Final Results

RNS Number : 2996Y

Mears Group PLC

12 May 2021

 

 

Mears Group PLC

("Mears" or "the Group" or "the Company")

Preliminary Results for the year ended 31 December 2020

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its preliminary financial results for the year ended 31 December 2020 ("FY2020").

Key highlights

· Significant strategic progress made during the year, positioning Mears as a low capital-intensity housing services specialist

o  Disposals of Terraquest and Domiciliary Care businesses for up to £70.0m¹ and £7.5m respectively

· Trusted client relationships coupled with sustained investment in technology and people enabled the Group to respond positively and decisively to the enormous operational challenges presented by Covid-19

o  The health, safety and welfare of our customers and employees were the number one priority throughout the year

o  Customer satisfaction levels, contract KPIs, and workforce engagement all remained high

o  With its key people, operating infrastructure and customer relationships all retained, the Company is well positioned for a full recovery as restrictions ease

· Group revenues were resilient overall, down 9% on a continuing basis to £805.8m (2019: £881.5m)

o  Maintenance-led revenues of £536.9m (2019: £660.7m) down 19% impacted by reduced activity during the pandemic

o  Management-led revenues of £253.8m (2019: £181.3m) up 40% due to the full year impact of the Asylum Accommodation and Support Contract ('AASC') which mobilised in September 2019

· The Group returned to profitability in the second half, delivering a £4.8m adjusted profit before tax² (H1: £8.2m loss).

o  The full year adjusted loss before tax on continuing items was £(3.4)m (2019: £32.4m profit)

o  The statutory loss before tax on continuing items, after the amortisation of acquisition intangibles and exceptional items was £15.2m (2019: profit £20.3m)

· Significant transformation in Group indebtedness driven by   strategic disposals resulting in net cash at 31 December 2020 of £56.9m (2019: £51.0m net debt) and average daily net debt of £97.3m (2019: £114.4m)

o  Underlying average daily net debt at December 2020 is estimated to be in the region of £65m³, with an expectation of a continued reduction over the short and medium term.

· Group order book stands at £2.6bn (2019: £2.5bn), reflecting a number of new contract extensions

· The Board does not intend to declare a final dividend for FY2020

o  In anticipation of a return to dividends, the Group has paid back all monies received in 2021 to date under the UK Government's Job Retention Scheme at a cost of £1.5m

Financial summary

£m (unless stated otherwise) Continuing operations	H1 FY2020	H2 FY2020	Total FY2020	FY2019
Revenue (£m)	396.3	409.5	805.8	881.5
Statutory (loss) / profit before tax (£m)	(13.9)	(1.3)	(15.2)	20.3
Normalised (loss) / profit before tax2 (£m)	(8.2)	4.8	(3.4)	32.4
Statutory diluted EPS2 (p)			(10.90p)	15.64p
Normalised diluted EPS1 (p)			(2.29p)	23.74p
Dividend per share (p)	-	-	-	3.65p
Average daily net debt (£m)	121.2	73.4	97.3	114.0

Strategy and outlook

· Mears has substantially completed its transition to a focussed, low capital intensity, housing services provider, specialising in the affordable sector.

· The Board sees growth opportunities driven by: increasing investment in the affordable sector; the Social Housing White paper's call for higher standards and engagement; continued demographic pressure; increasing housing waiting lists; and Government commitments to raise the carbon efficiency of all social housing stock

· Mears will further supplement this market growth, through improved upsell/cross sell across the broader housing services, leadership in the de-carbonisation of client's housing stock, participation in new, larger, integrated housing contracts across local and central Government and continuing to evolve its affordable rental and integrated management solutions.

· Operating margins are expected to improve as the Group returns to normalised pricing mechanisms with a focus on delivering further operational efficiencies through a more centralised administrative and support services and further digital innovation to drive operational consistency.

· The Board is pleased with the resilient trading and liquidity performance of the Group during the first quarter of FY2021 and remains confident of a full recovery as lockdown restrictions are lifted.

· Given the impact of the third national lockdown, profitability for the full year is expected to be second half weighted.

· Cash and working capital management has remained very strong in Q1, with average daily net debt of £17.0m.

· The Board is comfortable with current market consensus expectations for revenues and adjusted profit before tax for the current financial year⁴.

David Miles, Chief Executive Officer of the Group, commented:

"The Mears' business responded with great responsibility and professionalism during the pandemic, both in terms of the ongoing resilience of our operations and supporting the communities where we work. The strength of our people, our infrastructure and our client relationships have served us well through Covid-19, while the urgent need for the services Mears provide has only been heightened by it.

"Today, Mears looks after more homes than any other organisation across Local and increasingly Central Government. We have clear leadership in the maintenance market with c.20% share of outsourced contracts and a long-standing reputation for service quality, technology, workforce management and social value. Our range of services within housing management continues to grow and evolve with successful contracts underway providing housing solutions for many of society's most vulnerable groups.

"Together with our strengthened balance sheet and good cash generation, we look forward with confidence."  

1.  Terraquest consideration of up to £70m consists of Initial consideration of £56.8m after working capital adjustments, £10.0m of maximum deferred consideration and £3.2m of equity roll-over

2.  Normalised profit/(loss) before tax stated on continuing activities before exceptional items and before the amortisation of acquired intangibles. The normalised diluted EPS measure is further adjusted to reflect a full tax charge

3.  Adjusted net cash / (debt) excludes lease obligations. One-off cash items include VAT deferral, client payments received on account and cost accruals relating to lump sum contracts, aggregating to a circa £40m benefit to the reported spot 31 December 2020 net cash position.

4.  Mears compiled analyst consensus forecasts for FY2021 show revenues ranging from £770m - £820m and adjusted profit before tax in the range of £21.3m - £25.5m

For further information, contact:

Mears Group PLC

David Miles, Chief Executive Officer	Tel: [phone]
Andrew Smith, Finance Director	Tel: [phone]
Alan Long, Executive Director	Tel: [phone]
Joe Thompson, Investor Relations	Tel: [phone]
www.mearsgroup.co.uk

About Mears

Mears currently employs around 6,000 people and provides services in every region of the UK. In partnership with our Housing clients, we maintain, repair and upgrade the homes of hundreds of thousands of people in communities from remote rural villages to large inner-city estates. Mears has extended its activities to provide broader housing solutions to solve the challenge posed by the lack of affordable housing and to provide accommodation and support for the most vulnerable.

We focus on long-term outcomes for people rather than short-term solutions and invest in innovations that have a positive impact on people's quality of life and on their communities' social, economic and environmental wellbeing. Our innovative approaches and market leading positions are intended to create value for our customers and the people they serve while also driving sustainable financial returns for our providers of capital, especially our shareholders.
 

CHIEF EXECUTIVE OFFICER'S REVIEW

HIGHLIGHTS

I am extremely proud of the resilience shown by the Group during a year which has seen unprecedented challenges. Notwithstanding the fact that much of the energy and focus in 2020 was expended in reacting to the operational challenges brought by Covid-19, it is pleasing that the Group made such strong progress against all of its key strategic objectives as detailed below:

· Operational delivery and customer service KPIs remained high, including on our key central government AASC and Key Worker contracts. Maintenance clients quickly transitioned to new ways of working and supported through interim financial arrangements. Throughout the primary focus has always been the safety and well-being of our staff and customers.

· Workforce engagement measures remained high and we retain our place on  the Sunday Times list of Top 25 Best Big Companies to work for. The staff survey carried out in June 2020 saw our scores reach a new high, reflecting the efforts made on communication and keeping all staff safe, involved and supported. In addition, we saw positive progress on our key workforce measurements in respect of staff retention and diversity.

· Completed the Group's exit from standalone Domiciliary Care with the disposal of the Scotland business in September 2020, following the disposal of its England and Wales Domiciliary Care business in January 2020..

· Sale of Terraquest - the Group's planning solutions business in November 2020, generating an upfront cash inflow of £52.5m (after transaction costs) and a profit on disposal of £52.8m.

· Continued unwind of Development despite significant market disruption., The working capital absorbed in this area of c.£25.0m was maintained at a similar level to the prior year.

· A significant reduction in indebtedness , with the Group reporting an adjusted net cash at 31 December 2020 of £56.9m (2019: net debt: £51.0m). Importantly, the Group has reported a quarter-on-quarter improvement in its average daily net debt, which for the full year was £97.3m (2019: £114.4m).

COVID-19

Mears' response to Covid-19 was swift and decisive. Positively, service levels have remained at their traditionally high levels, with many clients directly complimenting the exceptional performance and dedication of the Mears workforce.  The Group's IT systems enabled a swift transfer to remote working for many staff. The Group's ability to adapt so quickly to the new methods required for managing the business benefited from the investment made in the core systems over many years, and the customer-centric ethos which has consistently been core to Mears' values.

As detailed below, the Group received tremendous support from its clients throughout this period, which would not have been forthcoming without the strong client relationships built over many years. Accordingly, we have been able to retain our key people, infrastructure, clients and capabilities through the pandemic and are well-positioned to make a full recovery once normality returns. 

The demand for the services the Group provides is undiminished by Covid-19 and a back-log of lower priority maintenance-led jobs now requires swift resolution. The health inequalities that the pandemic has so cruelly exposed, will only add further political pressure to increase and upgrade the affordable and social housing stock in the UK. 

In adapting to new ways of working, the primary focus has always been the safety and well-being of our staff and of the individual customers to whom services are provided. As with many of our peers, access to PPE was difficult at times but the established procurement routes, together with the support of many clients, helped to keep staff fully protected.

Th e Group's success depended upon the commitment and engagement of its workforce. Significant extra effort has been put into workforce management and the Group is pleased to put on record its recognition of the dedication and commitment shown by all our staff and our appreciation for the fundamental role they played.

FINANCIAL PERFORMANCE

Group

The challenges of Covid-19 had a significant impact on the Group's trading results, particularly in the Maintenance-led activities in the first half of the financial year, which were restricted to the delivery of essential and priority services only. However, in the second half, as lockdown restrictions eased our clients and service users adapted to the changing environment and the Group experienced a lesser impact on work volumes, even during subsequent lockdowns. Accordingly, financial performance recovered strongly in the second half, with all areas of our Maintenance-led and Management-led activities returning to profitability in this period.

Continuing activities	H1 2020 £m	H2 2020 £m	FY 2020 £m	2019 £m
Revenue
Maintenance-led	266.9	270.0	536.9	660.7
Management-led	121.2	132.6	253.8	181.3
Development	8.6	6.5	15.1	39.5
Total	396.7	409.1	805.8	881.5
Operating profit measures:
Statutory operating (loss) / profit	(8.8)	2.5	(6.3)	28.1
Normalised operating (loss) / profit (pre-IFRS16)1	(5.9)	6.5	0.6	37.6
Normalised operating (loss) / profit (post-IFRS 16)1	(3.1)	9.7	6.6	41.1
Profit before tax measures:
Statutory (Loss) / profit before tax	(13.9)	(1.3)	(15.2)	20.3
Normalised (loss) / profit before tax2	(8.2)	4.8	(3.4)	32.4

1.Normalised operating (loss) / profit (pre and post-IFRS16) stated on continuing activities before exceptional items, the amortisation of acquired intangibles but inclusive of share of profit from associates. 2 .Normalised profit/(loss) before tax stated on continuing activities before exceptional items and before the amortisation of acquired intangibles. See Finance Review for reconciliation of alternative performance measure

Following the disposal of the Group's Domiciliary Care and Planning Solution activities, Mears is a smaller and simpler business with a single strategic focus; to be a leading provider of housing solutions. This single Housing segment reported revenues in the period of £805.8m (2019: £881.5m) and adjusted operating profits (pre IFRS-16) of £0.6m (2019: £37.6m)

The Group's Housing activities have historically between categorised Maintenance, Management and Development. However, it is also important to recognise that our Management or more accurately 'Management-led' contracts require the delivery of maintenance as part of the service offering, and similarly our 'Maintenance-led' contracts include a significant level of tenancy management.

While disclosure of revenue trends between these 'Management-led' and 'Maintenance-led' contracts remains of relevance, the disposal of the Domiciliary Care and Planning Solutions, together with the withdrawal from Development, makes the split of operating margin against each category of limited value. The Group has a single support function servicing all continuing activities and applying an arbitrary allocation of central overheads against each revenue stream is not reflective of the commercial reality. The continuing maintenance-led and management-led activities are priced to achieve similar operating margins.

The Group reported a statutory loss before tax on continuing activities of £15.2m (2019: profit before tax £20.3m). At the normalised PBT level the Group returned to profitability in the second half posting a profit of £4.8m (H1 2020: £(8.2m)). The Group's normalised loss before tax for the full year was therefore (£3.4m) (2019: adjusted profit £32.4m) This outturn for the full year represents a very resilient financial performance given the impact of the pandemic and was in line with the Board's expectations set at the half year of 2020.

As described in detail below, the Group adapted quickly at the start of the first national lockdown to agree interim operating and financial arrangements with its Maintenance-led clients. In the majority of cases, this limited Maintenance-led activity in people's homes to an emergency-only service and provided new payment mechanisms which (at a minimum) were sufficient to cover direct costs and local site overheads. These arrangements varied by client, but typically fell short of covering central support costs and a profit margin, in line with central government guidance. This was the principle factor in the significant reduction in profitability in 2020. A small number of Maintenance-led clients failed to provide any financial support and those contracts account disproportionately towards the operating loss in the first half.

Positively, notwithstanding the operational challenges, the Management-led activities delivered an operating profit which was in line with management expectations at the start of the year.

OPERATING REVIEW

Maintenance-led contracts

2020 Revenue by quarter	Q1 £m	Q2 £m	Q3 £m	Q4 £m	Total £m
Maintenance-led	173.9	93.0	131.6	138.4	536.9

In respect of the services delivered under the Maintenance-led category, the Group saw a significant reduction in work volumes as the UK entered the first national lockdown. Generally, a consistent position was taken across all our Local Authority and Housing Association clients, with activity levels reducing to cover only emergency and priority works which was typically 15-20% of the normal level of activity. The primary focus was ensuring the safety of our workforce and our vulnerable service users.

The pricing mechanisms attached to the Group's Maintenance-led contracts can broadly be split into two types which brought different financial challenges and required different negotiated solutions with clients:

· a lump sum mechanism where Mears receives a fixed amount, irrespective of work volumes. Whilst revenues have been recognised against these works, the pandemic has resulted in some order backlog and costs have been accrued to protect against the unwinding of this backlog when normality returns. In a normal year, around 25% of the Group's Maintenance-led revenues fall into this lump sum category.

· a volume linked pricing mechanism where the revenues generated are directly linked to the activities delivered. In a period that saw such a sharp drop in activity, but required the continued provision of emergency cover, these volume-linked mechanisms represented a significant financial risk to the Group. Positively, in most cases, the Group secured interim arrangements with its clients to address these risks and ensure the recovery of direct labour and local overheads ("cost re-imbursement models").  Whilst these interim arrangements removed much of the downside financial risk, such arrangements typically provided reduced recovery of central overheads and a limited profit contribution. Around 75% of the Group's maintenance-led contracts fall into this volume linked category.

Whilst the Group's clients took a consistent stance on entering the first national lockdown, there was less consistency in the approach and speed over which lower-priority works started to return. The picture was further complicated by the regional nature of further restrictions. The Group retained the majority of its cost re-imbursement mechanisms with clients, thereby protecting the Group from further downside risk as work volumes again saw some volatility through the second and third national lockdowns, albeit not the same extremes as the first lockdown.

The Group utilised the Government's Coronavirus Job Retention Scheme ('furlough'), taking guidance from its clients before adopting an approach on a contract by contract basis. Where clients agreed interim arrangements with the Group, the impact of the cost reduction from furlough was incorporated into those mechanisms, and ultimately any open book reconciliation will ensure all savings are passed on to clients, within the spirit of the scheme. The Group also utilised furlough in respect of its central support functions to further mitigate financial downside and more importantly the ability to retain exceptional staff. I am pleased to note the Group has also elected to repay its furlough rebate in respect of the first quarter of 2021 amounting to c. £1.5m, recognising the improving performance of the Group and reduced uncertainty surrounding Covid-19.

As disclosed previously, in the early part of 2020 and prior to the impact of Covid-19, the Group saw the expiry of a small number of contracts with annual revenues amounting to circa £45m where the Group did not participate in a retender. In addition, the Group had taken action to exit contracts with annual revenues of circa £20m, where the Group identified certain contracts as not fitting the criteria of the Mears way of working. In addition, the Group also terminated several customer relationships, with an annual revenue of £30m, where the Group could not sufficiently mitigate the short-term risk, and the longer-term payback was not sufficiently visible. 

Management-led contracts

2020 Revenue by quarter	Q1 £m	Q2 £m	Q3 £m	Q4 £m	Total £m
Management-led	61.5	59.7	65.0	67.6	253.8

In respect of the services delivered under the management-led category, the Group saw increasing demand during the year. This is because the large numbers of key workers and vulnerable service users whose accommodation and other service needs provided by Mears were undiminished (if not increased) by the pandemic. Accordingly, the challenge was not financial but operational in continuing to support such vulnerable service users whilst adhering to the social distancing and other Covid-19 restrictions.  The Management-led activities reported revenues of £253.8m (2019: £181.3m), an increase of 40%. Much of this increase is due to the full year impact of the Asylum Accommodation and Support Contract ('AASC') which mobilised in September 2019.

The Group saw an increase in AASC volumes across the entire process over the course of the year, with new service users entering the system and few exiting. The requirement for additional accommodation was operationally challenging. Covid-19 presented a challenge for those people new to the UK with many lacking language skills and the knowledge to access basic supplies and necessities. In agreement with the relevant public authorities, it was decided that the safest environment for new service users was to locate them in good quality hotels. That ensured their protection from Covid-19 infection, the ability to self-isolate if required and that they had access to food and other essentials. It remains the intention to support moving these people into dispersed accommodation as soon as it is safe to do so. Mears' priority throughout and going forward, will be the safety of staff and the service users.

When excluding year-on-year growth from the AASC contract, the pre-existing Management-led business has reported a revenue reduction. This is in line with management expectations, as the Group reduces its focus on emergency homelessness solutions. The Group's Key Worker housing management contract with the Defence Infrastructure Organisation has performed well through the year, with all major performance KPIs being met. This contract is in re-bid with the result expected shortly. Mears has been shortlisted with one other party.

Development

2020 Revenue by quarter	Q1 £m	Q2 £m	Q3 £m	Q4 £m	Total £m
Development	7.1	1.5	3.2	3.3	15.1

The Group made a clear strategic decision in 2019 to reduce its exposure to Development activity and exit from those new build activities which utilised significant amounts of the Group's working capital. These new build sites were developed in conjunction with a number of the Group's existing clients and the Group continues to honour its commitments to deliver and sell-through on the remaining  active projects.  During the Covid-19 outbreak, the remaining two active building sites were mothballed, and action was taken immediately to reduce the fixed cost base.  These sites have subsequently been reopened but the activity maintained at a low level to ensure that working capital cash flows are tightly controlled.

The sales activity in 2020 was restricted to predominantly four remaining sites, with 43 the units completed and 29 sold during the year. As at 31 December 2020, there were 43 remaining units under construction and 49 completed units (of which 10 units have been sold since the year end and a further 22 reserved.) Average month-end net working capital absorbed by the Development activities during the year was £25.0m.The Board is taking active steps to accelerate the unwind of the working capital absorbed in this area and maintain a sensible balance between liquidity and maximising value.

ESG

From its creation in 1988, Mears has sought to differentiate itself with a consistent and long-term focus on the wider societal value, as well as financial value, which it can and should generate. This is reflected by a commitment which can be seen throughout the Group to the lives of the people we support and the communities in which they live, the quality of the staff experience itself and, increasingly, a commitment to change in the environmental agenda. This is a core purpose for the company and, accordingly, for those who work within it.

The strength of the commitment is evidence by the company's continued success over many years in a number of areas, whether it be the FTSE4Good accreditation programme, the Sunday Times' Top 25 Best Big companies to work for or the Royal Society for the Preventions of Accidents Order of Distinction Award. In 2020, we have refocused the work of the Mears Foundation, our staff charity based on give-as-you-earn with employer matching, where we now have an independent chair and, for the first time, a General Manager. Similarly, the Mears Customer Scrutiny board, chaired by Terrie Alafat, has started its work to help us to improve the way we work with tenants to help them receive the best service from us. The ESG section of the Annual Report gives more details of the very wide range of initiatives which the company has in place to generate social and ultimately value.

During 2020, we appointed our first Head of Carbon Reduction. This individual will help to develop our efforts in two areas. First, to lead our product and business development initiatives to help clients change the way in which we heat residential social housing.  In addition, Mears must make its own contribution to the country's net zero target and it will be a priority for the Group this year to develop a more detailed programme to 'green' Mears.

STRATEGY

We are leaders in the affordable housing market, for which the future demand profile remains positive, given the fundamental shortage and poor quality of affordable housing in the UK. With the non-core disposal programme completed during the year, the Board conducted a strategic review, together with external consultants to refine and enhance the Group's strategy to be the most respected housing specialist outsourced service provider in the UK. Work is continuing, but the fundamental attractions of our existing business and the key drivers of its future growth are already clear. After a period of strategic transition and Covid-19 disruption, Mears has a number of simple market, growth and margin drivers across its Housing solutions businesses:

Market drivers

· Increased government investment in the affordable housing sector given expanding social housing waiting lists and renewed political focus on housing post-Covid

· Social Housing white paper and Government policy towards higher standards for safety and customer engagement

· The commitment to raise the carbon efficiency of all social housing stock by one EPC band by 2030, presents significant investment requirements

· Increasing Local Authority spend on long-term, cost-effective Homelessness solutions

· On-going demographic pressure on the UK housing shortage particularly in Mears core competencies of affordable rental and specialist retirement living

Mears growth drivers

· Leverage our market leading position in housing maintenance to better cross-sell/upsell our broader housing services through more effective client planning

· Continue to evolve our affordable rental, temporary accommodation, and integrated housing offer to meet increasing market demands

· Participation in larger, integrated housing contracts, across Local and Central Government

· Assist new and existing clients to meet their targets for the de-carbonisation of housing stock

Margin drivers

· Fully restore normal charging mechanisms, overhead recovery and operating profit margins as interim Covid restrictions ease and volumes return

· Drive greater operational efficiencies through more centralised administrative and support services such as our regional Hub network

· Continued digital innovation to increase agility of frontline operations whilst continuing to drive improvements to the customers experience

· Operational consistency across the Group and contract rationalisation to improve underperforming contracts

Even with the potential post-Covid economic challenges, Housing is a sector that will be invested in to support economic recovery and indeed to meet longer term challenges, such as those posed by climate change. There is clear opportunity to grow both our maintenance-led and management-led work and indeed we see an increasing number of opportunities that will integrate all of our services. The responsible approach that we have taken to business through Covid and indeed from the start of Mears, has left us really well placed to benefit from these opportunities.

CURRENT TRADING AND GUIDANCE

The Board is pleased with the resilient trading and liquidity performance of the Group during the first quarter of FY2021 and is confident of a full recovery as lockdown restrictions are lifted. However, given the national lockdown in Q1 and into Q2, profitability for the full year is expected to be H2 weighted. Cash and working capital management has remained in-line with expectations in Q1, with average daily net debt of £17.0m.

The Group is confident to re-instate the following guidance:

	Key measures	Guidance FY21
Revenue growth	Annual revenue growth	· FY 21 Revenues: £770m-£820m
N ormalised Profit before tax	Profit before tax before exceptional items and amortisation of acquired intangibles	· FY 21 Profit before tax: £21.3m-25.5m
Cash conversion	Operating cash inflow as a % of EBITDA	· 100% conversion on the combined 2020/2021 results; taking the two year measure removes the short-term Covid related impacts such as the VAT deferral and client payments received on account · £25m of Development working capital unwind over 2 years
Cape x		· c. 1.25% of revenue
Capital allocation	Investment Capital structure (adjusted net debt (pre-IFRS-16) / EBITDA (pre-IFRS-16)) Shareholder distributions	· Not material in FY21 (or FY22) · Continued average net debt reduction · Return to dividend list as soon as prudent

ORDERBOOK AND PIPELINE

The order book stands at £2.6bn (2019: £2.5bn), a consistent level over the last twelve months reflecting a number of contract extensions. The Group secured maintenance-led contracts in 2020 valued at over £150m with a win rate (by value) of 53%. The key orders secured are detailed below:

	Base term (years)	Extension option (years)	Annual value £m	Base contract value £m	New / Retention
Contracts awarded in 2020
Exeter City Council; repairs and maintenance	10	5	8.5	85.0	Retention
London Borough of Hammersmith and Fulham; repairs and maintenance	5	2	4.2	21.0	Retention
Islington Council; cyclical works	4	6	10.0	40.0	Retention
Sub-total; secured in 2020			22.7	146.0
London Borough of Redbridge; repairs and maintenance	7	7	5.2	36.4	Retention
Angus Council	3	2	2.3	6.9	New
Leeds City Council; repairs and maintenance	5	-	12.8	64.0	Retention
Sub-total; secured in 2021 to date			20.3	107.3

In addition, Mears was delighted to secure a three-year contract extension with Milton Keynes Council, which will see Mears continue to provide services, with an annual value of around £40m per annum, until at least April 2024. This contract, which mobilised in April 2016, has delivered excellence in respect of service delivery and employee engagement, and it was pleasing to see the efforts of our local team recognised and rewarded with this extension.

Mears has also been confirmed as the preferred bidder by Cornwall Council, to be a strategic partner to deliver to the Council up to 750 new extra care units across the County over the next 7-10 years. As Strategic Partner, and using Council owned land, Mears will deliver the end to end solution to identify funders, and to design, build, manage and maintain the units over a period of up to 30 years. Mears is not required to commit significant working capital. The contract value attached to this contract may be significant but at this stage no value has been assigned to the order book in respect of this opportunity.

The Group has an active bid pipeline. Given the bidding delays across the market as a result of Covid-19, 2020 was a relatively quiet year for bid activity. However, we are now entering a period of increased bid activity. This includes a c.£25m annual revenue contract for the national accommodation management services under the Future Defence Infrastructure Services programme There are also a number of existing contracts which are active live tenders, with a combined annual revenue of circa £100m. These are important clients to the Group, and we remain confident that we will retain these key customer relationships. This re-bid activity includes the work we do with the Defence Infrastructure Organisation providing housing management and relocation services to key workers nationally. This contract is worth £60m of revenue per annum. Mears is short-listed in the final two candidates and an outcome is expected shortly. 

SUMMARY

2020 was a challenging year, and for many of our people and our customers a difficult one. However, the progress the Company has made and actions it has taken during the pandemic will stand it in very good stead for the recovery. Finally, I would like to thank again the Mears workforce whose commitment to the company and the people who we serve is such an important reason why the Group will continue to prosper into 2021 and beyond.

 

BOARD DEVELOPMENTS

As previously notified, Amanda Hillerby, the Employee Director, left the board in February 2020 and her successor in that role, Claire Gibbard joined in July. At non-executive level, Jason Burt stood down from the Board in March 2020 and took up another role within the Company. Both Roy Irwin and Geraint Davies have indicated their intention to retire from the Board and will not offer themselves for re-election at the 2021 AGM.

Roy joined the Board in 2017, bringing over 30 years of experience gained in a variety of senior roles in public sector housing. Geraint joined the Board in 2015, having been in professional practice as a chartered accountant for over 25 years. Both have offered their considerable knowledge and wisdom which has been invaluable at the Board table and also in many other discussions within the company. Geraint has chaired the audit committee since appointment while Roy has served on the Remuneration Committee, and for the last two years has been its chairman. Much Board-level work is now done at committee level and both Roy and Geraint have provided exceptional service to the company in these roles during their tenure. The Board thanks them on behalf of the company for all of their work and input to the company over the last four and six years respectively.

Post the AGM, Jim Clarke, having been a member of the Audit Committee since his appointment to the Board in July 2019, will become its chairman. Julia Unwin will become a member of that committee. Chris Loughlin, who has been a member of the Remuneration Committee since his appointment to the board in September 2019, will become its chairman. Jim Clarke will become a member of that committee. Julia Unwin has indicated her desire to step down from the position of Senior Independent Director and Chris Loughlin has agreed to take over that responsibility. The Board would like to thank Julia for her work as SID over the last three years.

In line with the overall streamlining of the Group which has occurred over the last couple of years, these decisions collectively provide an opportunity modestly to reduce the overall size of the Board. Accordingly, it is intended to add only one new non-executive director to the Board and a search will be commenced shortly to identify a suitable candidate.

 

FINANCIAL REVIEW

This section provides further key information in respect of the financial performance and financial position of the Group to the extent not already covered in detail within the Chief Executive Officer's Review.

Alternative performance measures ('APM')

This preliminary statement includes both statutory and adjusted performance measures, the latter of which is considered  to be useful to stakeholders in projecting a basis for measuring the understanding of performance in the year and between periods, and when comparing the financial outputs  to those of our peers. The APMs have been set considering the requirements and views of the Group's investors and debt funders amongst other stakeholders. The APMs and KPIs are aligned to the Group's strategy and also form the basis of the performance measures for remuneration.

These APMs should not be considered to be a substitute for or superior to IFRS measures, and the Board has endeavoured to report both statutory and alternative measures with equal prominence throughout this preliminary statement.

The APMs used by the Group are detailed below and an explanation as to why management considers the APM to be useful in helping understanding as to the Group's underlying performance. A reconciliation is also provided to map each non-IFRS measure to its IFRS equivalent.

The Group defines normalised results as excluding the amortisation of acquisition intangibles and before other normalisation adjustments which management believe are infrequent in nature and are considered not to be part of underlying trading.  The normalised results are further adjusted to reflect an 19% corporation tax charge. The Directors believe this aids consistency when comparing to historical results, and provides less incentive for the Group to participate in schemes where the primary intention is to reduce the tax charge. The Group's normalised results typically focus on continuing activities, however for completeness are also reported to include discontinued activities.

A reconciliation between the statutory profit measures and the normalised result for both 2020 and 2019 is detailed below. This is analysed between both continuing and discontinued activities together with the aggregate result for the Group.

		2020	2019
		£'000	£'000
Continuing activities
(Loss) / profit before tax	Statutory	(15,218)	20,253
Amortisation of acquisition intangibles	Note 4	9,525	10,122
Non-underlying item: restructure costs	Note 8	779	-
Non-underlying item: fixed asset impairment	Note 8, 15	1,500	-
Non-underlying item: litigation costs	Note 8	-	2,018
Normalised (loss) / profit before tax	APM	(3,414)	32,393
Net Finance costs	Note 5	9,998	8,731
Normalised operating (loss) / profit	APM	6,584	41,125
Discontinued activities
Profit / (loss) for the year before tax	Statutory	56,933	(82,223)
Non-underlying item: profit on disposal of business activities	Note 10	(54,074)	-
Non-underlying item: litigation costs	Note 10	1,206	-
Non-underlying item impairment of intangibles	Note 10	-	80,562
Normalised profit / (loss) before tax	APM	4,065	(1,661)
Net Finance income	Note 10	4	191
Normalised operating (loss) / profit	APM	4,069	(1,470)
All activities
Profit for the year before tax	Statutory	41,715	(61,970)
Normalised profit for the year before tax	APM	651	30,732
Normalised operating profit for the year	APM	10,653	39,655

IFRS 16

In addition, the Group also provides an APM which reports results before the impact of lease accounting under IFRS 16. Management have provided this alternative measure at the request of a number of shareholders and market analysts to allow those stakeholders to properly assess the results of the Group over-time. The Group adopted IFRS 16 from 1 January 2019 and the results prior to this date have not been re-stated resulting in a distortion of the results compared over time. In addition, the Group's banking covenants utilise adjustment profit measurements which are reported before IFRS 16 and stakeholders require better visibility of the Group's adjusted profit for that purpose.

A reconciliation between the statutory measure for EBITDA and the same measurement before the impact of IFRS 16 for 2020 and 2019 is detailed below:

Continuing activities	Note	2020	2019
		£'000	£'000
(Loss) / profit before tax	Statutory	(15,218)	20,253
Removal of IFRS 16 profit impact	See below	1,118	2,223
Finance costs (non-IFRS 16)	Note 5	2,875	2,971
Amortisation of acquired intangibles	Note 4	9,526	10,122
Non-underlying items	Note 8	2,279	2,018
Operating profit pre-IFRS-16 before non-underlying items and amortisation of acquired intangibles	APM	580	37,587
Amortisation of software intangibles	Note 4	2,211	2,109
Depreciation and loss on disposal (non IFRS 16)	Note 4	5,677	5,955
EBITDA pre-IFRS 16 and before non-underlying items	APM	8,467	45,652
IFRS 16 profit impact		(1,118)	(2,223)
Finance costs (IFRS 16)	Note 5	7,123	5,760
Depreciation and loss on disposal (IFRS 16)	Note 4	42,242	29,908
EBITDA post-IFRS-16 before non-underlying items and amortisation of acquired intangibles	APM	56,714	79,096
Amortisation of software intangibles		(2,211)	(2,109)
Depreciation and loss on disposal (IFRS 16)	Note 4	(42,242)	(29,908)
Depreciation and loss on disposal (non-IFRS 16)	Note 4	(5,677)	(5,955)
Operating profit post IFRS 16 and before non-underlying items	APM	6,585	41,124

	2020	2019
	£'000	£'000
Charge to income statement on a post-IFRS 16 basis	(49,365)	(35,668)
Charge to Income Statement on a pre-IFRS 16 basis	(48,247)	(33,445)
Profit impact from the adoption of IFRS 16	(1,118)	(2,223)

For the purposes of assessing the Group's compliance with its banking covenants, the Group utilises an adjusted measure based on EBITDA before the impact of IFRS 16 and before non-underlying items which are termed as 'exceptional items' within the Group's bank facility agreement.

A reconciliation between the statutory measure for Profit (loss) for the year attributable to shareholders before and after adjustments for both basic and diluted EPS is:

	Normalised (continuing)		Normalised (discontinued)		Normalised (continuing and discontinued)
	2020 £'000	2019 £'000	2020 £'000	2019 £'000	2020 £'000	2019 £'000
Profit/(loss) attributable to shareholders:	(11,781)	17,367	56,242	(83,755)	44,461	(66,388)
Amortisation of acquisition intangibles	9,525	10,122	-	-	9,525	10,122
Full tax adjustment	(2,125)	(2,757)	(10,696)	1,360	(12,821)	(1,397)
Exceptional costs	1,846	1,634	(42,823)	65,255	(40,977)	66,889
Normalised earnings	(2,535)	26,366	2,723	(17,140)	188	9,226

Adjusted Net cash / (debt)

The Group excludes the financial impact from IFRS 16 from its adjusted net debt measure. This adjusted net debt measure has been introduced to align with the borrowings measurement which is defined for the Group's banking covenants, which are required to be stated before the impact of IFRS 16. The Group utilises leases as part of its day to day business providing around 10,000 residential properties to vulnerable service users and key workers. A significant proportion of these leases have break provisions and the lease terms are aligned to the Group's customer contracts to mitigate risk.  The Group does not recognise these lease obligations as traditional debt instruments given the Group's ability to break these leases and in so doing cancel the associated lease obligation. A reconciliation between the reported net cash / (debt) and the adjusted measure is detailed below:

	Note	2020 £'000	2019 £'000
Cash and cash equivalents		96,220	73,061
Long-term borrowings and overdrafts		(39,353)	(124,047)
Adjusted net cash / (debt)	APM	56,867	(50,986)
Lease liabilities (current)	Note 24	(42,888)	(39,175)
Lease liabilities (non-current)	Note 24	(166,183)	(166,000)
Total	Statutory	(152,204)	(256,161)
Less: Lease Obligations (IFRS 16)	Note 24	209,071	205,175
Adjusted net cash / (debt)		56,867	(50,986)

COVID-19

The business faced significant challenges in mitigating the risks of Covid-19, reacting quickly to the fast-changing environment and maintaining traditionally high service levels, albeit often at lower levels of activity as the business focussed on emergency and high priority works.

It is inevitable that the financial outputs delivered in 2020 have been significantly impacted by these events and this is covered in detail in the Chief Executives Review and the Annual Report.

In adapting to new ways of working, the primary focus has always been the safety and well-being of our staff and of the individual customers and ensuring that they were kept fully protected although access to PPE was difficult at times. The Group's saw its PPE expenditure increase by £1.7m in the year, with further PPE provided by clients, free of charge.

To mitigate losses flowing from Covid-19, and the impact of a significant reduction in work volumes, the Group participated in the Government's Job Retention Scheme. The number of people furloughed peaked at around 2,200 employees in May 2020 and there remained a small number of people on furlough at the year end. Under this scheme, individuals were put on an extended period of leave during which time HMRC reimbursed Mears for 80% of their pay, up to £30,000. Mears applied top-up payments to ensure the lowest paid saw no reduction in pay, and those higher paid employees received no less than 80% of their normal pay. Total top-up payments made to people on furlough amounted to £3.0m. Total payments made to those on furlough amounted to £19.1m and the total recovery was £16.1m.

Whilst the cost of PPE and Furlough combined amounts to around £4.7m, the Directors concluded that it would be inappropriate to treat this as an exceptional item and it is not adjusted within the Group's APM.

RESTATEMENT OF PRIOR YEAR - REASSESSMENT OF LEASE ACCOUNTING

During the year, the Group revisited the assumptions made at the time of the adoption of IFRS 16, and its assessment of the right of use assets and lease obligations as at transition and at 31 December 2019.  The Directors have concluded that in the prior year, the right of use asset and associated lease obligation were overstated and as such, the Consolidated Statement of Profit or Loss, Consolidated Balance Sheet  and Consolidated Cash Flow Statement have been restated to correct this error. In respect of the Statements of Profit or Loss and Cash Flow, the adjustments to the prior year have no impact upon their respective bottom lines. The restatements to the Balance Sheet are significant and reduces retained earnings by £0.7m.  The accounting for residential leases is covered in detail below and the line level adjustments together with additional explanation is included within note 33 to the financial statements.

NON-UNDERLYING ITEMS

Non-underlying items are items which are considered outside normal operations. They are material to the results of the Group either through their size or nature. These items have been disclosed separately on the face of the Income Statement to provide a better understanding as to the underlying performance of the Group.

	2020 £'000	2019 £'000
Restructure costs	779	-
Impairment of assets in the course of construction	1,500	-
Exceptional legal costs	-	2,018
	2,279	2,018

Restructuring costs

The Group incurred restructuring costs in 2020 of £3.2m (2019: £1.7m) of which £0.8m (2019: £nil) has been categorised within non-underlying items. In choosing how to report and disclose the impact of this expense, management has focussed on distinguishing between the different types of restructuring cost incurred. Restructuring costs are included within the statutory operating profit measures to the extent that they arise from Group-wide initiatives to reduce the ongoing cost base and improve efficiency in the business or where they relate to local initiatives at a branch level which will typically be supported by a business case which shows a positive financial impact to the Group over the longer-term. This is not considered exceptional as they are recurring in nature and reflect the normal day to day stewardship of the business.  However, restructuring costs are excluded from the adjusted operating profit to the extent they arise from initiatives which are significant in scope and impact but will not form part of recurring operational activities in the future; in this case this included redundancy costs associated with the Development activities and the terminations of a number of maintenance-led contracts.

Impairment of assets in the course of construction

In 2018, Mears commenced the construction of a modular homes scheme which has, over the previous two financial years, been disclosed as an asset in the course of construction. The off-site construction is complete, however the impact of Covid-19 has meant that a significant part of the on-site installation remains outstanding. The original agreement was that upon completion, Mears would lease these units to a Local Authority client for a period of 15 years and the lease payments would fund the construction cost. Given the Board's stated objective to reduce the Group's indebtedness, the Group agreed to a contract variation which has removed Mears entirely from this arrangement, in return for a fixed payment of £6.4 million, payable on completion of the installation. As at 31 December 2020, Mears had incurred capital expenditure of £5.8m. Following an assessment of the costs incurred to date, and the costs required to complete the on-site installation, an impairment has been recognised on the asset in the course of construction by £1.5m. Following the reduction in the carrying value, the asset has been re-categorised as a contract asset. The impairment charge applied against this asset is considered to be an exceptional item. It is abnormal in size and nature and relates to an activity which is not part of the continuing activities of the Group. 

AMORTISATION OF ACQUISITION INTANGIBLES

	2020 £'000	2019 £'000
Amortisation charge	9,525	10,122

A charge for amortisation of acquisition intangibles arose in the year of £9.5m (2019: £10.1m). The majority of the remaining carrying value of acquired intangible of £10.3m will be amortised during 2021. As detailed above, the Group adjusts for this charge within the Group's alternative profit measure. This amortisation charge is very material in size and can vary significantly based upon the Directors' assessment of useful economic life. The Group's shareholders and market analysts typically add back this item in their analysis and the Group's alternative performance measure is aligned to that. Management believe that through reporting profit figures that excludes this item can help the reader to more easily understand the underlying performance of the business, without any distortion as a result of this charge.

DISCONTINUED ACTIVITIES

The Chief Executive Officer's review focuses upon the results relating to the continuing activities of the Group. However, 2020 was a particularly active year in refocussing Mears on housing activities, with the Group completing its exit from standalone Domiciliary Care and the sale of its planning solutions business ('Terraquest'). Both transactions are covered in greater detail below, and the trading results for the period leading up to disposal are included with additional granularity, whilst aggregated into a single line on the face of the Income Statement. The other category comprises litigation costs relating to a business sold in 2013.

	2020				2019
	Planning solutions	Domiciliary Care	Other	Total	Planning solutions	Domiciliary Care	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Sales revenue	16,282	19,106	-	35,388	20,879	77,521	98,400
Cost of sales	(6,403)	(14,384)	-	(20,787)	(9,029)	(61,411)	(70,440)
Gross profit	9,880	4,722	-	14,602	11,850	16,110	27,960
Administrative expenses	(5,101)	(5,436)	-	(10,532)	(6,788)	(22,642)	(29,430)
Finance (costs)/income	-	(4)	-	(4)	(114)	(77)	(191)
Profit / (loss) for the year before tax before exceptional items	4,779	(714)	-	4,066	4,948	(6,609)	(1,661)
Exceptional items	52,798	1,054	(984)	52,868	-	(80,562)	(80,562)
Profit / (loss) for the year before tax and before exceptional items	57,577	340	(984)	56,933	4,948	73,953	(82,223)
Tax	(121)	-	-	(121)	(961)	(100)	(1,061)
Profit / (loss) for the year after tax	57,456	340	(984)	56,812	3,987	73,853	(83,284)

Domiciliary Care disposal

In January 2020, the Group completed the disposal of the England and Wales Domiciliary Care business to Cera Care Operations Holdings Limited ('Cera Care') for cash consideration of £4.0m payable on completion, and a further £1.0m of deferred consideration was received over the following twelve months. The transaction was completed on a debt free basis, and with a normal level of working capital. A completion balance sheet mechanism resulted in the Group making a subsequent payment to the buyer of £0.1m in respect of a working capital shortfall.

In September 2020, the Group completed its exit from standalone domiciliary care with the disposal of the Scotland Domiciliary Care business, once again to Cera Care for a cash consideration of £2.0m payable on completion, and a further £0.5m of deferred consideration receivable twelve months from completion and which is due to be settled in September 2021. The contract mechanics for the Scotland sale were identical to the first transaction and a working capital top-up payment was subsequently made of £0.1m

	Domiciliary Care (England and Wales)	Domiciliary Care (Scotland)	Domiciliary Care  (All regions)
	£'000	£'000	£'000
Initial consideration	4,000	2,000	6,000
Deferred consideration	1,000	500	1,500
Working capital top-up	(102)	(91)	(193)
Total consideration	4,898	2,409	7,307
Less: Net assets and goodwill	(3,947)	(1,571)	(5,518)
Less: Transaction costs	(519)	(216)	(735)
Profit on disposal	432	622	1,054

Planning Solutions disposal ("Terraquest")

In November 2020, the Group announced its intention to sell its entire share capital in its Planning Solutions business ('Terraquest') for a headline enterprise value of £72m. Following a strategic review, the Board considered the business activities of Terraquest to be different from the core activities of the Group, and that the prospects of Terraquest would be optimised under new ownership. The Disposal constituted a Class 1 transaction requiring shareholder approval which was subsequently received on 25 November 2020 with over 99% of votes cast voting in favour of the transaction. For the purposes of accounting for the disposal, this date was taken as the point that the risks and rewards of ownership, together with control, was lost. The transaction was legally completed on 9 December 2020.

The Buyer was a newly formed company controlled by funds advised by Apse Capital ('the Buyer'). The Buyer and the Group entered into the Disposal Agreement on 5 November 2020 to sell the entire issued share capital of Terraquest. The consideration payable to the Company pursuant to the terms of the Disposal Agreement is structured as follows:

· £56.9 million payable in cash at Completion

· the issue by the Buyer to the Company of Consideration Loan Notes with an aggregate nominal value of £3.16 million, accruing an interest rate of 10 per cent. per annum payable on redemption

· the issue by the Buyer to the Company of £0.06m of Ordinary Shares in the Buyer, representing 6.16 per cent of the entire issued share capital

· a maximum amount of £10 million of deferred consideration payable in cash conditional upon the Terraquest Group achieving an aggregate EBITDA of £9.5 million in the financial year ending on 31 December 2021.  A base figure of £5 million is guaranteed.

	Terraquest
	£'000
Initial consideration	56,869
Deferred consideration	5,395
Equity and loan notes	3,225
Total consideration	65,489
Less: Net assets and goodwill	(8,297)
Less: Transaction costs	(4,394)
Profit on disposal	52,798

The Directors have estimated deferred consideration of £6.0m based upon Terraquest generating an EBITDA of £8.5m during the earn-out period. Given that £5.0m of the deferred consideration has been guaranteed by the buyer, the element which can be considered at risk is only the additional £1.0m above this base figure. Deferred consideration has been fair valued at £5.4m. The deferred consideration is payable in April 2022.

The gain on disposal is not subject to Corporation Tax due to the substantial shareholding exemption

As part of the Disposal, the Continuing Group has agreed to provide certain transitional services already being provided by it to the Terraquest for a limited period following Completion.

 

TAXATION

Tax strategy

Mears does not engage in artificial tax planning arrangements but takes advantage of available tax reliefs. The tax position in any transaction is aligned with the commercial reality and any tax planning is consistent with the spirit as well as the letter of tax law. Mears has a low appetite for risk and when making decisions regarding tax; reputational and commercial as well as financial risks are considered. Given the Group's activities are largely involved in servicing public sector clients, the risk of reputational damage flowing from a tax compliance failure is higher than in other sectors. This leads the Group to take a risk averse approach if there is an element of uncertainty regarding a particular treatment.

The Group 'normalises' its headline Earnings per Share ('EPS') measure to reflect a full tax charge. In so doing, the Board has removed from its primary performance measure any potentially positive impact that could be achieved through reducing the Group's corporation tax charge.

Taxes paid

Further detail in respect of the taxes paid during 2020 are detailed below:

	For the year ended 31 December 2020
	Taxes borne	Tax collected	Total
	£m	£m	£m
Corporation Tax	-	-	-
VAT & IPT	2.2	62.0	64.2
Construction industry tax	-	12.4	12.4
Income taxes	-	28.6	28.6
National insurance	19.5	18.2	37.7
Total	21.7	121.2	142.9

As detailed above, the Group participated in the Government's Job Retention Scheme ('Furlough'). Total payments made to those on furlough amounted to £19.1m resulting in a tax recovery of £16.1m.  This tax rebate is not included within the table above.

In addition, the Group accepted the short-term relief to defer the payment of its March 2020 VAT liability. This sum of £16.0m is included within the figures detailed above and was settled in full since the year end. The Group has also elected to repay its furlough rebate received and relating to the first quarter of 2021 amounting to £2.1m, recognising that much of the uncertainty surrounding Covid-19 has now been resolved, and following the disposal of Terraquest, Mears should no longer utilize further Government support.

BALANCE SHEET

		2020	2019
	Note	£'000	£'000
Goodwill, acquisition intangibles and investments		135,044	152,382
Property, plant and equipment		23,600	26,326
Right of use asset	1	200,041	198,384
Inventories	2	31,258	36,045
Trade receivables	2	139,884	164,091
Trade payables	2	(221,373)	(202,366)
Net cash / (debt)		56,867	(51,138)
Lease obligations	1	(209,071)	(205,175)
Net pension	3	(7,880)	2,088
Taxation		3,678	(2,231)
Receivables relating to disposal of Terraquest	4	8,591	-
Net assets held for resale		-	5,293
Other payables		(4,588)	(5,362)
Net assets		156,051	118,337

1 Detailed explanation provided in IFRS 16 section below

2 Working capital balances include trade receivables, trade payables and inventories; further explanation is provided within the working capital management section below

3 Net pension is detailed within the pension section below and comprises pension assets of £7.1m (2019: £6.9m), pension guarantee assets of £30.7m (2019: £23.8m) less pension obligations of £45.7m (2019: £28.6m)

4 Receivables relating to the disposal of Terraquest comprises deferred consideration of £5.4m and loan notes of £3.1m as detailed within the Discontinued activities section above

Overall, the Group reported an increase in net assets driven by the profit generated on the disposal on the sale of Terraquest and the Domiciliary Care businesses. The key elements which are addressed in greater detail below is the reduction in working capital balances (together with the positive cash flows flowing from this), the significant impact to the business of the IFRS 16 lease accounting and the balances relating to pensions and how the Group seeks to manage those risks.

 

CASH FLOW AND WORKING CAPITAL MANAGEMENT

	2020 £'000	2019 £'000
EBITDA on continuing operations	55,935	77,078
Cash inflow from operating activities of continuing operations before taxes paid	103,223	86,918
Cash conversion %	185%	113%
Average daily net debt	97,300	114,400
Adjusted net cash/ (debt) at 31 December	56,867	50,986

The Group reported a net cash position at the year-end of £56.9m (2019: net debt £51.0m). The key drivers for this improvement was the consideration received in respect of the Terraquest and Domiciliary Care disposals amounting to £63.9m (before transactions costs of £5.1m), and a significant operating cash inflow from operating activities of £102.7m], resulting in a cash conversion of 185% (2019: 113%) when taken as a proportion of EBITDA. Importantly, the strong year end performance is also mirrored in the average daily net debt for the year at £97.3m (2019: £114.4m).

Whilst this reflects excellent working capital management and highlights the Group's ability to adapt quickly to changing payment mechanisms, the impact of Covid-19 resulted in certain cashflows which are non-recurring and will unwind over time, which is detailed below. The components which are considered temporary and are expected to unwind over the course of 2021 are primarily:

· the £16.0m deferral of the Group's March 2020 VAT liability which is now been settled in full

· contract payments received on account of £23.0m relating to client receipts in respect of the Covid-19 interim arrangements

· amounts received in respect of lump sum arrangement where the associated cost had not been incurred. This amounts to £0.7m at the year end, having been around £4.0m as the Group exited the first national lockdown

The average month end trade receivable and trade payable balance split by Housing category reflects strong working capital management during a period where liquidity was paramount. The Group is grateful also for the additional support which the majority of clients showed throughout the course of the pandemic; their commitment to settle payments, often ahead of their due date, provided stability and allowed the Group to similarly support its own supply chain.

	2020			2019
	Receivables £m	Payables £m	Net working capital £m	Receivables £m	Payables £m	Net working capital £m
Maintenance-led	138.5	(125.7)	12.8	159.3	(126.2)	33.1
Management-led	32.4	(25.5)	6.9	29.8	(24.3)	5.5
Development	31.0	(6.0)	25.0	33.4	(8.7)	24.7
	201.9	(157.2)	44.7	222.5	(159.2)	63.3

The core activities of Maintenance and Management have historically absorbed a relatively low level of working capital when compared to the size of the business and the profit generated. As detailed above, the Maintenance-led activities delivered a reduction in working capital utilisation, reducing from £33.1m to £12.8m; after adjusting for the benefit from the VAT deferral and the increase in payments received on account, this reduction is broadly in line with the reduction in revenue.

The average working capital absorbed in Management increased from £5.5m to £6.9m which outperformed management expectations. It was previously indicated that the full year impact from the Asylum contract was likely to absorb a further £6.0m of working capital in 2020 given the averaging methodology reflected only a part-year impact in 2019 for this newly mobilised contract. The underlying movement in working capital absorbed in Management-led activities is broadly in line with the increase in revenue.

The working capital absorbed within the Development activity was maintained at a similar level to the prior year at £25.0m (2019: £24.7m). The remaining two active sites were mothballed during the period but have subsequently been reopened, but activity has been maintained at a low level to closely manage the working capital cash flows. Management expect to see the unwind of the working capital absorbed in this area over the course of the next 2-years.

A summary of the consolidated cash flow is detailed below together with explanations in respect of the major movements.

		2020		2019
	Note	Reported	Before the impact of IFRS 16	Reported	Before the impact of IFRS 16
		'000	£'000	£'000	£'000
(Loss) / profit before tax		(15,218)	(14,100)	20,253	22,475
Net finance costs		9,998	2,875	8,731	2,971
Amortisation of acquisition intangibles		9,525	9,525	10,122	10,122
Depreciation and amortisation		51,630	9,388	37,972	8,064
EBITDA		55,935	7,688	77,078	43,633
Other adjustments		1,608	1,608	(5)	(5)
Change in inventories		4,787	4,787	(6,357)	(6,357)
Change in operating receivables		17,975	17,975	2,680	2,680
Change in operating payables		22,418	24,075	13,523	12,848
Operating cash flow		103,223	56,633	86,918	52,798
EBITDA to operating cash conversion		185%	737%	113%	121%
Taxes paid		41	41	(3,377)	(3,377)
Cash inflow from discontinued operations	1	2,528	2,528	4,904	4,904
Capital expenditure		(6,765)	(6,765)	(12,318)	(12,318)
Cash flows relating to property acquisition activity	2	4,618	4,618	(7,176)	(7,176)
Acquisitions and Disposals	3	54,612	54,612	(1,300)	(1,300)
Dividends	4	-	-	(13,811)	(13,811)
Financing costs		(10,447)	(3,324)	(9,744)	(3,984)
Discharge of lease liability		(39,958)	(491)	(29,179)	(819)
Change in net debt		107,853	107,853	14,918	14,918
Opening net debt		(50,986)	(50,986)	(65,904)	(65,904)
Closing net debt	5	56,867	56,867	(50,986)	(50,986)

1.  As detailed above, the Domiciliary Care and Planning Solutions activities have been reported as discontinued in the results for the year

2.  The Group cancelled its property acquisition facility. The final asset sold in 2019 included an element of deferred consideration of £4.6m which was settled in September 2020.

3.  As reported earlier, the disposal of Domiciliary Care and Planning Solutions resulted in a combined cash inflow after acquisition costs of £57.8m. Netted off this figure is a balance of £3.5m reflecting the acquisition of a minority interest in equity and loan notes in the buyer of the planning solutions business. Within the consolidated cash flow statement these entries are not netted off and are reported individually.

4.  Following the uncertainties surrounding Covid-19, the Board did not believe it appropriate to declare a dividend for 2020.The dividend for 2019 comprises the final dividend for 2018 of 8.85p and an interim dividend for 2019 of 3.65p, resulting in a total in-year outflow of £13.8m

5.  The statutory cash flow statement reports a cash balance at 31 December 2020 of £96.2m (2019: £73.1m). Whilst this disclosure complies with accounting standards, it is not a fair reflection of the Group's funding arrangement. The Group has a revolving credit facility to the value of £125m. The Group makes drawdowns against that facility, meaning the cash balance and loan balance are inextricably linked. The closing net debt at 31 December 2020 of £56.9m (2019: £51.0m) comprises a cash balance of £96.2m (£73.1m) reduced by an associated drawdown of £39.4m (2019: £124.0m).

Accounting for residential leases and IFRS 16

Leasing properties for rental to tenants is a core business activity for Mears. As a result, Mears currently holds around 10,425 residential property leases and this number can be expected to increase over time. The Group's management of the operational and financial risks and rewards of leasing is thus a key element of the value which the Group generates for stakeholders. This section describes in brief the main different classes of residential lease assets held by Mears, their key contractual obligations, the associated risk and reward and the accounting treatment. (Mears also has over 3,500 office property and vehicle leases, but the risk and reward and accounting treatment of these is straightforward and not considered further here).

Accounting for residential leases is a complex area. A number of key judgements must be made, as follows:

· Identifying whether a given contractual arrangement is a lease

· Assessing whether Mears or another party has the right to direct the use of the lease asset to obtain economic benefit

· Determining the term of the lease

· Assessing the value of future lease payments, including variable and fixed elements

Only once this has been done is it possible to conclude whether any given lease should be accounted for under IFRS 16 or not. Broadly speaking, a lease should be accounted for under IFRS 16 only if Mears has the right to direct its use which, through its decision-making rights, can affect the economic benefit derived from that asset. In addition, a practical expedient offered under IFRS 16 allows those leases with a term of less than 12-months to be expensed. Of Mears' portfolio of some 10,425 residential leases, over 60% do not fall under the criteria for recognising on the Balance Sheet, mostly because they are either short term in nature or they have two-way break clauses with short notice periods or because Mears does not in practice have the right to control the use of the asset. IFRS 16 focuses upon a 'right of use asset', and to complete the book-keeping, recognises a corresponding lease obligation. Given the focus of the standard is on the right of use asset, the lease obligation is not entirely consistent with the historical definition of a liability; accordingly, the lease obligation is not a typical debt instrument.

The table below splits the Group's residential property leases across several lease categories. It highlights the operational risks and contractual obligations that need to be managed and the key factors which are considered to assess the correct accounting treatment, in particular whether the arrangements fall under the definition of a lease as laid down by IFRS 16.

Lease category	Number of leases	Lease term	Annual lease payment	IFRS 16 lease obligation	Key considerations for assessing the accounting treatment under IFRS 16, together with risk management considerations
Category A	2,480	3-5 years	£16.3m	£32.4m	This lease type contains a one-way no-fault break in Mears' favour. Whilst the Group could exit all arrangements within 30 days, the Group is deemed to control the asset, and the arrangement meets the definition of a lease under IFRS 16. Notwithstanding the break clause, the Group measures the obligation based on the Group's best estimate of its future intentions, which has been modelled on 3 years.  Notwithstanding the reported lease obligation, the unavoidable debt obligation to the Group is one-twelfth of the annual lease payment, being £1.7m.
Category B	380	7-10 years	£3.8m	£23.7m	This lease category meets the definition of a lease under IFRS 16. The Group has no ability to terminate these leases early. Positively, the lease term is aligned to the underlying contract, and Mears would have the right to novate these leases to a new provider if the customer contract was to be terminated early. There remains a relatively low number of this lease type but it is an area where the Group anticipates an increasing number to secure an optimal  mix of lease terms to provide best value whilst retaining the flexibility to react to changes in the volume of service users.
Category C	635	3-20 years	£9.3m	£85.0m	This lease category meets the definition of a lease under IFRS 16. The Group has no ability to terminate these leases early but enjoys nomination agreements with Local Authority clients which ensures that a property is either occupied, or that Mears is compensated if the property is empty
Category D	400	20 years	£3.5m	£42.4m	This lease category meets the definition of a lease under IFRS 16. The Group does not enjoy an ability to terminate these leases early. Positively, these properties have been secured at rental levels below market rent and in areas where demand is expected to remain high. Whilst the Group considers this asset type to be low risk, it does carry a higher bad debt and void risk than the Group's other lease categories.
Category E	660	10 years	£4.2m	£nil as treated as short term	These leases have been procured through Housing Associations and typically enjoy a no-fault two-way break with a 2-month notice period. These leases are not considered to be legally enforceable beyond 2 months and are therefore considered to be short-life leases within the rules of IFRS 16. These leases can be considered low risk from a financial standpoint given the ability to break at short notice. However, this represents an operational risk and Mears endeavours to ensure its portfolio has a mix of tenures and break clauses as the financial costs of running short of suitable properties is equally as severe as carrying surplus bed spaces.
Category F	1,065	7-10 years	£9.3m	£nil at not a lease under IFRS 16	These leases represent a long-term commitment to lease properties. However, the lessor has a right of substitution meaning that the lessor can swap one property for another without Mears approval. As such, under the rules of IFRS 16, Mears does not control an identifiable asset, and there is no right of use asset or lease obligation. Notwithstanding this, the Board believes that stakeholders should be aware of this annual lease payment which represents a long-term financial commitment. Positively, the lease term is aligned to the underlying contract, and Mears holds the right to terminate these leases early if the customer contract was terminated.
Category G	500	20 years	£4.6m	£nil as not a lease under IFRS 16	Under the terms of these leases, Mears has no right to direct the use of the asset. The Group's Local Authority partner has the right to operate the asset in a manner that it determines, and Mears participation is restricted to delivering tenancy management and maintenance services. Mears enjoys a rent guarantee and certain void protections meaning its income is secure and that Mears carries limited risk associated with the lease.
Category H	4,005	< 1 year	£47.9m	£nil as treated as short term	These leases are procured for a period of less than 12 months or the underlying asset is continuing to be used after the expiry of the original lease term. Under the rules of IFRS 16, these are termed as short-life leases and there is no recognition of either a right of use asset or lease obligation. Given their short duration, these leases represent minimal financial risk but this can be a negative from an operational standpoint, given we are required under the customer contract to provide accommodation at short notice, in locations where there is a scarcity of suitable properties
Category I	300	3 years	£3.0m	£nil as no variable lease payment is estimated	This lease type typically contains a one-way no-fault break in Mears' favour. Whilst Mears direct the use of the asset, the lease obligation to the landlord is based on a pass-through arrangement. Mears only make lease payments to the owner to the extent that the property is occupied and to the extent that rents are received from the tenant, in an environment where credit risk is high. As such, Mears recognises no fixed lease payments associated with these leases and as a result, no right of use asset or lease obligation is recognised. Importantly, these leases carry no financial risk.
Total	10,425		£101.9m	£183.5m

Where a contract is identified as a lease under the rules of IFRS 16, the Group recognises its right to use a leased asset and a lease liability representing its obligation to make lease payments. The depreciation cost of the newly recognised 'right of use' lease asset is charged to profit within cost of sales or administrative costs, whilst the interest cost of the newly recognised lease liability is charged to finance costs.

On the basis that depreciation is required to be charged on a straight-line basis, whilst the interest element is charged on a reducing balance basis, this results in a higher charge being applied to the income statement in the early years of a lease, with this impact reversing over the later years.

PENSIONS

The Group participates in two principal Group pension schemes (2019: two) together with a further 20 (2019: 28) individual defined benefit schemes where the Group has received Admitted Body status in a Local Government Pension Scheme (LGPS). The accounting treatment for these schemes follows the guidelines set for defined benefit schemes. This treatment does not present the commercial reality for a number of these LGPS arrangements, where the Group holds back-to-back indemnities from its clients in respect of both its exposure to changes in pension contribution rates and to future deficit risk.

The pension disclosure is split on the face of the Balance Sheet between non-current assets and non-current liabilities. In addition, the pension guarantee assets are reported separately from their associated liabilities which complies with accounting standards but is not reflective of the contractual nature. The table below provides an alternative categorisation to assist stakeholders in better understanding the Group's pension risks. Where the Group enjoys a back to back indemnity with its Local Authority and Housing Association clients, it is classed within 'limited-risk'. For other LGPS arrangements, whilst the Group does not benefit from an indemnity, the risks associated with these schemes matches the time horizon of the underlying contract which, whilst not removing all risks, does reduce the period over which a deficit can arise. This second category has been identified in the table below as 'medium-term risk'.

The Group schemes are standard defined benefit arrangements where the Group will continue to continue to hold a long-term obligation. The Group actively participates in running these schemes and meets with the Trustees regularly. This last category has been classified as 'long-term risk'.

	Non-contract specific (no indemnity) long-term risk	Contract specific (no indemnity) medium-term risk	Contract specific (indemnified) limited risk	Total
Number of schemes	2	12	8	22
Scheme assets £'000	185,436	63,317	225,174	473,927
Scheme liabilities £'000	(181,184)	(74,279)	(245,907)	(501,370)
Funded status £'000	4,252	(10,962)	(20,733)	(27,443)
Surpluses not recognised £'000	-	(870)	(10,272)	(11,142)
Guarantee asset £'000	-	-	30,705	30,705
Net surplus/(deficit) £'000	4,252	(11,832)	(300)	(7,880)

BANKING AND FINANCIAL COVENANTS

The Company is party to a £120.0m Revolving Credit Facility ('RCF') and is grateful for the tremendous support that has been provided to the Group by its three banking partners, Barclays, HSBC and Bank of Ireland. At the time that the UK entered the first national lockdown, the Group held total commitments of £170m and given the level of uncertainty at that time, quickly secured additional short-term funding, increasing the Group's debt facilities to £192.7m. The Group has delivered strong cash performance and positively the additional funding line has not been drawn down. Following the disposal of Terraquest, the Group cancelled this short -term facility together with voluntarily reducing total commitments from £170.0m to £145.0m prior to the year end. Since the year end, the Board have further reduced the total commitment by a further £25.0m, reducing the RCF facility to £120.0m.

In order to mitigate the Covid-related risks on the Group's banking covenants, and in support of the Terraquest disposal, the Group agreed amendments to its banking covenants. The new financial covenants removed the existing leverage and interest cover covenants tested at December 2020 and June 2021 and introduced two new covenants requiring a minimum level of Covenant EBITDA and a maximum level of adjusted net debt at those two testing dates only. In setting these amended covenants, the Company was required to prepare projections on the basis of what was considered by the Board to be a reasonable worst scenario. The covenants applicable from December 2020 up to the expiry of the existing debt facility in November 2022 are detailed below:

	Previous	December 2020	June 2021	December 2021	June 2022
Leverage	3.00x	n/a	n/a	3.50x	3.00x
Interest cover	3.50x	n/a	n/a	3.50x	3.50x
Minimum adjusted EBITDA	n/a	(£9.0m)	£3.8m	n/a	n/a
Maximum net borrowings	n/a	£63.0m	£95.0m	n/a	n/a

The covenant calculations are tested every six months using figures derived on a rolling 12-month basis. EBITDA and Net Borrowings are calculated on a pre-IFRS 16 basis. The key items included within the covenant calculation are detailed below as:

	2020	2019
	£'000	£'000
(Loss) / profit before tax on continuing operations	(15,220)	20,253
Add back: depreciation (non-IFRS 16)	5,677	5,955
Add back: profit impact of IFRS 16	1,118	2,223
Add back: amortisation	11,736	12,231
Add back: finance costs (non-IFRS 16)	2,875	2,971
Add back: share based payments	993	400
Add back: non-underlying item	2,279	2,018
Covenant EBITDA	9,458	46,052
Net finance costs	9,998	8,731
Deduct: net interest received on pension obligations	102	432
Deduct: credit on unwind of discount	36	-
Deduct: finance costs (IFRS 16)	(7,123)	(5,760)
Covenant net finance costs	3,013	3,403
Adjusted net debt (or £nil if cash)	-	50,986
Leverage covenant (Adjusted net debt / Covenant EBITDA)	n/a	1.1
Interest cover covenant (Covenant net finance costs / Covenant EBITDA)	3.1	12.8

Consolidated statement of profit or loss for the year ended 31 December 2020

	Note	2020 £'000	2019 (restated*) £'000
Continuing operations
Sales revenue	2	805,817	881,457
Cost of sales		(649,530)	(675,348)
Gross profit		156,287	206,109
Other administrative expenses		(150,759)	(165,880)
Exceptional costs	8	(2,279)	(2,018)
Amortisation of acquisition intangibles	14	(9,525)	(10,122)
Total administrative costs		(162,563)	(178,020)
Operating profit before exceptional costs and amortisation of acquisition intangibles		5,528	40,229
Operating (loss)/profit		(6,276)	28,089
Share of profits of associates	17	1,056	895
Finance income	5	293	849
Finance costs	5	(10,291)	(9,580)
(Loss)/profit for the year before tax, exceptional costs and amortisation of acquisition intangibles		(3,414)	32,393
(Loss)/profit for the year before tax		(15,218)	20,253
Tax credit/(expense)	9	3,207	(3,015)
(Loss)/profit for the year from continuing operations		(12,011)	17,238
Discontinued operations
Profit/(loss) from discontinued operations	10	56,933	(82,223)
Tax charge on discontinued operations	9	(121)	(1,061)
Profit/(loss) for the year after tax from discontinued operations		56,812	(83,284)
Profit/(loss) for the year from continuing and discontinued operations		44,801	(66,046)
Attributable to:
Owners of Mears Group PLC		44,519	(66,388)
Non-controlling interest		282	342
Profit/(loss) for the year		44,801	(66,046)
Earnings per share - from continuing operations
Basic	12	(10.66)p	15.72p
Diluted	12	(10.66)p	15.64p
Earnings per share - from continuing and discontinued operations
Basic	12	40.21p	(60.09)p
Diluted	12	40.21p	(59.77)p

* Note 33 contains details of the restatement of the prior year figures.

The accompanying accounting policies and notes form an integral part of this preliminary statement.

 

Consolidated statement of comprehensive income for the year ended 31 December 2020

	Note	2020 £'000	2019 (restated*) £'000
Profit/(loss) for the year		44,801	(66,046)
Other comprehensive expense:
Which will be subsequently reclassified to the Consolidated Statement of Profit or Loss:
Cash flow hedges:
losses arising in the year	24	(1,139)	(145)
reclassification to the Consolidated Statement of Profit or Loss	24	354	49
Increase in deferred tax asset in respect of cash flow hedges	25	149	18
Which will not be subsequently reclassified to the Consolidated Statement of Profit or Loss:
Actuarial loss on defined benefit pension scheme	29	(19,114)	(15,519)
Pension guarantee asset movements in respect of actuarial loss	29	10,024	4,231
Increase in deferred tax asset in respect of defined benefit pension schemes	25	1,727	2,145
Other comprehensive expense for the year		(7,999)	(9,221)
Total comprehensive income/(expense) for the year		36,802	(75,267)
Attributable to:
Owners of Mears Group PLC		36,520	(75,609)
Non-controlling interest		282	342
Total comprehensive income/(expense) for the year		36,802	(75,267)

Total comprehensive income/(expense) for the year attributable to owners of Mears Group PLC arises from:
Continuing operations		(19,721)	8,146
Discontinued operations		56,241	(83,755)
Total comprehensive income/(expense) for the year attributable to owners of Mears Group PLC		36,520	(75,609)

* Note 33 contains details of the restatement of the prior year figures.

The accompanying accounting policies and notes form an integral part of this preliminary statement.

 

Consolidated balance sheet as at 31 December 2020

	Note		2020 £'000	2019 (restated*) £'000
Assets
Non-current
Goodwill	13		118,873	123,204
Intangible assets	14		15,205	28,642
Property, plant and equipment	15		23,600	26,326
Right of use assets	16		200,041	198,384
Investments	17		966	536
Loan notes	24		3,160	-
Contingent consideration	24		5,431	-
Pension and other employee benefits	29		7,068	8,249
Pension guarantee assets	29		30,705	23,810
Deferred tax asset	25		3,320	-
			408,369	409,151
Current
Assets classified as held for sale	10		-	11,185
Inventories	18		31,258	36,045
Trade and other receivables	19		139,884	164,091
Current tax assets			358	-
Cash and cash equivalents	24		96,220	72,909
			267,720	284,230
Total assets			676,089	693,381
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital	26		1,109	1,105
Share premium account			82,225	82,224
Share-based payment reserve			1,312	2,421
Hedging reserve	24		(760)	(124)
Merger reserve			7,971	12,956
Retained earnings			63,536	19,840
Total equity attributable to the shareholders of Mears Group PLC			155,393	118,422
Non-controlling interest			658	(85)
Total equity			156,051	118,337
Liabilities
Non-current
Long-term borrowing and overdrafts	24		39,353	124,047
Pension and other employee benefits	29		45,653	29,971
Deferred tax liabilities	25		-	1,572
Interest rate swaps	24		462	39
Lease liabilities	21		166,183	166,000
Other payables	23		3,667	4,700
			255,318	326,329
Current
Trade and other payables	20		221,029	202,366
Interest rate swaps	24		459	119
Lease liabilities	21		42,888	39,175
Provisions	22		344	504
Current tax liabilities			-	659
Liabilities related to assets classified as held for sale	10		-	5,892
Current liabilities			264,720	248,715
Total liabilities			520,038	575,044
Total equity and liabilities			676,089	693,381

 

Consolidated cash flow statement for the year ended 31 December 2020

	Note	2020 £'000	2019 (restated*) £'000
Operating activities
Result for the year before tax		(15,218)	20,253
Adjustments	27	72,761	56,819
Change in inventories		4,787	(6,357)
Change in trade and other receivables		18,475	2,680
Change in trade, other payables and provisions		22,418	13,523
Cash inflow from operating activities of continuing operations before taxation		103,223	86,918
Taxes paid		41	(3,377)
Net cash inflow from operating activities of continuing operations		103,264	83,541
Net cash outflow from operating activities of discontinued operations		2,527	4,904
Net cash inflow from operating activities		105,791	88,445
Investing activities
Additions to property, plant and equipment		(5,065)	(8,377)
Additions to other intangible assets		(1,717)	(1,679)
Proceeds from disposals of property, plant and equipment		17	46
Cash inflow in respect of property for resale	28	4,618	7,824
Payments on acquisitions, net of cash acquired		-	(1,300)
Loans repaid by/(made to) other entities (non-controlled)		10	(48)
Interest received		86	363
Net cash outflow from investing activities of continuing operations		(2,051)	(3,171)
Net cash inflow/(outflow) from investing activities of discontinued operations		54,612	(2,309)
Net cash inflow/(outflow) from investing activities		52,561	(5,480)
Financing activities
Proceeds from share issue		4	1
Repayment of borrowings related to assets classified as held for sale	27	-	(15,000)
Net movement in revolving credit facility		(84,694)	30,267
Discharge of lease liabilities		(39,958)	(29,179)
Interest paid		(10,056)	(9,446)
Dividends paid - Mears Group shareholders		-	(13,811)
Net cash outflow from financing activities of continuing operations		(134,704)	(37,168)
Net cash outflow from financing activities of discontinued operations		(489)	(612)
Net cash outflow from financing activities		(135,193)	(37,780)
Cash and cash equivalents, beginning of year		73,061	27,876
Net increase in cash and cash equivalents		23,159	45,185
Cash and cash equivalents, end of year (including discontinued)		96,220	73,061
The Group considers its revolving credit facility to be an integral part of its cash management:
Cash and cash equivalents		96,220	73,061
Revolving credit facility		(39,353)	(124,047)
Cash and cash equivalents, including revolving credit facility		56,867	(50,986)

Consolidated statement of changes in equity for the year ended 31 December 2020

	Attributable to equity shareholders of the Company
	Share capital £'000	Share premium account £'000	Share- based payment reserve £'000	Hedging reserve £'000	Merger reserve £'000	Retained earnings £'000	Non- controlling interest £'000	Total Equity £'000
At 1 January 2019	1,105	82,224	2,021	(46)	46,214	79,189	(427)	210,280
Impact of change in accounting policies (restated*)	-	-	-	-	-	(3,074)	-	(3,074)
Adjusted balance at 1 January 2019 (restated*)	1,105	82,224	2,021	(46)	46,214	76,115	(427)	207,206
Net result for the year (restated*)	-	-	-	-	-	(66,388)	342	(66,046)
Other comprehensive income	-	-	-	(78)	-	(9,143)	-	(9,221)
Total comprehensive income for the year (restated*)	-	-	-	(78)	-	(75,531)	342	(75,267)
Deferred tax on share-based payments	-	-	-	-	-	(191)	-	(191)
Share options - value of employee services	-	-	400	-	-	-	-	400
Transfer of realised profits	-	-	-	-	(33,258)	33,258	-	-
Dividends	-	-	-	-	-	(13,811)	-	(13,811)
At 1 January 2020	1,105	82,224	2,421	(124)	12,956	19,840	(85)	118,337
Net result for the year	-	-	-	-	-	44,519	282	44,801
Other comprehensive income	-	-	-	(636)	-	(7,363)	-	(7,999)
Total comprehensive income for the year	-	-	-	(636)	-	37,156	282	36,802
Deferred tax on share-based payments	-	-	-	-	-	10	-	10
Issue of shares	4	1	-	-	-	-	-	5
Share options - value of employee services	-	-	1,029	-	-	-	-	1,029
Share options - exercised or lapsed	-	-	(2,138)	-	-	2,138	-	-
Non-controlling interest eliminated on disposal of subsidiary	-	-	-	-	-	-	(132)	(132)
Transactions with non-controlling interests	-	-	-	-	-	(593)	593	-
Transfer of realised profits	-	-	-	-	(4,985)	4,985	-	-
At 31 December 2020	1,109	82,225	1,312	(760)	7,971	63,536	658	156,051

* Note 33 contains details of the restatement of the prior year figures.

The accompanying accounting policies and notes form an integral part of this preliminary statement.

Notes to the financial statements - Group for the year ended 31 December 2020

1. Accounting policies

Accounting policies are detailed in their respective notes, where relevant. Policies that are not specific to a particular note are detailed below.

Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRS) adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union and as issued by the International Accounting Standards Board (IASB). The financial statements are prepared under the historical cost convention as modified by the revaluation of derivative financial instruments and share-based payments. They are presented in Sterling and all values are rounded to the nearest thousand (£'000).

The accounting policies remain unchanged from the previous year except for the modification of a number of standards with effect from 1 January 2020. Changes include Amendments to IFRS 3 (Definition of a Business); IAS 1 and IAS 8 (Definition of Material) and IFRS 9, IAS 39 and IFRS 7 (Interest Rate Benchmark Reform). The adoption of these amendments had no material effect on the Group's financial statements.

The preparation of financial statements in conformity with IFRS requires the use of estimates and judgements that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Although these estimates are based on management's best knowledge of the amounts, actual results may ultimately differ from those estimates. The most significant estimates made by management in these financial statements are set out in the accounting policies to which they relate.

Mears Group PLC is incorporated and domiciled in England and Wales (registration number 03232863). Its registered office and principal place of business is 1390 Montpellier Court, Gloucester Business Park, Brockworth, Gloucester GL3 4AH. Mears Group PLC's shares are listed on the London Stock Exchange.

Basis of consolidation

The Consolidated Balance Sheet includes the assets and liabilities of the Company and its subsidiaries and is made up to 31 December 2020. Entities for which the Group has the ability to exercise control over financial and operating policies are accounted for as subsidiaries. Control is achieved where the Company has existing rights that give it the current ability to direct the activities that affect the Company's returns and exposure or rights to variable returns from the entity. Interests acquired in entities are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal.

All significant intercompany transactions and balances between Group enterprises, including unrealised profits arising from intra-group transactions, are eliminated on consolidation; no profit is taken on sales between Group companies.

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholders' share of changes in equity since the date of the combination. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interest having a deficit balance.

A joint venture is a joint arrangement whereby the parties that have joint control have the rights to the net assets of the arrangement. Associates are entities over which the Group does not have control, but has significant influence. Investments in joint ventures and associates are accounted for using the equity method of accounting. Under this method, the Group's share of post-acquisition profits or losses is recognised in the Consolidated Statement of Profit or Loss; the cost of the investment in a given joint venture or associate, together with the Group's share of that entity's post-acquisition changes to shareholders' funds, is included in investments within the Consolidated Balance Sheet.

Going concern

The Directors consider that, as at the date of approving the financial statements, there is a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the period to at least 30 June 2022. When making this assessment, management considers whether the Group will be able to maintain adequate liquidity headroom above the level of its borrowing facilities and to operate within the financial covenants applicable to those facilities which will be measured at 30 June 2021, 31 December 2021 and 30 June 2022. At 31 December 2020, the Group had £145m of committed borrowing facilities, maturing in November 2022. Since the year end, the Directors have voluntarily cancelled £25m of facilities, with the total commitments available reduced to £120m at the date of signing. The principal borrowing facilities are subject to covenants as detailed within the Finance Review section of the Strategic Report. The Strategic Report also details the principal risks and uncertainties and how the Group manages its risks. Note 24 to the financial statements sets out more information on the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to credit and liquidity risk. During the year, certain covenants were renegotiated due to the initial effects of the COVID-19 pandemic resulting in a very significant headroom at 31 December 2020. The covenants will return to the previous measures from 31 December 2021 and the Group has modelled its cash flow outlook for the period to 30 June 2022 and the forecasts indicate significant liquidity headroom will be maintained above the Group's borrowing facilities and that financial covenants will be met throughout the period, including the covenant tests at 30 June 2021 and 31 December 2021. The Group's existing debt facilities run to November 2022. The Group considers that there will be enough appetite from its existing or new funders to provide the required level of funding on similar terms, as supported by evidence from the facility amendments during 2020, the positive trading outlook and the time available to renegotiate as necessary.

The Group has carried out stress tests against the base case to determine the performance levels that would result in a breach of covenants or a reduction of headroom against its borrowing facilities to £nil. After making these assessments, the Directors have a reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Business combinations

Business combinations are accounted for using the acquisition method. The acquisition method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the Consolidated Balance Sheet at their fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill is stated after separating out identifiable intangible assets. Goodwill represents the excess of acquisition cost over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition.

Where applicable, the consideration for an acquisition includes any assets or liabilities arising from a contingent consideration arrangement, measured at fair value at the acquisition date. Subsequent changes in such fair values are adjusted against the cost of acquisition where they result from additional information obtained up to one year from the acquisition date about facts and circumstances that existed at the acquisition date. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are recognised in accordance with IFRS 9 in the Consolidated Statement of Profit or Loss.

For transactions with non-controlling parties that do not result in a change of control, the difference between the fair value of the consideration paid and the amount by which the non-controlling interest is adjusted is recognised in equity.

Any business combinations prior to 1 January 2010 were accounted for in accordance with the standards in place at the time, which differ in the following respects: transaction costs directly attributable to the acquisition formed part of the acquisition costs; contingent consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable; and subsequent adjustments to the contingent consideration were recognised as part of goodwill.

Fair value

The Group measures certain assets and liabilities at fair value on a recurring basis, including its interest rate swaps, contingent consideration and assets in the Group's defined benefit pension schemes.

Trade and other receivables, trade and other payables and other loans are initially measured at fair value and are subsequently held at amortised cost. Other assets are measured at fair value when they are assessed for impairment or on classification as held for sale.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Group uses valuation techniques that maximise the use of relevant observable inputs using the following valuation hierarchy, ordered from highest to lowest priority:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable either directly or indirectly.

Level 3 - Unobservable inputs, typically derived from the Group's own information with any necessary adjustments to eliminate factors specific to the Group.

For assets and liabilities measured at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by assessing the lowest level input that is significant to the most recent measurement.

Details of the particular valuation techniques used by the Group are provided in the relevant notes for each type of asset or liability measured at fair value.

Use of judgements and estimates

The preparation of financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenditure during the reported period. The estimates and associated judgements are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.

The estimates and underlying judgements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

In the preparation of these consolidated financial statements, key estimates and judgements have been made by management concerning provisions necessary for certain liabilities, the discount rates used and other judgements when recognising right of use assets for lease accounting, the timing of revenue recognition, the recoverability of contract assets and work in progress, actuarial estimates in respect of defined benefit pension schemes, the fair value of contingent consideration in respect of disposed entities and other similar evaluations. Actual amounts could differ from those estimates. Further details of key estimates and judgements are provided in the appropriate notes.

The impact of COVID-19 has been considered when making the estimates and judgements above. The global and local effects of the pandemic have primarily affected the discount rates used for lease accounting as well as the assumptions of discount rate and inflation rate used in calculating the Group's liabilities in respect of defined benefit pension schemes.

New standards and interpretations not yet applied

A number of standards have been modified with effect for accounting periods commencing on or after 1 January 2021. These include 'Interest Rate Benchmark Reform - Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16', 'IAS 37 - Cost of Fulfilling a Contract', 'IAS 16 - Proceeds Before Intended Use' and other existing standards arising from the Annual Improvements to IFRSs 2018-2020 cycle. None of these amendments are expected to have a material effect on the Group's financial statements.

2. Revenue

Accounting policy

Revenue is recognised in accordance with IFRS 15 'Revenue from Contracts with Customers'. IFRS 15 provides a single, principles-based, five-step model to be applied to all sales contracts. It is based on the transfer of control of goods and services to customers. The detail below sets out the principal types of contract and how the revenue is recognised in accordance with IFRS 15.

Repair and maintenance contracts

For contracts in this category, the customer raises orders on demand, for example to carry out responsive repairs. Revenue is derived from a mixture of lump-sum periodic payments and task-based payments depending on the terms of the individual contract.

Where a lump-sum payment is in place it may cover the administrative element of the contract or may cover the majority of the tasks undertaken within that contract with exclusions to this being charged in addition to the lump-sum charge. For the works covered by the lump-sum payment, the performance obligation is being available to deliver the goods and services in the scope of the contract, not the performance of the individual works orders themselves. Revenue is recognised on a straight-line basis as performance obligations are being met over time.

For works orders not covered by a lump-sum payment, each works order represents a distinct performance obligation and, as the customer controls the asset being enhanced through the works, the performance obligation is satisfied over time. Each works order can be broken down into one or more distinct tasks which are either complete or not complete. The stage of completion of the works order is assessed by looking at which tasks are complete. The transaction price for partly completed works orders is recognised as cost plus expected margin. The transaction price for completed works orders is the invoice value, which is typically determined by a pricing schedule referred to as a Schedule of Rates that provides a transaction price for each particular task.

Some contracts may include an element of variable revenue based on certain key performance indicators (KPIs). These are recognised either at a point in time or over time, depending on the nature of the KPI and the contractual agreement in which it is contained. Where there is uncertainty in the measurement of variable consideration, at both the start of the contract and subsequently, management will consider the facts and circumstances of the contract in determining either the most likely amount of variable consideration when the outcome is binary, or the expected value based on a range of possible considerations. Included within this assessment will be the extent to which there is a high probability that a significant reversal in variable consideration revenues will not occur once the uncertainty is subsequently resolved. This assessment will include consideration of the following factors: the total amount of the variable consideration; the proportion of consideration susceptible to judgements of customers or third parties, for example KPIs; the length of time expected before resolution of the uncertainty; and the Group's previous experience of similar contracts.

Contracting projects

For contracting projects, the contract states the scope and specification of the construction works to be carried out, for a fixed price. Mears is continuously satisfying this single performance obligation as cost is incurred, determining progress against the performance obligation on an input basis. The customer controls the site or output as the work is being performed on it and therefore revenue is recognised over time where there is an enforceable right to payment for works completed to date and the work completed does not create an asset with an alternative use to the Group. An assessment is made of costs incurred to date and the costs required to complete the project. If a project is not deemed to be profitable, the unavoidable costs of fulfilling the contract are provided for immediately. This category also includes construction contracts where an end customer has not yet been identified and the revenue is recognised at the point of sale of the property, rather than over time.

Property income

Where the Group is acting as principal, lessor operating lease revenue is recognised in revenue on a straight-line basis over the tenancy.

Where the Group is providing a management service, Mears recognises revenue as an agent (the net management fee) on a straight-line basis. Where significant initial costs are required to make good the housing to perform Housing Management activities, the costs directly attributable to the initial upgrade will be recognised as costs incurred to fulfil a contract and held within current assets, to the extent that it is determined that costs are recoverable.

Where the Group is providing an accommodation and support service, revenue is recognised at a point in time for each night that the accommodation is occupied.

Some contracts may include an element of variable revenue based on certain KPIs. This is recognised on the same basis as above.

Where the Group enters into arrangements with customers for the provision of housing, an assessment is made as to whether this income is recognised under IFRS 15 or IFRS 16. The contract between the Group and the customer is deemed to contain a lease where the contract conveys the right to control an identified asset for a period of time in exchange for consideration. In this instance, the rental income is recognised on a straight-line basis over the life of the lease. All such sub-leased residential property leases are classified as operating leases. Revenue in respect of sub-leased residential property is disclosed separately..

Professional services

Revenue represents amounts recoverable from clients for professional services provided during the year. Revenue is recognised either at a point in time, where the performance obligation is completed instantaneously such as processing a planning application, or over time, where the services are delivered over time. For this latter category, revenue is recognised by reference to the time expended to date as a proportion of the total time expected to be required to complete the performance obligation.

Care services

The standalone selling prices for providing care are overtly stated in the contract, and the method of application of the rate of charge is on a unit of time basis, usually expressed as a rate per visit. Revenue will be recognised in respect of this single performance obligation, by reference to the chargeable rate and time for completed care visits in the period.

From time to time, care contracts with customers include a fixed fee per period for performing a consistent scope of care services. For these contract types, the revenue recognition is consistent with lump-sum payments included in repair and maintenance contracts, as described above.

Other

From time to time, the Group receives revenue that does not fall within any of the categories above but is not individually significant enough to require a specific policy. In these cases, the revenue is considered separately and recognised in accordance with IFRS 15.

Mobilisation

Across all revenue types, where a contract includes a mobilisation element, consideration is initially given to whether the mobilisation element contains any discrete performance obligations. If this is the case, an element of the total contract price is allocated to those performance obligations and recognised either at a point in time or over time, depending on the nature of the performance obligation. Mobilisation income is included in the revenue category to which the contract relates.

Where amounts are received for mobilisation elements that are not performance obligations, these amounts are allocated to the performance obligations in the contract to which they relate.

No revenue was recognised during 2020 in respect of mobilisation performance obligations.

Key sources of estimation uncertainty

Contract recoverability

Determining future contract profitability requires estimates of future revenues and costs to complete. In making these assessments there is a degree of inherent uncertainty. The Group utilises the appropriate expertise in determining these estimates and has well-established internal controls to assess and review the expected outcome.

Critical judgements in applying the Group's accounting policies

Revenue recognition

The estimation techniques used for revenue and profit recognition in respect of contracting and variable consideration contracts require judgements to be made about the stage of completion of certain contracts and the recovery of work in progress, mobilisation costs and contract assets. Each contract is treated on its merits and subject to a regular review of the revenue and costs to complete that contract.

The Group's revenue disaggregated by pattern of revenue recognition is as follows:

	2020 £'000	2019 (restated) £'000
Revenue from contracts with customers
Repairs and maintenance	449,974	562,181
Contracting	103,643	171,097
Property income	199,718	99,119
Professional services	47	645
Care services	19,825	19,237
Other	62	581
	773,269	852,860
Lease income	32,548	28,597
	805,817	881,457

All of the above categories fall exclusively within the Housing segment. In addition to the restatement detailed in note 33, revenue for 2019 has been re-presented in order to aid comparability with the 2020 disaggregation.

A total of £2.1m of revenue was recognised in respect of the balance of contract liabilities at the start of the year (2019: £1.9m).

Repairs and maintenance and care services revenue is typically invoiced between one and 30 days from completion of the performance obligation. Contracting revenue is typically invoiced based on the stage of completion of the overall contract. Property income is typically invoiced monthly in advance. Professional services revenue is typically invoiced monthly in arrears. Payment terms for revenue invoiced are typically 30 to 60 days from the date of invoice.

A maturity analysis of future minimum lessor income as at 31 December is shown in the table below:

	2020 £'000	2019 £'000
Less than 1 year	7,963	7,001
Between 1 and 2 years	2,938	2,314
Between 2 and 3 years	2,385	1,484
Between 3 and 4 years	2,087	1,484
Between 4 and 5 years	1,683	1,488
Over 5 years	2,296	3,767
	19,352	17,538

3. Segment reporting

Accounting policy

Segment information is presented in respect of the Group's operating segments based on the format that the Group reports to its chief operating decision maker.

The Group considers that the chief operating decision maker comprises the Executive Directors of the business.

The Group had one continuing operating segment during the year:

Housing - following the disposal of the Group's domiciliary care operations, all services provided by the Group fall within this segment. This includes housing repairs and maintenance services, a full housing management service and Care services directly related to housing provision.

All of the Group's activities are carried out within the United Kingdom and the Group's principal reporting to its chief operating decision maker is not segmented by geography.

The principal financial measures used by the chief operating decision maker to review the performance of the Group are those of revenue growth and operating margin. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles and costs relating to the long-term incentive plans. Whilst the Strategic Report includes reference to a number of sub-categories of activities, this has been included to assist stakeholders in understanding the Group's business model. The key decision around the allocation of resources is made at the full continuing Group level.

The disclosures below also include information in respect of the discontinued activities of the business, which comprise Care and Planning Solutions activities.

	2020		2019 (restated)
Operating segments	Housing (continuing) £'000	Care and Planning Solutions (discontinued) £'000	Housing (continuing) £'000	Care and Planning Solutions (discontinued) £'000
Revenue	805,817	35,388	881,457	98,400
Operating result, including share of profits of associates, before exceptional costs, amortisation of acquisition intangibles and long-term incentive plans	7,577	4,105	41,524	(1,470)
Operating margin, including share of profits of associates, before exceptional costs amortisation of acquisition intangibles and long-term incentive plans	0.94%	11.60%	4.71%	(1.49%)
Long-term incentive plans	(993)	(36)	(400)	-
Operating result, including share of profits of associates, before exceptional costs and amortisation of acquisition intangibles	6,584	4,069	41,124	(1,470)
Exceptional (costs)/income	(2,279)	-	(2,018)	-
Impairment of assets to fair value less costs to sell	-	-	-	(80,562)
Profit on disposal of discontinued business	-	52,868	-	-
Amortisation of acquisition intangibles	(9,525)	-	(10,122)	-
Operating (loss)/profit including share of profits of associates	(5,220)	56,937	28,984	(82,032)
Net finance (costs)/income	(9,998)	(4)	(8,731)	(191)
Tax credit/(expense)	3,207	(121)	(3,015)	(1,061)
(Loss)/profit for the year	(12,011)	56,812	17,238	(83,284)

All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. No revenue in respect of a single customer comprises more than 8% of the total revenue reported.

4. Operating costs

Operating costs, relating to continuing activities, include the following:

	2020 £'000	2019 (restated) £'000
Share-based payments	993	400
Depreciation	47,688	35,187
Impairment of fixed assets	1,500	-
Amortisation of acquisition intangibles	9,525	10,122
Amortisation of other intangibles	2,211	2,109
Loss on disposal of property, plant and equipment	231	178

Fees payable for audit and non-audit services during the year were as follows:

	2020 £'000	2019 £'000
In respect of continuing activities:
Fees payable to the auditor for the audit of the Group's financial statements	130	71
Other fees payable to the auditor in respect of:
auditing of accounts of subsidiary undertakings pursuant to legislation	485	265
other audit related fees	-	9
Fees payable to the auditor in respect of discontinued activities	70	50
Total auditor's remuneration	685	395

5. Finance income and finance costs

	2020 £'000	2019 (restated) £'000
Interest charge on overdrafts and loans	(2,663)	(3,541)
Interest charge on hedged items (effective hedges)	(354)	(49)
Interest on lease obligations	(7,123)	(5,760)
Other interest	(19)	(122)
Finance costs on bank loans, overdrafts and finance leases	(10,159)	(9,472)
Interest charge on defined benefit obligation	(132)	(108)
Total finance costs	(10,291)	(9,580)
Interest income resulting from short-term bank deposits	6	48
Interest income resulting from defined benefit asset	234	540
Other interest income	53	261
Finance income	293	849
Net finance charge	(9,998)	(8,731)
Gains and losses on hedged items recognised in other comprehensive income
Losses arising in the year	(1,139)	(145)
Reclassification to the Consolidated Statement of Profit or Loss	354	49
Changes in mark-to-market of interest rate swaps (effective hedges)	(785)	(96)

6. Employees

Accounting policy

Government grants are recognised where there is reasonable assurance that the grant will be received, and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed.

During the period, the Group benefited from receipts from the UK Government under the Coronavirus Job Retention Scheme (CJRS). In accordance with IAS 20, amounts received were presented as a deduction to the employment costs upon which CJRS claims had been based.

Staff costs during the year were as follows:

	2020 £'000	2019 £'000
Wages and salaries	161,128	203,576
Social security costs	17,380	20,123
Other pension costs	9,454	9,120
	187,962	232,819

Wages and salaries are presented net of Coronavirus Job Retention Scheme receipts of £15.7m (2019: £nil).

The average number of employees of the Group during the year was:

	2020	2019
Site workers	3,474	3,796
Carers	703	724
Office and management	2,150	2,370
	6,327	6,890

7. Share-based employee remuneration

Accounting policy

All share-based payment arrangements are recognised in the consolidated financial statements in accordance with IFRS 2.

The Group operates equity-settled share-based remuneration plans for its employees. All employee services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value (excluding the effect of non-market-based vesting conditions) of the share options awarded. Their value is determined at the date of grant and is not subsequently remeasured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using the Black Scholes option pricing model and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period. For Save As You Earn (SAYE) plans, employees are required to contribute towards the plan. This non-vesting condition is taken into account in calculating the fair value of the option at the grant date.

All share-based remuneration is ultimately recognised as an expense in the Consolidated Statement of Profit or Loss. For equity-settled share-based payments there is a corresponding credit to the share-based payment reserve.

Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital, with any excess being recorded as share premium.

As at 31 December 2020 the Group maintained four active share-based payment schemes for employee remuneration.

Details of the share options outstanding and movement during the year are as follows:

	2020		2019
	Number '000	Weighted average exercise price p	Number '000	Weighted average exercise price p
Outstanding at 1 January	3,325	217	2,752	265
Granted	4,004	93	1,704	216
Forfeited or lapsed	(1,647)	240	(1,128)	333
Exercised	(390)	7	(3)	26
Outstanding at 31 December	5,292	131	3,325	217

The weighted average share price at the date of exercise for share options exercised during the period was 129p. At 31 December 2020, 0.4m options had vested and were still exercisable at prices between 1p and 429p. These options had a weighted average exercise price of 314p and a weighted average remaining contractual life of 3.0 years.

The fair values of options granted were determined using the Black Scholes option pricing model. Significant inputs into the calculation include the market price at the date of grant, the exercise price and share price volatility. Furthermore, the calculation incorporates an estimate of the future dividend yield and the risk-free interest rate. The share price volatility was determined from the daily log normal distributions of the Company share price over a period commensurate with the expected life as calculated back from the date of grant. The risk-free interest rate utilised the zero-coupon bond yield derived from UK Government bonds as at the date of calculation for a life commensurate with the expected life. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions.

There were 4.0m options granted during the year and 1.6m options that lapsed during the year. The market price at 31 December 2020 was 154p and the range during 2020 was 106p to 320p.

All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.

The Group recognised the following expenses related to share-based payments:

	2020 £'000	2019 £'000
Giving rise to share-based payment reserve:
SAYE	682	93
Share plan	347	307
	1,029	400

The Group is currently running four active schemes, detailed below:

Share Incentive Plan (SIP)

All employees are eligible to participate in the Company's Share Incentive Plan. Under the terms of the plan, all employees can apply for three or five-year options to acquire the Company's shares priced at a discount of up to 20%. Under the terms of the SIP, the Company can choose to offer free shares, partnership shares, matching shares (up to two for one on any partnership shares purchased) and/or dividend shares. To date, no awards have been granted under this plan.

Options are exercisable at a price equal to the average quoted market price of the Company's shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves Mears Group before the options vest.

Share save plan (Save As You Earn (SAYE))

Options are available to all employees. Options are granted for a period of three years. Options are exercisable at a price based on the quoted market price of the Company's shares at the time of invitation, discounted by up to 20%. Options are forfeited if the employee leaves Mears Group before the options vest, which impacts on the number of options expected to vest. If an employee stops saving but continues in employment, this is treated as a cancellation, which results in an acceleration of the share-based payment charge.

Company Share Option Plan (CSOP)

The Company operates a discretionary unapproved share plan and a Company Share Option Plan. Options are exercisable at a price below market value at the date of grant and often at nominal value. The vesting period is three years. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves Mears Group before the options vest. No awards to Executive Directors are proposed under these plans.

Long-Term Incentive Plans (LTIP)

The LTIP provides for awards of free shares (i.e. either conditional shares or nil or nominal cost options) normally on an annual basis which are eligible to vest after three years subject to continued service and the achievement of challenging performance conditions. It is anticipated that the first award under this scheme will be made in 2021. Options are granted under this scheme to key senior management subject to performance conditions as detailed in the Remuneration Report.

The Group has managed the run-off from a number of legacy plans and any remaining options granted under those plans vested prior to 2020. No further issues will be made under these plans and during 2020 the final options under those arrangements were either exercised or expired.

8. Exceptional costs

Accounting policy

Exceptional items are transactions that are outside normal operations and are material to the results of the Group, either by virtue of size or nature. As such, the items set out below require separate disclosure on the face of the Consolidated Statement of Profit or Loss to assist with the understanding of the underlying performance of the Group.

	2020 £'000	2019 £'000
Costs of restructure	779	-
Impairment of fixed assets	1,500	-
Exceptional legal costs	-	2,018
	2,279	2,018

The Group incurred restructuring costs in 2020 of £3.2m (2019: £1.7m) of which £0.8m (2019: £nil) has been categorised within exceptional items. In assessing how to report and disclose the costs of restructure, management has focused on distinguishing between the underlying drivers for the cost incurred. Restructure costs are not considered exceptional where they are recurring in nature or where they form part of a wider plan to deliver operational and financial improvements to the business to the benefit of future periods. Management considers such expenditure to be a normal trading item. However, where an expense arises in respect of a permanent exit from a contract or from a type of activity which management considers will not form part of recurring operational activities in the future, then such expenditure is categorised as an exceptional item.  This was the case for £0.8m of the cost incurred, which related to the redundancy costs incurred in respect of the termination of a number of maintenance-led contracts, together with the acceleration of the exit from the Group's development activities.

In 2018, Mears commenced the construction of a modular homes scheme which has, over the previous two financial years, been disclosed as an asset in the course of construction. The off-site construction is complete; however the impact of COVID-19 pandemic has meant that a significant part of the on-site installation remains outstanding. The original agreement was that upon completion, Mears would lease these units to a Local Authority client for a period of 15 years and the lease payments would fund the construction cost. Given the Board's stated objective to reduce the Group's indebtedness, the Group agreed to a contract variation which has removed Mears entirely from this arrangement, in return for a fixed payment of £6.4m, payable on completion of the installation. As at 31 December 2020, Mears had incurred capital expenditure of £5.8m. Following an assessment of the costs incurred to date, and the costs required to complete the on-site installation, an impairment has been recognised on the asset in the course of construction by £1.5m. Following the reduction in the carrying value, the asset has been recategorised as a contract asset. The impairment charge applied against this asset is considered to be an exceptional item. It is abnormal in size and nature and relates to an activity which is not part of the continuing activities of the Group. 

Exceptional legal costs were incurred during 2019 in respect of a property lease. Given the size of this item and unique circumstance of the dispute, management believes this should be treated as an exceptional item to better reflect the underlying financial performance. No further costs are anticipated in respect of this dispute and no further costs were incurred during 2020.

9. Tax expense

Accounting policy

Current tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the accounting periods to which they relate, based on the taxable profit for the year.

Where an item of income or expense is recognised in the Consolidated Statement of Profit or Loss, any related tax generated is recognised as a component of tax expense in the Consolidated Statement of Profit or Loss. Where an item is recognised directly to equity or presented within the Consolidated Statement of Comprehensive Income, any related tax generated is treated similarly.

Deferred taxation is the tax expected to be repayable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method.

Deferred taxation liabilities are generally recognised on all taxable temporary differences in full with no discounting. Deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability, unless the related transaction is a business combination or affects tax or accounting profit.

Deferred taxation is calculated using the tax rates and laws that are expected to apply in the period when the liability is settled or the asset is realised, provided they are enacted or substantively enacted at the balance sheet date. The carrying value of deferred taxation assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available against which taxable temporary differences can be utilised. Deferred tax is charged or credited to either the Consolidated Statement of Profit or Loss, the Consolidated Statement of Comprehensive Income or equity to the extent that it relates to items charged or credited. Deferred tax relating to items charged or credited directly to equity is also credited or charged to equity.

Tax recognised in the Consolidated Statement of Profit or Loss:

	2020 £'000	2019 (restated) £'000
United Kingdom corporation tax	(785)	3,248
Adjustment in respect of previous periods	674	71
Total current tax (credit)/charge recognised in Consolidated Statement of Profit or Loss	(111)	3,319
Deferred taxation charge:
on defined benefit pension obligations	(167)	(40)
on share-based payments	101	46
on accelerated capital allowances	(26)	228
on amortisation of acquisition intangibles	(1,553)	(1,882)
on short-term temporary timing differences	144	(52)
on corporate tax losses	(324)	1,770
other timing differences	43	53
Adjustment in respect of previous periods	(1,314)	(427)
Total deferred taxation recognised in Consolidated Statement of Profit or Loss	(3,096)	(304)
Total tax (credit)/charge recognised in Consolidated Statement of Profit or Loss on continuing operations	(3,207)	3,015
Total tax charge recognised in Consolidated Statement of Profit or Loss on discontinued operations	121	1,061
Total tax (credit)/charge recognised in Consolidated Statement of Profit or Loss	(3,086)	4,076

The charge for the year can be reconciled to the result for the year as follows:

	2020 £'000	2019 (restated) £'000
(Loss)/profit for the year on continuing operations before tax	(15,218)	20,253
Profit/(loss) for the year on discontinued operations before tax	56,933	(82,223)
Result for the year before tax	41,715	(61,970)
Result for the year multiplied by standard rate of corporation tax in the United Kingdom for the period of 19.0% (2019: 19.0%)	7,926	(11,774)
Effect of:
expenses not deductible for tax purposes	142	496
goodwill impairment	-	15,658
fixed asset impairment	285	-
net proceeds of disposals of subsidiaries not subject to tax	(9,760)	-
income not subject to tax	(248)	(135)
tax impact of employee share schemes	201	120
temporary timing differences not recognised in deferred tax	-	67
tax losses not previously recognised in deferred tax	(35)	-
adjustment in respect of prior periods	(1,597)	(356)
Actual tax expense	(3,086)	4,076

Deferred tax is recognised on both temporary differences between the treatment of items for tax and accounting purposes. Deferred tax on the amortisation of acquisition intangibles is a temporary difference and arises because no tax relief is due on this kind of amortisation.

Tax losses generated in previous years which are expected to be utilised against future profits are recognised as a deferred tax asset and a subsequent charge arises as those losses are utilised. No deferred tax asset is recognised in respect of losses of £29.0m (2019: £28.9m) across several entities in the Group as it is not expected that they will be eligible to be utilised against profits in the future.

Deferred tax is also recognised on short-term temporary timing differences, primarily relating to provisions. These differences are expected to reverse in the following year and arise because tax relief is only available when the costs are incurred.

Capital allowances represent tax relief on the acquisition of property, plant and equipment and are spread over several years at rates set by legislation. These differ from depreciation, which is an estimate of the use of an item of property, plant and equipment over its useful life. Deferred tax is recognised on the difference between the remaining value of such an asset for tax purposes and its carrying value in the accounts.

The UK Budget 2021 announcements on 3 March 2021 included measures to support economic recovery as a result of the ongoing COVID-19 pandemic. These included an increase to the UK's main corporation tax rate to 25%, which is due to be effective from 1 April 2023. These changes were not substantively enacted at the balance sheet date and hence have not been reflected in the measurement of deferred tax balances at the period end. If the Group's deferred tax balances at the period end were remeasured at 25% this would result in a deferred tax credit of £1.0m.

The following tax has been charged to other comprehensive income or equity during the year:

	2020 £'000	2019 £'000
Deferred tax credit recognised in other comprehensive income
on defined benefit pension obligations	(1,727)	(2,145)
on cash flow hedges	(149)	(18)
Total deferred tax credit recognised in other comprehensive income	(1,876)	(2,163)
Deferred tax recognised directly in equity
Deferred tax (credit)/charge:
on share-based payments	(10)	191
Total deferred tax recognised in equity	(10)	191
Total tax
Total current tax	10	4,275
Total deferred tax	(4,982)	(2,171)

10. Discontinued activities

During the year, the Group completed the disposal of its Domiciliary Care business with the disposal of the England and Wales element in January and the Scotland business in September. These businesses had been classified as held for sale in 2019 as their disposal was anticipated during 2020.

In addition, the Group disposed of its Planning Solutions business, with completion in December 2020. This comprised of two trading subsidiaries: Terraquest Solutions Limited and Portalplanquest Limited.

The results of all disposed businesses prior to their disposal are presented within discontinued operations in the Consolidated Statement of Profit or Loss.

The results of the operations which have been included in the consolidated financial statements are as follows:

	2020 £'000	2019 (restated) £'000
Revenue and profits
Sales revenue	35,388	98,400
Cost of sales	(20,787)	(70,440)
Administrative expenses	(11,738)	(29,430)
Impairment of intangibles	-	(80,562)
Profit on disposal	54,074	-
Finance costs	(4)	(191)
Profit/(loss) for the year before tax on discontinued operations	56,933	(82,223)
Tax on discontinued operations	(121)	(1,061)
Profit/(loss) for the year after tax on discontinued operations	56,812	(83,284)

The results of all disposed businesses prior to their disposal are presented within discontinued cash flows in the Consolidated Cash Flow Statement.

The results of the operations which have been included in the Consolidated Cash Flow Statement are as follows:

	2020 £'000	2019 (restated) £'000
Operating activities
Result for the year before tax	56,933	(82,223)
Net finance costs	4	191
Share based payments	36	-
Depreciation and amortisation	1,004	3,721
Impairment of goodwill	-	80,562
Net loss/(profit) on disposal of investments	(58,993)	-
Change in operating receivables	586	6,198
Change in operating payables	2,962	(3,930)
Net cash inflow from operating activities before taxation	2,532	4,519
Taxes paid	(5)	385
Net cash inflow from operating activities	2,527	4,904
Investing activities
Additions to property, plant and equipment	(305)	(977)
Additions to other intangible assets	(3,141)	(1,332)
Proceeds from disposal of subsidiaries	63,676	-
Net cash disposed of with subsidiaries	(5,618)	-
Net cash inflow/(outflow) from investing activities	54,612	(2,309)
Financing activities
Discharge of lease liabilities	(485)	(421)
Interest paid	(4)	(191)
Net cash outflow from financing activities	(489)	(612)
Net increase in cash and cash equivalents	56,650	1,983

	2020 £'000	2019 £'000
Statement of Financial Position
Assets of disposal group	-	11,185
Liabilities related to assets classified as held for sale	-	(5,892)
Net assets of disposal group	-	5,293

The major classes of assets and liabilities classified as held for sale at 31 December 2019 are as follows:

	£'000
Property, plant and equipment	2,824
Pension guarantee assets	57
Deferred tax asset	280
Trade and other receivables	7,872
Cash and cash equivalents	152
Trade and other payables	(3,756)
Pension and other employee benefits	(57)
Lease liabilities	(2,064)
Current tax liabilities	(15)
Net assets held for sale	5,293

Net assets held for sale are held at the lower of their carrying amount and fair value less costs to sell. Management assessed the fair value less costs to sell of the disposal group as at 31 December 2019. There were no observable inputs to the valuation of the disposal group, so the assessment was based on level 3 inputs.

The Group had commenced a sales process during 2019 and a number of offers had been received from potential buyers at that time. At 31 December 2019, the expected sales valuation was estimated to be in the region of £6.0m, valued on a debt-free basis, with a normal level of working capital, and an assumption that the England & Wales and Scotland Domiciliary Care businesses would be sold to two separate buyers. Legal and advisory costs were estimated to be £0.7m, resulting in a net recoverable amount of £5.3m which supported the carrying value of the net assets held, as detailed above.

11. Dividends

Accounting policy

Dividend distributions payable to equity shareholders are included in 'Current financial liabilities' when the dividends are approved in a general meeting prior to the balance sheet date.

The following dividends were paid on ordinary shares in the year:

	2020 £'000	2019 £'000
Final 2019 dividend of 0p (2019: final 2018 dividend of 8.55p) per share	-	9,778
Interim 2020 dividend of 0p (2019: interim 2019 dividend of 3.65p) per share	-	4,033
	-	13,811

Given the impact of the COVID-19 pandemic, and the loss for the year from continuing operations, the Board does not intend to declare a dividend for 2020. The Board will seek to return to the dividend list once it is prudent to do so.

12. Earnings per share

	Basic (continuing)		Basic (discontinued)		Basic (continuing and discontinued)
	2020 p	2019 (restated) p	2020 p	2019 (restated) p	2020 p	2019 (restated) p
Earnings per share	(10.66)	15.72	50.87	(75.80)	40.21	(60.09)
Effect of amortisation of acquisition intangibles	8.62	9.16	-	-	8.62	9.16
Effect of full tax adjustment	(1.92)	(2.50)	(9.68)	1.23	(11.60)	(1.26)
Effect of exceptional costs	1.67	1.48	(38.73)	59.06	(37.06)	60.54
Normalised earnings per share	(2.29)	23.86	2.46	(15.51)	0.17	8.35

	Diluted (continuing)		Diluted (discontinued)		Diluted (continuing and discontinued)
	2020 p	2019 (restated) p	2020 p	2019 (restated) p	2020 p	2019 (restated) p
Earnings per share	(10.66)	15.64	50.87	(75.41)	40.21	(59.77)
Effect of amortisation of acquisition intangibles	8.62	9.11	-	-	8.62	9.11
Effect of full tax adjustment	(1.92)	(2.48)	(9.68)	1.22	(11.60)	(1.26)
Effect of exceptional costs	1.67	1.47	(38.73)	58.75	(37.06)	60.22
Normalised earnings per share	(2.29)	23.74	2.46	(15.44)	0.17	8.30

A normalised earnings per share EPS is disclosed in order to show performance undistorted by the amortisation of acquisition intangibles and exceptional costs. The Group defines normalised earnings as excluding the amortisation of acquisition intangibles and exceptional costs and adjusted to reflect a full tax charge. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:

	Normalised (continuing)		Normalised (discontinued)		Normalised (continuing and discontinued)
	2020 £'000	2019 (restated) £'000	2020 £'000	2019 (restated) £'000	2020 £'000	2019 (restated) £'000
(Loss)/profit attributable to shareholders:	(11,781)	17,367	56,242	(83,755)	44,461	(66,388)
Amortisation of acquisition intangibles	9,525	10,122	-	-	9,525	10,122
Full tax adjustment	(2,125)	(2,757)	(10,696)	1,360	(12,821)	(1,397)
Exceptional costs	1,846	1,634	(42,823)	65,255	(40,977)	66,889
Normalised earnings	(2,535)	26,366	2,723	(17,140)	188	9,226

The calculation of EPS is based on a weighted average of ordinary shares in issue during the year. The diluted EPS is based on a weighted average of ordinary shares calculated in accordance with IAS 33 'Earnings per Share', which assumes that all dilutive options will be exercised. IAS 33 defines dilutive options as those whose exercise would decrease earnings per share or increase loss per share from continuing operations. The additional normalised basic and diluted EPS use the same weighted average number of shares as the basic and diluted EPS.

	2020 Million	2019 Million
Weighted average number of shares in issue:	110.56	110.49
Dilutive effect of share options	-	0.58
Weighted average number of shares for calculating diluted earnings per share	110.56	111.07

As the Group made a loss from continuing operations during 2020, there were no dilutive options during this period. The number of antidilutive potential shares not included in the above table for 2020 was 0.39 million (2019: none).

13. Goodwill

Accounting policy

Goodwill arises on the acquisition of subsidiaries and represents any excess of the cost of the acquired entity over the Group's interest in the fair value of the entity's identifiable assets and liabilities acquired and is capitalised as a separate item. Goodwill is recognised as an intangible asset.

Under the business combinations exemption of IFRS 1, goodwill previously written off directly to reserves under UK GAAP is not recycled to the Consolidated Statement of Profit or Loss on calculating a gain or loss on disposal.

Impairment

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows: cash-generating units (CGUs). As a result, some assets are tested individually for impairment and some are tested at CGU level. Goodwill is allocated to those CGUs that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors the related cash flows.

Goodwill or CGUs that include goodwill and those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or CGUs are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

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

For the partial disposal of a CGU, goodwill is allocated proportionately to the branches acquired based on operating profit.

Key sources of estimation uncertainty

The determination of whether goodwill is impaired has been a key source of estimation uncertainty in the past, given the size of the carrying value, combined with the challenging environment of domiciliary care. Following the disposal of this business, the remaining goodwill is attached to the Group's Housing business, which has a higher level of headroom between the carrying value and the value in use. Whilst management will continue to carry out regular assessments of the carrying value, this area is no longer considered a key source of estimation uncertainty.

	Goodwill arising on consolidation £'000	Purchased goodwill £'000	Total £'000
Gross carrying amount
At 1 January 2019	195,516	8,250	203,766
Assets classified as held for sale	(80,562)	-	(80,562)
At 1 January 2020	114,954	8,250	123,204
Reclassification	4,208	(4,208)	-
Disposal of subsidiary	(4,331)	-	(4,331)
At 31 December 2020	114,831	4,042	118,873
Accumulated impairment losses
At 1 January 2019, at 1 January 2020 and at 31 December 2020	-	-	-
Carrying amount
At 31 December 2020	114,831	4,042	118,873
At 31 December 2019	114,954	8,250	123,204

Goodwill on consolidation arises on the excess of cost of acquisition over the fair value of the net assets acquired on purchase of a company.

Purchased goodwill arises on the excess of cost of acquisition over the fair value of the net assets acquired on the purchase of the trade and assets of a business by the Group.

Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there are any indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of CGUs according to the level at which management monitors that goodwill. Goodwill is carried at cost less accumulated impairment losses.

The sale of the Terraquest Group during the year resulted in the disposal of £4.3m of goodwill arising on consolidation.

The carrying value of goodwill is allocated to the following CGUs:

	Goodwill arising on consolidation £'000	Purchased goodwill £'000	Total £'000
Housing	95,742	4,042	99,784
Housing with Care	19,089	-	19,089
	114,831	4,042	118,873

An asset is impaired if its carrying value exceeds the CGUs recoverable amount, which is based on value in use. At 31 December 2020 impairment reviews were performed by comparing the carrying value with the value in use for the CGUs to which goodwill has been allocated.

The Housing CGU's value in use is calculated from the Board-approved one-year budgeted cash flows and extrapolated cash flows for the next four years discounted at a post-tax discount rate of 8.0% over a five-year period with a terminal value. The impairment reviews incorporated a terminal growth assumption of 1.0%, which is conservative when compared with the UK long-term growth rate.

The Housing with Care CGU's value in use is calculated from a detailed business plan deriving cash flows over a five-year review period, discounted at a post-tax discount rate of 8.0% over a five-year period with a terminal value. The impairment review incorporated a terminal growth assumption of 1.7%, which is in line with the UK long-term growth rate of 1.7% and is supported by the underlying demographics underpinning strong organic growth in adult social care.

The estimated growth rates are based on knowledge of the individual CGU's sector and market and represent management's base level expectations for future growth. Changes to revenue and direct costs are based on past experience and expectation of future changes within the markets of the CGUs. All CGUs have the same access to the Group's treasury function and borrowing arrangements to finance their operations.

Management considers that reasonably possible changes in these assumptions would not cause a CGU's carrying amount to exceed its recoverable amount.

The rates used were as follows:

	Post-tax discount rate	Pre-tax discount rate	Volume growth rate (years 1-5)	Terminal growth rate
Housing	8.00%	9.20%	1.00%	1.00%
Housing with Care	8.00%	9.45%	2.00%	1.70%

14. Other intangible assets

Accounting policy

In accordance with IFRS 3 (Revised) 'Business Combinations', an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the Group are not reliably measurable. Where the individual fair values of the complementary assets are reliably measurable, the Group recognises them as a single asset provided the individual assets have similar useful lives. Intangible assets are amortised over the useful economic life of those assets.

Development costs incurred on software development are capitalised when all the following conditions are satisfied:

-  Completion of the software module is technically feasible so that it will be available for use.

-  The Group intends to complete the development of the module and use it.

-  The software will be used in generating probable future economic benefits.

-  There are adequate technical, financial and other resources to complete the development and to use the software.

-  The expenditure attributable to the software during its development can be measured reliably.

Costs incurred making intellectual property available for use (including any associated borrowing costs) are capitalised when all of the following conditions are satisfied:

-  Completion of the data set is technically feasible so that it will be available for use.

-  The Group intends to complete the preparation of the data and use it.

-  The data will be used in generating probable future economic benefits.

-  There are adequate technical, financial and other resources to complete the data set and to use it.

-  The expenditure attributable to the intellectual property during its development can be measured reliably.

Development costs not meeting the criteria for capitalisation are expensed as incurred. Careful judgement by management is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each balance sheet date. In addition, all internal activities related to the research and development of new software are continually monitored by management.

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Directly attributable costs include employee costs incurred on software development.

Amortisation commences upon completion of the asset and is shown within other administrative expenses. Until the asset is available for use on completion of the project, the assets are subject to impairment testing only. Development expenditure is amortised over the period expected to benefit.

The identifiable intangible assets and associated periods of amortisation are as follows:

Order book- over the period of the order book, typically three years

Client relationships  - over the period expected to benefit, typically five years

Supplier relationships- over the period expected to benefit, typically two years

Development expenditure- over four to five years, straight line

Intellectual property  - over the period of usefulness of the intellectual property, typically five years

Software  - 25% p.a., reducing balance

The useful economic lives of intangible assets are reviewed annually and amended if appropriate.

			Acquisition intangibles			Other intangibles
	Client relationships £'000	Order book  £'000		Supplier relationships £'000	Total acquisition intangibles  £'000	Development expenditure £'000	Intellectual property £'000	Total other intangibles £'000	Total intangibles  £'000
Gross carrying amount
At 1 January 2019	83,438	40,626		-	124,064	19,976	224	20,200	144,264
Additions	-	-		1,300	1,300	3,022	-	3,022	4,322
Reclassification	(460)	(412)		872	-	-	-	-	-
Disposals	-	-		-	-	-	(224)	(224)	(224)
Assets classified as held for sale	(16,991)	(22,444)		-	(39,435)	-	-	-	(39,435)
At 1 January 2020	65,987	17,770		2,172	85,929	22,998	-	22,998	108,927
Additions	-	-		-	-	4,858	-	4,858	4,858
Disposals of subsidiaries	-	-		-	-	(7,896)	-	(7,896)	(7,896)
At 31 December 2020	65,987	17,770		2,172	85,929	19,960	-	19,960	105,889
Accumulated amortisation
At 1 January 2019	66,991	28,422		-	95,413	11,615	224	11,839	107,252
Amortisation charge for period	1,891	8,014		217	10,122	2,570	-	2,570	12,692
Reclassification	(460)	(412)		872	-	-	-	-	-
Disposals	-	-		-	-	-	(224)	(224)	(224)
Assets classified as held for sale	(16,991)	(22,444)		-	(39,435)	-	-	-	(39,435)
At 1 January 2020	51,431	13,580		1,089	66,100	14,185	-	14,185	80,285
Amortisation charge for period	8,351	525		650	9,526	2,625	-	2,625	12,151
Disposal of subsidiaries	-	-		-	-	(1,752)	-	(1,752)	(1,752)
At 31 December 2020	59,782	14,105		1,739	75,626	15,058	-	15,058	90,684
Carrying amount
At 31 December 2020	6,205	3,665		433	10,303	4,902	-	4,902	15,205
At 31 December 2019	14,556	4,190		1,083	19,829	8,813	-	8,813	28,642

Development expenditure is an internally developed intangible asset and relates largely to the development of the Group's Housing job management system. Development expenditure is amortised over its useful economic life of 5.0 years. The weighted average remaining economic life of the asset is 3.1 years (2019: 3.4 years).

Amortisation of development expenditure is included within other administrative expenses. Amortisation of acquisition intangibles is presented separately.

15. Property, plant and equipment

Accounting policy

Items of property, plant and equipment are stated at historical cost, net of depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow into the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Consolidated Statement of Profit or Loss during the financial period in which they are incurred.

Freehold land is not depreciated. Depreciation on other assets is calculated to write down the cost less estimated residual value over their estimated useful economic lives. The rates generally applicable are:

Freehold buildings   - 2% p.a., straight line

Leasehold improvements- over the period of the lease, straight line

Plant and machinery - 25% p.a., reducing balance

Equipment- 25% p.a., reducing balance

Fixtures and fittings   - 50% p.a., straight line

Motor vehicles- 25% p.a., reducing balance

During the year management reassessed the depreciation methodology for fixtures and fittings from 25% reducing balance to 50% straight line. This reassessment was made as a result of a change in the types of assets included in this category. Typically, these are now assets for residential accommodation which are now considered to have a shorter useful economic life.

Residual values are reviewed annually and updated if appropriate. The carrying value is reviewed for impairment in the period if events or changes in circumstances indicate the carrying value may not be recoverable. An asset's carrying value is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within administrative expenses in the Consolidated Statement of Profit or Loss.

Identifying whether there are indicators of impairment in respect of property, plant and equipment involves some judgement and a good understanding of the drivers of value behind the asset. At each reporting period an assessment is performed in order to determine whether there are any such indicators, which involves considering the performance at both a contract and business level, and any significant changes to the markets in which we operate. This is not considered to be a critical judgement or an area of significant uncertainty.

	Freehold property £'000	Leasehold improvements £'000	Plant and machinery £'000	Fixtures, fittings and equipment £'000	Motor vehicles £'000	Assets under construction £'000	Total £'000
Gross carrying amount
At 1 January 2019	932	18,424	3,105	50,549	1,001	3,593	77,604
Additions	-	5,050	253	2,962	16	1,133	9,414
Disposals	-	(383)	(425)	(5,091)	(9)	-	(5,908)
Transferred to disposal group	(110)	(594)	-	(980)	-	-	(1,684)
At 1 January 2020	822	22,497	2,933	47,440	1,008	4,726	79,426
Additions	-	2,969	28	846	-	1,113	4,956
Disposals	(6)	(6,080)	(151)	(10,755)	(24)	-	(17,016)
Reclassification	-	(104)	-	104	-	-	-
Disposal of subsidiaries	-	(241)	(761)	(2,005)	-	-	(3,007)
Transferred from disposal group	110	129	-	17	-	-	256
At 31 December 2020	926	19,170	2,049	35,647	984	5,839	64,615
Depreciation
At 1 January 2019	27	11,235	2,264	38,134	988	-	52,648
Provided in the year	19	2,077	222	4,683	3	-	7,004
Eliminated on disposals	-	(353)	(373)	(4,959)	(9)	-	(5,694)
Transferred to disposal group	-	(135)	-	(723)	-	-	(858)
At 1 January 2020	46	12,824	2,113	37,135	982	-	53,100
Provided in the year	28	2,226	214	3,205	7	-	5,680
Eliminated on disposals	(6)	(6,080)	(135)	(10,496)	(23)	-	(16,740)
Impairment	-	-	-	-	-	1,500	1,500
Reclassification	-	2	-	(2)	-	-	-
Disposal of subsidiaries	-	(102)	(641)	(1,808)	-	-	(2,551)
Transferred from disposal group	-	18	-	8	-	-	26
At 31 December 2020	68	8,888	1,551	28,042	966	1,500	41,015
Carrying amount
At 31 December 2020	858	10,282	498	7,605	18	4,339	23,600
At 31 December 2019	776	9,673	820	10,305	26	4,726	26,326

16. Right of use asset

Accounting policy

Where an asset is subject to a lease, the Group recognises a right of use asset and a lease liability on the balance sheet. The right of use asset is measured at cost, which matches the initial measurement of the lease liability and any costs expected at the end of the lease, and then depreciated on a straight-line basis over the lease term.

The lease liability is measured at the present value of the future lease payments discounted using the Group's incremental borrowing rate. Lease payments include fixed payments, variable payments based on an index and payments arising from options reasonably certain to be exercised.

The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right of use asset and a lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

On the statement of financial position, right of use assets and lease liabilities are presented separately.

Critical judgements in applying the Group's accounting policies

The Group holds more than 15,000 leases across its portfolio of residential properties, offices and vehicles. Whilst the Group endeavours to standardise the form of leases, operational demands dictate that many leases have specific wording to address particular operational needs and also to manage the associated operational and financial risks. As such, each lease requires individual assessment and the Group is required to make key judgements which include:

 - the identification of a lease;

 - assessing the right to direct the use of the underlying asset;

 - determining the lease term; and

 - the assessment as to the level of future lease payments, including fixed and variable payments.

The most typical challenges encountered and which form the key judgements are:

- where the lease contains a one-way no-fault break in Mears' favour, the Group measures the obligation based on the Group's best estimate of its future intentions;

- where a unilateral break is in place, assessing whether the lease can be terminated with no more than an insignificant penalty;

- where the lessor has a right of substitution meaning that the lessor can swap one property for another without Mears' approval;

- where Mears does not in practice have the right to control the use of the asset and the key decision-making rights are retained by the supplier;

 - where a wider agreement for a supply of services includes a lease component which meets the definition of a lease under IFRS 16; and

 - the assessment of the fixed lease payments where the lease obligation to the landlord is based on a pass-through arrangement in which Mears only makes lease payments to the owner to the extent that the property is occupied and to the extent that rents are received from the tenant.

Key sources of estimation uncertainty

Estimation is required in calculating the appropriate discount rate to use when recognising the present value of future lease payments as a lease obligation. The Group undertook a synthetic credit rating exercise which determined a credit rating of BB+ for Mears Group PLC. Given the cross-guarantees in place across the Group, it was considered appropriate to use a single credit rating across all Group entities. Using the Thomson Reuters Eikon database, a yield curve was built that can be used to determine appropriate incremental borrowing rates for the varying lease tenors. In order to build an appropriate yield curve, we have calculated a proxy GBP BB+ yield curve for a range of maturities by interpolating yields at the mid-point between BBB and BB rated GBP corporate bond yields.

The sensitivity of the lease liability to the assumptions used in these estimations is indicated in note 21.

Investment property

Included within right of use assets are certain properties classified as investment properties in accordance with IAS 40. These properties are held primarily in order to earn rentals. The Group has chosen to apply the cost model to all investment property and therefore measurement is in line with IFRS 16 as described in the Leased assets accounting policy.

Properties that generate rentals but are primarily held for the provision of social benefits are not considered to meet the definition of investment property.

		Assets that are sub-leased to customers		Assets that are used directly within the business
		Investment property £'000	Residential property £'000	Residential property £'000	Offices £'000	Motor vehicles £'000	Total £'000
Gross carrying amount
At 1 January 2019		-	-	-	-	-	-
Recognised on transition to IFRS 16 (restated)		27,052	104,673	-	11,088	21,179	163,992
Additions (restated)*		-	10,983	42,455	3,454	11,124	68,016
Disposals (restated)		-	(64)	(103)	-	-	(167)
Transferred to disposal group		-	-	-	(2,581)	(194)	(2,775)
At 1 January 2020		27,052	115,592	42,352	11,961	32,109	229,066
Additions*		476	2,999	33,462	1,479	8,187	46,603
Disposals		-	(6,552)	(507)	(1,105)	(2,390)	(10,554)
Disposal of subsidiaries		-	-	-	(1,259)	-	(1,259)
At 31 December 2020		27,528	112,039	75,307	11,076	37,906	263,856
Depreciation
At 1 January 2019		-	-	-	-	-	-
Provided in the year (restated)		1,509	11,878	3,463	3,503	10,652	31,005
Eliminated on disposals (restated)		-	(4)	(3)	-	-	(7)
Impairment		-	-	-	463	-	463
Transferred to disposal group		-	-	-	(684)	(95)	(779)
At 1 January 2020		1,509	11,874	3,460	3,282	10,557	30,682
Provided in the year		1,521	10,832	16,292	2,753	11,112	42,510
Eliminated on disposals		-	(5,555)	(140)	(1,063)	(2,215)	(8,973)
Disposal of subsidiaries		-	-	-	(404)	-	(404)
At 31 December 2020		3,030	17,151	19,612	4,568	19,454	63,815
Carrying amount
At 31 December 2020		24,498	94,888	55,695	6,508	18,452	200,041
At 31 December 2019 (restated)		25,543	103,718	38,892	8,679	21,552	198,384

* Additions includes both new underlying assets and remeasurement of the right of use asset for changes in the lease terms.

Investment property included above represents properties held by the Group primarily to earn rentals, rather than for use in the Group's other activities. The amount included in lease income in note 2 in respect of these properties is £2.9m (2019: £3.0m). Direct operating expenses arising from investment property that generated rental income during the period was £3.4m (2019: £3.2m). The carrying value of the right of use asset in respect of investment property is considered to be approximately equal to its fair value.

17. Investments

Accounting policy

Investments include those over which the Group has significant influence but which it does not control. These are categorised as associates. It is presumed that the group has significant influence where it has between 20% and 50% of the voting rights in the investee unless indicated otherwise. The Group also holds investments in joint ventures where the Group and other parties have joint control over their activities.

The basis by which associates and joint ventures are consolidated in the Group financial statements is through the equity method, as outlined in the basis of consolidation.

In addition to associates and joint ventures, the Group holds investments in entities over which it does not exert significant influence. These are accounted for at fair value through profit or loss.

	Associates £'000	Joint ventures £'000	Other investments £'000	Total £'000
At 1 January 2019	-	-	-	-
Share of profit	895	-	-	895
Distributions received	(359)	-	-	(359)
At 1 January 2020	536	-	-	536
Share of profit	1,056	-	-	1,056
Distributions received	(691)	-	-	(691)
Acquisition	-	-	65	65
At 31 December 2020	901	-	65	966

On 9 December 2020, as part of the disposal of the Group's planning solutions business, the Group acquired 6.16% of the ordinary share capital of Mason Topco Limited, the new owner of the disposed business. This investment is presented in Other investments and is mandatorily held at fair value through profit or loss. There were no changes in the fair value of the investment following initial acquisition.

The Group has an interest in one active joint venture, as described below. This entity has retained losses and therefore the carrying value of the investment recognised at 31 December 2020 was £nil (2019: £nil).

Joint ventures and associates

Set out below are the investments in joint ventures and associates as at 31 December 2020, which in management's opinion are significant to the Group:

				Carrying value
	Nature of relationship	Proportion held	Country of registration	2020 £'000	2019 £'000
Pyramid Plus South LLP	Associate	30%	England and Wales	901	536
YourMK LLP	Joint venture	50%	England and Wales	-	-

Pyramid Plus South LLP is a repairs and maintenance service provider that is central to one of the Group's contracts. YourMK LLP is a joint venture with Milton Keynes Council and manages the delivery of regeneration and maintenance.

During the year, the Group received distributions of £0.7m (2019: £0.9m) from Pyramid Plus South LLP. Summarised financial information for Pyramid Plus South LLP for the year is shown below:

	2020 £'000	2019 (restated) £'000
Revenue and profits
Revenue	18,413	15,047
Expenses	(14,895)	(12,064)
Profit for the year	3,518	2,983
Other comprehensive income	-	-
Total comprehensive income	3,518	2,983
Share of profit at 30%	1,056	895
Net assets
Non-current assets	-	-
Current assets	6,275	3,485
Current liabilities	(3,257)	(1,681)
Non-current liabilities	(4)	(4)
Total assets less total liabilities	3,014	1,800

Cash and cash equivalents of £0.9m (2019: £0.7m) were included in current assets above.

The Group's unrecognised share of losses in YourMK LLP for 2020 is £0.3m (2019 share of profit: £0.1m). The Group's unrecognised share of the cumulative losses in YourMK LLP as at 31 December 2020 is £0.3m (2019: £nil).

The subsidiary undertakings within the Group at 31 December 2020 are shown below:

	Proportion held	Country of registration	Nature of business
3c Asset Management Limited	100%	England and Wales	Dormant
Careforce Group Plc	100%	England and Wales	Dormant
Coulter Estates Limited	100%	Scotland	Dormant
Evolve Housing Limited	50%	England and Wales	Dormant
Helcim Group Limited	100%	England and Wales	Dormant
Helcim Homes Limited	100%	England and Wales	Dormant
ILS Group Limited	100%	Scotland	Dormant
ILS Trustees Limited	100%	Scotland	Dormant
Jackson Lloyd Limited	100%	England and Wales	Dormant
Laidlaw Scott Limited	100%	Scotland	Dormant
Let to Birmingham Limited	100%	England and Wales	Housing management services
Manchester Working Limited	80%	England and Wales	Maintenance services
Mears Direct Limited	80%	England and Wales	Dormant
Mears Energy Limited	100%	England and Wales	Dormant
Mears Estates Limited	100%	England and Wales	Grounds maintenance
Mears Extra Care Limited	100%	England and Wales	Provision of care
Mears Facility Management Limited	100%	England and Wales	Dormant
Mears Home Improvement Limited	100%	England and Wales	Maintenance services
Mears Homecare Limited	100%	England and Wales	Provision of care
Mears Homes Limited	100%	England and Wales	Dormant
Mears Housing Management Limited	100%	England and Wales	Housing management services
Mears Housing Management (Holdings) Limited	100%	England and Wales	Intermediate holding company
Mears Housing Portfolio (Holdings) Limited	100%	England and Wales	Intermediate holding company
Mears Housing Portfolio (London) Limited	100%	England and Wales	Dormant
Mears Housing Portfolio 1 Limited	100%	England and Wales	Dormant
Mears Housing Portfolio 3 Limited	100%	England and Wales	Dormant
Mears Housing Portfolio 4 Limited	100%	England and Wales	Property acquisition
Mears Insurance Company Limited	99.99%	Guernsey	Insurance services
Mears Learning Limited	90%	England and Wales	Dormant
Mears Limited	100%	England and Wales	Maintenance services
Mears Modular Homes Limited	100%	England and Wales	Dormant
Mears New Homes Limited	100%	England and Wales	House building
Mears Scotland (Housing) Limited	100%	Scotland	Dormant
Mears Scotland (Services) Limited	66.67%	Scotland	Dormant
Mears Scotland LLP	66.67%	Scotland	Maintenance services
Mears Social Housing Limited	100%	England and Wales	Dormant
Mears Supported Living Limited	100%	Scotland	Provision of care
Mears Wales Limited	100%	England and Wales	Dormant
MHM Property Services Limited	100%	England and Wales	Maintenance services
Morrison Facilities Services Limited	100%	Scotland	Maintenance services
MPM Housing Limited	100%	England and Wales	Dormant
MPS Housing Limited	100%	England and Wales	Maintenance services
O&T Developments Limited	100%	England and Wales	Housing management services
Omega Housing Limited	100%	England and Wales	Housing registered provider
Plexus UK (First Project) Limited	100%	England and Wales	Housing registered provider
PS Business Services Limited	100%	Scotland	Dormant
Scion Group Limited	100%	England and Wales	Dormant
Scion Property Services Limited	100%	England and Wales	Dormant
Scion Technical Services Limited	100%	England and Wales	Maintenance services
Supporta Limited	100%	England and Wales	Dormant
Tando Homes Limited	100%	England and Wales	Housing management services
Tando Property Services Limited	100%	England and Wales	Housing management services

All subsidiary undertakings with the exception of Evolve Housing Limited, Manchester Working Limited and MPM Housing Limited prepare accounts to 31 December. Evolve Housing Limited prepares accounts to 30 June in line with its historical accounting reference date. Manchester Working Limited and MPM Housing Limited prepare accounts to 30 September.

The Group includes the following three trading subsidiaries with non-controlling interests: Manchester Working Limited, Mears Learning Limited and Mears Scotland LLP. The table below sets out selected financial information in respect of those subsidiaries:

	2020 £'000	2019 £'000
Revenue and profits
Revenue	46,586	63,987
Expenses and taxation	(47,685)	(63,816)
Profit for the year	(1,099)	171
Other comprehensive expense	-	-
Total comprehensive income	(1,099)	171
(Loss)/profit for the year allocated to non-controlling interests	(68)	255
Total comprehensive expense allocated to non-controlling interests	-	-
Net assets
Non-current assets	305	380
Current assets	17,538	19,978
Current liabilities	(12,899)	(14,120)
Non-current liabilities	(1,421)	(1,773)
Total assets less total liabilities	3,523	4,465
Equity shareholders' funds	2,807	3,681
Non-controlling interests	716	784
Total equity	3,523	4,465

The following UK subsidiaries will take advantage of the audit exemption set out within Section 479A of the Companies Act 2006 for the year ended 31 December 2020, except MPM Housing Limited, which will take the same exemption for the period ended 30 September 2021:

	Registration number
Careforce Group PLC	05201238
Let to Birmingham Limited	08757503
Mears Estates Limited	03720903
Mears Home Improvement Limited	03716517
Mears Housing Management (Holdings) Limited	04726480
Mears Housing Portfolio (Holdings) Limited	10908305
Mears Housing Portfolio 4 Limited	10952906
MHM Property Services Limited	07448134
MPM Housing Limited	03528320
O&T Developments Limited	05692853
Scion Group Limited	03905442
Scion Technical Services Limited	03671450
Tando Homes Limited	09260353
Tando Property Services Limited	07405761

18. Inventories

Accounting policy

Inventories are stated at the lower of cost and net realisable value. Cost is the actual purchase price of materials.

Work in progress is included in inventories after deducting any foreseeable losses and payments on account not matched with revenue. Work in progress represents costs incurred on speculative construction projects where a customer has not yet been identified. Work in progress is stated at the lower of cost and net realisable value. Cost comprises materials, direct labour and any subcontracted work that has been incurred in bringing the inventories and work in progress to their present location and condition.

	2020 £'000	2019 £'000
Materials and consumables	3,558	7,068
Work in progress	27,700	28,977
	31,258	36,045

The Group consumed inventories totalling £163.3m during the year (2019: £168.9m). No items are being carried at fair value less costs to sell (2019: £nil).

19. Trade and other receivables

Accounting policy

Trade receivables represent amounts due from customers in respect of invoices raised. They are initially measured at their transaction price and subsequently remeasured at amortised cost.

Retention assets represent amounts held by customers for a period following payment of invoices, to cover any potential defects in the work. Retention assets are included in trade receivables and are therefore initially measured at their transaction price.

Contract assets represent revenue recognised in excess of the total of payments on account and amounts invoiced.

Critical judgements and key sources of estimation uncertainty

The estimation techniques used for revenue in respect of contracting require judgements to be made about the stage of completion of certain contracts and the recovery of contract assets. Each contract is treated on its merits and subject to a regular review of the revenue and costs to complete that contract. Contract assets represent revenue recognised in excess of the total of payments on account and amounts invoiced.

However, due to the estimation uncertainty across numerous contracts each with different characteristics, it is not practical to provide a quantitative analysis of the aggregated judgements that are applied, and management does not believe that disclosing a potential range of outcomes on a consolidated basis would provide meaningful information to a reader of the accounts.

There is a small sub-set of the contract asset balance where the contract asset being carried is the subject of a crystallised contractual dispute and litigation. Additional analysis is provided within the note to provide stakeholders with an understanding as to the quantum and the range of possible outcomes. Management has engaged third party legal advisers and other quantum experts in assessing each judgement.

	2020 £'000	2019 (restated) £'000
Current assets:
Trade receivables	39,831	36,749
Contract assets	88,594	110,263
Contract fulfilment costs	1,408	1,253
Prepayments and accrued income	6,517	6,111
Deferred consideration	500	4,618
Other debtors	3,034	5,097
Total trade and other receivables	139,884	164,091

Included in trade receivables is £4.7m (2019: £3.7m) in respect of retention payments due in more than one year.

Trade receivables are normally due within 30 to 60 days and do not bear any effective interest rate. All trade receivables and accrued income are subject to credit risk exposure.

The maximum exposure to credit risk in relation to trade receivables and accrued income at the balance sheet date is the fair value of trade receivables and accrued income. The Group's customers are primarily a mix of Local and Central Government and Housing Associations where credit risk is minimal. The Group's customer base is large and unrelated and, accordingly, the Group does not have a significant concentration of credit risk with any one counterparty.

The amounts presented in the balance sheet in relation to the Group's trade receivables and accrued income balances are presented net of loss allowances. The Group measures loss allowances at an amount equal to lifetime expected credit losses using both quantitative and qualitative information and analysis based on the Group's historical experience, and forward-looking information.

The ageing analysis of trade receivables is as follows:

	2020				2019
	Gross amount due £'000	Expected credit loss £'000	Carrying value £'000	Gross amount due £'000		Expected credit loss £'000	Carrying value £'000
Not past due	33,279	(722)	32,557	31,548		(1,184)	30,364
Less than three months past due	5,496	(479)	5,017	4,784		(547)	4,237
More than three months past due	9,221	(6,964)	2,257	7,539		(5,391)	2,148
Total trade receivables	47,996	(8,165)	39,831	43,871		(7,122)	36,749

For expected credit losses with large organisations, such as Government bodies or Housing Associations, expected credit losses are calculated on an individual basis, taking account of all the relevant factors applicable to the amount outstanding. The Group has no history of defaults with these types of customers, so expected credit losses relate to specific disputed balances.

For individual tenant customers, expected credit losses are calculated based on the Group's historical experience of default by applying a percentage based on the age of the customer's balance.

The movement in expected credit loss during the period is shown below:

	2020 £'000	2019 £'000
As at 1 January	7,122	6,347
Changes in amounts provided	2,958	1,031
Amounts utilised	(1,915)	(256)
As at 31 December	8,165	7,122

The movement in contract assets during the period is shown below:

	2020 £'000	2019 £'000
As at 1 January	110,263	94,801
Recognised on completion of performance obligations	773,269	852,860
Invoiced during the year	(794,938)	(837,398)
As at 31 December	88,594	110,263

Contract assets includes a sub-set of contracts where the balance being carried is the subject of a crystallised contractual dispute and litigation. The combined carrying value of the contracts in dispute at 31 December 2020 is £1.2m (2019: £3.1m) against a total claim value of £3.2m. (2019: £3.2m). Management believes that the carrying value represents the mid-point in the range of likely outcomes, whilst recognising that all claims carry litigation risk.

Deferred consideration of £0.5m (2019: £4.6m) is consideration receivable in respect of the disposal of subsidiaries. The 2020 balance is in respect of the disposal of the Group's Domiciliary Care business as detailed in note 28. The 2019 balance was in respect of the disposal of Mears Housing Portfolio 2 Limited in 2019 and was received in full during 2020.

20. Trade and other payables

	2020 £'000	2019 £'000
Trade payables	114,711	125,054
Accruals	42,797	46,470
Social security and other taxes	34,983	21,989
Contract liabilities	25,330	2,112
Other creditors	3,208	6,741
	221,029	202,366

Due to the short duration of trade payables, management considers the carrying amounts recognised in the Consolidated Balance Sheet to be a reasonable approximation of their fair value.

The movement in contract liabilities during the period is shown below:

	2020 £'000	2019 £'000
As at 1 January	2,112	1,814
Revenue recognised in respect of contract liabilities	(2,112)	(1,814)
Payments received in advance of performance obligations being completed	25,330	2,112
As at 31 December	25,330	2,112

Contract liabilities relate to payments received from the customer on the contract, and/or amounts invoiced to the customer in advance of the Group performing its obligations on contracts where revenue is recognised either over time or at a point in time. These amounts are expected to be recognised within revenue within one year of the balance sheet date.

21. Lease liabilities

Lease liabilities are separately presented on the face of the Consolidated Statement of Financial Position as shown below:

	2020 £'000	2019 (restated) £'000
Current	42,888	39,175
Non-current	166,183	166,000
	209,071	205,175

The Group had not committed to any leases which had not commenced at 31 December 2020. The majority of the Group's property leases contain variable lease payments that vary annually either by reference to an index, such as the Consumer Prices Index (CPI), or based on market conditions each year. The potential impact of this variation depends on future events and therefore cannot be quantified but the Group would typically expect commensurate adjustments to income derived from these properties.

A smaller number of property leases contain termination or extension options. Management has assessed whether it is reasonably certain that the longer term will apply. In some cases, a portfolio of leases with similar lease terms is considered together and, where a rolling notice period is available to the Group, an average expected lease life may be applied.

The Group has elected not to recognise a lease liability for short-term leases and leases of low value. Payments made under such leases are expensed on a straight-line basis. Certain leases incorporate variable lease payments that are not included in the measurement of lease liabilities in accordance with IFRS 16. The expense relating to payments not included in the measurement of the lease liability is as follows:

	2020 £'000	2019 (restated) £'000
Short-term leases	45,846	51,035
Low-value leases	839	812
Variable lease payments	2,737	3,479

The portfolio of short-term leases to which the Group is committed at the end of the reporting period is not dissimilar to the portfolio to which the above disclosure relates.

Other disclosures relating to lease liabilities are provided in the table below:

	Note	2020 £'000	2019 (restated) £'000
Depreciation of right of use assets during the year	16	42,510	31,005
Additions during the year	16	46,603	68,016
Carrying value at the year end	16	200,041	198,384
Interest on lease liabilities during the year - continuing activities	5	7,123	5,760
Total cash outflow in respect of leases during the year	27	47,470	35,434

The Group's lease liabilities are subject to changes in certain key assumptions in estimating the incremental borrowing rates (IBRs) used to calculate the liabilities. The impact of an increase in all IBRs applied during 2020 by 0.1% is a £0.8m reduction in the lease liability and a £0.1m reduction in profit before tax.

22. Provisions

A summary of the movement in provisions during the year is shown below:

			Onerous contract provisions £'000	Other provisions £'000	Total £'000
At 1 January 2020			320	184	504
Reclassified from accruals			737	-	737
Adjusted balance as at 1 January 2020			1,057	184	1,241
Utilised during the year			(713)	(184)	(897)
At 31 December 2020			344	-	344

A provision of £0.7m for costs in respect of offices related to the discontinued care business was reclassified from accruals to onerous contract provision on 1 January 2020. The balance of this provision of £0.3m as at 31 December 2020 is expected to be utilised within one year.

All prior year provisions arose as a result of the acquisition of MPS Housing Limited on 30 November 2018 and related to contracts where a future loss was anticipated as a result of contractual obligations entered into by MPS Housing Limited and provisions for dilapidations of leased offices. The utilisation of provisions in the year resulted from the expected liabilities being settled.

23. Long-term other liabilities

Accounting policy

The Group self-insures certain fleet and liability risks. A provision for claims incurred but not received is recognised in respect of these potential claims. The value of this provision is estimated based on past experience of claims.

	2020 £'000	2019 £'000
Other creditors	3,667	4,700

Long-term other creditors represent self-insured claims incurred but not yet reported.

24. Financial instruments

Accounting policy

The Group uses a limited number of financial instruments comprising cash and liquid resources, borrowings, interest rate swaps and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to finance the Group's operations. The Group seeks to finance its operations through a combination of retained earnings and borrowings and investing surplus cash on deposit. The Group uses financial instruments to manage the interest rate risks arising from its operations and sources of finance but has no interests in the trade of financial instruments.

Financial assets and liabilities are recognised in the Consolidated Balance Sheet when the Group becomes party to the contractual provisions of the instrument. The principal financial assets and liabilities of the Group are as follows:

Financial assets

Investments in unlisted equities that do not convey control or significant influence over the underlying entity are recognised at fair value. They are subsequently remeasured at fair value with any changes being recognised in the Consolidated Statement of Profit or Loss.

Contingent consideration is held by the Group in order to collect the associated cash flows but until the amount is determined, these are not solely payments of principal and interest and therefore these assets are measured both initially and subsequently at fair value, with any changes being recognised in the Consolidated Statement of Profit or Loss.

Loan notes are held by the Group in order to collect the associated cash flows and not for trading. They are therefore initially recognised at fair value and subsequently measured at amortised cost, less any provision for impairment.

Financial assets generated from goods or services transferred to customers are presented as either trade receivables or contract assets. All of the Group's trade receivables are short-term in nature, with payments typically due within 60 days of the works being performed. The Group's contracts with its customers therefore contain no significant financing component.

Mears recognises a loss allowance for expected credit losses on financial assets subsequently measured at amortised cost using the 'simplified approach'. Individually significant balances are reviewed separately for impairment based on the credit terms agreed with the customer. Other balances are grouped into credit risk categories and reviewed in aggregate.

Trade receivables and cash at bank and in hand are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade receivables are initially recorded at fair value net of transaction costs, being invoiced value less any provisional estimate for impairment should this be necessary due to a loss event. Trade receivables are subsequently remeasured at invoiced value, less an updated provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the Consolidated Statement of Profit or Loss.

Cash and cash equivalents include cash at bank and in hand and bank deposits available with no notice or less than three months' notice from inception that are subject to an insignificant risk of changes in value. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances. The Group considers its revolving credit facility to be an integral part of its cash management.

Following initial recognition, financial assets are subsequently remeasured at amortised cost using the effective interest rate method.

Financial liabilities

The Group's financial liabilities are overdrafts, trade and other payables and interest rate swaps. They are included in the Consolidated Balance Sheet line items 'Long-term borrowings and overdrafts', 'Trade and other payables', 'Interest rate swaps' and 'Other payables'.

All interest related charges are recognised as an expense in 'Finance costs' in the Consolidated Statement of Profit or Loss with the exception of those that are directly attributable to the construction of a qualifying asset, which are capitalised as part of that asset.

Bank and other borrowings are initially recognised at fair value net of transaction costs. Gains and losses arising on the repurchase, settlement or cancellation of liabilities are recognised respectively in finance income and finance costs. Borrowing costs are recognised as an expense in the period in which they are incurred with the exception of those which are directly attributable to the construction of a qualifying asset, which are capitalised as part of that asset.

Trade payables on normal terms are not interest bearing and are stated at their fair value on initial recognition and subsequently at amortised cost.

Derivative financial instruments

The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from operational and financing activities.

Derivative financial instruments are recognised initially and subsequently at fair value, with mark-to-market movements recognised in the Consolidated Statement of Profit or Loss except where cash flow hedge accounting is applied.

The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties.

In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes.

Hedge accounting for interest rate swaps

Where an interest rate swap is designated as a hedge of the variability in cash flows of an existing or highly probable forecast loan interest payment, the effective part of any valuation gain or loss on the swap instrument is recognised in other comprehensive income in the hedging reserve. The cumulative gain or loss is removed from equity and recognised in the Consolidated Statement of Profit or Loss at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in the Consolidated Statement of Profit or Loss immediately.

When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the Consolidated Statement of Profit or Loss immediately.

Categories of financial instruments

	2020 £'000	2019 (restated) £'000
Non-current assets
Fair value (level 3)
Investments - other investments	65	-
Contingent consideration	5,431	-
	5,496	-
Amortised cost
Loan notes	3,160	-
Current assets
Amortised cost
Trade receivables	39,831	36,749
Deferred consideration	500	4,618
Other debtors	3,034	5,097
Cash at bank and in hand	96,220	72,909
	139,585	119,373
Non-current liabilities
Fair value (level 2)
Interest rate swaps - effective	(479)	(39)
Interest rate swaps - ineffective	17	-
Interest rate swaps	(462)	(39)
Amortised cost
Long-term borrowing and overdrafts	(39,353)	(124,047)
Lease liabilities	(166,183)	(166,000)
Other payables	(3,667)	(4,700)
	(209,203)	(294,747)
Current liabilities
Fair value (level 2)
Interest rate swaps - effective	(484)	(119)
Interest rate swaps - ineffective	25	-
Interest rate swaps	(459)	(119)
Amortised cost
Trade payables	(114,711)	(125,054)
Lease liabilities	(42,888)	(39,175)
Other creditors	(3,208)	(6,741)
	(160,807)	(170,970)
	(222,690)	(346,502)

The amount recognised as an allowance for expected credit losses on trade receivables during 2020 was £3.0m (2019: £1.0m).

The IFRS 13 hierarchy level categorisation relates to the extent the fair value can be determined by reference to comparable market values. The classifications range from level 1, where instruments are quoted on an active market, through to level 3, where the assumptions used to arrive at fair value do not have comparable market data.

The fair values of interest rate swaps have been calculated by a third party expert discounting estimated future cash flows on the basis of market expectations of future interest rates (level 2).

The amount of contingent consideration receivable is typically determined by future expected profits of the sold businesses. The fair values of contingent consideration have been calculated by management by reference to expected future income and expenditure of the disposed business and the terms of the sale (level 3). Where appropriate, the fair value of contingent consideration is discounted at the Group's weighted average cost of capital.

The increase in the fair value of contingent consideration of £0.04m between the date of disposal and the year end was recognised in the Consolidated Statement of Profit or Loss.

The fair values of investments in unlisted equity instruments are determined by reference to an assessment of the fair value of the entity to which they relate. This is typically based on a multiple of earnings of the underlying business.

There have been no transfers between levels during the year.

Fair value information

The fair value of the Group's financial assets and liabilities is as disclosed above and approximates to the book value.

Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (including interest rate risk and price risk); credit risk; and liquidity risk. The main risks faced by the Group relate to the availability of funds to meet business needs and the risk of credit default by customers. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

Risk management is carried out under policies and guidelines approved by the Board of Directors.

Borrowing facilities

The Group's borrowing facilities are drawn on as required to manage its cash needs. Banking facilities are reviewed regularly and extended and replaced in advance of their expiry.

The Group had total borrowing facilities of £145.0m with Barclays Bank PLC, HSBC Bank PLC and the Bank of Ireland, of which £40.0m was utilised at 31 December 2020.

The facilities comprise a committed four-year £135.0m revolving credit facility and an unsecured overdraft facility of £10.0m. The undrawn amounts at 31 December 2020 were a £95.0m revolving credit facility and an overdraft facility of £10.0m.

Details of the Group's banking covenants are provided on page [24].

Interest rate risk management

The Group finances its operations through a mixture of retained profits and bank borrowings from major banking institutions at floating rates of interest based on LIBOR. The Group's exposure to interest rate fluctuations on borrowings is managed through the use of interest rate swaps; hence the fixed rate borrowings relate to floating rate loans where the interest rate has been fixed by a hedging arrangement. Publication of LIBOR is expected to cease before the end of 2021, after which floating interest rates currently linked to LIBOR will be transitioned to an appropriate alternative reference rate.

The fair value of interest rate exposure on financial liabilities of the Group as at 31 December 2020 was:

	Interest rate
	Fixed £'000	Floating £'000	Zero £'000	Total £'000
Financial liabilities - 2020	40,000	-	-	40,000
Financial liabilities - 2019	70,000	55,000	-	125,000

The Group's policy is to accept a degree of interest rate risk, provided the effects of the various potential changes in rates remain within certain prescribed parameters.

Accordingly, at 31 December 2020 the Group had hedged part of the £145.0m total borrowing facilities by entering into interest rate swap arrangements with Barclays Bank PLC and Bank of Ireland. In addition, the Group had entered into interest rate swap arrangements with forward start dates with HSBC Bank PLC.

The arrangement with Barclays Bank PLC consists of two £15.0m swap contracts expiring in August 2021. The arrangement with Bank of Ireland consists of one £15.0m swap contract expiring in June 2023. The arrangement with HSBC Bank PLC consists of three swap contracts totalling £45.0m expiring in January 2024. All arrangements have quarterly maturity, matching the underlying facility.

The maturity of the interest rate swap contracts is as follows:

	2020		2019
	Nominal amount hedged £'000	Average applicable interest rates %	Nominal amount hedged £'000	Average applicable interest rates %
Within one year	30,000	0.96%	40,000	0.84%
One to two years	-	-	30,000	0.96%
Two to five years	60,000	0.45%	-	-
More than five years	-	-	-	-

Effective interest rates

Interest rate swaps with fair value liabilities of £0.9m (2019: £0.2m) and average remaining lives of two years and two months have been accounted for in financial liabilities.

The Group's overall average cost of debt, including effective interest rate swaps, is 2.4% as at 31 December 2020 (2019: 2.6%). Excluding these swaps, the average is 2.1% (2019: 2.6%).

Cash flow hedging reserve

The cash flow hedging reserve comprises all gains and losses arising from the valuation of interest swap contracts which are effective hedges and mature after the year end. These are valued on a mark-to-market basis, accounted for through the Consolidated Statement of Comprehensive Income and recycled through the Consolidated Statement of Profit or Loss when the hedged item affects the Consolidated Statement of Profit or Loss.

Movements during the year were:

	£'000
At 1 January 2019	(46)
Amounts transferred to the Consolidated Statement of Profit or Loss	49
Revaluations during the year	(145)
Deferred tax movement	18
At 1 January 2020	(124)
Amounts transferred to the Consolidated Statement of Profit or Loss	354
Revaluations during the year	(1,139)
Deferred tax movement	149
At 31 December 2020	(760)

At 31 December 2020 the Group had minimal exposure to movements in interest rates as the remaining interest rate risk was offset by the Group's cash and short-term deposits.

If the interest rates had been 0.5% higher or lower and all other variables were held constant, the Group's profit before taxation for the year ended 31 December 2020 and reserves would decrease or increase, respectively, by £0.6m (2019: £0.4m).

Liquidity risk management

The Group seeks to manage liquidity risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.

Management monitors rolling forecasts of the Group's liquidity reserve (comprising undrawn borrowing facilities and cash and cash equivalents) on the basis of expected cash flows. This is generally carried out at a local level in the operating companies of the Group in accordance with the practice and limits set by the Group. These limits vary by location and take into account the liquidity and nature of the market in which the entity operates.

The quantum of committed borrowing facilities of the Group is regularly reviewed and is designed to exceed forecast peak gross debt levels. For short-term working capital purposes, the Group utilises bank overdrafts as required. These facilities are regularly reviewed and are renegotiated ahead of their expiry date.

The table below shows the maturity profile of the Group's financial liabilities:

	Within 1 year £'000	1-2 years £'000	2-5 years £'000	Over 5 years £'000	Total £'000
2020
Non-derivative financial liabilities
Bank borrowings	-	39,353	-	-	39,353
Trade and other payables	117,919	3,667	-	-	121,586
Lease liabilities	55,237	33,777	54,774	121,603	265,391
Derivative financial liabilities
Interest rate swaps - effective	459	246	216	-	921
2019
Non-derivative financial liabilities
Bank borrowings	54,047	-	70,000	-	124,047
Trade and other payables	131,795	4,700	-	-	136,495
Lease liabilities (restated)	41,383	32,499	53,499	126,455	253,836
Derivative financial liabilities
Interest rate swaps - effective	119	39	-	-	158

The Group has disclosed core bank borrowings of £39.4m as due in two to five years. Whilst the amounts borrowed could be repaid each quarter, the Group's intention is to align core bank borrowings with its interest rate swaps.

Credit risk management

The Group's credit risk is primarily attributable to its trade receivables, contract assets and work in progress.

Trade receivables are normally due within 30 to 60 days. Trade and other receivables included in the Consolidated Balance Sheet are stated net of a bad debt provision which has been estimated by management following a review of individual receivable accounts. There is no Group-wide rate of provision and provision made for debts that are overdue is based on prior default experience and known factors at the balance sheet date. Receivables are written off against the bad debt provision when management considers that the debt is no longer recoverable.

Housing customers are typically Local and Central Government and Housing Associations. The nature of these customers means that credit risk is minimal. Other trade receivables contain no specific concentration of credit risk as the amounts recognised represent a large number of receivables from various customers.

The Group continually monitors the position of major customers and incorporates this information into its credit risk controls. External credit ratings are obtained where appropriate.

Details of the ageing of trade receivables are shown in note 19.

Loan notes receivable

The loan notes included within non-current assets were received as part of the disposal of the TerraQuest Group. They are repayable in December 2028 and accrue interest at 10% per annum.

Deferred and contingent consideration

The table below shows the movements in deferred consideration receivable:

	Deferred £'000	Contingent £'000	Total £'000
At 1 January 2019	-	-	-
Increase due to disposals in the year	4,618	-	4,618
At 1 January 2020	4,618	-	4,618
Increase due to disposal of Domiciliary Care businesses	1,500	-	1,500
Fair value of contingent consideration on disposal of Planning Solutions business	-	5,395	5,395
Movement in fair value of contingent consideration	-	36	36
Received during the year	(5,618)	-	(5,618)
At 31 December 2020	500	5,431	5,931

The balance of deferred consideration is expected to be received within one year. The balance of contingent consideration is expected to be received in March 2022.

Capital management

The Group's objectives when managing capital are:

to safeguard the Group's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;

to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk; and to maintain an optimal capital structure to reduce the cost of capital.

The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The capital structure of the Group consists of net debt as disclosed below and equity as disclosed in the Consolidated Statement of Changes in Equity.

	2020 £'000	2019 £'000
The Group considers its revolving credit facility to be an integral part of its cash management:
Cash at bank and in hand	96,220	73,061
Revolving credit facility	(39,353)	(124,047)
Cash and cash equivalents, including revolving credit facility	56,867	(50,986)

25. Deferred taxation

Deferred tax is calculated on temporary differences under the liability method.

Deferred tax assets

The following deferred tax assets were recognised by the Group as at 31 December 2020:

	Pension scheme £'000	Share-based payments £'000	Cash flow hedges £'000	Tax losses £'000	Other temporary differences (restated) £'000	Total £'000
At 1 January 2019	723	607	11	1,407	1,752	4,500
Impact of change in accounting policies (restated)	-	-	-	-	646	646
Adjusted balance at 1 January 2019 (restated)	723	607	11	1,407	2,398	5,146
Credit/(debit) to Consolidated Statement of Profit or Loss	92	(45)	-	(1,343)	(330)	(1,626)
Debit to Consolidated Statement of Changes in Equity	-	(191)	-	-	-	(191)
Credit to Consolidated Statement of Comprehensive Income	356	-	18	-	-	374
Assets classified as held for sale	-	-	-	-	(280)	(280)
At 1 January 2020	1,171	371	29	64	1,788	3,423
Credit/(debit) to Consolidated Statement of Profit or Loss	145	(100)	-	1,215	264	1,524
Credit to Consolidated Statement of Changes in Equity	-	10	-	-	-	10
Credit to Consolidated Statement of Comprehensive Income	1,524	-	149	-	-	1,673
Disposal of subsidiary	-	-	-	-	(92)	(92)
At 31 December 2020	2,840	281	178	1,279	1,960	6,538

In accordance with IFRS 2 'Share-based Payment', the Group has recognised an expense for the consumption of employee services received as consideration for share options granted. A tax deduction will not arise until the options are exercised. The tax deduction in future periods is dependent on the Company's share price at the date of exercise. The estimated future tax deduction is based on the options' intrinsic value at the balance sheet date.

The cumulative amount credited to the Consolidated Statement of Profit or Loss is limited to the tax effect of the associated cumulative share-based payment expense. The excess has been credited directly to equity. This is presented in the Consolidated Statement of Comprehensive Income.

In addition to those recognised, unused tax losses totalling £29.0m (2019: £28.9m) have not been recognised as management does not consider that it is probable that they will be recovered.

Deferred tax liabilities

The following deferred tax liabilities were recognised by the Group as at 31 December 2020:

	Pension scheme £'000	Acquisition intangibles £'000	Total £'000
At 1 January 2019	3,300	5,310	8,610
Debit/(credit) to Consolidated Statement of Profit or Loss	56	(1,882)	(1,826)
Credit to Consolidated Statement of Comprehensive Income	(1,789)	-	(1,789)
At 1 January 2020	1,567	3,428	4,995
Credit to Consolidated Statement of Profit or Loss	(22)	(1,553)	(1,575)
Credit to Consolidated Statement of Comprehensive Income	(202)	-	(202)
At 31 December 2020	1,343	1,875	3,218

Intangible assets acquired as part of a business combination are capitalised at fair value at the date of the acquisition and amortised over their useful economic lives. The UK tax regime calculates tax using the individual financial statements of the members of the Group and not the consolidated accounts. Hence, the tax base of acquisition intangible assets arising on consolidation is £nil. Furthermore, no UK tax relief is available on the majority of acquisition intangibles within individual entities, so the tax base of these assets is also £nil. The estimated tax effect of this £nil tax base is accounted for as a deferred tax liability which is released over the period of amortisation of the associated acquisition intangible asset.

26. Share capital and reserves

Classes of reserves

Share capital represents the nominal value of shares that have been issued.

Share premium represents the difference between the nominal value of shares issued and the total consideration received.

Share-based payment reserve represents employee remuneration which is credited to the share-based payment reserve until the related share options are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.

The cash flow hedging reserve comprises all gains and losses arising from the valuation of interest swap contracts which are effective hedges and mature after the year end. These are valued on a mark-to-market basis, accounted for through the Consolidated Statement of Comprehensive Income and recycled through the Consolidated Statement of Profit or Loss when the hedged item affects the Consolidated Statement of Profit or Loss.

The merger reserve relates to the difference between the nominal value and total consideration in respect of acquisitions, where the Company was entitled to the merger relief offered by the Companies Act 2006. During the year, £5.0m (2019: £33.3m) of this reserve was transferred to retained earnings following the disposal of a subsidiary (2019: following the impairment of the goodwill associated with the original merger reserve).

Share capital

	2020 £'000	2019 £'000
Allotted, called up and fully paid
At 1 January 110,490,459 (2019: 110,487,586) ordinary shares of 1p each	1,105	1,105
Issue of 391,438 (2019: 2,873) shares on exercise of share options	4	-
At 31 December 110,881,897 (2019: 110,490,459) ordinary shares of 1p each	1,109	1,105

During the year 391,438 (2019: 2,873) ordinary 1p shares were issued in respect of share options exercised.

27. Notes to the Consolidated Cash Flow Statement

The following non-operating cash flow adjustments have been made to the result for the year before tax:

	2020 £'000	2019 (restated) £'000
Depreciation	47,688	35,187
Impairment of fixed assets	1,500	-
Loss on disposal of property, plant and equipment	231	178
Amortisation	11,736	12,231
Share-based payments	993	400
IAS 19 pension movement	878	190
Equity accounted income from investments	(365)	(536)
Finance income	(86)	(362)
Finance cost	10,186	9,531
Total	72,761	56,819

Movements in financing liabilities during the year are as follows:

		Revolving credit facility £'000	Borrowings relating to assets held for resale £'000	Lease liabilities £'000	Total £'000
At 1 January 2019		93,780	15,000	1,268	110,048
Impact of change in accounting policies		-	-	167,713	167,713
Adjusted balance at 1 January 2019		93,780	15,000	168,981	277,761
Inception of new leases		-	-	68,016	68,016
Termination of leases		-	-	(138)	(138)
Interest		3,157	335	5,814	9,306
Arrangement fees expensed during the year		531	-	-	531
Transferred to assets held for sale		-	-	(2,064)	(2,064)
Cash inflows/(outflows)		26,579	(15,335)	(35,434)	(24,190)
At 1 January 2020		124,047	-	205,175	329,222
Inception of new leases		-	-	46,603	46,603
Termination of leases		-	-	(1,611)	(1,611)
Interest		2,711	-	7,254	9,965
Arrangement fees expensed during the year		515	-	-	515
Disposal of subsidiaries		-	-	(880)	(880)
Cash outflows		(87,920)	-	(47,470)	(135,390)
At 31 December 2020		39,353	-	209,071	248,424

The movement on the borrowings relating to assets held for resale represents the repayment of the remainder of the property acquisition facility introduced during 2017 to enable the Group to acquire and build portfolios of properties prior to disposal to a long-term funding partner. 

28. Acquisitions and disposals

The Group made three disposals during the year: its England and Wales Domiciliary Care business in the form of Mears Care Limited, its Scotland Domiciliary Dare business in the form of Mears Care (Scotland) Limited and its Planning Solutions business in the form of Terraquest Solutions Limited and Portalplanquest Limited.

Both Domiciliary Care businesses were classified as available for sale in the year ended 31 December 2019. Mears Care Limited was sold on 31 January 2020 for £4.0m in cash and £1.0m in deferred consideration, all of which had been received at 31 December 2020. Mears Care (Scotland) Limited was sold on 25 September 2020 for £2.0m in cash and £0.5m in deferred consideration, with the deferred consideration due during 2021. These disposals completed the Group's planned exit from the Domiciliary Care market. The Group made a profit on disposal of £0.4m and £0.6m respectively for the sales of Mears Care Limited and Mears Care (Scotland) Limited.

The disposal of the Planning Solutions business (the 'Terraquest group') was completed on 9 December 2020. The proceeds from this disposal were £56.9m in cash, £3.2m in loan notes, £0.1m of shares, representing a 6.16% holding in the disposed business and a maximum of £10.0m of contingent consideration. The fair value of the contingent consideration was estimated as £5.4m based on the terms of the sale agreement and the expected future profitability of the Terraquest group, on which the consideration will be calculated. Portalplanquest Limited was a 75% owned subsidiary prior to the sale and therefore the non-controlling interest was eliminated at the point of disposal, resulting in a decrease in equity of £0.1m. The Group made a profit on disposal of £53.0m from the sale of the Terraquest group. Further details of the terms of the sale can be found in the Financial Review.

During the year, the Group also acquired the remaining 10% of the share capital of Mears New Homes Limited, a subsidiary in which there had previously been a non-controlling interest. These shares were acquired for nominal consideration and resulted in the elimination of the non-controlling interest in the net liabilities of the subsidiary of £0.5m as presented in the Consolidated Statement of Changes in Equity.

During 2019, the Group disposed of Mears Housing Portfolio 2 Limited (MHP 2), a subsidiary that had been part of the Group's property acquisition business. The company was sold for £6.9m of cash plus £4.6m of deferred consideration. The amount received on sale of £6.9m is included in 'cash inflow in respect of property for resale' in the Consolidated cash flow statement for 2019. The deferred consideration was received in September 2020 as described in note 19.

29. Pensions

Accounting policy

Retirement benefit obligations

The Group operates both defined benefit and defined contribution pension schemes as follows:

Defined contribution pensions

A defined contribution plan is a pension plan under which the Group pays fixed contributions to an independent entity. The Group has no legal obligations to pay further contributions after payment of the fixed contribution.

The contributions recognised in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short-term nature.

The assets of the schemes are held separately from those of the Group in an independently administered fund.

Defined benefit pensions

The Group contributes to defined benefit schemes which require contributions to be made to separately administered funds.

A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligations for any benefits from this kind of pension plan remain with the Group, even if plan assets for funding the defined benefit plan have been set aside.

Scheme liabilities are measured using the projected unit funding method, applying the principal actuarial assumptions at the balance sheet date. Assets are measured at market value. In accordance with IFRIC 14, the asset that is recognised is restricted to the amount by which the IAS 19 service cost is expected, over the lifetime of the scheme, to exceed funding contributions payable in respect of accruing benefits.

Where the Group has a contractual obligation to make good any deficit in its share of a Local Government Pension Scheme (LGPS) but also has the right to recover the costs of making good any deficit from the Group's client, the fair value of that guarantee asset has been recognised and disclosed. Movements in the guarantee asset are taken to the Consolidated Statement of Profit or Loss and to the Consolidated Statement of Comprehensive Income to match the movement in pension assets and liabilities.

The Group recognises the pension liability and guarantee assets separately on the face of the Consolidated Balance Sheet.

Actuarial gains and losses are taken to the Consolidated Statement of Comprehensive Income as incurred. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred.

Other movements in the net surplus or deficit are recognised in the Consolidated Statement of Profit or Loss, including the current service cost, any past service cost and the effect of curtailments or settlements. The net interest cost is also charged to the Consolidated Statement of Profit or Loss. The amount charged to the Consolidated Statement of Profit or Loss in respect of these plans is included within operating costs.

When the Group ceases its participation in a defined benefit pension scheme, the difference between the carrying value of the scheme as calculated on an IAS 19 basis and any deficit payment or surplus receipt due are recognised in the Consolidated Statement of Profit or Loss as a settlement.

The Group's contributions to the scheme are paid in accordance with the rules of the scheme and the recommendations of the scheme actuary.

Defined benefit assets

Scheme assets for LGPS have been estimated by rolling forward the published asset position from the previous year using market index returns over the period. This is considered to provide a good estimate of the fair value of the scheme assets and the values will be updated to actuals each time a triennial valuation takes place.

Defined benefit liabilities

A number of key estimates have been made, which are given below, and which are largely dependent on factors outside the control of the Group:

-  inflation rates;

-  mortality;

-  discount rate; and

-  salary and pension increases.

Details of the particular estimates used are included in this note. Sensitivity analysis for these key estimates is included below.

Where the Group has a contractual obligation to make good any deficit in its share of an LGPS but also has the right to recover the costs of making good any deficit from the Group's client, the fair value of that asset has been recognised and disclosed. The right to recover costs is limited to exclude situations where the Group causes the scheme to incur service costs in excess of those which would have been incurred were the members employed within Local Government. Management has made judgements in respect of whether any of the deficit is as a result of such situations.

The right to recover costs is also limited to situations where the cap on employer contributions to be suffered by the Group is not set so as to contribute to reducing the deficit in the scheme. Management, in conjunction with the scheme actuaries, has made judgements in respect of the predicted future service cost and contributions to the scheme to reflect this in the fair value of the asset recognised.

Key sources of estimation uncertainty

The net position on defined benefit pension schemes is a key source of estimation uncertainty. Given the importance of this area and to ensure appropriate estimates are made based on the most relevant information available, management has continued to engage with third party advisors in assessing each of the underlying assumptions. The discount rate is derived from the return on corporate bond yields, and whilst this is largely observable, any change in discount rates in the future could have a material impact on the carrying value of the defined benefit obligation. Similarly, inflation rates and mortality assumptions impact the defined benefit obligation as they are used to model future salary increases and the duration of pension payments. Whilst current assumptions use projected future inflation rates and the most up to date information available on expected mortality, if these estimates change, the defined benefit obligation could also change materially in future periods.

Defined contribution schemes

The Group operates a defined contribution Group personal pension scheme for the benefit of certain employees. The Group contributes to personal pension schemes of certain Directors and senior employees. The Group operates a stakeholder pension plan available to all employees. During the year, the Group contributed £[5.7]m (2019: £5.7m) to these schemes.

Defined benefit schemes

The Group contributed to 23 (2019: 30) principal defined benefit schemes on behalf of a number of employees which require contributions to be made to separately administered funds.

These pension schemes are operated on behalf of Mears Limited, Morrison Facilities Services Limited and their subsidiary undertakings. The assets of the schemes are administered by trustees in funds independent from the assets of the Group.

The Group schemes are no longer open to new members and have no particular concentration of investments, so expose the Group only to typical risks associated with defined benefit pension schemes including the risk that investments underperform compared to movements in the scheme liabilities.

In certain cases, the Group will participate under Admitted Body status in the LGPS. The Group will contribute for a finite period up until the end of the particular contract. The Group is required to pay regular contributions as detailed in the scheme's schedule of contributions. In some cases, these contributions are capped and any excess can be recovered from the body from which the employees originally transferred. Where the Group has a contractual right to recover the costs of making good any deficit in the scheme from the Group's client, the fair value of that asset has been recognised as a separate pension guarantee asset. Certain judgements around the value of this asset have been made and are discussed in the judgements and estimates disclosure within the accounting policies.

The disclosures in respect of the two (2019: two) Group defined benefit schemes and the 21 (2019: 28) other defined benefit schemes in this note have been aggregated. Details of movements in pension guarantee assets are presented in a separate table and the disclosures for 2019 have been re-presented in the same way in order to aid comparability.

Costs and liabilities of the schemes are based on actuarial valuations. The latest full actuarial valuations for the schemes were updated to 31 December 2020 by qualified independent actuaries using the projected unit funding method.

The principal actuarial assumptions at the balance sheet date are as follows:

	2020	2019
Rate of increase of salaries - first year	2.85%	2.90%
Rate of increase of salaries - second year	2.85%	2.90%
Rate of increase of salaries - long term	2.85%	2.90%
Rate of increase for pensions in payment - based on CPI with a cap of 5%	2.45%	1.95%
Rate of increase for pensions in payment - based on RPI with a cap of 5%	2.80%	2.85%
Rate of increase for pensions in payment - based on CPI with a cap of 3%	2.10%	1.75%
Rate of increase for pensions in payment - based on RPI with a cap of 3%	2.30%	2.35%
Discount rate	1.35%	2.10%
Retail prices inflation	2.85%	2.90%
Consumer prices inflation	2.45%	1.90%
Life expectancy for a 65-year-old male	21.8 years	22.4 years
Life expectancy for a 65-year-old female	24.0 years	24.6 years

The amounts recognised in the Consolidated Balance Sheet and major categories of plan assets are:

	2020			2019
	Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Quoted assets
Equities	-	180,791	180,791	-	178,526	178,526
Bonds	92,356	66,618	158,974	86,567	65,003	151,570
Property	4,325	29,857	34,182	4,341	7,934	12,275
Pooled investment vehicles
Multi-asset funds	82,147	-	82,147	69,507	-	69,507
Alternative asset funds	10,604	-	10,604	9,291	-	9,291
Return seeking funds	2,089	-	2,089	1,449	-	1,449
Other assets
Equities	-	-	-	-	14,924	14,924
Bonds	-	-	-	-	1,836	1,836
Property	-	361	361	-	6,853	6,853
Derivatives	2,284	-	2,284	15,046	-	15,046
Cash and other	3,823	10,864	14,687	2,263	28,388	30,651
Investment liabilities
Derivatives	(12,192)	-	(12,192)	(25,214)	-	(25,214)
Group's estimated asset share	185,436	288,491	473,927	163,250	303,464	466,714
Present value of funded scheme liabilities	(181,184)	(320,186)	(501,370)	(156,379)	(327,460)	(483,839)
Funded status	4,252	(31,695)	(27,443)	6,871	(23,996)	(17,125)
Scheme surpluses not recognised as assets	-	(11,142)	(11,142)	-	(4,597)	(4,597)
Pension asset/(liability)	4,252	(42,837)	(38,585)	6,871	(28,593)	(21,722)
Pension guarantee assets	-	30,705	30,705	-	23,810	23,810

As noted above, there are two Group schemes, one of which had a recognised surplus at 31 December 2020 of £7.1m (2019: £8.2m) while the other had a deficit of £2.8m (2019: £1.4m). The scheme in deficit is aggregated with the other schemes in deficit on the face of the Consolidated Balance Sheet.

The amounts recognised in the Consolidated Statement of Profit or Loss are as follows:

	2020			2019
	Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Current service cost	2,029	4,244	6,273	1,989	4,595	6,584
Past service cost	-	-	-	-	150	150
Settlement and curtailment	-	(22)	(22)	-	-	-
Administration costs	375	-	375	277	-	277
Total operating charge	2,404	4,222	6,626	2,266	4,745	7,011
Net interest	(206)	466	260	(512)	481	(31)
Effects of limitation of recognisable surplus related to net interest	-	56	56	-	119	119
Total charged to the result for the year	2,198	4,744	6,942	1,754	5,345	7,099

Past service cost above includes a charge of £nil (2019: £150,000) in respect of the Group's estimate of the impact LGPSs of the 'McCloud' judgement in respect of historical age discrimination.

Cumulative actuarial gains and losses recognised in other comprehensive income (OCI) are as follows:

	2020			2019
	Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Return on plan assets in excess of that recorded in net interest	21,081	20,766	41,847	8,623	33,851	42,474
Actuarial gain arising from changes in demographic assumptions	1,693	8,364	10,057	717	-	717
Actuarial loss arising from changes in financial assumptions	(25,060)	(62,337)	(87,397)	(18,481)	(40,664)	(59,145)
Actuarial (loss)/gain arising from liability experience	(350)	25,300	24,950	(957)	(1)	(958)
On scheme transfer	-	(157)	(157)	-	-	-
Effects of limitation of recognisable surplus related to OCI movements	-	(8,414)	(8,414)	-	1,393	1,393
Total gains and losses recognised in OCI	(2,636)	(16,478)	(19,114)	(10,098)	(5,421)	(15,519)

Changes in the present value of the defined benefit obligations are as follows:

	2020			2019
	Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Present value of obligations at 1 January	156,379	327,460	483,839	136,548	282,368	418,916
Liabilities related to assets classified as held for sale	-	-	-	-	(3,105)	(3,105)
Current service cost	2,029	4,244	6,273	1,989	2,391	4,380
Past service cost	-	-	-	-	150	150
Interest on obligations	3,241	5,974	9,215	3,958	7,812	11,770
Plan participants' contributions	264	763	1,027	301	894	1,195
Benefits paid	(4,446)	(4,189)	(8,635)	(5,138)	(5,505)	(10,643)
Contract transfer	-	(42,595)	(42,595)	-	(79)	(79)
Settlements	-	(144)	(144)	-	-	-
Actuarial gain arising from changes in demographic assumptions	(1,693)	(8,364)	(10,057)	(717)	-	(717)
Actuarial loss arising from changes in financial assumptions	25,060	62,337	87,397	18,481	42,533	61,014
Actuarial loss/(gain) arising from liability experience	350	(25,300)	(24,950)	957	1	958
Present value of obligations at 31 December	181,184	320,186	501,370	156,379	327,460	483,839

Changes in the fair value of the plan assets are as follows:

	2020			2019
	Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Fair value of plan assets at 1 January	163,250	303,464	466,714	152,872	268,774	421,646
Assets classified as held for sale	-	-	-	-	(3,079)	(3,079)
Expected return on plan assets	3,447	5,508	8,955	4,470	7,331	11,801
Employer's contributions	2,215	1,805	4,020	2,399	1,767	4,166
Plan participants' contributions	264	763	1,027	301	894	1,195
Benefits paid	(4,446)	(4,189)	(8,635)	(5,138)	(5,505)	(10,643)
Scheme administration costs	(375)	-	(375)	(277)	-	(277)
Contract transfer	-	(39,836)	(39,836)	-	(253)	(253)
Settlements	-	(122)	(122)	-	-	-
Return on plan assets above/(below) that recorded in net interest	21,081	21,098	42,179	8,623	33,535	42,158
Fair value of plan assets at 31 December	185,436	288,491	473,927	163,250	303,464	466,714

Changes in the fair value of guarantee assets are as follows:

	2020 £'000	2019 £'000
Fair value of guarantee assets at 1 January	23,810	16,947
Assets classified as held for sale	-	(92)
Transferred out on scheme exit	(5,173)	-
Recognised in the Consolidated Statement of Profit or Loss
Guarantee asset movement in respect of service cost	1,626	2,204
Guarantee asset movement in respect of net interest	418	520
Recognised in other comprehensive income
Guarantee asset movement in respect of actuarial losses	10,024	4,231
Fair value of guarantee assets at 31 December	30,705	23,810

History of experience gains and losses is as follows:

	Group schemes
	2020 £'000	2019 £'000	2018 £'000	2017 £'000	2016 £'000
Fair value of scheme assets	185,436	163,250	152,872	157,325	149,529
Net present value of defined benefit obligations	(181,184)	(156,379)	(136,548)	(132,591)	(137,721)
Net surplus	4,252	6,871	16,324	24,734	11,808
Experience adjustments arising on scheme assets
Amount	21,081	8,623	(7,270)	3,942	27,129
Percentage of scheme assets	11.4%	5.3%	(4.8%)	2.5%	18.1%
Experience adjustments arising on scheme liabilities
Amount	350	957	3,967	28	(1,000)
Percentage of scheme liabilities	0.2%	0.6%	2.9%	0.0%	(0.7%)

	Other schemes
	2020 £'000	2019 £'000	2018 £'000	2017 £'000	2016 £'000
Fair value of scheme assets	288,491	303,464	268,774	345,527	404,104
Pension guarantee assets	30,705	23,810	16,947	7,026	18,587
Net present value of defined benefit obligations	(320,186)	(327,460)	(282,368)	(324,920)	(410,258)
Net (deficit)/surplus	(990)	(186)	3,353	27,633	12,433
Asset value not recognised as surplus	(11,142)	(4,597)	(6,111)	(30,025)	(15,747)
Net deficit	(12,132)	(4,783)	(2,758)	(2,392)	(3,314)
Experience adjustments arising on scheme assets
Amount	21,098	33,535	(17,467)	(4,314)	59,020
Percentage of scheme assets	7.3%	11.1%	(6.5%)	(1.2%)	14.6%
Experience adjustments arising on scheme liabilities
Amount	(25,300)	1	676	(31,447)	(1,714)
Percentage of scheme liabilities	(7.9%)	0.0%	0.2%	(9.7%)	(0.4%)

Funding arrangements are agreed for each of the Group's defined benefit pension schemes with their respective trustees. The employer's contributions expected to be paid during the financial year ending 31 December 2021 amount to £3.3m.

Each of the schemes manages risks through a variety of methods and strategies to limit downside in falls in equity markets, movement in inflation and movement in interest rates.

The Group's defined benefit obligation is sensitive to changes in certain key assumptions. The sensitivity analysis below shows how a reasonably possible increase or decrease in a particular assumption, in isolation, results in an increase or decrease in the present value of the defined benefit obligation as at 31 December 2020.

	Decrease £'000	Increase £'000
Rate of inflation - decrease/increase by 0.1%	(8,795)	8,689
Rate of increase in salaries - decrease/increase by 0.1%	(3,755)	3,744
Discount rate - decrease/increase by 0.1%	9,157	(9,051)
Life expectancy - decrease/increase by 1 year	(18,816)	18,816

30. Capital commitments

The Group had no capital commitments at 31 December 2020 or at 31 December 2019.

31. Contingent liabilities

The Group has guaranteed that it will complete certain Group contracts that it has commenced. At 31 December 2020 these guarantees amounted to £14.7m (2019: £19.3m). 

The Group had no other contingent liabilities at 31 December 2020 or at 31 December 2019.

32. Related party transactions

Identity of related parties

The Group has a related party relationship with its pension schemes, its subsidiaries and its Directors.

Pension schemes

Details of contributions to pension schemes are set out in note 29.

Subsidiaries

The Group has a central treasury arrangement in which all subsidiaries participate. Management does not consider it meaningful to set out details of transfers made in respect of this treasury arrangement between companies, nor does it consider it meaningful to set out details of interest or dividend payments made within the Group.

Transactions with key management personnel

The Group has identified key management personnel as the Directors of Mears Group PLC.

Key management personnel held the following percentage of voting shares in Mears Group PLC:

	2020 %	2019 %
Directors	0.6	0.3

Key management personnel's compensation is as follows:

	2020 £'000	2019 £'000
Salaries including social security costs	2,063	1,634
Contributions to defined contribution pension schemes	131	130
Share-based payments	340	-
	2,534	1,764

Further details of Directors' remuneration are disclosed within the Remuneration Report.

No dividends were paid to Directors during the year (2019: £0.04m).

Transactions with other related parties

During the year the Group made an additional short-term loan to YourMK LLP, an entity in which the Group is a 50% member, totalling £0.2m (2019: £0.1m). This loan was repaid during the period. At 31 December 2020, the Group was owed £0.5m (2019: £0.5m) by YourMK LLP.

During the year the Group provided maintenance services to Pyramid Plus South LLP, an entity in which the Group is a 30% member, totalling £7.9m (2019: £6.5m). At 31 December 2020, £0.9m (2019: £0.8m) was due to the Group in respect of these transactions. Pyramid Plus South LLP also made recharges of certain staff costs to the Group totalling £0.1m (2019: £nil). There were no amounts outstanding at 31 December 2020 in respect of these recharges (2019: £nil).

33. Restatement of prior year

Discontinued activities

The Consolidated statement of Profit or Loss has been restated to reflect the disposal of the Group's Planning Solutions business which was the subject of a disposal in December 2020, as detailed in note 10.

Deferred tax reclassification

A reclassification adjustment has been made to deferred tax and relates to the netting off of the deferred tax asset against the deferred tax liability, where the asset and liability were previously reported separately.

Reassessment of lease accounting 

During the year, the Group revisited the assumptions made at the time of the adoption of IFRS 16, and its assessment of the right of use assets and lease obligations as at transition and at 31 December 2019. As detailed below, the Directors have concluded that in the prior year, the right of use asset and associated lease obligation were overstated and as such, the Consolidated Statement of Profit or Loss, Consolidated Balance Sheet and Consolidated Cash Flow Statement have been restated to correct this error.

The Group holds more than 15,000 leases across its portfolio of residential properties, offices and vehicles. The most significant and complex category relates to the Group's portfolio of residential properties which comprises approximately 10,500 leases; whilst the Group endeavours to standardise the form of leases, operational demands dictate that many leases have specific wording to address particular operational needs and also to manage the associated operational and financial risks. The Group's suppliers of residential properties, being the property owners, will similarly have their own requirements. As such, each residential property lease requires individual assessment and the Group is required to make key judgements which include:

· the identification of a lease;

· assessing the right to direct the use of the asset;

· determining the lease term; and

· the assessment as to the level of future lease payments, including fixed and variable payments.

The most typical challenges encountered, and which form the key judgements are:

· where the lease contains a one-way no-fault break in Mears' favour, the Group measures the obligation based on the Group's best estimate of its future intentions;

· where a unilateral break is in place, assessing whether the lease can be terminated with no more than insignificant penalty;

· where the lessor has a right of substitution meaning that the lessor can swap one property for another without Mears approval;

· where Mears does not in practice have the right to control the use of the asset and the key decision-making rights are retained by the supplier;

· where a wider agreement for a supply of services includes a lease component which meets the definition of a lease under IFRS 16; and

· the assessment of the fixed lease payments where the lease obligation to the landlord is based on a pass-through arrangement in which Mears only makes lease payments to the owner to the extent that the property is occupied and to the extent that rents are received from the tenant.

Several errors and omissions impacting on the carrying values reported within the 2019 comparatives were identified; one particularly significant reassessment resulted in a significant reduction in the right of use asset and lease obligation reported in 2019. This reassessment related to the Group's 'More Homes' homelessness solution, through which the Group and its Local Authority partner acquire properties and, utilising a leasing arrangement, make these properties available to service users nominated by the Local Authority partner. Mears has no right to direct the use of the properties and the Local Authority partner operates the asset in a manner that it determines. Mears' participation is restricted to delivering tenancy management and maintenance services, and therefore the associated revenue has been restated to reflect Mears as the agent.

In the prior year, this arrangement was incorrectly identified as a lease within the definition of IFRS 16. This treatment has been reassessed during 2020, and management recognises that the previous treatment was incorrect.

The comparative figures have therefore been restated to reflect the correctly calculated figures as shown in the tables below:

Consolidated Statement of Profit or Loss	Previously reported £'000	Discontinued activities £'000	Reassessment of lease accounting £'000	Restated £'000
Continuing operations
Sales revenue	905,084	(20,880)	(2,747)	881,457
Cost of sales	(686,874)	9,030	2,496	(675,348)
Gross profit	218,210	(11,850)	(251)	206,109
Other administrative expenses	(172,632)	6,788	(36)	(165,880)
Exceptional costs	(2,018)	-	-	(2,018)
Amortisation of acquisition intangibles	(10,122)	-	-	(10,122)
Total administrative costs	(184,772)	6,788	(36)	(178,020)
Operating profit/(loss)	33,438	(5,062)	(287)	28,089
Share of profits of associates	895	-	-	895
Finance income	849	-	-	849
Finance costs	(9,981)	114	287	(9,580)
Profit/(loss) for the year before tax	25,201	(4,948)	-	20,253
Tax (expense)/credit	(3,976)	961	-	(3,015)
Profit/(loss) for the year from continuing operations	21,225	(3,987)	-	17,238

The adjustment for discontinued activities removes the trading result from the Group's Planning Solutions business in accordance with IFRS 5.

The adjustment for the reassessment of lease accounting in the Consolidated Statement of Profit or Loss reflects Mears as agent in the arrangement with More Homes referred to above and the net impact of removing the depreciation charge to reflect the reduction in the right of use asset, replacing this with the lease payments associated with the assets no longer falling under IFRS 16. Similarly, the reduction in the interest charge reflects the reduction in the lease obligation.

Consolidated Balance Sheet - restated lines	Previously reported £'000	Reclassification £'000	Reassessment of lease accounting £'000	Restated £'000
Non-current assets
Right of use assets	264,576	-	(66,192)	198,384
Deferred tax asset	3,310	(3,310)	-	-
Current assets
Trade and other receivables	162,838	-	1,253	164,091
Equity
Retained earnings	20,496	-	(656)	19,840
Non-current liabilities
Deferred tax liabilities	4,995	(3,310)	(113)	1,572
Lease liabilities	228,588	-	(62,588)	166,000
Current liabilities
Lease liabilities	40,757	-	(1,582)	39,175

The reclassification adjustment relates to the netting off of the deferred tax asset against the deferred tax liability where the asset and liability were previously reported separately.

The adjustment for the reassessment of lease accounting reflects the reduction in both the right of use asset and lease obligation. The increase to trade and other receivables relates to the recognition of a contract fulfilment asset, given the underlying contractual arrangements no longer fall under IFRS 16, and are therefore required to follow the accounting rules set by IFRS 15. The adjustment to retained earnings reflects the reassessment of the right of use asset and lease obligation recognised on transition, having adopted IFRS 16 on 1 January 2019.

Consolidated Cash Flow statement - restated lines	Previously reported £'000	Discontinued activities £'000	Reassessment of lease accounting £'000	Restated £'000
Operating activities
Result for the year before tax	25,201	(4,948)	-	20,253
Adjustments	64,032	(1,607)	(5,606)	56,819
Change in inventories	(6,294)	(63)	-	(6,357)
Change in trade and other receivables	4,971	(1,038)	(1,253)	2,680
Change in trade, other payables and provisions	12,340	1,195	(12)	13,523
Cash inflow from operating activities of continuing operations before taxation	100,250	(6,461)	(6,871)	86,918
Taxes paid	(2,991)	(386)	-	(3,377)
Net cash inflow from operating activities of continuing operations	97,259	(6,847)	(6,871)	83,541
Net cash outflow from operating activities of discontinued operations	(1,943)	6,847	-	4,904
Net cash inflow from operating activities	95,316	-	(6,871)	88,445
Investing activities
Additions to property, plant and equipment	(8,513)	136	-	(8,377)
Additions to other intangible assets	(3,011)	1,332	-	(1,679)
Proceeds from disposals of property, plant and equipment	46	-	-	46
Cash inflow in respect of property for resale	7,824	-	-	7,824
Payments on acquisitions, net of cash acquired	(1,300)	-	-	(1,300)
Loans made to other entities (non-controlled)	(48)	-	-	(48)
Interest received	363	-	-	363
Net cash (outflow)/inflow from investing activities of continuing operations	(4,639)	1,468	-	(3,171)
Net cash (outflow)/inflow from investing activities of discontinued operations	(841)	(1,468)	-	(2,309)
Net cash outflow from investing activities	(5,480)		-	(5,480)
Financing activities
Proceeds from share issue	1	-	-	1
(Repayment of)/receipts from borrowings related to assets classified as held for sale	(15,000)	-	-	(15,000)
Net movement in revolving credit facility	30,267	-	-	30,267
Discharge of lease liabilities	(35,411)	(351)	6,583	(29,179)
Interest paid	(9,843)	109	288	(9,446)
Dividends paid - Mears Group shareholders	(13,811)	-	-	(13,811)
Net cash outflow from financing activities of continuing operations	(43,797)	(242)	6,871	(37,168)
Net cash outflow from financing activities of discontinued operations	(854)	242	-	(612)
Net cash outflow from financing activities	(44,651)	-	6,871	(37,780)
Cash and cash equivalents, beginning of year	27,876	-	-	27,876
Net increase in cash and cash equivalents	45,185	-	-	45,185
Cash and cash equivalents, end of year (including discontinued)	73,061	-	-	73,061

The adjustment for discontinued activities removes the cash flows from the Group's Planning Solutions business which are aggregated and included within the discontinued operations.

The adjustment for the reassessment of lease accounting reflects the changing focus from IFRS 16 (which is seen as financing activities) to IFRS 15 (which is seen as operating cash flows). IFRS 16 has no impact on pre-tax cash flows and as such there is no cash impact from this restatement of the prior year.

 

END

 

 

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