Annual Financial Report

RNS Number : 2503G

Royal Mail PLC

25 May 2017

Royal Mail plc

25 May 2017

Annual Report and Financial Statements 2016-17

and Disclosures required in accordance with DTR 6.3.5

Annual Report and Financial Statements 2016-17

Following the release by Royal Mail plc (the Company) on 18 May 2017 of the Company's final results announcement, the Company announces that it has today published its Annual Report and Financial Statements 2016-17 (Annual Report 2016-17) via Royal Mail's website: www.royalmailgroup.com/results.

The Company also announces that it will provide shareholders, by their chosen communication means, the Annual Report 2016-17 and Notice of Meeting for the 2017 Annual General Meeting on or around 13 June 2017.

In accordance with Listing Rule 9.6.1, a copy of the Annual Report 2016-17 is being uploaded today to the National Storage Mechanism and will be available shortly for viewing.

Disclosures required in accordance with DTR 6.3.5

Information on important events that have occurred during the financial year and their impact on the Annual Report 2016-17 were included in the results announcements released on 18 May 2017. This, together with the following information, which is extracted from the Financial report for the full year ended 26 March 2017 (Financial Report) and the Annual Report 2016-17, constitutes the information required by DTR 6.3.5 to be communicated in full, unedited text through a regulatory information service. This information is not a substitute for reading the full Annual Report 2016-17. Any page references in the Related party information and the Statement of Directors' Responsibilities in respect of the Annual Report 2016-17 and Financial Statements are to those in the Annual Report 2016-17. All other page and note references are to those in the Financial Report which is available on the Company's website: www.royalmailgroup.com/results.

Contacts:

Company Secretariat
Kulbinder Dosanjh
Phone: 020 7449 8133
Email: cosec@royalmail.com

Media Relations
Andrew Moys
Mobile: 07841 803 321
Email: andrew.moys@royalmail.com

Investor Relations
Catherine Nash
Phone: 07436 560 910
Email: investorrelations@royalmail.com

CONSOLIDATED INCOME STATEMENT

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

	Notes	Reported¹ 52 weeks 2017 £m	Reported^1,2 52 weeks 2016 £m
Continuing operations
Revenue	2	9,776	9,251
Operating costs³	3/4	(9,286)	(8,766)
People costs		(5,576)	(5,456)
Distribution and conveyance costs		(2,106)	(1,736)
Infrastructure costs		(868)	(854)
Other operating costs		(736)	(720)

Operating profit before transformation costs		490	485
Transformation costs		(137)	(191)
Operating profit after transformation costs		353	294
Operating specific items:
Employee Free Shares charge		(105)	(158)
Legacy/other (costs)/credit		(18)	2
Amortisation of intangible assets in acquisitions		(11)	-
Operating profit		219	138
Profit on disposal of property, plant and equipment (non-operating specific item)		14	29
Loss on disposal of business		(2)	-
Earnings before interest and tax		231	167
Finance costs	5	(18)	(16)
Finance income	5	2	3
Net pension interest (non-operating specific item)	9(c)	120	113
Profit before tax		335	267
Tax charge	6	(62)	(45)
Profit for the year from continuing operations		273	222
Discontinued operations
Profit from disposal of discontinued operations (non-operating specific item)		-	31
Tax on profit from disposal of discontinued operations	6	-	(5)
Profit for the year		273	248
Profit for the year attributable to:
Equity holders of the parent Company		272	241
Non-controlling interests		1	7

Earnings per share
Basic - continuing operations	7	27.5p	21.5p
Diluted - continuing operations	7	27.3p	21.4p
Basic - total Group	7	27.5p	24.1p
Diluted - total Group	7	27.3p	24.0p

¹ Reported - prepared in accordance with International Financial Reporting Standards (IFRS).

² The sub-analysis of operating costs has been re-presented as stated in Note 2. Total operating costs remain unchanged.

³Operating costs are stated before transformation costs, Employee Free Shares charge, Legacy/other (costs)/credit and amortisation of intangible assets in acquisitions.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

	Notes	Reported 52 weeks 2017 £m	Reported 52 weeks 2016 £m
Profit for the year		273	248
Other comprehensive income/(expense) for the year from continuing operations:
Items that will not be subsequently reclassified to profit or loss:
Amounts relating to pensions accounting		405	255
IFRIC 14 adjustment relating to defined benefit surplus	9	113	(114)
Remeasurement gains of the defined benefit surplus	9(c)	399	320
Tax on above items	6	(107)	49
Items that may be subsequently reclassified to profit or loss:
Foreign exchange translation differences		18	8
Exchange differences on translation of foreign operations (GLS)¹		59	36
Net loss on hedge of a net investment (€500 million bond)		(38)	(26)
Net loss on hedge of a net investment (euro-denominated finance lease payable)		(3)	(2)
Designated cash flow hedges		32	5
Gains/(losses) on cash flow hedges deferred into equity		22	(34)
Losses on cash flow hedges released from equity to income		16	42
Gains on cash flow hedges released from equity to the carrying amount of non-financial assets		(1)	-
Tax on above items	6	(5)	(3)
Total other comprehensive income for the year		455	268
Total comprehensive income for the year		728	516
Total comprehensive income for the year attributable to:
Equity holders of the parent Company		727	509
Non-controlling interests		1	7

¹ Includes net £4 million charge (2015-16: £2 million) in relation to tax liabilities (see Note 6).

CONSOLIDATED BALANCE SHEET

At 26 March 2017 and 27 March 2016

	Notes	Reported at 26 March 2017 £m	Reported at 27 March 2016 £m
Non-current assets
Property, plant and equipment		2,062	2,002
Goodwill		316	206
Intangible assets		567	451
Investments in associates and joint venture		7	9
Financial assets
Pension escrow investments		20	20
Derivatives		4	2
Retirement benefit surplus - net of IFRIC 14 adjustment	9	3,839	3,430
Other receivables		13	12
Deferred tax assets	6	15	9
		6,843	6,141
Assets held for sale		37	39
Current assets
Inventories		23	21
Trade and other receivables		1,117	1,020
Income tax receivable		7	6
Financial assets
Derivatives		8	5
Cash and cash equivalents		299	368
		1,454	1,420
Total assets		8,334	7,600
Current liabilities
Trade and other payables		(1,810)	(1,700)
Financial liabilities
Interest-bearing loans and borrowings		(33)	-
Obligations under finance leases		(64)	(84)
Derivatives		(9)	(33)
Income tax payable		(12)	(23)
Provisions		(88)	(151)
		(2,016)	(1,991)
Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings		(430)	(392)
Obligations under finance leases		(130)	(136)
Derivatives		(2)	(8)
Provisions		(108)	(96)
Other payables		(47)	(41)
Deferred tax liabilities	6	(603)	(469)
		(1,320)	(1,142)
Total liabilities		(3,336)	(3,133)
Net assets		4,998	4,467
Equity
Share capital		10	10
Retained earnings		4,940	4,451
Other reserves		47	(3)
Equity attributable to parent Company		4,997	4,458
Non-controlling interests		1	9
Total equity		4,998	4,467

The financial statements were approved and authorised for issue by the Board of Directors on 17 May 2017 and were signed on its behalf by:

Moya Greene

Chief Executive Officer

Matthew Lester

Chief Finance Officer

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

	Share capital £m	Retained earnings £m	Foreign currency translation reserve £m	Hedging reserve £m	Equity holders of the parent £m	Non-controlling interests £m	Total equity £m
Reported at 29 March 2015	10	3,993	14	(30)	3,987	9	3,996
Profit for the year	-	241	-	-	241	7	248
Other comprehensive income for the year	-	255	8	5	268	-	268
Total comprehensive income for the year	-	496	8	5	509	7	516
Transactions with owners of the Company, recognised directly in equity
Release of Post Office Limited separation provision	-	5	-	-	5	-	5
Dividend paid to equity holders of the parent Company	-	(213)	-	-	(213)	-	(213)
Dividend paid to non-controlling interests	-	-	-	-	-	(7)	(7)
Share-based payments
Employee Free Shares issue¹	-	152	-	-	152	-	152
Save As You Earn (SAYE) scheme	-	3	-	-	3	-	3
Long Term Incentive Plan (LTIP)²	-	15	-	-	15	-	15
Reported at 27 March 2016	10	4,451	22	(25)	4,458	9	4,467
Profit for the year	-	272	-	-	272	1	273
Other comprehensive income for the year	-	405	18	32	455	-	455
Total comprehensive income for the year	-	677	18	32	727	1	728
Transactions with owners of the Company, recognised directly in equity
Release of Post Office Limited separation provision	-	1	-	-	1	-	1
Dividend paid to equity holders of the parent Company	-	(222)	-	-	(222)	-	(222)
Dividend paid to non-controlling interests	-	-	-	-	-	(8)	(8)
Acquisition of non-controlling interests	-	(15)	-	-	(15)	(6)	(21)
Recognition of put options for non-controlling interests	-	(6)	-	-	(6)	-	(6)
Disposal of subsidiary	-	-	-	-	-	(1)	(1)
Acquisition of subsidiary	-	-	-	-	-	6	6
Share-based payments
Employee Free Shares issue¹	-	100	-	-	100	-	100
Save As You Earn (SAYE) scheme	-	2	-	-	2	-	2
Long Term Incentive Plan (LTIP)²	-	9	-	-	9	-	9
Purchase of own shares³	-	(53)	-	-	(53)	-	(53)
Settlement of LTIP 2013	-	(4)	-	-	(4)	-	(4)
Reported at 26 March 2017	10	4,940	40	7	4,997	1	4,998

¹ Excludes £5 million (2015-16: £6 million) National Insurance, charged to the income statement, included in provisions on the balance sheet.

² Excludes £1 million (2015-16: £1 million) National Insurance, charged to the income statement, included in provisions on the balance sheet.

³Purchases in respect of LTIP and Employee Free Shares schemes.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016

	Notes	Reported 52 weeks 2017 £m	Reported 52 weeks 2016 £m
Cash flow from operating activities
Profit before tax		335	267
Adjustment for:
Net pension interest		(120)	(113)
Net finance costs		16	13
Profit on disposal of property, plant and equipment		(14)	(29)
Loss on disposal of business		2	-
Legacy/other costs/(credit)		29	(2)
Employee Free Shares charge		105	158
Transformation costs		137	191
Operating profit before transformation costs		490	485
Adjustment for:
Depreciation and amortisation		301	272
Share of post-tax loss/(profit) from associates and joint venture		2	(1)
EBITDA before transformation costs		793	756
Working capital movements		(9)	(20)
Increase in inventories		(2)	(1)
Increase in receivables		(40)	(62)
Increase in payables		56	22
Net decrease in derivative assets		2	1
(Decrease)/increase in provisions (non-specific items)		(25)	20
Pension charge to cash difference adjustment		222	257
Share-based awards (SAYE and LTIP) charge		11	13
Cash cost of transformation operating expenditure¹		(142)	(233)
Cash cost of operating specific items		(61)	(6)
Cash inflow from operations		814	767
Income tax paid		(60)	(40)
Net cash inflow from operating activities		754	727
Cash flow from investing activities
Dividend received from associate company		-	1
Finance income received		3	3
Proceeds from disposal of property (excluding London property portfolio), plant and equipment (non-operating specific item)		37	38
London property portfolio costs (non-operating specific item)		(34)	(23)
Proceeds from disposal of discontinued operations (non-operating specific item)		-	41
Disposal of subsidiary (non-operating specific item)		(3)	-
Purchase of property, plant and equipment¹		(230)	(270)
Acquisition of business interests, net of cash acquired		(122)	(14)
Purchase of intangible assets (software)¹		(157)	(191)
Payment of deferred consideration in respect of prior years' acquisitions		(4)	(4)
Net sale of financial asset investments (current)		-	56
Net cash outflow from investing activities		(510)	(363)
Net cash inflow before financing activities		244	364
Cash flow from financing activities
Finance costs paid		(17)	(16)
Acquisition of non-controlling interests		(18)	-
Purchase of own shares		(53)	-
Payment of capital element of obligations under finance lease contracts		(74)	(90)
Cash received on sale and leasebacks		41	36
Drawdown of loan facility		31	-
Repayment of loans and borrowings		(7)	-
Dividends paid to equity holders of the parent Company	8	(222)	(213)
Dividend paid to non-controlling interests		(8)	(7)
Net cash outflow from financing activities		(327)	(290)
Net (decrease)/increase in cash and cash equivalents		(83)	74
Effect of foreign currency exchange rates on cash and cash equivalents		14	7
Cash and cash equivalents at the beginning of the year		368	287
Cash and cash equivalents at the end of the year		299	368

¹Items comprise total investment within 'In-year trading cash flow' measure (see Financial Review).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation

General information

Royal Mail plc ('the Company') is incorporated in the United Kingdom (UK) and listed on the London Stock Exchange. The UK is the Company's country of domicile.

The consolidated financial statements of the Company for the 52 weeks ended 26 March 2017 (2015-16: 52 weeks ended 27 March 2016) comprise the Company and its subsidiaries (together referred to as 'the Group') and the Group's interest in its associate undertakings and joint venture.

Basis of preparation and accounting

(a) The Directors consider that the Group has adequate resources to continue in operational existence for a minimum of 12 months from the signing date of these financial statements and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements.

(b) The consolidated financial statements of the Group have been prepared in accordance with the Companies Act 2006 and applicable IFRS as adopted for use in the EU. The consolidated financial statements have been prepared in accordance with the accounting policies stated in the Group's Annual Report and Financial Statements for the reporting year ended 26 March 2017.

The financial information set out in this document does not constitute the Group's statutory financial statements for the reporting years ended 26 March 2017 or 27 March 2016, but is derived from those financial statements. The auditor's report on those statutory financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. Statutory financial statements for the reporting year ended 27 March 2016 have been delivered to the Registrar of Companies. The statutory financial statements for the reporting year ended 26 March 2017 were approved by the Board of Directors on 17 May 2017 along with this Financial report, but will be delivered to the Registrar of Companies in due course.

The Annual Report and Financial Statements 2016-17, together with details of the Annual General Meeting (AGM), will be despatched to shareholders before the AGM. The AGM will take place on 20 July 2017.

Presentation of results and accounting policies

The Group's significant accounting policies, including details of new and amended accounting standards adopted in the reporting year, can be found in the Annual Report and Financial Statements 2016-17. Details of key sources of estimation uncertainty, are provided below.

These financial statements and associated Notes have been prepared in accordance with IFRS as adopted by the EU and as issued by the International Accounting Standards Board (IASB) (i.e. on a 'reported' basis). In some instances, Alternative Performance Measures (APMs) are used by the Group. This is because Management are of the view that these APMs provide a more meaningful basis on which to analyse business performance, and are consistent with the way that financial performance is measured by Management and reported to the Board. Details of the APMs used by the Group are provided on page 22.

Key sources of estimation uncertainty and critical accounting judgements

The preparation of consolidated financial statements necessarily requires Management to make estimates and assumptions that can have a significant impact on the financial statements. These 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. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below.

Pensions

The value of defined benefit pension plan liabilities and assessment of pension plan costs are determined by long-term actuarial assumptions. These assumptions include discount rates (which are based on the long-term yield of high-quality corporate bonds), inflation rates and mortality rates. Differences arising from actual experience or future changes in assumptions will be reflected in the Group's consolidated statement of comprehensive income. The Group exercises its judgement in determining the assumptions to be adopted, after discussion with a qualified actuary. Details of the key actuarial assumptions used and of the sensitivity of these assumptions for RMPP are included within Note 9.

Deferred revenue

The Group recognises advance customer payments on its balance sheet, predominantly relating to stamps and meter credits purchased by customers but not yet used at the balance sheet date. The valuation of this deferred revenue is based on a number of different estimation and sampling methods using external specialist resource as appropriate.

The majority of this balance is made up of stamps sold to the general public. For sales to the general public, estimates of stamp volumes held are made on the basis of monthly surveys performed by an independent third-party. In order to avoid over-estimation of the typical number of stamps held, Management applies a cap to the results to exclude what are considered to be abnormal stamp holdings from the estimate. The level at which holdings are capped is judgemental and is currently set at 99 of each stamp type per household. The impact of applying alternative capping values on the year end public stamp deferred revenue balance is shown in the table below.

Capped

Uncapped

At 26 March 2017

As reported

300

Public stamp holdings value (£m)

152

184

200

216

The value of stamps and meter credits held by retail and business customers are more directly estimated through the analysis of sales volumes and monthly meter sampling. Further adjustments are also made for each type of sale to take into account volume purchasing of stamps when price changes are announced.

The results of the above procedures are reviewed by Management in order to make a judgement of the carrying amount of the accrual. The total accrual is held within current trade and other payables but a portion (which cannot be measured) will relate to stamps and meter credits used one year or more after the balance sheet date.

Provisions

Due to the nature of provisions, a significant part of their determination is based upon estimates and/or judgements concerning the future. The industrial diseases claims provision is considered to be the area where the application of judgement has the most significant impact.

The industrial diseases claims provision arose as a result of a Court of Appeals judgement in 2010 and relates to individuals who were employed in the General Post Office Telecommunications division prior to October 1981. The provision requires estimates to be made of the likely volume and cost of future claims, as well as the discount rate to be applied to these, and is based on the best information available as at the year end, which incorporates independent expert actuarial advice. The result of a 0.5 per cent decrease in the discount rate estimate would be a £6 million increase in the overall industrial diseases provision.

Business acquisitions

Identifiable assets acquired and liabilities and contingent liabilities assumed in business acquisitions are measured initially at their fair values at the acquisition date. The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Independent valuers were used to assist in the valuation of the Group's in-year acquisitions.

In determining the fair value of the intangible assets acquired, risk-adjusted future cash flows discounted using discount rates specific to the asset are generally used. In determining cash flows, a combination of historical data and estimates regarding revenue growth, profit margins and operating cash flows have been used.

•	customer relationships required judgement on future cash flows, churn, and the expected remaining life of the customer relationship.
•	brands were measured by estimating the savings realised by owning or holding the right to use the brand name (as opposed to paying a royalty fee to a third party). This includes an estimate of the projected revenues generated and the estimated life of the brand to a third party.
•	internally developed software acquired was valued using the relief from royalty approach, taking into account software licencing costs in the postage, courier and shipping service sector. Internally developed software acquired, was valued on the basis of the estimated cost to recreate the software.
•	tangible assets were valued by estimating the current cost to purchase or replace the assets, whilst also taking into account available market data for the sale or transfer of such assets.

The excess of the consideration transferred over the fair value of the net identifiable assets acquired is recorded as goodwill. The Group has one year from the acquisition date to re-measure the fair values of the acquired assets and liabilities and the resulting goodwill if new information is obtained relating to conditions that existed at the acquisition date.

Acquisition related costs are expensed as incurred. The business acquisitions during the period are disclosed in Note 10.

Goodwill allocation and impairment testing

Goodwill recognised in a business combination is not amortised and, as such, must be tested annually for impairment in line with IAS 36 'Impairment of Assets'. In making assessments for impairment, assets that do not generate independent cash flows, such as goodwill, are allocated to an appropriate cash-generating unit (CGU), or group of CGUs, on the basis of whether those CGUs are expected to benefit from the synergies of the combination. Management necessarily applies judgement in allocating goodwill to CGUs. As at 26 March 2017 £299 million of the total goodwill balance of £316 million was allocated to the Group of CGUs making up the GLS reportable segment.

In assessing whether there has been any impairment of goodwill, Management determines whether the goodwill carrying value is higher than the recoverable amount of the underlying CGUs. The recoverable amount is the higher of a CGU's fair value less costs to sell (realisable value) and value-in-use. In the case of goodwill allocated to the GLS reportable segment the realisable value is estimated by applying an average share price/earnings ratios of quoted peers to the current year results of GLS. Judgement must be made by Management in choosing a suitable peer group against which to compare the realisable value of GLS.

Deferred tax

Assessment of the deferred tax asset requires an estimation of future profitability. Such estimation is inherently uncertain in a market subject to various competitive pressures. Should estimates of future profitability change in future years, the amount of deferred tax recognised will also change accordingly. Prior to recording deferred tax assets for tax losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits. The carrying values of the deferred tax assets and liabilities are included within Note 6.

2. Segment information

The Group's operating segments are based on geographic business units whose primary services and products relate to the delivery of parcels and letters. These segments are evaluated regularly by the Chief Executive's Committee and the Royal Mail plc Board - the Chief Operating Decision Maker (CODM) as defined by IFRS 8 'Operating Segments' - in deciding how to allocate resources and assess performance.

In the year, following the acquisition of the minority shareholding (49 per cent) on 31 March 2016, Romec Limited, previously reported in a
third operating segment in 2015-16, has been incorporated into the UKPIL segment. This is to better reflect how the segment's resources are managed and reported to the CODM. The 2015-16 comparative information has been restated accordingly. There has also been a re-presentation of £141 million costs between infrastructure costs and other operating costs in the Group income statement.

Of the residual businesses previously included in the 'Other' segment in 2015-16, the Group disposed of its 51 per cent shareholding in NDC 2000 Limited (NDC) on 24 April 2016 and the results of the Quadrant Catering Limited associate company do not materially impact Group results. A loss of £2 million has been recognised in the income statement for the disposal of NDC.

A key measure of segment performance is operating profit before transformation costs (used internally for the Corporate Balanced Scorecard). This measure of performance is disclosed on an 'adjusted' basis, a non-IFRS measure, excluding specific items and the pension charge to cash difference adjustment (see APMs section on page 22). This is consistent with how financial performance is measured internally and reported to the CODM.

Segment revenues have been attributed to the respective countries based on the primary location of the service performed. Transfer prices between segments are set at arm's length/fair value on the basis of charges reached through negotiation between the relevant business units that form part of the segments. Trading between UKPIL and GLS is not material.

	UK operations		Non-UK operations	Group
52 weeks 2017			Adjusted		Specific items and pension adjustment¹	ReportedGroup
Continuing operations		UKPIL £m	GLS £m	Total £m	£m	Total £m
Revenue		7,658	2,118	9,776	-	9,776
People costs		(4,865)	(489)	(5,354)	(222)	(5,576)
Non-people costs		(2,245)	(1,465)	(3,710)	-	(3,710)
Operating profit before transformation costs		548	164	712	(222)	490
Transformation costs		(137)	-	(137)	-	(137)
Operating profit after transformation costs		411	164	575	(222)	353
Operating specific items
Employee Free Shares charge		-	-	-	(105)	(105)
Legacy/other costs		-	-	-	(18)	(18)
Amortisation of intangible assets in acquisitions		-	-	-	(11)	(11)
Operating profit		411	164	575	(356)	219
Non-operating specific items
Profit on disposal of property, plant and equipment		-	-	-	14	14
Loss on disposal of business		-	-	-	(2)	(2)
Earnings before interest and tax		411	164	575	(344)	231
Net finance costs		(13)	(3)	(16)	-	(16)
Net pension interest (non-operating specific item)		-	-	-	120	120
Profit before tax		398	161	559	(224)	335

¹A £7 million credit for specific items and a £222 million charge for the pension charge to cash difference adjustment relate to UKPIL. A £9 million charge for specific items relates to GLS, comprising £10 million amortisation offset by £1 million profit on disposal of property, plant and equipment.

	UK operations		Non-UK operations	Group
52 weeks 2016			Adjusted		Specific items and pension adjustment¹		Reported Group
Continuing operations		UKPIL £m	GLS £m	Total £m	£m	Total £m
Revenue		7,671	1,580	9,251	-	9,251
People costs		(4,841)	(358)	(5,199)	(257)	(5,456)
Non-people costs		(2,205)	(1,105)	(3,310)	-	(3,310)
Operating profit before transformation costs		625	117	742	(257)	485
Transformation costs		(191)	-	(191)	-	(191)
Operating profit after transformation costs		434	117	551	(257)	294
Operating specific items
Employee Free Shares charge		-	-	-	(158)	(158)
Legacy/other credit		-	-	-	2	2
Operating profit		434	117	551	(413)	138
Non-operating specific items
Profit on disposal of property, plant and equipment		-	-	-	29	29
Earnings before interest and tax		434	117	551	(384)	167
Net finance costs		(13)	-	(13)	-	(13)
Net pension interest (non-operating specific item)		-	-	-	113	113
Profit before tax		421	117	538	(271)	267

¹Specific items and pension charge to cash difference adjustment all relate to UKPIL.

The expenses and share of loss from associates and joint venture below are included within operating profit before transformation costs in the income statement.

The non-current assets below are included within non-current assets on the balance sheet but exclude financial assets, retirement benefit surplus and deferred tax.

	UK operations		Non-UK operations
52 weeks 2017		UKPIL £m	GLS £m	Total £m
Depreciation		(198)	(37)	(235)
Amortisation of intangible assets (mainly software)²		(56)	(21)	(77)
Share of post-tax loss from associates and joint venture		(1)	(1)	(2)

Non-current assets		2,199	766	2,965

	UK operations		Non-UK operations
52 weeks 2016		UKPIL £m	GLS £m	Total £m
Depreciation		(194)	(30)	(224)
Amortisation of intangible assets (mainly software)²		(39)	(9)	(48)
Share of post-tax profit from associates and joint venture		1	-	1

Non-current assets		2,125	555	2,680

²Includes £11 million (2015-16: £nil) presented as an operating specific item in the income statement.

3. Operating costs

Operating profit before transformation costs is stated after charging the following operating costs:

	52 weeks 2017 £m	52 weeks 2016 £m
People costs (see Note 4)	(5,576)	(5,456)

Distribution and conveyance costs
Charges from overseas postal administrations	(356)	(294)
Fuel costs	(159)	(172)
Operating lease costs - vehicles	(17)	(11)

Infrastructure costs
Depreciation and amortisation	(301)	(272)
Depreciation of property, plant and equipment	(235)	(224)
Amortisation of intangible assets¹	(66)	(48)

¹ Excludes £11 million (2015-16: £nil) amortisation of intangible assets in acquisitions, presented as an operating specific item in the income statement.

Other operating costs
Post Office Limited charges	(343)	(342)
Inventory expensed	(49)	(46)
Operating lease costs - property, plant and equipment	(143)	(134)

Research and development

During the year, the Group continued to develop products and services within the business. An indication of the nature of the activities performed will be provided in the Strategic Report in the Annual Report and Financial Statements 2016-17.

Regulatory body costs

The following disclosure is relevant in understanding the extent of costs in relation to the regulation of the Group.

	52 weeks 2017 £m	52 weeks 2016 £m
Ofcom	(4)	(5)
Citizens Advice/Consumer Council for Northern Ireland	(3)	(3)
Total	(7)	(8)

Statutory audit costs

Disclosure of statutory audit costs is a requirement of the Companies Act 2006.

Auditor's fees	52 weeks 2017 £000	52 weeks 2016 £000
Audit of Group statutory financial statements	(2,178)	(1,887)
Other fees to Auditor:
Regulatory audit	(122)	(122)
Other assurance	(44)	(6)
Taxation services	-	(29)
Other non-audit services	(342)	(216)
Total	(2,686)	(2,260)

The 2016-17 fees relate to the services of the Group's appointed auditor KPMG LLP who, in addition to the above amounts, were paid by the respective Trustees, £88,000 for the audit of the Royal Mail Pension Plan (2015-16: £85,000) and £28,000 for the audit of the Royal Mail Defined Contribution Plan (2015-16: £31,000).

4. People information

People costs

	52 weeks 2017 £m	52 weeks 2016 £m
Wages and salaries	(4,371)	(4,323)
UK-based	(3,949)	(4,020)
GLS	(422)	(303)
Pensions (see Note 9)	(776)	(768)
Defined benefit UK	(568)	(619)
Defined contribution UK	(51)	(45)
UK defined benefit and defined contribution Pension Salary Exchange (PSE)	(151)	(99)
GLS	(6)	(5)
Social security	(429)	(365)
UK-based	(368)	(315)
GLS	(61)	(50)

Total people costs	(5,576)	(5,456)

Defined benefit pension plan rates:
Income statement	28.8%	29.8%
Cash flow	17.1%	17.1%
Defined contribution pension plan average rate:
Income statement and cash flow¹	6.0%	5.7%

People numbers

The number of people employed during the reporting year was as follows:

		Full-time equivalents²				Headcount
	Year end			Average		Year end		Average
	52 weeks 2017		52 weeks 2016	52 weeks 2017	52 weeks 2016	52 weeks 2017	52 weeks 2016	52 weeks 2017	52 weeks 2016
UKPIL	148,170		151,713	151,601	154,572	141,819	142,544	142,579	143,835
GLS - continuing operations	12,966		9,683	12,617	9,471	17,136	13,991	16,912	13,829
Total	161,136		161,396	164,218	164,043	158,955	156,535	159,491	157,664

Directors' remuneration

	52 weeks 2017 £000	52 weeks 2016 £000
Directors' remuneration³	(3,345)	(2,830)
Amounts earned under Long Term Incentive Plans (LTIP)	(400)	(676)

Number of Directors accruing benefits under defined benefit plans	-	-
Number of Directors accruing benefits under defined contribution plans	1	1

¹Employer contribution rates are one per cent for employees in the entry level category and seven to nine per cent for those in the standard level category, depending on the employees' selected contribution rate.

²These people numbers relate to the total number of paid hours (including part-time, full-time and agency hours) divided by the number of standard full-time working hours in the same year.

³These amounts include any cash supplements received in lieu of pension.

5. Net finance costs

	52 weeks 2017 £m	52 weeks 2016 £m
Unwinding of discount relating to industrial diseases claims provision	(2)	(2)
Interest payable on financial liabilities	(16)	(14)
Syndicated bank loan facility
Loans and borrowings	(1)	-
Unused facility fees	(2)	(2)
Arrangement fees	(1)	(2)
€500 million bond - 2.375% Senior Fixed Rate Notes due July 2024	(11)	(9)
Finance leases	(4)	(5)
Capitalisation of borrowing costs on specific qualifying assets	4	4
Other finance costs	(1)	-

Finance costs	(18)	(16)
Finance income - interest receivable on financial assets	2	3
Net finance costs	(16)	(13)

6. Taxation

	52 weeks 2017 £m	52 weeks 2016 £m
Tax (charged)/credited in the income statement
Current income tax:
Current UK income tax charge	(16)	(16)
Foreign tax	(45)	(35)
Current income tax charge	(61)	(51)
Amounts overprovided in previous years	1	1
Total current income tax charge	(60)	(50)
Deferred income tax:
Effect of change in tax rates	9	6
Relating to origination and reversal of temporary differences	(20)	(17)
Amounts overprovided in previous years	9	11
Total deferred income tax charge	(2)	-
Tax charge in the consolidated income statement	(62)	(50)

Tax credited/(charged) to other comprehensive income
Current tax:
Tax credit on foreign currency translation	1	-
Deferred tax:
Tax (charge)/credit in relation to actuarial gains on defined benefit pension plans	(107)	49
Tax charge on revaluation of cash flow hedges	(5)	(3)
Tax charge on foreign currency translation	(5)	(2)
Total deferred income tax (charge)/credit	(117)	44
Total (charge)/credit in the consolidated statement of other comprehensive income	(116)	44

Reconciliation of the total tax charge

A reconciliation of the tax charge in the income statement and the UK rate of corporation tax applied to accounting profit for the 52 weeks ended 26 March 2017 and 52 weeks ended 27 March 2016 is shown below.

	52 weeks 2017 £m	52 weeks 2016 £m
Profit before tax¹	335	298

At UK standard rate of corporation tax of 20% (2015-16: 20%)	(67)	(60)
Effect of higher taxes on overseas earnings	(9)	(10)
Tax overprovided in previous years	10	12
Non-deductible expenses	(5)	(6)
Associates' profit after tax charge (included in Group pre-tax profit)	-	1
Tax effect of property disposals	5	7
Net increase in tax charge resulting from non-recognition of deferred tax assets and liabilities	(5)	-
Effect of change in tax rates	9	6
Tax charge in the income statement²	(62)	(50)

Tax on specific items

	52 weeks 2017 £m	52 weeks 2016 £m
Continuing operations	59	72
Discontinued operations	-	(5)
Tax specific items - adjustments in respect of previous years	-	1
Total tax credit on specific items	59	68

The tax credit on specific items of £59 million (2015-16: £68 million) includes the tax impact of property transactions and certain tax-only adjustments, such as the impact of changes in tax law.

Current tax

The current tax charge for the Group is mainly in respect of GLS. UK taxable profits in 2016-17 are partially covered by a combination of brought forward losses and capital allowance claims. Accordingly, the current tax rate for the Group is 18 per cent (2015-16: 17 per cent).

Effective tax rate

The effective tax rate on reported profit is 19 per cent (2015-16: 17 per cent), comprising current tax due on reported profits and deferred tax in relation to temporary differences. This rate is below the UK statutory rate, principally due to changes to tax law detailed below, tax overprovided in previous years and no tax charge recognised in relation to property disposals³. The majority of the prior year overprovision is in relation to tax incentives in earlier years.

GLS pays tax in a number of territories, with the majority of its profits in the reporting year to 26 March 2017 earned in territories where the tax rate is above the UK statutory tax rate. Certain subsidiaries, notably GLS France, continue to not recognise deferred tax credits on losses made during the reporting year as it is not sufficiently certain of its capacity to utilise them in the future. These factors contribute to GLS having a higher effective tax rate for the year than the UK statutory rate.

¹ The 2015-16 profit includes £31 million in respect of discontinued operations.

² The 2015-16 charge includes £5 million in respect of discontinued operations.

³No tax charge has been recognised on property disposals included in specific items, as no tax liability would be expected to crystallise on the grounds that, were the assets (into which the gains have been rolled over) to be sold at their residual values, no capital gain would arise.

Deferred tax

Deferred tax by balance sheet category 52 weeks ended 26 March 2017	At 28 March 2016 £m	(Charged)/ credited to income statement £m	(Charged)/ credited to other comprehensive income £m	(Charged)/ credited directly to equity £m	Acquisition of subsidiaries £m	R&D credit £m	At 26 March 2017 £m
Liabilities
Accelerated capital allowances	(1)	(13)	(2)4	-	-	-	(16)
Pensions temporary differences	(565)	25	(107)	-	-	-	(647)
Employee share schemes	(25)	15	-	(1)	-	-	(11)
Intangible assets	(33)	17	(3)⁴	-	(17)	-	(36)
Hedging derivatives temporary differences	4	-	(5)	-	-	-	(1)
Deferred tax liabilities	(620)	44	(117)	(1)	(17)	-	(711)
Assets
Deferred capital allowances	78	(41)	-	-	-	-	37
Provisions and other	19	-	-	-	1	-	20
Losses available for offset against future taxable income	63	(5)	-	-	4	-	62
R&D expenditure credit	-	-	-	-	-	4	4
Deferred tax assets	160	(46)	-	-	5	4	123

Net deferred tax liability	(460)	(2)	(117)	(1)	(12)	4	(588)

Deferred tax by balance sheet category 52 weeks ended 27 March 2016	At 30 March 2015 £m	(Charged)/ credited to income statement £m	(Charged)/ credited to other comprehensive income £m	At 27 March 2016 £m
Liabilities
Accelerated capital allowances	(1)	-	-	(1)
Pensions temporary differences	(667)	53	49	(565)
Employee share schemes	(48)	23	-	(25)
Intangible assets	(29)	(2)	(2)⁴	(33)
Deferred tax liabilities	(745)	74	47	(624)
Assets
Deferred capital allowances	127	(49)	-	78
Provisions and other	25	(6)	-	19
Losses available for offset against future taxable income	82	(19)	-	63
Hedging derivatives temporary differences	7	-	(3)	4
Deferred tax assets	241	(74)	(3)	164

Net deferred tax liability	(504)	-	44	(460)

Deferred tax - balance sheet presentation	At 26 March 2017 £m	At 27 March 2016 £m
Liabilities
GLS group	(50)	(34)
Net UK position	(553)	(435)
Deferred tax liabilities	(603)	(469)
Assets
GLS group	15	9
Net UK position	-	-
Net deferred tax liability	(588)	(460)

⁴£5 million charged (2015-16: £2 million) to the 'Foreign currency translation reserve'.

The deferred tax position shows an increased overall liability in the reporting year to 26 March 2017.

This increase in the liability is primarily as a result of the deferred tax impact of the increase in the surplus in RMPP.

The movement in pensions temporary differences credited to 'Other comprehensive income' includes a credit of £43 million (2015-16: £48 million) relating to the change in tax law detailed below. Additionally a charge of £65 million (2015-16: £59 million credit) has been recognised in relation to the IFRIC 14 adjustment detailed in Note 9.

GLS has deferred tax assets and liabilities in various jurisdictions which cannot be offset against one another. The main elements of the liability relate to goodwill and intangibles in GLS Germany, for which the Group has already taken tax deductions, and acquisition intangibles in relation to ASM and GSO.

At 26 March 2017, the Group had unrecognised deferred tax assets of £73 million (2015-16: £68 million) comprising £68 million (2015-16: £62 million) relating to tax losses of £259 million (2015-16: £234 million), mainly in GLS, that are available for offset against future profits if generated in the relevant GLS companies, and £5 million (2015-16: £6 million) in relation to £30 million (2015-16: £30 million) of UK capital losses carried forward. The Group has not recognised these deferred tax assets on the basis that it is not sufficiently certain of its capacity to utilise them in the future.

The Group also has temporary differences in respect of £211 million (2015-16: £211 million) of capital losses, the tax effect of which is £36 million (2015-16: £38 million) in respect of assets previously qualifying for industrial buildings allowances. Further temporary differences exist in relation to £212 million (2015-16: £217 million) of gains for which rollover relief has been claimed, the tax effect of which is £36 million (2015-16: £40 million). No tax liability would be expected to crystallise on the basis that, were the assets (into which the gains have been rolled over) to be sold at their residual values, no capital gain would arise.

Changes to UK corporation tax rate

Reductions in the UK corporation tax rate from 20 per cent to 19 per cent (effective from 1 April 2017) and to 17 per cent (effective 1 April 2020) were substantively enacted on 26 October 2015 and 15 September 2016 respectively. In future, this will reduce the Group's current tax charge accordingly. In accordance with accounting standards, the effect of these rate reductions on deferred tax balances has been reflected in these financial statements, dependent upon when temporary differences are expected to reverse.

7. Earnings per share

	52 weeks 2017			52 weeks 2016
	Reported	Specific items¹	Adjusted	Reported	Specific items¹	Adjusted
Attributable to equity holders of the parent Company
Profit for the year from continuing operations (£million)	272	(165)	437	215	(198)	413
Weighted average number of shares issued (million)	990	n/a	990	1,000	n/a	1,000
Basic earnings per share from continuing operations (pence)	27.5	n/a	44.1	21.5	n/a	41.3
Diluted earnings per share from continuing operations (pence)	27.3	n/a	43.8	21.4	n/a	41.1
Profit for the year (£million)	272	(165)	437	241	(172)	413
Weighted average number of shares issued (million)	990	n/a	990	1,000	n/a	1,000
Basic earnings per share (pence)	27.5	n/a	44.1	24.1	n/a	41.3
Diluted earnings per share (pence)	27.3	n/a	43.8	24.0	n/a	41.1

¹ Further detail of the balances which make up the specific items totals can be found in the Financial Review on page 16.

The diluted earnings per share for the year ended 26 March 2017 is based on a weighted average number of shares of 996,593,330 (2015-16: 1,004,792,701) to take account of the potential issue of 3,252,077 ordinary shares resulting from the Long Term Incentive Plans (LTIP) for certain senior management and 2,923,428 ordinary shares resulting from the the Save As You Earn (SAYE) scheme. The 9,582,175 shares held in an Employee Benefit Trust for the settlement of options and awards to current and former employees, are treated as treasury shares for accounting purposes. The Company, however, does not hold any shares in treasury.

Basic and diluted earnings per share from discontinued operations were nil pence per share (2015-16: 2.6 pence per share).

8. Dividends

	52 weeks 2017	52 weeks 2016	52 weeks 2017	52 weeks 2016
Dividends on ordinary shares	Pence per share	Pence per share	£m	£m
Final dividends paid	15.1	14.3	149	143
Interim dividends paid	7.4	7.0	73	70
Total dividends paid	22.5	21.3	222	213

In addition to the above dividends paid, the Directors are proposing a final dividend for the year ending 26 March 2017 of 15.6 pence per share, equivalent to £156 million. This dividend will be paid to shareholders on 28 July 2017 subject to approval at the AGM to be held on 20 July 2017.

9. Retirement benefit plans

Summary pension information

	52 weeks 2017 £m	52 weeks 2016 £m
Ongoing UK pension service costs
UK defined benefit plan (including administration costs)¹	(568)	(619)
UK defined contribution plan	(51)	(45)
UK defined benefit and defined contribution plans' Pension Salary Exchange (PSE)² employer contributions	(151)	(99)
Total UK ongoing pension service costs	(770)	(763)
GLS defined contribution type plan costs	(6)	(5)
Total Group ongoing pension service costs	(776)	(768)
Cash flows relating to ongoing pension service costs
UK defined benefit plan employer contributions³	(336)	(352)
Defined contribution plans' employer contributions	(57)	(50)
UK defined benefit and defined contribution plans' PSE employer contributions	(151)	(99)
Total Group cash flows relating to ongoing pension service costs	(544)	(501)
RMSEPP deficit correction payments	(10)	(10)
Pension charge to cash difference adjustment	(222)	(257)

	At 26 March 2017 '000	At 27 March 2016 '000
UK pension plans - active membership
UK defined benefit plan	88	93
UK defined contribution plan	45	42
Total	133	135

¹ These pension service costs are charged to the income statement. They represent the cost (as a percentage of pensionable payroll - 28.8 per cent (2015-16: 29.8 per cent)) of the increase in the defined benefit obligation due to members earning one more year's worth of pension benefits. They are calculated in accordance with IAS 19 and are based on market yields (high quality corporate bonds and inflation) at the beginning of the reporting year. Pensions administration costs for the Royal Mail Pension Plan (RMPP) of £5 million (2015-16: £6 million) continue to be included within the Group's ongoing UK pension service costs.

² At the beginning of August 2015, PSE was introduced under which eligible employees who are enrolled into PSE opt out of making employee contributions to their pension and the Group makes additional contributions in return for a reduction in basic pay. As a result, there is a decrease in wages and salaries and a corresponding increase in pension costs of £151 million (2015-16: £99 million) in the reporting year.

³ The employer contribution cash flow rate (17.1 per cent in both the current and prior year) forms part of the payroll expense and is paid into the RMPP. The contribution rate is set following each actuarial funding valuation, usually every three years. These actuarial valuations are required to be carried out on assumptions determined by the Trustee and agreed by Royal Mail.

UK Defined Contribution plan

Royal Mail Group Limited, the Company's main operating subsidiary, operates the Royal Mail Defined Contribution Plan, which was launched in April 2009 and is open to employees who joined the Group from 31 March 2008, following closure of the RMPP to new members.

Ongoing UK defined contribution plan costs have increased from £63 million in 2015-16 to £82 million (including £31 million PSE costs). This is mainly due to the introduction of PSE, but also as a result of the continued increase in plan membership and an increase in the average employer's contribution rate from 5.7 per cent in 2015-16 to 6.0 per cent in 2016-17.

UK Defined Benefit plans

Royal Mail Group Limited had one of the largest defined benefit pension plans in the UK (based on membership and assets), called the Royal Mail Pension Plan (RMPP). On 1 April 2012 (one week into the 2012-13 reporting year) - after the granting of State Aid approval by the European Commission to HM Government on 21 March 2012 - almost all of the historic pension liabilities and pension assets of RMPP, built up until 31 March 2012, were transferred to a new HM Government pension scheme, the Royal Mail Statutory Pension Scheme (RMSPS).

On this date, RMPP was also sectionalised, with Royal Mail Group Limited and Post Office Limited each responsible for their own sections from 1 April 2012 onwards.

The transfer left the Royal Mail section (RM section) of the RMPP fully funded on an actuarial basis. On this basis, using long-term actuarial assumptions agreed at that date, it was predicted the Company would have to make no further cash deficit correction payments relating to the historic liabilities. All further references in this Note to the RMPP, relate to its RM section.

Royal Mail Pension Plan

The RMPP is funded by the payment of contributions to separate trustee administered funds. RMPP includes sections A, B and C, each with different terms and conditions:

•	Section A is for members (or beneficiaries of members) who joined before 1 December 1971;
•	Section B is for members (or beneficiaries of members) who joined on or after 1 December 1971 and before 1 April 1987, or for members of Section A who chose to receive Section B benefits; and
•	Section C is for members (or beneficiaries of members) who joined on or after 1 April 1987 and before 1 April 2008.

Benefits provided are based on final salary in respect of service to 31 March 2008, and on career salary blocks for each year of service, revalued annually, for service from 1 April 2008.

Royal Mail Pensions Trustees Limited acts as the corporate trustee to the RMPP. Within the Trustee, there is a Trustee Board of nine nominated Trustee Directors. The Trustee Board is supported by an executive team of pension management professionals who provide day-to-day plan management, advise the Trustee on its responsibilities and ensures that decisions are fully implemented.

The Trustee has several responsibilities. It must always act in the best interests of all RMPP beneficiaries - including active members, deferred members, pensioners and beneficiaries. Specifically, it must pay all benefits as they fall due under the Trust Deed and Rules. The Trustee is responsible for:

•	monitoring the RMPP - to help protect benefits, the Trustee monitors the financial strength of the participating employers;
•	investing contributions - the Trustee invest the member and employer contributions in a mix of equities, bonds, property and other investments including derivatives. It holds all the contributions and investments on behalf of the members; and
•	keeping members informed - the Trustee sends active members an annual benefit illustration, which shows what members can expect in the future, together with a summary of the RMPP's annual report and accounts.

2013 Pensions Review

In June 2013, the Group began a consultation with RMPP members on a proposal to ensure the RMPP could remain open to future accrual, subject to certain conditions, at least until the conclusion of the next periodic review in March 2018. Subsequently, on 26 September 2013, the Company agreed with the RMPP Trustee to implement a Pensions Reform with effect from 1 April 2014.

This agreement enabled the March 2012 actuarial valuation to be concluded, and allowed the Company's regular future service contribution rate for RMPP, expressed as a percentage of pensionable pay, to remain at 17.1 per cent.

The RMPP's investment strategy was developed to mitigate the largest risks - movements in interest rates and inflation rates. This has enabled the Company to maintain its March 2018 commitment.

As part of the March 2012 actuarial valuation, the Group agreed to pay additional contributions of up to £50 million a year from April 2016 onwards if the RMPP Trustee considers these necessary to maintain the RMPP's projected funding position in March 2019. The RMPP Trustee has carried out its assessment of liabilities as at March 2016 and confirmed that no payment was due for 2016-17. Following agreement on the revised Schedule of Contributions, such assessments will no longer be carried out.

2018 Pensions Review

In January 2017, the Company consulted RMPP members about its proposal for the future of the RMPP. The consultation closed on 10 March 2017. Following a review of member feedback, on 13 April 2017 the Company announced that it had not found an affordable way to keep the RMPP open in its current form after March 2018, and had made the decision to close the RMPP⁴ to future accrual on 31 March 2018.

On 8 May 2017, after the balance sheet date, agreement was reached between the Company and the RMPP Trustee on the March 2015 actuarial valuation and a revised Schedule of Contributions.

In accordance with the new Schedule of Contributions, the service contribution rate for 2017-18 will remain at 17.1 per cent. The March 2015 valuation continues to show the scheme in surplus and therefore no deficit correction payments are expected to be made. The Company expects to contribute around £320 million and employees around £110 million towards the RMPP in 2017-18.

⁴ The decision was made to close Sections B and C of the RMPP to future accrual. Section A of the Plan which has a small number of active members remains open to future accrual.

Royal Mail Senior Executives Pension Plan (RMSEPP)

Royal Mail Group Limited also contributes to a smaller defined benefit plan for executives, RMSEPP - which closed in December 2012 to future accrual, therefore the Group makes no regular future service contributions. As agreed in the February 2013 Funding Agreement with the Trustees, the Group makes deficit correction payments of £10 million per annum until at least the date on which the 2018 valuation is completed (no later than 30 September 2018). Deficit correction payments in 2016-17 were £10 million (2015-16: £10 million). The RMSEPP triennial valuation at 31 March 2015 has been completed, based on the assumptions agreed as part of the Funding Agreement made between the Company and the Trustees in 2013.

In April 2016 the RMSEPP Trustees purchased a 'buy-in' policy of insurance in respect of pensions in payment of its oldest members. This is considered an asset of the RMSEPP and does not confer any rights to individual members. All benefit payments due from the RMSEPP remain unchanged. The insurance policy exactly matches the value and timing of the benefits payable under the RMSEPP (for the oldest members) and the fair value is deemed to be the present value of the related obligation. The buy-in policy valued at £151 million is included as a pension asset and a pension liability at 26 March 2017.

A liability of £2 million (2015-16: £2 million) has been recognised for future payment of pension benefits to a past Director.

Accounting and actuarial surplus position (RMPP and RMSEPP)

The combined plans' assets and liabilities are shown below.

	Accounting (IAS 19)		Actuarial/cash funding
	At 26 March 2017 £m	At 27 March 2016 £m	At 31 March 2017 £m	At 31 March 2016 £m
Fair value of plans' assets (9(b) below)⁵	9,847	7,374	10,066	7,442
Present value of plans' liabilities	(5,992)	(3,815)	(8,984)	(5,665)
Surplus in plans (pre IFRIC 14 adjustment)	3,855	3,559	1,082	1,777
IFRIC 14 adjustment	(16)	(129)	n/a	n/a
Surplus in plans	3,839	3,430	1,082	1,777

⁵Difference between accounting and actuarial/cash funding asset fair values arises from the different year end dates used for the valuation of the assets under both methods.

There is no element of the present value of the plans' liabilities above that arises from plans that are wholly unfunded.

Accounting (IAS 19)

As the Group has a legal right to benefit from a surplus, under IAS 19 and IFRIC 14 it is required to recognise the economic benefit it is assumed it will derive either in the form of a reduction to future contributions or a refund of the surplus.

In the current period, the RMPP surplus is assumed to be fully recoverable as a reduction to future employer contributions as the economic benefit resulting from comparing the future service costs to the employer contributions is more than the accounting surplus. Therefore, no IFRIC 14 adjustment is required.

Following the Company's decision to close the RMPP, after 31 March 2018 the surplus will no longer be assumed to be recoverable as a reduction to future employer contributions. If this had been the position at 26 March 2017, only one year of economic benefit would be recoverable as a reduction to future employer contributions, with the remaining surplus assumed to be available as a refund. This would result in an additional IFRIC 14 adjustment of £1,176 million and a reduction in the overall 26 March 2017 pension surplus (net of IFRIC 14) from £3,839 million to £2,663 million. On this basis, the deferred tax liability in respect of the surplus as at 26 March 2017 of £647 million would be reduced to £85 million. It is not currently anticipated that any curtailments will arise as a result of the closure of RMPP.

Included in the IAS 19 figures in the table above is an RMSEPP surplus at 26 March 2017 of £47 million (pre IFRIC 14) (2015-16: £37 million surplus).

As RMSEPP is closed to future accrual, the surplus is assumed to be available as a refund as per IFRIC 14 and, as such, is shown net of taxation withheld in both years.

The Directors do not believe that the current excess of pension plan assets over the liabilities on an accounting basis will result in an excess of pension assets on an actuarial/cash funding basis. However, the Directors are required to account for the pension plan based on their legal right to benefit from a surplus, using long-term actuarial assumptions current at the reporting date, as required by IFRS. The legal right to benefit from a surplus has not changed as a result of the changes agreed between the Company and Trustee on 8 May 2017.

Actuarial/cash funding

The actuarial funding surplus of the RMPP and RMSEPP is £1,082 million at 31 March 2017 (2015-16: £1,777 million surplus). The cost of benefits being accrued to RMPP each year, based on market conditions at the end of March 2017, would currently be £1,260 million. This is significantly greater than projected 2017-18 contributions of £320 million by the Company and £110 million by employees. Accordingly we expect the actuarial surplus would be exhausted during 2018 if the RMPP had remained open in its current form.

The following disclosures relate to the major assumptions, sensitivities, assets and liabilities in the RMPP and RMSEPP.

a) Major long-term assumptions used for accounting (IAS 19) purposes - RMPP and RMSEPP

The major assumptions used to calculate the accounting position of the pension plans are as follows:

	At 26 March 2017	At 27 March 2016
Retail Price Index (RPI)	3.2%	3.0%
Consumer Price Index (CPI)	2.2%	2.0%
Discount rate
- nominal	2.5%	3.5%
- real (nominal less RPI)⁶	(0.7)%	0.5%
Rate of increase in pensionable salaries⁷	RPI-0.1%	RPI-0.1%
Rate of increase for deferred pensions	CPI	CPI
Rate of pension increases - RMPP Sections A/B	CPI	CPI
Rate of pension increases - RMPP Section C⁷	RPI-0.1%	RPI-0.1%
Rate of pension increases - RMSEPP members transferred from Section A or B of RMPP	CPI	CPI
Rate of pension increases - RMSEPP all other members⁷	RPI-0.1%	RPI-0.1%
Life expectancy from age 60 - for a current 40/60 year old male RMPP member	28/26 years	29/27 years
Life expectancy from age 60 - for a current 40/60 year old female RMPP member	31/29 years	32/30 years

⁶ The real discount rate used reflects the long average duration of the RMPP of around 30 years.

⁷ The rate of increase in salaries, and the rate of pension increase for Section C members (who joined RMPP on or after April 1987) and RMSEPP 'all other members', is capped at five per cent, which results in the average long-term pension increase assumption being 10 basis points lower than the RPI long-term assumption.

Mortality

The March 2017 mortality assumptions have been updated in line with the March 2015 valuation. The RMPP assumptions are based on the latest Self-Administered Pension Scheme (SAPS) S2 mortality tables with appropriate scaling factors (116 per cent for male pensioners and 109 per cent for female pensioners). Future improvements are based on the CMI 2015 core projections with a long-term trend of 1.5 per cent per annum.

Sensitivity analysis for RMPP liabilities

The RMPP liabilities are sensitive to changes in key assumptions. The potential impact of the largest sensitivities on the RMPP liabilities is as follows:

Key assumption change	Potential Increase in liabilities £m
Additional one year of life expectancy	220
Increase in inflation rate (both RPI and CPI simultaneously) of 0.1% p.a.	160
Decrease in discount rate of 0.1% p.a.	160
Increase in CPI assumption (assuming RPI remains constant) of 0.1% p.a.	30

This sensitivity analysis has been determined based on a method that assesses the impact on the defined benefit obligation, resulting from reasonable changes in key assumptions occurring at the end of the reporting year. Changes inverse to those in the table (e.g. an increase in discount rate) would have the opposite effect on liabilities. The average duration of the RMPP obligation is 30 years (2015-16: 27 years).

b) RMPP and RMSEPP assets

	At 26 March 2017			At 27 March 2016
	Quoted £m	Unquoted £m	Total £m	Quoted £m	Unquoted £m	Total £m
Equities
UK	22	126	148	20	138	158
Overseas	561	27	588	427	-	427
Bonds
Fixed interest - UK	306	11	317	272	7	279
- Overseas	938	14	952	793	2	795
Index linked - UK	26	151	177	191	-	191
Pooled investments
Managed funds	1,018	-	1,018	775	-	775
Unit Trusts	6,004	-	6,004	4,188	-	4,188
Property (UK)	26	317	343	25	302	327
Cash and cash equivalents	320	-	320	210	-	210
Other	5	-	5	(3)	-	(3)
Derivatives	(25)	-	(25)	27	-	27
Total plans' assets	9,201	646	9,847	6,925	449	7,374

There were open equity derivatives within this portfolio with a fair value of £1 million at 26 March 2017 (2015-16: £48 million). £5 billion (2015-16: £4 billion) of HM Government Bonds are primarily included in Unit Trusts above. The plans' assets do not include property or assets used by the Group, but do include shares of the Royal Mail plc with an approximate market value of £21,000 at 26 March 2017 (2015-16: £27,000).

Risk exposure and investment strategy

The investment strategy of the RMPP Trustee aims to safeguard the assets of the Plan and to provide, together with contributions, the financial resource from which benefits are paid. Investment is inevitably exposed to risks. The investment risks inherent in the investment markets are partially mitigated by pursuing a widely diversified approach across asset classes and investment managers. The RMPP uses derivatives (such as swaps, forwards and options) to reduce risks whilst maintaining expected investment returns. The RMPP Trustee recognises that there is a natural conflict between improving the potential for positive return and limiting the potential for poor return. The RMPP Trustee has specified objectives for the investment policy that balance these requirements.

The largest risks faced by the RMPP are movements in interest rates and inflation rates. To reduce the risk of movements in these rates driving the RMPP into a funding deficit, and the Group not being able to maintain its March 2018 commitment, the RMPP Trustee has hedged in advance, a significant proportion of the funding liabilities which it is estimated will build up by March 2018. It has done this predominantly through investment in index-linked gilts and derivatives (interest rate and inflation rate swaps) held in Unit Trust pooled investments providing economic exposure to gilts. The impact of the RMPP's advance hedging of projected funding liabilities is to increase near term volatility in the pension surplus, due to the return on the liability-hedging assets not being matched by an increase in the accrued liabilities.

As the accrued liabilities get closer to the projected liabilities that have been hedged, this volatility will reduce. The increase in the liability-hedged assets is predominantly reflected in the Unit Trust values above which have increased from £4,188 million at 27 March 2016 to £6,004 million at 26 March 2017.

The notional value covered by the interest rate swaps (full exposure to the relevant asset class incurred by entering into a derivative contract) held in a specific managed portfolio for this purpose at 26 March 2017 is £2.3 billion (2015-16: £2.6 billion) and the notional value covered by the inflation rate swaps at 26 March 2017 is £1.9 billion (2015-16: £1.8 billion).

The equity exposure of RMPP was reduced in October 2016 by means of a short Total Return Swap (TRS), a derivative that can be used to reduce exposure to a particular asset class without selling the physical assets held. TRS were introduced in order to control some downside risk whilst broadly maintaining the existing expected returns. The TRS economically offset £260 million of the Plan's global equity exposure.

The spread of investments continues to balance security and growth in order to pay the RMPP benefits when they become due.

In addition to holding return-seeking assets, RMSEPP holds long-dated index linked gilts of £26 million (2015-16: £191 million) and the buy-in annuity policy of £151 million at 26 March 2017 (2015-16: £nil) to match its liabilities.

c) Movement in RMPP and RMSEPP assets, liabilities and net position

Changes in the value of the defined benefit pension liabilities, fair value of the plans' assets and the net defined benefit surplus are analysed as follows:

	Defined benefit asset		Defined benefit liability		Net defined benefit surplus
	2017 £m	2016 £m	2017 £m	2016 £m	2017 £m	2016 £m
Retirement benefit surplus (pre IFRIC 14 adjustment) at 28 March 2016 and 30 March 2015	7,374	6,619	(3,815)	(3,237)	3,559	3,382
Amounts included in the income statement
Ongoing UK defined benefit pension plan and administration costs (included in people costs)	(5)	(6)	(683)	(694)	(688)	(700)
Pension interest income/(cost)⁸	265	240	(145)	(127)	120	113
Total included in profit before tax	260	234	(828)	(821)	(568)	(587)
Amounts included in other comprehensive income - remeasurement gains/(losses)
Actuarial gain/(loss) arising from:
Financial assumptions	-	-	(1,711)	102	(1,711)	102
Demographic assumptions	-	-	243	-	243	-
Experience assumptions	-	-	76	186	76	186
Return on plans' assets (excluding interest income)	1,791	32	-	-	1,791	32
Total remeasurement gains/(losses) of the defined benefit surplus	1,791	32	(1,392)	288	399	320
Other
Employer contributions	476	488	-	-	476	488
Employee contributions	6	48	(6)	(48)	-	-
Benefits paid	(55)	(47)	55	47	-	-
Curtailment costs	-	-	(5)	(45)	(5)	(45)
Movement in pension-related accruals	(5)	-	(1)	1	(6)	1
Total other movements	422	489	43	(45)	465	444
Retirement benefit surplus (pre IFRIC 14 adjustment) at 26 March 2017 and 27 March 2016	9,847	7,374	(5,992)	(3,815)	3,855	3,559

In addition to the above items which affect the net defined benefit surplus, estimated curtailment costs of £4 million (2015-16: £36 million) have been provided for in Transformation costs in the income statement, along with the associated redundancy costs.

⁸ Pension interest income results from applying the plans' discount rate at 27 March 2016 to the plans' assets at that date. Similarly, the pension interest cost results from applying the plans' discount rate as at 27 March 2016 to the plans' liabilities at that date.

10. Acquisition of businesses

Acquisitions made in the year for a total consideration of £129 million in respect of Golden State Overnight Delivery Services Inc. (GSO), and other smaller acquisitions, Agencia Servicios Mensajería S.A.U. (ASM) and Revisecatch Limited (trading name eCourier), are detailed below. This information includes the provisional fair value of the identifiable assets and liabilities recognised as at the date of acquisition.

	52 weeks ended 26 March 2017
	GSO £m	Other £m	Total £m
Tangible assets acquired	5	4	9
Intangible assets recognised on acquisition	24	32	56
Trade and other receivables	10	21	31
Cash and cash equivalents	1	3	4
Goodwill recognised on acquisition	46	44	90
Total assets acquired	86	104	190
Trade and other payables	(9)	(22)	(31)
Obligations under finance leases	(3)	-	(3)
Interest bearing loans and borrowings	-	(7)	(7)
Tax liabilities	(8)	(6)	(14)
Non-controlling interests	-	(6)	(6)
Net assets acquired	66	63	129
Cash paid during the period	66	60	126
Deferred consideration	-	3	3
Total consideration	66	63	129

The fair value of trade debtors is equal to the gross contractual amounts receivable. An initial review of trade debtors has not indicated any recoverability issues.

The intangible assets recognised at fair value on acquisition relate to customer lists, software and brands. The goodwill of £90 million arising on these acquisitions is indicative of the acquired business knowledge of products and markets, and synergies that are expected through the integration of services.

No material fair value adjustments have been identified in respect of the remaining assets and liabilities acquired in the year.

Revenue generated from these entities since the date of acquisition is £139 million and the combined profit is £7 million, of which £51 million and £1 million relates to GSO, respectively. If these combinations had taken place at the beginning of the financial year, revenue generated would have been £222 million and the combined profit would have been £11 million, of which £98 million and £3 million relates to GSO, respectively.

The Group obtained control of GSO on 30 September 2016, through the acquisition of 100 per cent of the company's voting equity interest. GSO is a regional next day parcel delivery company, operating principally in California, and was purchased as part of GLS' careful and focused expansion outside of Europe.

There are no material non-controlling interests in relation to these acquisitions.

11. Events after the reporting year

Acquisition of Postal Express

On 6 April 2017, GLS acquired the US overnight parcel delivery company, Postal Express.

Postal Express is a regional overnight carrier operating in the states of Washington, Oregon and Idaho. It offers overnight parcel delivery, mainly to business-to-business customers across a number of industries. The total consideration paid for 100 per cent of the shares in Postal Express was $13.3 million (approximately £10.6 million).

No fair value disclosure has been made in these financial statements as the acquisition balance sheet is still being compiled under the terms of the purchase agreement.

Royal Mail Pension Plan (RMPP)

On 13 April 2017, the Company announced its decision to close RMPP to future accrual on 31 March 2018.

On 8 May 2017, agreement was reached between the Company and the RMPP Trustee on the March 2015 actuarial valuation and a revised Schedule of Contributions.

Further details can be found in the Strategic Report in the Annual Report and Financial Statements 2016-17 and Note 9.

PRINCIPAL RISKS

The Governance section describes in detail how the Group manages its risk from the Group Board level, its respective sub-committees and throughout the organisation.

The table below details each principal business risk, those aspects that would be impacted were the risk to materialise, our assessment of the current status of the risk, and how the Group mitigates it.

Principal risk	Status	How we are mitigating the risk
New arrangements and the risk of industrial action There is extensive trade union recognition in respect of our workforce in the UK with a strong and active trade union. As Royal Mail Group continues to pursue the necessary efficiency programmes in order to remain competitive in the letters and parcels markets and implements the new pension arrangements, there is an even greater risk of industrial action.
Industrial action
	↔
There is a risk that one or more material disagreements or disputes between the Group and its trade unions could result in widespread localised or national industrial action. Widespread localised or national industrial action would cause material disruption to our business in the UK and would be likely to result in an immediate and potentially ongoing significant loss of revenue for the Group. It may also cause Royal Mail to fail to meet the Quality of Service targets prescribed by Ofcom, leading to enforcement action and fines.	The Agenda for Growth agreement developed jointly with the Communications Workers Union (CWU) represented a fundamental change in our relationship with the CWU, and continues to promote stability in industrial relations. Industrial relations is an inherent risk within our business. We are negotiating a new pay deal for 2017-18 onwards and have completed a consultation on the future of the Royal Mail Pension Plan (RMPP). This, in combination with the continued pressure on costs and efficiencies in an increasingly competitive market, may put additional strain on the stability of our industrial relations.	• Our Agenda for Growth agreement with the CWU provides a joint commitment to improved industrial relations, and to resolving disputes at pace and in a way that is beneficial to both employees and Royal Mail. • A resolution process for local disputes uses trained mediators nominated by and representing both the CWU and the business. • The Agenda for Growth agreement has legally binding protections for the workforce in respect of future job security and our employment model, but which can be rescinded in the event of national industrial action.
Pension arrangements
	↔
We recognise that pension benefits are important to our people. There is a risk that we are unable to continue to provide sustainable and affordable pension arrangements which are acceptable to our people and unions, leading to industrial action. The Group is exposed to financial market conditions, changes in life expectancy and regulatory changes for defined benefits already accrued. Benefits accrued in the Royal Mail Pension Plan before April 2012 have been transferred to Government.	In 2013, we committed to keeping the RMPP open until at least March 2018, subject to certain conditions. The RMPP Trustee put in place a hedging strategy for that period of accrual which means we will be able to meet this commitment despite significant reductions in real interest rates. While the RMPP is currently in surplus, we expect this surplus will run out in 2018. On 8 May 2017, the Company and the Trustee agreed the March 2015 actuarial valuation and revised Schedule of Contributions following the decision to close the RMPP to future accrual from 31 March 2018. Closing the RMPP now avoids an unaffordable increase in pension costs for the Group. As noted, the RMPP is hedged against future interest rate and inflation rate exposures, arising on commitments made until March 2018, so we are confident that this will enable us to meet our commitment to keep the RMPP open to accrual up to 31 March 2018. We remain in discussions with our unions regarding the provision of future pension benefits from April 2018.	• We are exploring a range of options with our people, unions and advisers regarding future pension benefits. We have a clear set of affordability and capital allocation criteria for assessing any future pension arrangements. • The March 2015 Royal Mail Pension Plan valuation was agreed on 8 May 2017 with the RMPP Trustee. This is based on a prudent set of assumptions, appropriate to the Company's circumstances. • After the RMPP closes to accrual, we will continue to work closely with the Trustee to limit the risk of any deficit recovery payments being required from the Company in future.
Efficiency
	↔
Royal Mail must continuously become more efficient and flexible in order to compete effectively in the letter and parcel markets. The success of our strategy relies on the effective control of costs across all areas and the delivery of efficiency benefits. In the current industrial relations environment, there is a risk we cannot make the required short term business as usual and/or programme level cost reductions in a timely way; nor can we trial, with a view to broader roll out, more fundamental changes in methods required to meet customer requirements and to underpin future cost reductions.	We are continuing to see the positive impact of our cost reduction activities across the UK business. This has involved continuous focus on our efficiency performance in all areas, while providing a high quality service to our customers through our engaged workforce. Our productivity improvement is towards the upper range of our 2-3 per cent target, and we are confident that we will deliver the £600 million cumulative annualised cost avoided target, previously announced. As we negotiate fundamental changes to our pension and other terms and conditions, there is a risk that our workforce will delay the change we need.	• We have ongoing collaborative meetings with our unions to involve them in the efficiency improvements and growth opportunities. • We are delivering efficiencies both in and outside of the core operations and have over 200 projects and initiatives which underpin the £600 million cumulative annualised cost avoided target. • We continue to scope additional cost saving opportunities beyond 2017-18. However, the present trend of cost savings may not be sustainable and the need to deliver operational efficiencies will become greater.
Changes in market conditions and customer behaviour The industry sectors in which we operate remain highly competitive, with customers demanding more and our competitors responding quickly to these changing demands.
Customer expectations and Royal Mail's responsiveness to market changes
	↔
Changes in customer expectations, and changes in the markets in which the Group operates, could impact the demand for our products and services. There is a risk that our product offerings and customer experience may not adequately meet evolving customer expectations, or that we are unable to innovate or adapt our commercial and operational activities fast enough to respond to changes in the market.	We expect the letters sector to remain in structural decline, in the medium term, driven by e-substitution and further economic uncertainty. The parcels sector is undergoing rapid change. Competition in the UK domestic and international markets continues to intensify, with competitors offering innovative solutions that include convenient, reliable delivery and return options, and improved tracking facilities. The UK has one of the most developed e-commerce markets in the world. Growth available in the addressable UK parcels market continues to be impacted by Amazon's activities. Capacity expansion in the sector continues to exert downward pressure on prices. In the parcels business, disintermediation in online marketplaces may divert traffic to other carriers. There is a continuing requirement to invest in targeted growth and innovation to meet these challenges in the marketplace as well as reducing cost to ensure better price competitiveness. There are also potential behavioural changes by customers relating to the upcoming regulatory developments at the European level around data, including marketing mail.	• We use continuous in depth market monitoring and research to track how well we match our customers' expectations, including relative to our competitors, and to predict volume trends. • We continue to invest and introduce, at pace, new and improved products and services that: enhance customers' online and delivery experience; expand our core offering to small and medium sized businesses and marketplace sellers; and extend our product coverage. We target investments that will extend our value chain offer and increase our presence in faster growing areas of the parcels sector. • We continue to work with Amazon to provide enhanced propositions and high quality of service. • We promote the value of letters to customers through targeting advertisers and ad agencies, using our Mailmen campaign. We are also giving customers incentives to test new ways of using mail at a discounted rate. • We are investing in our Mail Centre equipment to ensure we get the best out of our machinery. To help add value to mail and keep customers using it, we invested in Mailmark^® last year. It gives customers visibility of their items in our pipeline and data on the effectiveness of their mailings. Around 80 per cent of suitable letters are sent using Mailmark^®. Further, we are planning investment to rollout barcodes to unsorted letters next year. • We continue to monitor developments and actively promote the value of marketing mail.
Economic environment
	↑
Historically, there has been a correlation between economic conditions and the level of letter and parcel volumes. Flat or adverse economic conditions could impact our ability to maintain and grow revenue, either by reducing volumes or encouraging customers to adopt cheaper service options for sending letters and parcels.	While economic conditions in the UK have proved resilient, business uncertainty before and after the EU referendum has resulted in a slowdown in marketing activity. We continue to monitor the broader long term economic impact on the UK economy. Economic growth in the Eurozone remains fragile. Low growth or recession in Europe could impact our international parcel volumes, including those handled by GLS.	• We have a challenging cost avoidance programme in place to respond to revenue headwinds. • Net cash investment is expected to be around £450 million in 2017-18 and less than £500 million per annum going forward. • In the event of an economic shock, we are able to reduce investment over the short term to protect the cash and indebtedness position of the business.
Growing in new areas
	New
Our success in growing in new areas of business is dependent on such factors as our continued ability to identify new profitable and sustainable areas of business, implementing appropriate investments, and having in place suitable structures to support continued transformation of the business.	Royal Mail Group is well positioned to grow in new markets through its subsidiary, GLS. It has a replicable and scalable business model founded on the development of strong regional businesses. Through increasing its footprint and focusing on growth opportunities in the deferred parcels space, with selective growth in the B2C parcels market, GLS is well positioned to support Royal Mail Group's overall strategy.	• Our acquisitions are primarily delivered through a targeted and focused expansion of GLS' geographic footprint, investing behind a proven operating model with a track record of identification, integration and optimisation of acquisitions over many years. • We are also developing partnerships with retailers and network partners to stimulate cross-border volumes between the UK and Asia, as well as working with China Post to provide Chinese and UK customers with faster delivery and tracking services. • We also have a number of small scale initiatives to seek new revenues which leverage our existing assets.
Regulatory and legislative environment The business operates in a regulated environment. Changes in legal and regulatory requirements could impact our ability to meet our targets and goals.
Absence of a sustainability framework to sustain the USO
	↓
USO finances are fragile. The regulatory system applies constraints to Royal Mail's ability to compete for traffic to support the costs of the Universal Service network. It imposes operational requirements not applied generally to the industry. These may impact our revenues and our ability to compete in the highly competitive sectors in which we operate. This could ultimately impact our ability to deliver the Universal Service on a sustainable basis.	Ofcom concluded its Fundamental Review of the Regulation of Royal Mail (FRR) in March 2017. It did not re-introduce price controls or add binding efficiency targets. However, it has not taken forward our proposal for a proactive sustainability framework. It has also not taken forward the opportunity to raise consumer protection standards across the industry. In terms of follow-up consultations, Ofcom is consulting on a new regulatory reporting framework to reflect the outcome of its FRR. It is also planning on conducting a cost allocation review. This will review the allocation of Royal Mail's delivery costs between parcels and letters.	We are continuing to lobby BEIS and Ofcom to tackle emerging issues of USO sustainability. We are arguing for fundamental changes in the regulatory environment including: • greater focus on sustainability, rather than on competition issues, including through the prompt introduction of a proactive sustainability framework; • procedural fairness issues and enforcement; • a material decrease in the significant regulatory burden; and • a level playing field across the whole industry, including higher consumer protection standards in parcels. We will engage fully with Ofcom's regulatory reporting review, to ensure a more targeted regime that reduces the regulatory burden.
Competition Act investigation
	↔
In January 2014, Royal Mail issued Contract Change Notices (CCNs) under the terms of the access contract regime. In February 2014, Ofcom announced that they would investigate some of these CCNs. The opening of the investigation automatically suspended the CCNs that were the subject of the investigation. These CCNs were therefore never implemented. Ofcom issued a statement of objections in July 2015. This statement sets out Ofcom's provisional view that Royal Mail breached competition law by engaging in conduct that amounted to unlawful discrimination against postal operators competing with Royal Mail in delivery. Depending on the outcome of the Ofcom investigation and any appeal, Royal Mail may be fined.	Royal Mail is refuting all of the allegations. Ofcom has stated that their final decision is likely to be made in 2017-18.	• We have robustly defended our conduct in both written and oral representations to Ofcom. • This reflects our belief that the 2014 CCNs under investigation, which were never implemented and have now been withdrawn, were fully compliant with competition law. • We will continue to defend our case.
Employment legislation and regulation
	↔
Changes to laws and regulations relating to employment (including the interpretation and enforcement of those laws and regulations) could, directly or indirectly, increase the Group's labour costs. Given the size of the Group's workforce, this could have an adverse effect on the Group.	Recent case law has suggested that, in some circumstances, regular overtime and commission payments should form part of holiday pay calculations. The legal position remains unclear as case law is still evolving in this area. We have commenced discussions with the trade union about the application of holiday pay for part timers but anticipate that this still will take some time to implement. Other risks to our cost base associated with employment legislation have emerged and were disclosed in our financial results for the half year ended 27 September 2016. These are: • The Apprenticeship Levy came into effect in April 2017, with an estimated cost to Royal Mail of around £20 million. • Proposed changes to National Insurance (NI) on termination of employment have been announced, which will increase employers' NI costs from April 2018. • Changes to tax/NI on salary sacrifice benefits came into effect from 1 April 2017, although pensions have specifically been excluded from these regulations.	• We continue to monitor developments in case law relating to the application of the Working Time Directive in respect of holiday pay calculations. Based on our estimates of the potential financial impact, we believe that we have made sufficient provision for any historic liabilities that may arise. • We liaise with the CBI, HMRC and HM Treasury to influence employment tax developments and minimise the impacts for Royal Mail as far as possible.
Other
Cyber security
	↔
We are subject to a range of regulations, contractual compliance obligations, and customer expectations around the governance and protection of various classes of data. In common with all major organisations, we are the potential target of cyber attacks that could threaten the confidentiality, integrity and availability of data in our systems. A cyber security incident could also trigger material service interruption. Either of these outcomes could result in financial and reputation damage, including loss of customer confidence.	While no material losses related to cyber security breaches have been suffered, given the increasing sophistication and evolving nature of this threat, and our reliance on technology and data for operational and strategic purposes, we consider cyber security a principal risk.	• As external threats become more sophisticated, and the potential impact of service disruption increases, we continue to invest in cyber security. Recognising that this risk cannot be eliminated, we have implemented significant protective measures which will need to be continuously enhanced in light of the changes and threats we face.
Attracting and retaining senior management and key personnel
	↔
Our performance, operating results and future growth depend on our ability to attract and retain talent with the appropriate level of expertise.	Turnover in senior and key personnel has been at normal levels for the business during the year, but this remains an inherent business risk.	• The Group's remuneration policy sets out that the overall remuneration package should be sufficiently competitive to attract, retain and motivate executives with the commercial experience to run a large, complex business in a highly challenging context. • We operate a succession planning process and have in place talent identification and development programmes.

Related party information

This Note provides details of amounts owed to and from related parties, which include the Royal Mail Pension Plan (RMPP), the Group's associate companies, and payments to key management personnel. Details of the Group's principal subsidiaries and associates are also provided.

Related party transactions

During the reporting year the Group entered into transactions with related parties as follows:

	52 weeks 2017 £m	52 weeks 2016 £m
Sales/recharges to:
RMPP (administration and investment service recharge)	5	5
Purchases/recharges from:
Associate undertaking (Quadrant Catering Limited)	(8)	(11)
Amounts owed to:
Associate undertaking (Quadrant Catering Limited)	(1)	(1)

The sales to and purchases from related parties are made at normal market prices. Balances outstanding at the year end are unsecured, interest free and settlement is made by cash.

Key management compensation

	52 weeks 2017 £000	52 weeks 2016 £000
Short-term employee benefits	(11,174)	(9,809)
Post-employment benefits	(44)	(172)
Other long-term benefits	(734)	-
Share-based payments	(4,102)	(1,879)
Total	(16,054)	(11,860)

Key management are considered to be the Executive and Non-Executive Directors of Royal Mail plc, all other members of the Chief Executive's Committee (see page 52) and the remainder of the Persons Discharging Managerial Responsibilities.

The ultimate parent and principal subsidiaries

Royal Mail plc is the ultimate parent Company of the Group. The consolidated financial statements include the financial results of Royal Mail Group Limited and the other principal subsidiaries listed below. The reporting year end for these entities is 26 March 2017 unless otherwise indicated.

Company	Principal activities	Country of incorporation	% equity interest 2017	% equity interest 2016
General Logistics Systems B.V.¹	Parcel services holding company	Netherlands	100	100
Royal Mail Estates Limited	Property holdings	United Kingdom	100	100
Royal Mail Investments Limited	Holding company	United Kingdom	100	100
Romec Limited	Facilities management	United Kingdom	100	51

The Company has complied with section 410 of the Companies Act 2006 by including, in these financial statements, a schedule of interests in all undertakings (see Note 28).

¹GLS' reporting year end date is 31 March each year. No adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group's reporting year end date (last Sunday in March) a full year of GLS results is consolidated into the Group.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law, they are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and applicable law, and have elected to prepare the parent Company financial statements in accordance with UK Accounting Standards, including FRS 101 'Reduced Disclosure Framework'.

Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to:

•	select suitable accounting policies and then apply them consistently;
•	make judgements and estimates that are reasonable and prudent;
•	for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU;
•	for the parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent Company financial statements; and
•	prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report and Financial Statements 2016-17, when taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Each of the Directors, whose names and function are set out on pages 49-51 of the Annual Report and Financial Statements 2016-17 confirm that, to the best of their knowledge:

•	the financial statements, which have been 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
•	the Strategic 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 that they face.

This information is provided by RNS

The company news service from the London Stock Exchange

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18 hours ago B&M European Value Retail S.A. (DI)
18 hours ago B&M European Value Retail S.A. (DI)
18 hours ago Haleon

All directors dealings today

Annual Financial Report

Moya Greene

Matthew Lester

1 Items comprise total investment within 'In-year trading cash flow' measure (see Financial Review).

1. Basis of preparation

2. Segment information

Depreciation

Amortisation of intangible assets (mainly software)2

Share of post-tax loss from associates and joint venture

Non-current assets

3. Operating costs

4. People information

5. Net finance costs

7. Earnings per share

UK Defined Benefit plans

Royal Mail Pension Plan

Royal Mail Senior Executives Pension Plan (RMSEPP)

Accounting and actuarial surplus position (RMPP and RMSEPP)

a) Major long-term assumptions used for accounting (IAS 19) purposes - RMPP and RMSEPP

Sensitivity analysis for RMPP liabilities

b) RMPP and RMSEPP assets

Risk exposure and investment strategy

c) Movement in RMPP and RMSEPP assets, liabilities and net position

Related party transactions

Key management compensation

The ultimate parent and principal subsidiaries

1 GLS' reporting year end date is 31 March each year. No adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group's reporting year end date (last Sunday in March) a full year of GLS results is consolidated into the Group.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

Companies

UK 100

Latest directors dealings

¹Items comprise total investment within 'In-year trading cash flow' measure (see Financial Review).

Amortisation of intangible assets (mainly software)²

¹GLS' reporting year end date is 31 March each year. No adjustment is made in the financial statements in this regard on the basis that, irrespective of the Group's reporting year end date (last Sunday in March) a full year of GLS results is consolidated into the Group.