Comment Impact Mitigation
As a major proportion of Serco's * Reduction in * Business strategy
customers are governments and market
governmental agencies, a opportunities * Diverse business
substantial part of the business across geographies
is dependent on government * Changes to terms and markets
policies, budget priorities and of existing or
regulatory or political new contracts * Business
constraints, in particular those significantly
regarding maintaining and * Failure to meet focused on
improving public infrastructure, growth or profit developed markets
which could have a significant expectations with strong and
impact on the size, scope, timing established legal
and duration of contracts and systems providing
orders under them and therefore on protection to
the level of business that we may changes in
win. contract terms
As such, these businesses are
susceptible to changes in
government, government policy,
budget allocations and the
political environment, primarily
in the UK and the US. Any
reduction in such government
expenditure and funding could
result in a suspension,
cancellation, termination or
non-renewal of contracts. Revenues
may also be adversely affected by
changes to the UK Government's or
US Government's policy in respect
of outsourcing.
Risk Failure to win a strategic or significant bid or rebid
Description/Comment Impact Mitigation
Failure to win material bids or * Failure to meet * Business Lifecycle
renew material contracts could growth or profit Governance process
restrict growth opportunities for expectations embedded in SMS
the future or have an adverse
impact on Serco's business, * Significant * Governance
financial condition and results of financial loss structure managed
operations. Further, a significant or cost overrun through Investment
number of Serco's contracts with Committee,
the UK Government, the US * Damage to programme and
Government and other public sector reputation project boards,
customers, including renewals and resulting in divisional and
extensions of previous contracts, loss of existing contract boards
are awarded through formal or new business
competitive bidding processes. * Business strategy
Competitive bidding processes * Impact on and targets managed
present a number of risks, strategic through internal
including substantial cost and objectives boards
management time and effort to
prepare bids and proposals for * Regular review and
contracts that may not be won. In monitoring of risk
addition, there is often a long registers
period between a successful
competition tender offer and * Gate review and
entering into definitive formal sign-off
contractual documentation and process
financial close, and in some cases
financial close may not occur.
Operational Risks
Risk Any harm to the Company's reputation could adversely impact business
Description/Comment Impact Mitigation
The Company is dependent on * Failure to meet * Robust bidding and
maintaining its reputation in each growth or profit contract review
jurisdiction in which it operates expectations process including
in order to maintain and grow its financial,
business. It is exposed to the * Significant technical and
risk that litigation, misconduct, financial loss commercial reviews
operational failures and negative or cost overrun
publicity could harm its * Governance
reputation. In addition, the * Loss of contract structure managed
Company's reputation could also be revenue related through Investment
adversely affected if its to operations Committee,
services, or the services and service programme and
performed by its sub-contractors, charges project boards,
do not perform as expected. Any divisional and
harm to its reputation could have * Damage to contract boards
a material adverse effect on its reputation
business, financial condition and resulting in * Business strategy
results of operations. loss of existing and targets
or new business
* Regular review and
* Impact on monitoring of risk
strategic registers
objectives
* Gate review and
formal sign-off
process
* Quality management
systems
Risk Failure of significant programmes, including operating within agreed
fixed costs
Description/Comment Impact Mitigation
Serco has a number of complex * Failure to meet * Robust bidding and
programmes which it is contracted growth or profit contract review
to deliver for the customer. These expectations process including
are often let on a fixed price financial,
basis irrespective of the actual * Significant technical and
costs incurred, and therefore if financial loss commercial reviews
costs exceed the contract ceiling or cost overrun
the Company may not be able to * Governance
obtain full reimbursement. * Loss of contract structure managed
Further, some projects require revenue related through Investment
delivery in accordance with to operations Committee,
specified milestones on agreed and service programme and
dates. Significant adverse charges project boards,
financial consequences can be divisional and
imposed where milestones are not * Damage to contract boards
met or a project is not delivered reputation
on time. The length and complexity resulting in * Robust cost
of such projects mean that loss of existing accounting
management estimates can be or new business
particularly difficult to make and * Internal audit
could turn out to be inaccurate. * Impact on
strategic * Business strategy
objectives and targets
* Regular review and
monitoring of risk
registers
* Gate review and
formal sign-off
process
* Quality management
systems
Risk Failure to deliver operational efficiency
Description/Comment Impact Mitigation
To deliver our commitments we * Erosion of * Business strategy
must ensure that we have profit and supporting plans
efficient operations. Our
operational efficiency programme * Impact on * Internal governance
facilitates delivery of competitiveness structure
operational change and
sustainable margin improvement. * Damage to * Business review
Failure to deliver may impact our reputation
ability to deliver business resulting in * Internal audit
commitments. loss of existing
or new business * LEAN/Continuous
Improvement
* Failure to meet programme
customer
expectations and * Quarterly management
business reporting
strategy
Risk Major information security breach
Description/Comment Impact Mitigation
Serco must comply with * Damage to * Information
restrictions on the use of reputation Systems policy,
confidential and classified data resulting in loss systems and
and provide for secure of existing or embedded
transmission of such information. new business governance
This is a heightened risk (disqualification structure
particularly with respect to from future
government contracts due to the tenders, contract * Think Privacy
sensitive and confidential nature termination, campaign to raise
of government data. Despite etc.) awareness and
controls to ensure the strengthen control
confidentiality of such * Impact on processes
information, Serco may breach strategic
restrictions or be subject to objectives * User and data
attack from computer programmes management
that attempt to penetrate its * Costly to rectify including data
network security and and potential for encryption,
misappropriate confidential dilution of information
information. shareholder classification,
returns data cleansing and
password controls
* Criminal and
civil action * ISO27000
certification
* Contract and
business external * Internal and
accreditations external audit
withdrawn
* Significant media
attention and
future scrutiny
Risk Major IT failure or prolonged loss of critical IT systems
Description/Comment Impact Mitigation
The IT Strategy is focussed on * Damage to * Information
standardising common processes, reputation policies and
establishing common business resulting in systems and
systems and enabling ways of loss of existing governance
working by providing and embedding or new business structure
tools that support what we do.
Within this the Company has defined * Impact on * Data recovery
enterprise applications. These are strategic capability
key information technology based objectives designed into
business systems within Serco. They systems and
include SAP for Finance, * Inability to periodically
Procurement and Human Resources; meet contract tested
Payroll, Risk Management, Safety requirements or
Assurance, email, intranet and perform core * Design out single
Nimbus Control for Process business points of failure
Excellence systems. Failings in the processes;
systems have the potential to * Server and system
seriously impact the management of * Costly to performance
the business. rectify and monitoring and
potential for reporting
dilution of
shareholder * Capacity
returns management
* Significant * Data back up and
media attention business
and future continuity plans
scrutiny in place
Governance Risks
Risk Significant incident of bribery or corrupt practice
Description/Comment Impact Mitigation
Serco's operations are principally * Legal action and * Policies and
in the UK, the US, Europe, the UAE, fines against the systems embedded
Australia and India. Certain of our Company in SMS
businesses carry out work in other
countries such as Canada, Costa * Disbarment from * Code of Conduct
Rica, Hong Kong, Afghanistan, Iraq tender lists
and China. Operating in * Ethics Committee
international markets brings with * Damage to
it inherent risks including bribery reputation * Speak Up process
and corruption, particularly in resulting in loss
certain developing nations. We of existing or * Ethics and
recognise that proposed UK new business compliance
legislation around bribery and programme and
corruption will establish more * Significant media training
stringent legal requirements. attention and
future scrutiny * Risk assessment
* Third-party
contracts
Risk Major accident or incident
Description/Comment Impact Mitigation
It is possible that a major * Deaths or serious * Robust management
catastrophic event, such as a injuries to systems subject to
major train derailment or air employees or external,
traffic accident, could occur at third parties regulatory and
one of the projects in relation to internal audit
which Serco has provided * Major
professional design, construction, environmental * System
engineering or support services. damage certification and
Such a catastrophic event could regulatory
result in the personal injury or * Severe financial approval
death of one or more employees of impact (fine by
the Company, employees of other regulators, * Formal oversight
subcontractors working on the suspension of through Group Risk
project or members of the public, operating Management
significant, actionable licence, Committee, Health
environmental harm, and/or compensation, Safety and
extensive damage to third-party clean up, etc.) Environment
property. In the event that such a Oversight Group,
catastrophic event is found or * Loss of business divisional and
perceived to be caused by the (disqualification internal boards
negligence of Serco, it could from future
subject the Company to claims for tenders, contract * Crisis management
personal injury, wrongful death, termination, and business
property damage by customers, etc.) continuity plans
subcontractors, governments, in place
employees or members of the * Contract and
public, which could lead to the business external * Insurance
payment of extensive damages and accreditations
result in significant adverse withdrawn * Strategy,
publicity and reputational harm. objectives,
Such adverse publicity and * Significant media targets and
reputational harm could lead to a attention/future regular reporting
loss of business. scrutiny
* Formal assurance
* Criminal and structure
civil action operating within
against Company defined
or individuals competencies
* Staff induction
and training
Risk Significant changes in energy and carbon costs and reporting
requirements
Description/Comment Impact Mitigation
We must understand our * Legal action and * Environmental
environmental impacts, manage them fines against policy and systems
and measure our performance to the Company
demonstrate improvement. Fuel * Environment
poverty is likely to significantly * Significant Oversight Group
impact energy prices. Increases in financial loss
energy costs are conservatively * Aspects and impacts
estimated at 10% per year for many * Disbarment from assessment
years to come. We need to make tender lists
sure we are managing our * ISO 14001
consumption to minimise the cost * Damage to
and reduce our carbon emissions. reputation * Carbon Trust
We also need to recognise and resulting in Standard
respond to increasing legislation. loss of existing
For example the UK Government's or new business * Reporting
Carbon Reduction Commitment. methodology and
* Significant systems
media attention
and future * Environmental
scrutiny strategy objectives
and targets
Risk Compliance with complex laws and regulations
Description/Comment Impact Mitigation
Serco must comply with laws and * Substantial * Policies and
regulations relating to the monetary damages systems embedded
formation, administration and or criminal in SMS
performance of government contracts violations
that affect how it does business * Code of Conduct
and may impose added costs. * Damage to
Further, it is required to obtain reputation * Risk assessment
environmental and safety permits resulting in loss
from various government authorities of existing or * Third-party
which require periodic renewal or new business contracts
review of their conditions. Failure
to comply with any of these * Disbarment from * System
regulations could result in civil tender lists certification and
and criminal penalties and regulatory
administrative sanctions, including * Significant media approval
termination of contracts, attention and
forfeiture of profits, harm to its future scrutiny * Internal board
reputation, suspension of payments, and governance
fines and suspension or debarment structure
from doing business with
government. * Staff induction
and training
People Risks
Risk Failure to attract and retain senior management and other key
employees
Description/Comment Impact Mitigation
The success of the Company depends * Increased cost * People policies and
on the efforts, abilities, in recruitment systems, strategy
experience and expertise of the activity and and targets
senior management teams and on time taken to supported by
recruiting, retaining, motivating, fill roles governance
effectively communicating with and structure including
developing highly skilled and * Instability and Remuneration
competent people at all levels of loss of business Committee
the organisation. There can be continuity
intense competition for personnel * Succession planning
from other companies and * Dilution of
organisations and there may at any brand and values * Leadership model
time be shortages in the
availability of appropriately * Reduced employee * Annual external
skilled people at all levels engagement (independent)
within Serco. Further, the Company through loss of remuneration review
cannot guarantee the retention of compelling
such key executives and technical leadership * Job structure and
personnel. The failure of the grading system
Company to retain and/or recruit * Strengthen
additional or substitute senior competitors * Talent database and
managers and/or other key (loss of leaders leadership
employees could have a material to them) development
adverse effect on its business. programme
* Impact on
business - risk * Employment
of not achieving engagement strategy
level of planned including annual
growth staff survey
Risk Failure to manage union/industrial relations
Description/Comment Impact Mitigation
A significant number of Serco's * Failure to * Policies and
employees are members of trade deliver systems embedded in
unions in the United Kingdom and a contractual SMS
number are members of trade unions requirements
in the United States and other * Industrial
countries. These include * Instability and Relations strategy
operations where a failure to loss of business
manage relationships may result in continuity * Industrial
industrial action by Serco staff Relations Working
in high-profile business * Dilution of Group
operations, i.e. where there will brand and values
be significant reputational * Stakeholder
damage, client or media attention. * Reduced employee management of key
Some sectors of the business are engagement relationships
subject to union recognition
agreements. The Company maintains * Damage to * Annual external
a number of relationships with reputation (independent)
trade unions and staff through resulting in remuneration review
work councils and other bodies. loss of existing
or new business * Job structure and
grading system
* Significant
media attention * Employment
and future engagement strategy
scrutiny
Finance Risks
Risk The impairment of goodwill could adversely impact reported results
Description/Comment Impact Mitigation
Goodwill accounts for approximately * Inability to * Internal board and
one-third of the Serco Group's meet profit governance
recorded total assets as at 31 expectations structure
December 2010. Serco evaluates
goodwill for impairment annually, * Damage to * Strategic plans
or more frequently when evidence of reputation and
potential impairment exists. Any shareholder * Business plans
decrease in expected cash flows or confidence
a deterioration in market * Business Lifecycle
conditions could require Serco to * Impact on Governance process
record future impairment charges strategic
that could have a material impact objectives * Financial review
on the financial position and and reporting
results of operations
Risk Additional funding requirements for pension schemes
Description/Comment Impact Mitigation
Serco operates defined benefit * Inability to * Actuarial
pension schemes for qualifying meet profit assessment of
employees of its subsidiaries in expectations scheme liabilities
the UK and Other European
countries. In addition, we have * Increase in * Appropriate
interests in joint ventures, which cash investment
operate defined benefit schemes for contributions management
qualifying employees. The nature of to our pension
a defined benefit scheme means that schemes * HR policy, systems
the funding levels of the schemes and governance
are subject to factors outside structure including
Serco's control which could create Remuneration
or impact a deficit in the scheme Committee and Board
at future actuarial valuations. If of Pension Trustees
the deficit in the scheme increases
at future actuarial valuations, the * Annual external
Group may be required to make (independent)
additional cash contributions to remuneration review
the schemes in the future,
preventing the use of cash for * Industrial
other purposes, which could have a Relations strategy
material impact on the Group's
business, financial condition and * Independent
results of operations over the long measurement of
term asset returns
* Internal audit
Risk Fluctuations in foreign currency exchange rates that are not
effectively hedged
Description/Comment Impact Mitigation
The international nature of Serco's * Material effect * The Group hedges
business means it is exposed to on the Group's short-term
fluctuations in foreign currency future results transaction risks
exchange rates in relation to of operations that are material
various currencies, primarily the and financial in value
US dollar, the Australian dollar position
and the Euro, arising from the * Management of
translation of earnings. In translational risk
addition, some of Serco's bank debt by the part
is denominated in currencies other currency matching
than pound sterling. of borrowings with
the net assets of
overseas
subsidiaries
Risk Fluctuations in interest rates
Description/Comment Impact Mitigation
Historically, Serco has financed its * Inability to meet * Fixed rate debt
operations partly through cash flow profit instruments and
generated by bank debt. Adverse expectations interest rate
movements in interest rates could derivatives that
therefore impact profitability and * Impact on swap floating
net assets. competitiveness for fixed rates
* Impact net assets
34. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are
related parties, have been eliminated on consolidation and are not disclosed in
this note. Transactions between the Group and its joint venture undertakings
are disclosed below, with the relevant proportion being eliminated on
consolidation.
Trading transactions
During the year, Group companies entered into the following material
transactions with joint ventures:
2010 2009
£m £m
Royalties and management fees receivable 2.0 1.6
Dividends receivable 51.5 46.3
53.5 47.9
The following receivable balances relating to joint ventures were included in
the Consolidated Balance Sheet:
2010 2009
£m £m
Current:
Loans 0.1 0.6
2010 2009
£m £m
Non-current:
Loans 3.5 2.2
Joint venture receivable and loan amounts outstanding have arisen from
transactions undertaken during the general course of trading, are unsecured,
and will be settled in cash. Interest arising on loans is based on LIBOR, or
its equivalent, with an appropriate margin. No guarantee has been given or
received. No provisions are required for doubtful debts in respect of the
amounts owed by the joint ventures.
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group
during the year other than service contracts and Directors' liability
insurance.
The remuneration of the key management personnel of the Group is set out below
in aggregate for each of the categories specified in IAS 24 Related Party
Disclosures:
2010 2009
£m £m
Short-term employee benefits 7.5 3.2
Post-employment benefits 0.8 0.4
Share-based payment expense 2.8 1.5
11.1 5.1
The key management personnel comprise the Executive Directors, Non-Executive
Directors and members of the Executive Committee (2010: 19 individuals, 2009: 9
individuals).
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