Annual Financial Report
Serco Group plc 2011 Annual Report and Accounts
The following documents have today been posted or otherwise made available to
shareholders:
1. 2011 Annual Report and Accounts
2. Notice of 2012 Annual General Meeting
3. Form of Proxy for the 2012 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 2011 Annual Report and Accounts
The information below, which is extracted from the 2011 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 28 February 2012 (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 2011 Annual Report and
Accounts. All page numbers and cross-references in the extracted information
below refer to page numbers in the 2011 Annual Report and Accounts.
For further information please contact Serco:
T +44 (0) 1256 745 900
Stuart Ford, Head of Investor Relations
Marcus De Ville, Head of Media Relations
Directors' responsibilities
Alastair Lyons CBE - Chairman
Christopher Hyman CBE - Chief Executive
Andrew Jenner - Finance Director
Leonard Broese van Groenou - Non-Executive Director
Ralph D Crosby Jr - Non-Executive Director
David Richardson - Non-Executive Director
Angie Risley - 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.
Whilst divisional boards review quarterly the risks they face, the Group Risk
Management Committee (GRMC), a formal committee of the Executive Committee,
meets quarterly to provide governance and oversight of risk across the Group.
The Board receives a quarterly report on the GRMC's assessment of the principal
risks facing the Group and the action being taken by management to mitigate
risks that are outside of the Group's risk appetite.
Our risk management policies, systems and processes conform to the requirements
of the Combined Code and form part of the Serco Management System (SMS).
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 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 GRMC 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 its impact 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.
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 GRMC or,
as appropriate, the Board on specific risks. Either 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 Group level. They are managed
through a formal process.
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 66 to 69.
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
achieving our strategic objectives.
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.
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 GRMC 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.
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 and 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 substantial opportunities Diverse business
part of the business is dependent on across geographies
government policies, budget Changes to and markets
priorities and regulatory or terms of
political constraints, in particular existing or new External Affairs
those regarding maintaining and contracts monitor political
improving public infrastructure, landscape and
which could have a significant Failure to meet government
impact on the size, scope, timing growth or activities
and duration of contracts and orders profit
under them and therefore on the expectations Business
level of business that we may win. significantly
As such, these businesses are focused on
susceptible to changes in developed markets
government, government policy, with strong and
budget allocations and the political established legal
environment, primarily in the UK and systems providing
the US. Any reduction in such protection to
government expenditure and funding changes in
could result in a suspension, contract terms
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 renew Failure to meet Business Lifecycle
material contracts could restrict growth or profit Governance process
growth opportunities for the future or expectations embedded in SMS
have an adverse impact on Serco's
business, financial condition and Significant Governance structure
results of operations. Further, a financial loss or managed through
significant number of Serco's contracts cost overrun Investment Committee,
with the UK Government, the US programme and project
Government and other public sector Damage to boards, divisional
customers, including renewals and reputation and contract boards
extensions of previous contracts, are resulting in loss
awarded through formal competitive of existing or Business strategy and
bidding processes. Competitive bidding new business targets managed
processes present a number of risks, through internal
including substantial cost and Impact on boards
management time and effort to prepare strategic
bids and proposals for contracts that objectives Regular review and
may not be won. In addition, there is monitoring of risk
often a long period between a registers
successful competition tender offer and
entering into definitive contractual Gate review and
documentation and financial close, and formal sign-off
in some cases financial close may not process
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 growth or profit contract review
each jurisdiction in which it expectations process including
operates in order to maintain and financial, technical
grow its business. It is exposed Significant financial and commercial reviews
to the risk that litigation, loss or cost overrun
misconduct, operational failures Governance structure
and negative publicity could harm Loss of contract managed through
its reputation. In addition, the revenue related to Investment Committee,
Company's reputation could also operations and programme and project
be adversely affected if its service charges boards and divisional
services, or the services boards
performed by its subcontractors, Inability to attract
do not perform as expected. Any the human and Business strategy and
harm to its reputation could have financial capital targets
a material adverse effect on its necessary to grow or
business, financial condition and expand into new Regular review and
results of operations. markets monitoring of risk
registers and
Damage to reputation operational
resulting in loss of performance indicators
existing or new
business Customer engagement
and employee
Impact on strategic engagement strategies
objectives
Relationship
management and
communication with
external stakeholders
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 growth Robust bidding and
programmes which it is or profit expectations contract review
contracted to deliver for the process including
customer. These are often let on Significant financial financial, technical
a fixed price basis irrespective loss or cost overrun and commercial
of the actual costs incurred, reviews
and therefore if costs exceed Loss of contract
the contract ceiling the Company revenue related to Governance structure
may not be able to obtain full operations and service managed through
reimbursement. Further, some charges Investment
projects require delivery in Committee, programme
accordance with specified Damage to reputation and project boards,
milestones on agreed dates. resulting in loss of divisional and
Significant adverse financial existing or new contract boards
consequences can be imposed business
where milestones are not met or Robust cost
a project is not delivered on Impact on strategic accounting
time. The length and complexity objectives
of such projects mean that Internal audit
management estimates can be
particularly difficult to make Business strategy
and could turn out to be and targets
inaccurate.
Regular review and
monitoring of risk
registers
Gate review and
formal sign-off
process
Quality management
systems
Risk: Lack of preparedness for the 2012 London Olympics
Description/Comment Impact Mitigation
In summer 2012, London will be Damage to Steering Committee
hosting the 2012 Olympics which reputation established several months
will be Britain's `largest resulting in loss ago to monitor/track/guide
peacetime logistical exercise'. of existing or new risks
In a relatively short time contracts
frame, it is anticipated that Programme Office
over 11 million game spectators Failure to meet established to identify
and almost 300,000 athletes, customer and work all risks across
officials, media and other performance and all contracts
`Games Family' members and service level
workforce will descend upon the requirements Risks have been identified
city. The majority of spectators across each contract and
will take public transport, walk Escalation of cost are being vetted
or cycle to the Games and leading to profit
activities. Although Serco are erosion Support is being provided
not providing specific support for planning and
directly to the Olympics, at Disruption to implementation where gaps
least 23 of our current contract delivery are identified
contracts have potential in the event of a
moderate to very high impact. terrorist attack at Planning and scenario
The top three contracts with the Games testing schedules in place
very high potential impact are: in directly impacted
DLR, London Cycle Hire and contracts
Traffic Streets.
Development of mitigation
strategies and contingency
plans
Risk: Failure to deliver operational efficiency
Description/Comment Impact Mitigation
To deliver our commitments we Erosion of profit Business strategy and
must ensure that we have supporting plans
efficient operations. Our Impact on competitiveness
operational efficiency Internal governance
programme facilitates delivery Damage to reputation structure
of business transformation, resulting in loss of
operational change and existing or new business Business review
sustainable margin improvement.
Failure to deliver may impact Failure to meet customer Internal audit
our ability to deliver business expectations and business
commitments. strategy LEAN/Continuous
Improvement programme
Quarterly management
reporting
Risk: Major information security breach
Description/Comment Impact Mitigation
Serco must comply with Loss of service to our Security and
restrictions on the handling customers information systems
of sensitive information policies, systems
(including personal and Damage to reputation and embedded
customer) and provide for resulting in loss of governance
secure transmission of such existing or new business structure
information. This is a (disqualification from
heightened risk, particularly future tenders, contract Think Privacy
with respect to government termination, etc.) campaign to raise
contracts, due to the staff awareness,
sensitive and confidential Impact on strategic provide training,
nature of government data. objectives promote incident
Despite controls to ensure the reporting and
confidentiality of such Costly to rectify and strengthen control
information, Serco may breach potential for dilution of processes
restrictions or be subject to shareholder returns
attack from computer programs User and data
that attempt to penetrate its Criminal and civil action management
network security and including data
misappropriate confidential Contract and business encryption,
information. external accreditations information
withdrawn classification,
identity
Significant media management, data
attention and future cleansing and
scrutiny access controls
(strong
authentication,
passwords etc.)
Regular risk
reviews
ISO 27000
certification
Internal and
external audit
Risk: Major IT failure or prolonged loss of critical IT systems
Description/Comment Impact Mitigation
The IT Strategy is focused on Damage to reputation Information systems
standardising common resulting in loss of policy, systems and
processes, establishing common existing or new business embedded governance
business systems and enabling structure
ways of working by providing Impact on strategic
and embedding tools that objectives Data recovery
support what we do. Within capability designed
this the Company has defined Inability to meet into systems and
enterprise applications. These contract requirements or periodically tested
are key information perform core business
technology-based business processes Design out single
systems within Serco. They points of failure
include SAP for Finance, Costly to rectify and
Procurement and Human potential for dilution Server and system
Resources; Payroll, Risk of shareholder returns performance monitoring
Management, Safety Assurance, and reporting
email, intranet and Nimbus Significant media
Control for Process Excellence attention and future Capacity management
systems. Failings in the scrutiny
systems have the potential to Data back-up and
seriously impact the business continuity
management of the business. plans in place
Governance risks
Risk: Significant incident of bribery or corrupt practice
Description/Comment Impact Mitigation
Serco operates in international Legal action and fines Policies and systems
markets, which brings with it against the Company embedded in SMS
inherent risks including
bribery and corruption, Debarment from tender Code of Conduct
particularly in certain lists
developing nations. Serco Ethics Committee
operates in a number of Damage to reputation
countries which are recognised resulting in loss of Speak Up process
as having a higher bribery and existing or new business
corruption risk. Increasing Ethics and compliance
legislation significantly Significant media programme and training
increases the consequences of attention and future
bribes and other corrupt scrutiny Risk assessment
practices. As we expand into
new services and geographic Third-party contracts
markets that are considered a
higher risk in the context of
corrupt practices we must
ensure our policies and
procedures are fully and
effectively applied.
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 employees or systems subject to
major train derailment or air third parties external, regulatory
traffic accident, could occur at and internal audit
one of the projects in relation Major environmental
to which Serco has provided damage System certification
professional design, and regulatory
construction, engineering or Severe financial impact approval
support services. Such a (fine by regulators,
catastrophic event could result suspension of operating Formal oversight
in the personal injury or death licence, compensation, through GRMC, Health,
of one or more employees of the clean up, etc.) Safety and
Company, employees of other Environment Oversight
subcontractors working on the Loss of business Group, divisional and
project or members of the (disqualification from internal boards
public, significant, actionable future tenders, contract
environmental harm, and/or termination, etc.) Crisis management and
extensive damage to third-party business continuity
property. In the event that such Contract and business plans in place
a catastrophic event is found or external accreditations
perceived to be caused by the withdrawn Insurance
negligence of Serco, it could
subject the Company to claims Significant media Strategy, objectives,
for personal injury, wrongful attention and future targets and regular
death, property damage by scrutiny reporting
customers, subcontractors,
governments, employees or Criminal and civil Formal assurance
members of the public, which action against Company structure operating
could lead to the payment of or individuals within defined
extensive damages and result in competencies
significant adverse publicity
and reputational harm. Such Staff induction and
adverse publicity and training
reputational harm could lead to
a loss of business.
Risk: Significant changes in energy and carbon costs and reporting requirements
Description/Comment Impact Mitigation
We must understand our Legal action and fines Environmental policy
environmental impacts, manage against the Company and systems
them and measure our
performance to demonstrate Significant financial Environment Oversight
improvement. Fuel poverty is loss Group
impacting energy prices. We
have seen increases in energy Debarment from tender Aspects and impacts
costs and expect these to rise lists assessment
further in the future. We need
to make sure we are managing Damage to reputation ISO 14001
our consumption to minimise resulting in loss of
the cost and reduce our carbon existing or new business Carbon Trust Standard
emissions. We also need to
recognise and respond to Significant media Reporting methodology
increasing legislation and attention and future and systems
reporting requirements. scrutiny
Environmental strategy
objectives and targets
Risk: Compliance with complex laws and regulations
Description/Comment Impact Mitigation
Serco must comply with laws Substantial monetary Policies and systems
and regulations relating to damages and/or criminal embedded in SMS
the formation, administration violations
and performance of government Code of Conduct
contracts that affect how it Damage to reputation
does business and may impose resulting in loss of Risk assessment
added costs. Further, it is existing or new business
required to obtain Third-party contracts
environmental and safety Debarment from tender
permits from various lists System certification
government authorities which and regulatory approval
require periodic renewal or Significant media
review of their conditions. attention and future Internal board and
Failure to comply with any of scrutiny governance structure
these regulations could result
in civil and criminal Staff induction and
penalties and administrative training
sanctions, including
termination of contracts, Internal compliance
forfeiture of profits, harm to programmes
its reputation, suspension of
payments, fines and suspension
or debarment from doing
business with governments.
People risks
Risk: Failure to attract and retain senior management and other key employees
Description/Comment Impact Mitigation
The success of the Company Increased cost in People policies and
depends on the efforts, recruitment activity systems, strategy and
abilities, experience and and time taken to fill targets supported by
expertise of the senior roles governance structure,
management teams and on including Remuneration
recruiting, retaining, Instability and loss of Committee
motivating, effectively business continuity
communicating with and Succession planning
developing highly skilled and Dilution of brand and
competent people at all levels values Leadership model
of the organisation. There can
be intense competition for Reduced employee Annual external
personnel from other companies engagement through loss (independent)
and organisations and there of compelling remuneration review
may at any time be shortages leadership
in the availability of Job structure and
appropriately skilled people Strengthen competitors grading system
at all levels within Serco. (loss of leaders to
Further, the Company cannot them) Talent database and
guarantee the retention of leadership development
such key executives and Impact on business - programme
technical personnel. The risk of not achieving
failure of the Company to level of planned growth Employment engagement
retain and/or recruit strategy, including
additional or substitute annual staff survey
senior managers and/or other
key employees could have a
material adverse effect on its
business.
Risk: Failure to manage union/industrial relations
Description/Comment Impact Mitigation
A significant number of Failure to deliver Policies and systems
Serco's employees are members contractual embedded in SMS
of trade unions in the UK and requirements
a number are members of trade Industrial relations
unions in the US and other Instability and loss strategy
countries. These include of business continuity
operations where a failure to Industrial Relations
manage relationships may Dilution of brand and Working Group
result in industrial action by values
Serco staff in high-profile Stakeholder management
business operations, i.e. Reduced employee of key relationships
where there will be engagement
significant reputational Annual external
damage, client or media Damage to reputation (independent)
attention. Some sectors of the resulting in loss of remuneration review
business are subject to union existing or new
recognition agreements. The business Job structure and
Company maintains a number of grading system
relationships with trade Significant media
unions and staff through work attention and future Employment engagement
councils and other bodies. scrutiny strategy
Finance risks
Risk: The impairment of goodwill could adversely impact reported results
Description/Comment Impact Mitigation
Goodwill accounts for just over Inability to meet Internal board and
one-third of Serco Group's profit expectations governance structure
recorded total assets as at 31
December 2011. Serco evaluates Damage to reputation Strategic plans
goodwill for impairment and shareholder
annually, or more frequently confidence Business plans
when evidence of potential
impairment exists. Any decrease Impact on strategic Business Lifecycle
in expected cash flows or a objectives Governance process
deterioration in market
conditions could require Serco Financial review and
to record impairment charges reporting
that could have a material
impact on the financial position
and results of operations.
Risk: Additional funding requirements for pension schemes
Description/Comment Impact Mitigation
Serco operates defined benefit Inability to meet Obtain actuarial
pension schemes for qualifying profit expectations assessment of scheme
employees of its subsidiaries in liabilities
the UK and other European Reduction in cash
countries. In addition, we have availability Appropriate investment
interests in joint ventures, management and
which operate defined benefit independent
schemes for qualifying employees. measurement of asset
The nature of a defined benefit returns
scheme means that the funding
levels of the schemes are subject Ensure robust
to factors outside Serco's monitoring via HR
control, including the policy, systems and
introduction of new legislation, governance structure
which could create or impact a including review by
deficit in the scheme at future the Audit and
actuarial valuations. If the Remuneration
deficit in the scheme increases Committees and Board
at future actuarial valuations, of Pension Trustees
the Group may be required to make
additional cash contributions to
the schemes in the future,
preventing the use of cash for
other purposes, which could have
a material impact on the Group's
business, financial condition and
results of operations over the
long term.
Risk: Fluctuations in foreign currency exchange rates that are not effectively
hedged
Description/Comment Impact Mitigation
The international nature of Material effect on the The Group hedges
Serco's business means it is Group's future results short-term transaction
exposed to fluctuations in of operations and risks that are material
foreign currency exchange rates financial position in value
in relation to various
currencies, primarily the US Management of
Dollar, the Australian Dollar translational risk by
and the Euro, arising from the the part currency
translation of earnings. In matching of borrowings
addition, some of Serco's bank with the net assets of
debt is denominated in overseas subsidiaries
currencies other than pound
Sterling.
Risk: Fluctuations in interest rates
Description/Comment Impact Mitigation
Historically, Serco has Inability to meet Fixed rate debt
financed its operations partly profit expectations and instruments and interest
through draw down of funding associated impact on rate derivatives that
facilities. Adverse movements net assets swap floating for fixed
in interest rates could rates
therefore impact profitability Impact on
and net assets. competitiveness
35. 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:
2011 2010
£m £m
Royalties and management fees receivable 1.5 2.0
Dividends receivable 64.3 51.5
65.8 53.5
The following receivable balances relating to joint ventures were included in
the consolidated balance sheet:
2011 2010
£m £m
Current:
Loans 0.5 0.1
2011 2010
£m £m
Non-current:
Loans 3.2 3.5
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:
2011 2010
£m £m
Short-term employee benefits 8.9 7.5
Post-employment benefits 0.6 0.8
Share-based payment expense 2.8 2.8
12.3 11.1
The key management personnel comprise the Executive Directors, Non-Executive
Directors and members of the Executive Committee (2011: 18 individuals, 2010:
19 individuals).
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