9 March 2022

Alfa Financial Software Holdings PLC

 

Full Year Report for year ended 31 December 2021

 

Continued strong financial and operational performance

 

 

Alfa Financial Software Holdings PLC ("Alfa" or the "Company"), a leading developer of software for the asset finance industry, today publishes its audited results for the twelve months ended 31 December 2021.

 

Financial summary:

 

Years ended 31 December

Results	2021	2020	Movement
£m, unless otherwise stated			%
Revenue	83.2	78.9	5%
Operating profit	24.7	23.9	3%
Profit before tax	23.8	23.2	3%
Earnings per share - basic (pence)	6.49	6.93	(6)%
Earnings per share - diluted (pence)	6.39	6.79	(6)%
Special dividend declared per share (pence)	10.0	15.0
Proposed ordinary dividend (pence)	1.1	1.0	10%
Net cash	23.1	37.0	(38)%

 

 

Key measures (1)	2021	2020	Movement
£m, unless otherwise stated			%
Revenue - constant currency	83.2	76.5	9%
Operating profit - constant currency	24.7	22.5	10%
Operating free cash flow conversion (%)	114%	114%	0%
Total Contract Value (TCV)	133.1	112.9	18%

 

^{(1) See definitions section for further information regarding calculation of measures not defined by IFRS.}

 

 

Financial highlights:

 

·    Revenue up 5% versus 2020, and up 9% on a constant currency basis, with strong growth in subscription revenues which are up 30%

·    Operating profit up 3% on 2020

·    Revenues up 17%  and operating profit up 46% excluding one-off licence income from 2020 and on a constant currency basis,

·    Improved customer diversification; top five customers 37% of revenues in 2021 (2020: 48%, 2019: 61%)

·    Continuing strong operating free cash flow conversion of 114% (2020: 114%)

·    Robust balance sheet with cash of £23m (2020: £37m) and no debt

·    Continued commitment to sustainable shareholder returns

o Regular dividend per share up 10% to 1.1 pence in line with commitment to a progressive dividend policy

o Launch of share buyback in January 2022 for up to £18m over 18 months

 

Operational highlights:

 

·    Strong conversion of pipeline with TCV up 18% to £133m (2020: £113m)

·    Excellent delivery and Cloud Hosting performance

·    Consistently high employee engagement, at 78% (2020: 74%)

·    Continuing to invest in people and product for future growth

·    Strategic progress, with staff augmentation partner days up 54%

·    Wholesale Finance module gaining traction

·    ISS ESG Prime status awarded

 

Andrew Denton, Chief Executive Officer

 

"We started 2021 with a strong financial and delivery performance and maintained this through the whole of the year. The market opportunity for Alfa is very exciting.  We have good visibility of work for 2022, and assuming we continue our excellent recent record of attracting and retaining talent, we will see good revenue growth in 2022, albeit with some additional margin pressure due to salary inflation and return to normal costs. With the improving quality of our revenue mix, the strategic improvements made across the business, the quality of our people and strength of the intellectual property in our software, we have great confidence in Alfa's prospects."

 

Enquiries

 

Alfa Financial Software Holdings PLC	+44 (0)20 7588 1800
Andrew Denton, Chief Executive Officer Duncan Magrath, Chief Financial Officer Andrew Page, Executive Chairman
Tulchan Communications LLP	+44 (0)20 7353 4200
James Macey White Victoria Boxall
Barclays	+44 (0)20 7623 2323
Robert Mayhew Edward Hill
Investec	+44 (0)20 7597 4000
Patrick Robb Virginia Bull Sebastian Lawrence

Investor and analyst webcast

 

The Company will host a conference call today at 09:30am.  To obtain details for the conference call, please email [email protected].  Please dial in at least 10 minutes prior to the start time.  

 

An archived webcast of the call will be available on the Investors page of the Company's website, https://investors.alfasystems.com/.

 

Notes to Editors

 

Alfa has been delivering software systems and consultancy services to the global asset and automotive finance industry since 1990.  Our best practice methodologies and specialised knowledge of asset finance facilitates delivery of large software implementations and highly complex business change projects.  With an excellent delivery track record spanning three decades, Alfa's experience and performance is unrivalled in the industry.

 

Alfa Systems, our class-leading technology platform, is at the heart of some of the world's largest asset finance companies. Key to the business case for each implementation is Alfa Systems' ability to replace multiple customer systems with our single platform. Alfa Systems supports both retail and corporate business for auto, equipment, wholesale and dealer finance on a multijurisdictional basis, including leases/loans, originations and servicing. An end-to-end solution with integrated workflow and automated processing using business rules, Alfa Systems provides compelling solutions to asset finance companies.

 

Alfa Systems is currently live in 37 countries where it is supporting a portfolio where the customers' end clients are located.  Alfa has offices in Europe, Australasia and North America.  For more information, visit www.alfasystems.com.

 

Forward-looking statements

 

This Full Year Report ("FYR") has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed.  The FYR should not be relied on by any other party or for any other purpose.  This report contains certain forward-looking statements.  All statements other than statements of historical fact are forward-looking statements. These include statements regarding Alfa's intentions, beliefs or current expectations, and those of our officers, directors and employees, concerning (without limitation), with respect to the financial condition, results of operations, liquidity, prospects, growth, strategies and businesses of Alfa.  These statements and forecasts involve known and unknown risks, uncertainty and assumptions because they relate to events and depend upon circumstances that will or may occur in the future and should therefore be treated with caution.  There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements.  These forward-looking statements are made only as at the date of this announcement.  Nothing in this announcement should be construed as a profit forecast.  Except as required by applicable law, Alfa disclaims any obligation or undertaking to update the forward-looking statements or to correct any inaccuracies therein, or to keep current any other information contained in the FYR. Accordingly, reliance should not be placed on any forward-looking statements.

 

 

 

CEO's REVIEW

We saw a strong performance throughout 2021 with good progress across all parts of our business. We have continued to deliver successful implementations with increased usage of our scalable and reliable cloud hosting solution, at the same time as releasing significant enhancements to our software.

We have seen excellent sales growth reflected in our contracted orders with Total Contract Value (TCV) of £133m up 4% since 30 September 2021 and 18% in the twelve months since 31 December 2020. The pipeline has continued to strengthen underpinning our confidence in the future growth of the business.

 In another difficult year for our people, with the disruption and uncertainty from the ongoing impact from COVID-19, we have continued to focus on our culture and we are pleased to see that translate into high employee engagement scores. The resulting high retention rates and our ability to continue to attract high-calibre people into Alfa, supports our ability to grow our headcount in a tight labour market. The strong conversion of our pipeline and continued investment in our product and processes have enabled our growing workforce to remain fully utilised.

Financial performance has also been strong. Revenue of £83.2m (2020: £78.9m) was up 5% on last year, or 14% compared with 2020 revenues of £73.3m, after excluding one-off licence revenue from a five year contract extension.

To support the growth in the business average headcount in the period was 383 (2020: 341), a 12% increase which increased salary costs. Hosting costs also increased as that business grew over last year. Both of these were partially offset by a full twelve months of reduced travel and office costs compared with 2020.

Overall operating profit was up £0.8m to £24.7m (2020: £23.9m) with the revenue increase of £4.3m partially offset by increased costs of £3.5m, whilst maintaining operating profit margin at 30% (2020: 30%).

Cash conversion was strong at 114% (2020: 114%) and we finished the period with net cash of £23.1m (31 Dec 2020: £37.0m) after payment of £32.7m of dividends in the calendar year.

We have continued to diversify our revenue base with our top five customers now representing 37% of our revenues in 2021 compared to 48% in 2020 and 61% in 2019.  We have continued to deepen our relationships across our customer base, leading to more customers making a material revenue contribution to our business.  We had 14 customers contributing revenues of more that £2m in the year, up from 10 in 2020 and 7 in 2019. 

Alfa's culture has meant that from the early days of forming the business we have focused on creating a positive, sustainable impact on society. It is pleasing that our underlying strength in ESG is now being reflected in improved ESG scores, including the Carbon Disclosure Project and by achieving an ISS ESG 'Prime' rating. ISS ESG takes an absolute best-in-class approach by industry, so companies are categorised as 'Prime' if they achieve/ exceed the sustainability performance requirements (the 'Prime threshold') defined by ISS ESG for each specific industry in the ESG Corporate Rating.

 

Subscription

Subscription revenues have grown rapidly over the last couple of years and comprise any revenues that are recurring including monthly or annual maintenance billing, cloud hosting services and bundled licence, maintenance and hosting contracts. We have transitioned to a 'cloud first' approach to sales because we see real benefits in the speed of implementation for customers and they see benefits in the reliability of the service and built-in tools, including automated monitoring, patching and scheduling. We anticipate that the majority of new customers will take a hosted service and all of the current v4 to v5 upgrades are moving into a hosted v5 environment. In addition we expect that new customers will increasingly take bundled licence, hosting and maintenance contracts, further improving the stickiness of the customer base. We now have seven customers taking cloud hosting services for live production environments and have five customers taking hosting services during design and implementation, most of which will become live production customers, to give a total of twelve customers taking hosting services, up from ten at the end of 2020.

The number of customers with ongoing maintenance contracts has increased to 29 from 27 at the end of 2020.

 

Software

Our strategy is to continue to develop our software, to ensure that we meet industry and customer needs as they evolve and as the regulatory environment changes. We release a new update of Alfa every four weeks, each one of which makes enhancements available to customers that add to their ability to serve their own customers. This maintains our edge as a leading provider of auto and equipment finance software.

During 2021 we invested in improving the efficiency of our software development; all part of our continuing drive for simplification. We see the focus of development in 2022 move towards customer facing functionality improvements, as customers continue to innovate and react to the changing demands of the market. We are also looking to expand our capacity to deliver new developments, and consequently we are in detailed planning for creating a new virtual development hub in Portugal to augment our London development teams.

Despite more of an internal focus on development in 2021 we did significantly advance our ability to service Wholesale customers which is a new and significant vertical market for Alfa. These enhancements allow support for all asset types, speedier access to funds for wholesale customers while tracking and managing contracts through the early stages and allowing for bulk changes to Wholesale contract curtailment schedules. We now have two customers using our Wholesale functionality and one of our major contract wins in the first half was for a Wholesale-only customer.

We have also delivered improvements in the areas of configuration management, credit decisioning, business rule creation and regulatory support for European markets.

The new user interface (UI) that we launched last year is now in production with eight customers and these new UI approaches have been used to develop collections and curtailments functionality.

As expected, overall software revenue reduced compared with last year due to the reduction in brand new Alfa implementations and consequently there was a reduction in licence income, although this was partially offset by increased development days for existing customers, including those upgrading from Alfa Systems v4 to v5.

 

Services

Services revenues are derived from all of the work on implementations and other services but exclude development days on new and existing customers (which is shown in software). We have continued to deliver a very high level of service to customers, whilst operating remotely during the period. In 2021 in the UK we saw go-lives on an Alfa Start project, implementing for new business following the acquisition by another customer and two v4 to v5 upgrades. In Europe we saw the continuation of a multi-country implementation across a further four European countries, and in the US a brand new implementation for an automotive client and the launch of three new modules for an existing customer.

We have grown our customer-serving team, however a greater proportion of their time was spent on software development which shows in software. Within services there was a reduction in new implementation work, offset by the implementation of v4 to v5 upgrades.

 

We have also grown our access to partner resources and during the year we had partners operating with us for seven customers, which is up from four customers for the last year. In 2020 there was some large systems integration work done by a partner which normally would not be within the scope of our work, and if this was excluded total partner days were up 54%.

 

Our partner programme is a key enabler of our growth and we will expand this further. We will create plans to develop partner-led delivery which would be a significant step forward from partners augmenting our existing resources.

 

 

 

Alfa iQ - putting theory into practice

Alfa iQ spent 2021 engaged in prototyping work with Alfa customers which successfully validated the business benefit of artificial intelligence and machine learning applications within the asset finance industry.  Alfa iQ has now been engaged by two leading organisations, one providing automotive finance and the other business finance, to implement artificial intelligence and machine learning solutions within their businesses, which will generate revenue in 2022.

The projects build on two different applications of artificial intelligence and machine learning in asset finance: improvements to originations and workflow optimisation.

Up until now Alfa iQ has relied on using resources from Alfa and Bitfount, the joint venture partners, however we are now actively recruiting into the joint venture. In the period Alfa iQ achieved ISO 27001 certification.

 

Strong engagement with our people

We have balanced the issues of safety along with recognising the mental health impacts of lockdowns. We have not required anyone to come to the offices during the pandemic who did not want to, but when allowed, we have opened up the office for those who want to be there. Each department or team has created its own charter for the way it wishes to work and we are implementing these now. We have continued to arrange remote events to keep engagement high, ranging from short presentations on work and life topics through to Company-wide hackathons, innovation days and conferences.

Engagement and retention have remained high, and we continue to be able to attract high-quality diverse people to Alfa, however we recognise that the market remains tight for quality software engineers and so we work hard to ensure that we are the employer of choice. With this in mind, we have a very full agenda in our global HR function, where activity has included updating our approach to on-boarding and to learning and development as well as an ongoing review of rewards and benefits. Employee share ownership has always been important to Alfa and we introduced a Save as You Earn (SAYE) share scheme in the UK and an Employee Stock Purchase Plan (ESPP) share scheme in the USA.

 

Capital return

We remain a strongly cash generative business. We continuously review our strategy, assess the funds needed to pursue that strategy and then review the options for any excess funds. When presenting our 2020 results we committed to starting a programme of regular dividends, and we remain committed to doing this through the declaration of a single ordinary dividend each year alongside our full-year results. Despite the payment of a regular dividend, we expect to continue to generate excess cash and so from time to time we will also look whether to return it. Having made an assessment of our potential investment needs and reviewing our internal forecasts for the next 12-18 months we declared a special dividend of 10 pence per share, for a total payment of £30m, which means that we will have generated total dividends for shareholders over the last 12 months of 26 pence per share or £77m. Looking forwards it remains our intention to continue to pay a regular dividend, and to grow this progressively, but in addition we announced a share buyback programme in January 2022 to spend up to £18m over the next 18 months to buy back our shares, partly to satisfy share option vestings, but with the majority to be held in Treasury and/or cancelled.

 

Robust market conditions

While the underlying auto and equipment finance market did initially see a dip in activity following widespread COVID-19 lockdowns, it has broadly been recovering since H2 2020. This continued through 2021 and we now see generally favourable market conditions, recognising that whilst we have no direct exposure to events in Ukraine and Russia, it is too early to say what the medium-term impacts on the macroeconomic outlook maybe.

Regarding the asset finance software market, since the initial disruption of the uncertainty caused by COVID-19 in H1 2020, we have seen no adverse impact on our market. Indeed, the remote working practices that companies have been forced to adopt, and are increasingly looking to be standard practice going forwards, has accelerated moves towards a digital strategy, alongside increased focus on system flexibility and reliability, and increasing regulatory and legacy push factors, both of which Alfa is well positioned to benefit from.

 

Good conversion of late-stage pipeline

When we announced our 2020 results we had a strong late-stage pipeline, but highlighted the importance of converting this into signed contracts and that converting prospects into signed contracts was taking longer than normal. During the year we have converted seven prospects into wins and added an additional five prospects, without losing any, so finishing the year with eight prospects. This success in converting the late-stage pipeline demonstrates that we have a compelling proposition. Since the end of 2021 we have added one additional prospect and converted one into a win so that we currently have eight prospects in our late-stage pipeline.

It is not only the quality of our software that gives us such a strong conversion of prospects, but our strong delivery record. An increasing trend has been the move towards customers looking to implement Minimum Viable Product (MVP) solutions supported by Alfa Start. This has the advantage of getting us on the ground faster, demonstrating the quality of our software and people.

 

 

Outlook

The market opportunity for Alfa is very exciting and we have good visibility of work for 2022. We know there is a tight talent market at the moment, but assuming we continue our excellent recent record of attracting and retaining talent, we will see good revenue growth in 2022, albeit with some additional margin pressure due to salary inflation and return to normal costs. With the improving quality of our revenue mix, the strategic improvements made across the business, the quality of our people and strength of the intellectual property in our software, we have great confidence in Alfa's prospects.

FINANCIAL REVIEW

 

Financial Results

 

						Movement
£m	2021				2020	%
Revenue		83.2			78.9	5%
Operating profit			24.7		23.9	3%
Profit before tax		23.8			23.2	3%
Taxation		(4.6)			(2.9)	159%
Profit for the period		19.2			20.3	(5)%
Basic EPS		6.5p			6.9p	(6)%

 

 

Revenues increased by 5% or £4.3m to £83.2m in the twelve months ended 31 December 2021 (2020: £78.9m). Growth at constant currency was 9%.

Operating profit increased by £0.8m to £24.7m (2020: £23.9m), due to the £4.3m increase in revenues, partially offset by £3.5m increase in expenses, principally due to a £1.8m increase in salary costs from pay rises and increased headcount, as well as higher hosting costs up by £0.8m and other computer costs up by £0.8m.

Net finance costs which relate to lease expenses of £0.8m (2020: £0.7m) resulted in profit before tax of £23.8m (2020: £23.2m). The Effective Tax Rate (ETR) for 2021 is 19.3% (2020: 12.5%), the increase reflects that the prior year benefited from R&D tax relief for the two years 2018 and 2019, whereas the current year reflects the R&D tax relief for 2020 only. The resulting profit for the period was £19.2m (2020: £20.3m).

 

 

Revenue

Revenue - by type	2021	2020	Movement
£m		(*restated)	%
Subscription*	23.5	18.1	30%
Software*	13.6	20.0	(32)%
Services*	46.1	40.8	13%
Total revenue	83.2	78.9	5%

 

*To better reflect the nature and type of revenue, changes have been made to the classification and allocation of revenue line items.  The comparative disclosures for the 2020 reporting period have also been amended to reflect a fair base for comparability.  These changes have had no impact on the total revenue or the profit before tax that were disclosed for 2020. Software revenues include revenues from recognition of customised licence revenue, one-off licence fees and any development revenues.  Subscription revenues include recurring revenues paid on a monthly or annual basis, including subscription licence revenues, maintenance and cloud hosting.  Services revenues are revenues from any work done for customers including pre-implementation work, implementation work, and ongoing services, but excludes any revenue from development work.

 

 

Subscription revenues

Overall subscription revenues increased 30% to £23.5m (2020: £18.1m). The increase was driven by a 24% increase in maintenance revenues with customers growing to 29 at the end of the year, up from 27 at the start of the year. Hosting customers increased from 10 at the end of last year to 12 at the end of 2021. Revenues from pure hosting alone grew strongly, alongside good growth from revenues from bundled subscriptions, which included not just hosting but also maintenance and licence payments.

 

 

Software revenues

Software revenues of £13.6m were down £6.4m or 32% on last year (2020: £20.0m). Of this reduction, £5.6m was due to a five-year contract extension agreed and recognised in 2020 with a customer who had previously terminated its licence. In 2021 we did recognise £2.1m of revenue across six existing customers for additional licence payments as a result of going through a contractual band or for new modules.

As previously discussed more of our implementation work this year has been for v4 to v5 upgrades, which generally do not attract additional licence payments, except where customers take on additional modules and so the income from customised licences was down on last year. This was partially offset by income from increased development work for existing customers, including those going through v4 to v5 upgrades.

 

 

Services revenues

Total services revenue increased by 13% to £46.1m (2020: £40.8m) at actual exchange rates, driven by higher chargeable days from our increased headcount. There was a reduction in pre-implementation revenues, where last year we had two large customers requiring detailed pre-implementation work. Revenues from new implementations were up, although stronger growth was seen with ongoing services work largely on the back of v4 to v5 upgrades.

 

 

 

Total contract value (TCV)

TCV - by stream
£m				2021	2020	Movement %
Subscription				85.8	69.1	24%
Software				14.9	12.8	16%
Services				32.4	31.0	5%
Total TCV				133.1	112.9	18%

Definition of TCV is included in the definitions section of this report

 

Total contract value (TCV) - as defined in the definitions section - increased over last year by 18% to £133.1m. As expected the subscription TCV has increased 24% driven by an increase in the number of customers and the significant growth in our hosting business. There was also a 16% increase in software, from secured development work and licences from the contracts from the strong conversion of the late-stage pipeline in the year. Growth in services TCV, at 5%, was somewhat lower with a number of v4 to v5 implementations coming to an end.

 

TCV - by stream for next 12 months
£m				2021	2020	Movement %
Subscription				26.9	22.4	20%
Software				6.7	6.1	10%
Services				26.2	23.8	10%
Total TCV				59.8	52.3	14%

 

Of the TCV at 31 December 2021, £59.8m (31 Dec 2020: £52.3m) is anticipated to convert into revenue within the next 12 months, assuming contracts continue as expected and are not cancelled or delayed. This includes £6.7m (2020: £6.1m) of software revenues, £26.9m (2020: £22.4m) of subscription revenues and £26.2m (2020: £23.8m) of services revenues.

 

 

 

 

 

Operating profit

The Group's operating profit increased by £0.8m, or 3%, to £24.7m in 2021 (2020: £23.9m).  This reflected the £4.3m increase in revenues, partially offset by an increase in the Group's cost base as we continued to invest in the business. Increased headcount drove higher costs although this was partially offset by reduced partner costs, which were high in 2020 due to one large pre-implementation project. The Group's operating profit on a constant currency basis increased by 10% as sterling was stronger against the USD than last year.

Headcount was up 6% at 31 December 2021 at 382 (31 Dec 2020: 360), with average headcount increasing more significantly to 383 (2020: 341) up 12%. Our staff retention rate has been strong at 87% over the 12 months up to that date, as expected down from the unusually high 93% experienced in 2020.

 

Expenses - net	2021		2020	Movement
£m			(restated)	%
Cost of sales*		29.0	27.0	7%
Sales, general and administrative expenses*		30.0	28.5	5%
Other income		(0.5)	(0.5)	-
Total expenses - net		58.5	55.0	6%

 

* To better reflect the nature and function of certain expenses, changes have been made to the classification and allocation of expense line items. The comparative disclosures for the December 2020 reporting period have also been amended to reflect a fair base for comparability. Costs previously classified as implementation and support expenses and research and product development expenses of £11.9m and £15.1m, respectively, have been presented as cost of sales. In addition, £3.4m of implementation and support expenses and £3.8m of research and product development expenses have been reclassified to sales, general and administrative expenses. The main items affected are administrative salary costs, computer costs and property related expenses. These changes have had no impact on the total expenses or the profit before tax that were disclosed at the end of December 2020.

Cost of sales increased by £2.0m to £29.0m (2020: £27.0m) due to higher salary costs from the increase in customer-facing headcount along with increased hosting costs, partially offset by a reduction in partner costs.

Sales, general and administrative (SG&A) expenses increased by £1.5m to £30.0m in the year (2020: £28.5m).  This included increased salary costs through higher headcount although this was somewhat offset by the reduction in contractor costs.  In addition Profit Share Pay increased to £3.1m (2020: £2.7m). There has also been an unfavourable increase in foreign currency differences of £0.7m, which moved from a gain of £0.5m in 2020 to a loss of £0.2m in 2021.  The above factors were offset by a further reduction in travel and conference costs, as there was almost no travel for the whole twelve month period.

Finance costs

Net finance costs which relate to leases of £0.8m (2020: £0.7m) remained relatively unchanged with a small reduction in finance income from reduced cash balances and interest rates.

Profit for the period

Profit after taxation decreased by £1.1m, or 5%, to £19.2m in 2021 (2020: £20.3m).  The Effective Tax Rate (ETR) for 2021 is 19.3% (2020:  12.5%) with this increase reflecting, in part, that the prior year benefited from R&D tax relief for the two years 2018 and 2019, whereas the current year will reflect the R&D tax relief for 2020 only.

Earnings per share

Basic earnings per share decreased by 6% to 6.49 pence in 2021 (2020: 6.93 pence). Diluted earnings per share decreased by 6% to 6.39 pence (2020: 6.79 pence).

Cash flow

Net cash (including the effect of exchange rate changes) decreased by £13.9m to £23.1m at 31 December 2021, from £37.0m at 31 December 2020. This decrease has been driven by strong cash generated from operations, offset by the payment of special and regular dividends of £32.7m.

Operating free cash flow conversion
£m				2021	2020
Cash generated from operations				31.3	30.1
Adjusted for:
Capital expenditure				(1.3)	(1.0)
Principal element of the lease payments in respect of IFRS16				(1.9)	(1.7)
Operating free cash flow				28.1	27.4
Operating profit				24.7	23.9
Operating free cash flow conversion				114%	114%

 

Cash generated from operations benefited from a continuing strong focus on cash performance. The Group's operating free cash flow conversion (FCF) of 114% (2020: 114%) was in line with last year due to continued focus on cash management. This is a very strong result and higher than our ongoing trend which will be closer to 100% conversion.

In addition to the cash generated from operations of £31.3m, the Group incurred £1.3m on capital expenditure (2020: £1.0m) and made net tax payments of £3.8m (2020: £3.8m). This included the research and development tax credit claim received during the period of £1.6m, which was claimed and recognised in 2020, resulting in the unusually low effective tax rate for FY 2020. The Group has no external bank borrowings.

In the year, net cash outflows of £39.2m (2020: £45.9m) from financing activities  were largely driven by £32.7m (2020: £44.2m) of dividends paid, with ordinary dividends of £3.0m (2020: nil) along with Special Dividends of £29.7m (2020: £44.2m).  In addition there were principal element of lease payments of £1.9m (2020: £1.7m) and £4.6m (2020: nil) for funding the Employment Benefit Trust for the purchase of shares to satisfy current and future LTIPs, thereby avoiding future potential dilution from the issue of shares to satisfy vestings.

Balance sheet

The most significant movement in the balance sheet was the change in cash noted above.  Other balance sheet movements were as follows:

Non-current assets of £44.4m were largely unchanged from last year (2020: £44.8m).

Current assets, excluding cash, increased by £2.8m to £16.5m (2020: £13.7m). Trade receivables remain well controlled with debtor days at 26 days (2020: 27 days) with only £0.1m (2020: £0.1m) more than 90 days overdue. Provision for impairment remains £nil (2020: £nil). Accrued income increased in the year by £1.3m to £6.3m due to increased revenue, partially offset by the unwinding of the accrued income related to the one-off licence fee booked in 2020. Prepayments increased by £1.1m to £3.2m (2020: £2.1m) due to the inclusion of deferred costs (offset by a related increase in deferred licence contract liabilities).

Current liabilities of £24.0m (2020: £18.1m) were up £5.9m. There was a £1.1m increase in trade payables and other payables to £9.3m (2020: £8.1m) principally due to higher bonus and profit share payments. Lease liabilities increased from £1.7m to £1.9m due to new leases for the Michigan and Sydney offices. Contract liabilities increased by £4.0m to £11.0m (2020: £7.0m) with deferred licence liabilities increasing £3.4m to £5.3m (2020: £1.9m) due to an increase in the material right related to customised licence implementations, along with an increase in deferred maintenance liabilities up £0.6m to £5.7m (2020: £5.1m) due to growth in the business.

Non-current liabilities reduced slightly, down £0.6m to £16.6m (2020: £17.2m) due to a reduction in lease liabilities to £15.2m (2020: £15.8m) with provisions remaining unchanged at £1.4m (2020: £1.4m).

Capital allocation and distributions

The Group's capital allocation policy takes into consideration the need to continue to invest in our people and technology whilst maintaining strong liquidity.

Since November 2020 we have paid £74m of special dividends and paid the first regular dividend of 1.0 pence per share in July 2021.

In January 2022 we announced a share buyback programme of up to £18m over the next 18 months.

The Board intends to progressively increase the dividend as the Group grows, whilst ensuring that we retain a strong balance sheet.

For 2021 we are proposing an ordinary dividend of 1.1 pence per share, amounting to £3.3m. If approved by shareholders in the Annual General Meeting, this will be paid on 24 June 2022 to shareholders on the register as at 27 May 2022. The ex-dividend date will be 26 May 2022.

Related parties

Details about related party transactions are disclosed in note 32.

Going concern

The financial statements are prepared on the going concern basis. The Group continues to be cash generative and the Directors believe that the Group has a resilient business model. The Group meets its day-to-day working capital requirements through its cash reserves generated from operating activities. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group has sufficient cash reserves to continue to operate for a period of not less than 12 months from the date of approval of these financial statements. The going concern assessment also includes downside stress testing in line with FRC guidance which demonstrates that even in the most extreme downside conditions considered reasonably possible, given the existing level of cash held, the Group would continue to be able to meet its obligations as they fall due, without the need for substantive mitigating actions. On this basis, whilst it is acknowledged that there is continued uncertainty over future economic conditions, the Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements.

Subsequent events

On 18 January 2022 the Group announced the launch of a share buyback programme. Refer to the Company website for more details. There have been no other reportable subsequent events.

 

Duncan Magrath

Chief Financial Officer

8 March 2022

 

 

DEFINITIONS

Constant currency

When the Company believes it would be helpful for understanding trends in its business, the Company provides percentage increases or decreases in its revenues or operating profit to eliminate the effect of changes in currency values.  When trend information is expressed herein "in constant currencies", the comparative results are derived by re-calculating comparative non-GBP denominated revenues and/or expenses using the average exchange rates of the comparable months in the current reporting period.

Operating free cash flow (FCF) conversion

Operating FCF conversion is calculated as cash from operations, less capital expenditures and the principal element of lease payments, as a percentage of operating profit.  Operating FCF is calculated as follows:

£m	2021	2020
Cash generated from operations	31.3	30.1
Capital expenditure	(1.3)	(1.0)
Principal element of lease payments	(1.9)	(1.7)
Operating FCF generated	28.1	27.4
Operating profit	24.7	23.9
Operating FCF Conversion	114%	114%

 

Total contract value (TCV)

Total contract value ("TCV") - TCV is calculated by analysing future contracted revenue based on the following components:

(i) an assumption of three years of subscription payments (including maintenance, Cloud Hosting and subscription licence) assuming these services continued as planned (actual contract length varies by customer); 

(ii) the estimated remaining time to complete services and software deliverables within contracted software implementations, and recognise deferred licence amounts (which may not all be under a signed statement of work).

(iii) Pre-implementation and ongoing services and software work which is contracted under a statement of work.  As TCV is a reflection of future revenues, forward looking exchange rates are used for the conversion into GBP.  The exchange rates used for the TCV calculation are as follows:

Exchange rates used for TCV	2021	2020
USD	1.38	1.29
Euro	1.17	1.11

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021

 

The preliminary results for the year ended 31 December 2021 are prepared in accordance with UK adopted International Accounting Standards (IAS) and interpretations by the IFRS Interpretations Committee applicable to companies reporting under UK adopted IFRS. They do not include all the information required for full annual statements and should be read in conjunction with the 2021 Annual Report.  The accounting policies adopted in this preliminary announcement are consistent with the Annual Report for the year ended 31 December 2021.

The comparative figures for the financial year 31 December 2020 have been extracted from the Group's statutory accounts for that financial year. The 2020 financial statements, which were prepared with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, have been reported on by the Group's auditors and delivered to the registrar of companies. There are no differences for the Group in applying each of these accounting frameworks. The financial information contained in this announcement does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.

The financial information has been extracted from the financial statements for the year ended 31 December 2021, which have been approved by the Board of Directors and on which the auditors have reported without qualification. The financial statements will be delivered to the Registrar of Companies after the Annual General Meeting. The financial statements for the year ended 31 December 2020, upon which the auditors reported without qualification, have been delivered to the Registrar of Companies. The audit report did not contain anything to which the auditors drew attention by way of emphasis and that the audit reports did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND COMPREHENSIVE INCOME

 

£m	Note	2021	2020 (restated)
Continuing operations
Revenue	5	83.2	78.9
Cost of sales*		(29.0)	(27.0)
Gross profit		54.2	51.9
Sales, general and administrative expenses*		(30.0)	(28.5)
Other income		0.5	0.5
Operating profit	6	24.7	23.9
Share of net loss of joint venture	19	(0.1)	-
Profit before net finance costs and tax		24.6	23.9
Finance income	10	-	0.1
Finance expense	10	(0.8)	(0.8)
Profit before taxation		23.8	23.2
Taxation	11	(4.6)	(2.9)
Profit for the financial year		19.2	20.3
Other comprehensive income:
Exchange differences on translation of foreign operations	27	(0.1)	0.1
Other comprehensive (loss)/income net of tax		(0.1)	0.1
Total comprehensive income for the year		19.1	20.4
Earnings per share (in pence) for profit attributable to the ordinary equity holders of the Company
Basic	12	6.49	6.93
Diluted	12	6.39	6.79
Weighted average no. of shares (m) - basic	12	296.7	293.8
Weighted average no. of shares (m) - diluted	12	301.5	300.1

*      To better reflect the nature and function of certain expenses, changes have been made to the classification and allocation of expense line items. The comparative disclosures for the December 2020 reporting period have also been amended to reflect a fair base for comparability. Costs previously classified as implementation and support expenses and research and product development expenses of £11.9m and £15.1m, respectively, have been presented as cost of sales. In addition, £3.4m of implementation and support expenses and £3.8m of research and product development expenses have been reclassified to sales, general and administrative expenses. The main items affected are administrative salary costs, computer costs and property related expenses. These changes have had no impact on the total expenses or the profit before tax that were disclosed at the end of December 2020.

The above consolidated statement of profit or loss and comprehensive income should be read in conjunction with the accompanying notes.

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

£m	Note	2021	2020
Assets
Non-current assets
Goodwill	14	24.7	24.7
Other intangible assets	15	2.4	2.2
Property, plant and equipment	16	0.8	0.9
Right-of-use assets	17	14.4	14.8
Deferred tax assets	18	1.8	1.8
Interests in joint venture	19	0.3	0.4
Total non-current assets		44.4	44.8
Current assets
Trade receivables	20	6.0	5.8
Accrued income	21	6.3	5.0
Prepayments	21	3.2	2.1
Other receivables	21	1.0	0.8
Cash and cash equivalents	22	23.1	37.0
Total current assets		39.6	50.7
Total assets		84.0	95.5
Liabilities and equity
Current liabilities
Trade and other payables	23	9.3	8.1
Corporation tax	23	1.8	1.3
Lease liabilities	24	1.9	1.7
Contract liabilities	23	11.0	7.0
Total current liabilities		24.0	18.1
Non-current liabilities
Lease liabilities	24	15.2	15.8
Provisions for other liabilities	25	1.4	1.4
Total non-current liabilities		16.6	17.2
Total liabilities		40.6	35.3
Capital and reserves
Share capital	26	0.3	0.3
Translation reserve	27	-	0.1
Own shares	28	(3.4)	-
Retained earnings		46.5	59.8
Total equity		43.4	60.2
Total liabilities and equity		84.0	95.5

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.

The consolidated financial statements were approved and authorised for issue by the Board of Directors on 8 March 2022 and signed on its behalf.

 

ANDREW DENTON                                           DUNCAN MAGRATH

Chief Executive Officer                                   Chief Financial Officer

Alfa Financial Software Holdings PLC - Registered number 10713517

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

£m	Note	Share capital	Own shares	Translation reserve	Retained earnings	Equity attributable to owners of the parent
Balance as at 1 January 2020		0.3	-	-	82.0	82.3
Profit for the financial year		-	-	-	20.3	20.3
Other comprehensive income		-	-	0.1	-	0.1
Total comprehensive income for the year		-	-	0.1	20.3	20.4
Transactions with owners in their capacity as owners:
Equity-settled share-based payment schemes	29	-	-	-	1.3	1.3
Equity-settled share-based payment schemes -deferred tax impact	18	-	-	-	0.4	0.4
Dividends	31	-	-	-	(44.2)	(44.2)
Balance as at 31 December 2020		0.3	-	0.1	59.8	60.2
Profit for the financial year		-	-		19.2	19.2
Other comprehensive loss		-	-	(0.1)	-	(0.1)
Total comprehensive income for the year		-	-	(0.1)	19.2	19.1
Transactions with owners in their capacity as owners:
Equity-settled share-based payment schemes	29	-	-	-	1.1	1.1
Equity-settled share-based payment schemes - deferred tax impact	18	-	-	-	0.3	0.3
Dividends	31	-	-	-	(32.7)	(32.7)
Own shares issued	28	-	1.2	-	(1.2)	-
Own shares acquired	28	-	(4.6)	-	-	(4.6)
Balance as at 31 December 2021		0.3	(3.4)	-	46.5	43.4

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

£m	Note	2021	2020
Cash flows from operating activities
Profit before tax		23.8	23.2
Net finance costs		0.8	0.7
Share of net loss from joint venture		0.1	-
Operating profit		24.7	23.9
Adjustments:
Depreciation	6/16/17	2.3	2.2
Amortisation	6/15	0.8	0.8
Share-based payment charge	29	1.5	1.5
Loss on disposal of assets		-	0.1
Movement in provisions	25	-	0.5
Movement in working capital:
Movement in contract liabilities	23	4.1	(1.9)
Movement in trade and other receivables	20/21	(2.8)	0.6
Movement in trade and other payables (excluding contract liabilities)	23	0.7	2.4
Cash generated from operations		31.3	30.1
Interest element on lease payments	10/24	(0.8)	(0.8)
Income taxes paid	11	(3.8)	(3.8)
Net cash generated from operating activities		26.7	25.5
Cash flows from investing activities
Purchases of property, plant and equipment	16	(0.3)	(0.2)
Purchases of computer software	15	(0.1)	(0.1)
Payments for internally developed software	15	(0.9)	(0.7)
Investment in joint venture	19	-	(0.3)
Loan to joint venture	19	-	(0.1)
Interest received	10	-	0.1
Net cash used in investing activities		(1.3)	(1.3)
Cash flows from financing activities
Dividends paid to Company shareholders		(32.7)	(44.2)
Principal element on lease payments	24	(1.9)	(1.7)
Purchase of own shares		(4.6)	-
Cash used in financing activities		(39.2)	(45.9)
Net decrease in cash		(13.8)	(21.7)
Cash and cash equivalents at the beginning of the year	22	37.0	58.8
Effect of foreign exchange rate changes on cash and cash equivalents		(0.1)	(0.1)
Cash and cash equivalents at the end of the year	22	23.1	37.0

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021

1. Summary of significant accounting policies

This note provides a list of the significant accounting policies adopted in the preparation of these consolidated financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the Group, consisting of Alfa Financial Software Holdings PLC (Alfa or the Company), its subsidiaries and joint venture, and are presented to the nearest million unless otherwise stated. The change in presentation from thousands to millions has been done to make the financial statements clearer for the users.

The principal activity of the Group is to provide software solutions and consultancy services to the auto and equipment finance industry in the United Kingdom, United States of America, Europe and Australasia.

1.1 Basis of preparation

Compliance with IFRS

The consolidated financial statements of the Group have been prepared in accordance with UK-adopted international accounting standards and Company Law. The change in the basis of preparation from 2020 is required by UK Company Law as a result of the UK's exit from the EU on 31 January 2020 and the cessation of the transition period on 31 December 2020. This change does not constitute a change in accounting policy, rather a change in the framework which is required to group the use of IFRS in company law. There is no impact on the recognition, measurement or disclosure between the two frameworks in the period reported.

Historical cost convention

The consolidated financial statements have been prepared under the historical cost convention, other than the revaluation of financial assets and financial liabilities recorded at fair value through profit or loss.

Going concern

The financial statements are prepared on the going concern basis. The Group continues to be cash-generative and the Directors believe that the Group has a resilient business model. The Group meets its day-to-day working capital requirements through its cash reserves generated from operating activities. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group has sufficient cash reserves to continue to operate for a period of not less than 12 months from the date of these financial statements.

The going concern assessment also includes downside stress testing in line with FRC guidance which demonstrates that even in the most extreme downside conditions considered reasonably possible, given the existing level of cash held, the Group would continue to be able to meet its obligations as they fall due, without the need for substantive mitigating actions.

On this basis, whilst it is acknowledged that there is continued uncertainty over future economic conditions, the Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements.

New and amended standards adopted by the Group

The Group applies for the first time the following new standard:

•      Amendments to IFRS 16 Leases: COVID-19-Related Rent Concessions (issued on 28 May 2020). 

By adopting the above, there has been no material impact on the financial statements.

New standards, amendments and interpretations not yet adopted

At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS Standards that have been issued but are not yet effective:

•      Amendments to IFRS 3 Business Combinations; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and Annual Improvements 2018-2020 (All issued 14 May 2020, effective from 1 January 2022).

The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group.

1.2 Group structure

Basis of consolidation

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

Unless otherwise stated, subsidiaries have share capital consisting solely of ordinary shares, and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation or registration is also each subsidiary's principal place of business.

All intra-Group transactions, balances, income and expenses are eliminated on consolidation. All subsidiaries have a 31 December year end.

In the current period it was concluded that the Group exercises control over the employee benefit trust because it is exposed to, and has a right to, variable returns from this trust and is able to use its power over the trust to affect those returns. Therefore the trust has been consolidated by the Group in the current period. The impact of consolidation of the trust in the prior period was immaterial.

Joint arrangements

A joint arrangement is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control; that is, when the relevant activities that significantly affect the investee's returns require the unanimous consent of the parties sharing control.

Joint control is the contractually agreed sharing of control of an arrangement, and exists only when decisions about the activities that significantly affect the arrangement's returns require the unanimous consent of the parties sharing control. Judgement is required in determining this classification through an evaluation of the facts and circumstances arising from each individual arrangement. Joint arrangements are classified as either joint operations or joint ventures based on the rights and obligations of the parties to the arrangement. In joint operations, the parties have rights to the assets and obligations for the liabilities relating to the arrangement, whereas in joint ventures, the parties have rights to the net assets of the arrangement.

Alfa only has one joint venture, namely Alfa iQ, which was formed in May 2020. The investment in the joint venture is accounted for using the equity method. The Group's share of the joint venture's net profit/ (loss) is based on its most recent financial statement drawn up to the Group's balance sheet date. The total carrying value of investment in joint venture represents the cost of the investment, including loans which form part of the net investment in the joint venture, plus the share of post-acquisition retained earnings and any other movements in reserves less any impairment in the value of the investment.

The carrying values of joint ventures are reviewed on a regular basis and if there is objective evidence that an impairment in value has occurred as a result of one or more events during the period, the investment is impaired. The Group's share of the joint venture's losses in excess of its interest in that joint venture is not recognised to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture. Unrealised gains arising from transactions with joint ventures are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way, but only to the extent that there is no evidence of impairment.

Loans to the joint venture are measured at fair value on initial recognition, and subsequently carried at amortised cost. Any surplus between the nominal and fair value of the loan is recognised as an investment in the joint venture.

1.3 Segment reporting

Operating and reporting segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The Group's Chief Executive Officer (CEO), who is responsible for allocating resources and assessing performance, has been identified as the CODM.

The CODM regularly reviews the Group's operating results in order to assess performance and to allocate resources. The CODM considers the business from a product perspective and, therefore, recognises one operating and reporting segment, being the sale of software and related services. The Group splits revenue by type of project but reports operating results on a consolidated basis, as presented to the CODM, along with the required entity wide disclosure.

The Group discloses revenue split by type of project being Subscription, Software and Services.

a.     Subscription revenues include recurring revenues paid on a monthly or annual basis, including subscription licence revenues, maintenance and cloud hosting.

b.     Software revenues include revenues from recognition of customised licence revenue, one-off licence fees and any development revenues.

c.     Services revenues are revenues from any work done for customers including pre-implementation, implementation work, and ongoing services, but excludes any revenue from development work which is disclosed in Software.

To better reflect the nature and type of revenue, changes have been made in 2021 to the classification and allocation of revenue line items. The comparative disclosures for the December 2020 reporting period have also been amended to reflect a fair base for comparability. These changes have had no impact on the total revenue or the profit before tax that were disclosed at the end of December 2020.

See note 1.5 for details of our revenue recognition accounting policy and note 2 for the critical accounting judgements and estimates in relation to revenue recognition.

 

 

 

 

 

 

 

 

 

1.4 Foreign currency translation

Functional currency

Items included in the consolidated financial statements of each of the Group's subsidiaries are measured using their functional currency. The functional currency of the parent and each subsidiary is the currency of the primary economic environment in which the entity operates. See applicable exchange rates used in 2021 and 2020 below:

	2021		2020
	Closing	Average	Closing	Average
USD	1.35	1.38	1.37	1.28
EUR	1.19	1.16	1.11	1.13
NZD	1.98	1.95	1.89	1.98
AUD	1.86	1.83	1.77	1.86

Presentation currency

The consolidated financial statements are presented in pounds sterling. Alfa's functional and presentation currency is pounds sterling.

Group companies

The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

•      Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of that consolidated statement of financial position;

•      Income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

•      All resulting exchange differences are recognised in other comprehensive income.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities are recognised in other comprehensive income. When a foreign operation is sold the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale.

Foreign currency transactions

Transactions in foreign currencies are translated into the respective functional currencies using the exchange rates prevailing at the dates of the transactions. Foreign exchange differences arising from the settlement of such transactions and from the translation at the reporting date of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. See applicable exchange rates used by the Group above.

1.5 Revenue recognition

The Group derives revenue by type of project being Subscription, Software and Services (as disclosed in note 1.3).

i       Subscription revenue which includes the periodic rights to use Alfa Systems, periodic maintenance, subscription (including cloud hosting) and one-off revenue relating to catch-up periodic maintenance;

ii      Software revenue which includes development revenue (part of the customised licence revenue), options over the right to use Alfa Systems and one-off licence fees; and

iii     Services revenue which includes software implementation services.

The Group provides the right to use, software development services, core implementation services and ongoing support of its product, Alfa Systems. The Group's contractual arrangements contain multiple deliverables or services, such as the development or customisation of the software to the customer's requirements, implementation services such as migration of data and testing and certain project management services.

Alfa assesses whether there are distinct performance obligations at the start of each contract and throughout the performance of the implementation, development and services projects and maintenance period. These performance obligations are laid out below. Any one contract may include a single performance obligation or a combination of those listed below:

a. Software implementation services

Where implementation services are considered to be distinct, i.e. when relatively straightforward, do not require additional development services and could be performed by an external third party, the implementation services are accounted for as a separate performance obligation from any development services.

When a customer is in the process of implementing the software, the transaction price is allocated to this based on the stand-alone selling prices (derived from standard day rates) and is recognised over time based on the effort incurred, limited to the amount to which Alfa has a right to payment. For customers under the Group's subscription based contracts that are undergoing implementation, revenue for software implementation services is deemed to be distinct from any other performance obligation and is recognised based on a percentage of completion basis.

When the type of services provided are ongoing services, the transaction price is deemed to be the actual day rate, and revenue is recognised at a point in time as the service is provided.

b. Development services and licence services (the customised licence)

The second performance obligation is the granting of a right to use Alfa Systems, which includes the delivery of the related software licence and any development efforts which change the underlying code.

During the initial phase of implementing the software, the total revenue attributable to this performance obligation is estimated at the outset of the relevant software implementation project and recognised as the effort is expended, on a percentage-of-completion basis, limited to the amount of revenue to which Alfa has the right to payment. A percentage-of-completion basis has been used because customers obtain the ability to benefit from the product from the start of the implementation project, the development or customisation of the asset is tailored to the customer's specific requirements; and the customer is entitled to the benefits of the efforts as at the date the efforts are delivered, so recognition over time is appropriate.

Revenue attributable to development services is valued using the residual value method as there are no stand-alone selling prices which are observable as each project is customised. For customers under the Group's subscription based contracts that are undergoing implementation, revenue for development services is deemed to be distinct from any other performance obligation and is recognised based on a percentage of completion basis.

Once the customer is already using the software and the services provided are ongoing development, the transaction price is deemed to be the actual day rate and revenue is recognised at a point in time as the development service is provided.

c. Option over the right to use Alfa Systems

In the event that customers have to pay periodic maintenance fees in order to keep using Alfa Systems, a component of these future maintenance fees is attributable to the right to use the software. In these circumstances the licence granted by Alfa is considered to renew in future periods. There may be a material right in respect of discounts in future periods. In order to ascribe a value to this option, management annualise the value of the customised licence performance obligation and compare it to the annual right to use software performance obligation post go live.

The value of this option is built up from the start of the implementation project in line with the percentage-of-completion of development revenue described in 1.5b above. Following the completion of the implementation project, the value of this option is recognised evenly over the expected remaining customer life.

d. Periodic right to use Alfa Systems

When a customer pays its maintenance fee annually, this performance obligation represents the proportion of this fee which relates to the periodic option to renew the right to use Alfa Systems. If there is the right of clawback of the annual right to use, such amounts are recognised throughout the annual period. If there is no right of clawback, then the annual right to use amount is recognised in full when there is a right of collection.

When a customer pays for its maintenance fee as part of a subscription contract (see section 1.5f below), it will not be treated as a separate performance obligation (and will instead be part of the subscription amount).

e. Periodic maintenance amounts

This represents the stand-alone selling price of the ongoing support or maintenance of Alfa Systems which is recognised throughout the period over which the services are delivered.

f. Subscription amounts

Certain of the Group's implementation and service contracts include a subscription payment mechanism. This represents a monthly fee charged to the customer covering one or more of the following performance obligations; the provision of monthly hosting services; the monthly periodic right to use Alfa Systems and the provision of monthly maintenance services (when this becomes applicable to the customer). The monthly payments are recognised as revenue in the period to which they relate. This reflects the underlying performance obligations of the Group and termination rights of the customer.

g. One-off revenue amounts

From time to time, the Group is entitled to receive one-off licence revenue from its customers as they increase the number of contracts on their version of Alfa Systems. Additionally, there are times when catch-up periodic maintenance amounts are entitled to be received by the Group, also as a result of the increased number of contracts. Generally this revenue is recognised at the point in time it is invoiced, or becomes contractually payable, reflecting the fact that the Group has no remaining performance obligations to satisfy.

Capitalised sales incentive costs

The Group incentivises its sales force for securing sales. In line with IFRS 15, these costs are capitalised and are amortised in line with the percentage of completion of the software implementation project.

Costs to fulfil contracts

The Group has recognised an asset of £1.1m in relation to employee costs to fulfil its long-term development contracts. These costs relate directly to the contracts, generate or enhance resources to be used to satisfy performance obligations in the future and are expected to be recovered. This asset is presented within prepayments in the Statement of Financial Position. These costs are amortised within cost of sales in line with the percentage of completion of the development project.

1.6 Operating expenses

Operating expenses include items such as personnel costs (including training and recruitment), cost of software not capitalised, research and development costs and other infrastructure expenses. These items have been grouped into the following categories for disclosure purposes:

•      Cost of sales - This includes salaries and other direct costs associated with satisfying customer contracts and for developing software.

•      Sales, general and administrative expenses - This includes all the residual operating costs.

1.7 Income tax

Taxation expense for the year comprises current and deferred tax recognised in the reporting period. Tax is recognised in profit and loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. Current or deferred taxation assets and liabilities are not discounted.

Current tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in the countries where the Group and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred tax

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Group's consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes, assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

1.8 Leases

Alfa enters into lease contracts in respect of various properties and motor vehicles. These rental contracts are typically made for fixed periods of two to ten years, and sometimes have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. In accordance with IFRS 16, leases are recognised as a right-of-use asset with a corresponding liability, at the date at which the leased asset is available for use by Alfa. These assets and liabilities are initially measured on a present value basis (as set out in more detail below), with each subsequent lease payment allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Alfa assesses whether a contract is, or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability, with respect to all lease arrangements in which it is the lessee, except for short‑term leases (defined as leases with a lease term of 12 months, or fewer) and leases of low-value assets. For these leases, the Group recognises the lease payments as an expense on a straight‑line basis over the term of the lease, unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

Lease liabilities

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

•      Fixed lease payments (including in substance fixed payments), less any lease incentives;

•      Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

•      The amount expected to be payable by the lessee under residual value guarantees;

•      The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

•      Penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability is presented in separate lines, split between current and non-current liabilities, in the consolidated statement of financial position. It is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group re-measures the lease liability (and makes a corresponding adjustment to the related right‑of‑use asset) whenever:

•      The lease term has changed, or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate;

•      The lease payments change due to changes in an index, or rate, or a change in expected payment under a guaranteed residual value. In these cases, the lease liability is re-measured by discounting the revised lease payments, using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); and

•      A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate.

Right-of-use assets

The right-of-use assets comprise:

•      The initial measurement of the corresponding lease liability;

•      Lease payments made at, or before, the commencement day;

•      Any initial direct costs; and

•      Restoration cost.

The right-of-use assets are presented as a separate line in the consolidated statement of financial position.

The right-of-use assets are subsequently measured at cost less accumulated depreciation and impairment losses (if applicable). They are depreciated from the commencement date of the lease and over the shorter period of the lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset, or the cost of the right-of-use asset reflects an expectation that the Group will exercise a purchase option, the related right‑of‑use asset is depreciated over the useful life of the underlying asset. Currently, the Group does not have any leases that include a purchase option, or transfer ownership of the underlying asset.

Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located, or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37.

Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. During the current financial period, there have been no changes in such assessments.

Variable rents that do not depend on an index, or rate, are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included as an expense in the consolidated statement of profit or loss and comprehensive income.

1.9 Impairment of assets

Goodwill is tested annually for impairment. The carrying amount is allocated to the cash-generating unit (CGU) that is expected to benefit from investment and which represents the lowest level at which the goodwill is monitored for internal management purposes. The carrying value of the CGU is then compared to the higher of its fair value less costs of disposal and its value in use. Any impairment attributed to the goodwill is recognised immediately as an expense and is not subsequently reversed.

Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

1.10 Cash and cash equivalents

Cash and cash equivalents include cash at bank and in hand as well as short-term deposits with original maturities of three months or less.

1.11 Financial assets

Recognition and de-recognition

Financial assets are recognised in the statement of financial position when the Group becomes party to the contractual provision of the instrument.

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred.

Classification and initial measurement of financial assets

Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with IFRS 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable). Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories:

•      Amortised cost;

•      Fair value through profit or loss (FVTPL); and

•      Fair value through other comprehensive income (FVOCI).

In the periods presented, the Group does not have any financial assets categorised as FVTPL or FVOCI. The classification is determined by both:

•      The entity's business model for managing the financial asset; and

•      The contractual cash flow characteristics of the financial asset.

All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within sales, general and administrative expenses.

Subsequent measurement of financial assets

Financial assets at amortised cost

Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL):

•      They are held within a business model whose objective is to hold the financial assets and collect their contractual cash flows; and

•      The contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group's trade and most other receivables (notes 20 and 21) and cash and cash equivalents (note 22) fall into this category of financial instruments.

Impairment of financial assets

Under IFRS 9 the requirements are to use forward-looking information to recognise expected credit losses - the 'expected credit loss (ECL) model'. The Group considers a broad range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

In applying this forward-looking approach, a distinction is made between:

•      Financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk ('Stage 1'); and

•      Financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low ('Stage 2').

•      'Stage 3' would cover financial assets that have objective evidence of impairment at the reporting date.

'12-month expected credit losses' are recognised for the first category while 'lifetime expected credit losses' are recognised for the second and third categories.

1.12 Trade receivables

Trade receivables are amounts due from customers for licences sold or services performed in the ordinary course of business. They are generally due for settlement within 30 days of the invoice date and are therefore all classified as current. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. An impairment loss is recognised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The Group considers information developed internally or obtained from external sources that indicates that a debtor is unlikely to pay its creditors, including the Group, in full (without taking into account any collateral held by the Group) as an indication that a financial asset is not recoverable.

The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. The expected impairment loss is recognised in the consolidated statement of profit or loss and comprehensive income within sales, general and administrative expenses, and subsequent recoveries are credited to the same account previously used to recognise the impairment charge. During the current and prior period the result of the above was immaterial and no impairment loss has been recognised.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The credit qualities of these receivables are periodically assessed by reference to external credit ratings (if available) or to historical information about their default rates. The Group does not hold any collateral as security.

As the total carrying amount of the current portion of the trade and other receivables is due within the next 12 months after the reporting date, the impact of applying the effective interest method is not significant and, therefore, the carrying amount equals the contractual amount or the fair value initially recognised.

1.13 Property, plant and equipment

Property, plant and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the item. Depreciation on assets is calculated using the straight-line method to allocate their cost over their estimated useful lives, as follows:

Fixtures and fittings: 3-10 years

IT equipment: 2-5 years

Motor vehicles: 10 years

The assets' residual values and useful lives are reviewed and adjusted if necessary at each reporting date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Repairs and maintenance are charged to the consolidated statement of profit or loss and comprehensive income as incurred. Any gains or losses on disposals are recognised within sales, general and administrative expenses in the consolidated statement of profit or loss and comprehensive income unless otherwise specified.

Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount, which is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

1.14 Goodwill and other intangible assets

Goodwill

Goodwill arose on the acquisition of subsidiaries in 2012 as part of a group reorganisation and represents the excess of the consideration transferred and the amount of any non-controlling interest in the investment over the fair value of the identifiable assets acquired and liabilities and contingent liabilities assumed.

The Group assesses whether goodwill has suffered any impairment on an annual basis in accordance with the accounting policy stated in note 1.9 above. There is one CGU, being the Group, as its geographical operations do not have separate or distinct cash inflows. The recoverable amount of goodwill has been determined based on value-in-use calculations using cash flow projections from financial budgets and forecasts.

Budgeted cash flow projections are based on the expectation of signing new customers in the Group's sales pipeline as well as ongoing projects with existing customers. Budgeted gross margin is based on historical evidence and the expectations of market development and efficiency leverage. Management believes that any reasonable change in any of the key assumptions on which the recoverable amount is based would not cause the reported carrying amount to exceed the recoverable amount of the CGU. The discount rate used reflects the Group's pre-tax weighted average cost of capital (WACC), as adjusted for region-specific risks and other factors as required by IFRS.

Intangible assets

Internally generated product development costs only qualify for capitalisation if the Group can demonstrate all of the following:

•      The technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete the intangible asset and use or sell it;

•      Its ability to use or sell the intangible asset; including how the intangible asset will generate probable future economic benefits;

•      The existence of a market or, if it is to be used internally, the usefulness of the intangible asset;

•      The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

•      Its ability to measure reliably the expenditure attributable to the intangible asset during development.

Generally, commercial viability of new products, modules or capabilities is not proven until all high-risk development issues have been resolved through testing of the specific development. Development expenditure incurred on minor or major upgrades, or other changes in software functionality, does not satisfy the criteria, where it is considered that the product is not substantially new in its design or functional characteristics. Such expenditure is therefore recognised as an expense. See note 15 for disclosure of development costs which have met the criteria of IAS 38 for recognition. The Group continues to assess the eligibility of development costs for capitalisation on a project-by-project basis.

Externally acquired intangible assets are initially recorded at historical cost. Historical cost includes expenditure that is directly attributable to the acquisition of the item.

The Group amortises intangible assets with a limited useful life, using the straight-line method over the following periods:

Computer software: licence period or 10 years as applicable

Internally generated software: 3-5 years

Amortisation is presented within sales, general and administrative expenses.

Research and development which does not meet the criteria set out above is recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in subsequent periods.

1.15 Trade and other payables

Trade payables are obligations to pay for goods or services which have been acquired in the ordinary course of business from suppliers. Trade payables are recognised initially at fair value and subsequently measured at amortised costs using the effective interest rate method. As the total carrying amount is due within the next 12 months from the reporting date, the impact of applying the effective interest method is not significant and, therefore, the carrying amount equals the contractual amount or the fair value initially recognised.

The Group's financial liabilities include trade and other payables and lease liabilities. Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortised cost using the effective interest method. All interest-related charges and, if applicable, changes in an instrument's fair value that are reported in profit or loss are included within finance costs or finance income. The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or expired.

Trade and other payables and lease liabilities are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

1.16 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. When the effect of the discounting is material, provisions are measured at the present value of the expenditures expected to be required to settle the obligation.

1.17 Employee benefits

The Group provides a range of benefits to employees, including paid holiday arrangements and defined contribution pension plans.

Short-term benefits

Short-term benefits, including health cover and other similar non-monetary benefits, are recognised as an expense in the period in which the service is received.

Post-employment benefits

The Group operates various defined contribution plans for its employees. A defined contribution plan is a pension plan where the Group pays fixed contributions into a separate independent entity. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to the employee's service in the current and prior periods.

Employee share scheme expense

The Group makes equity-settled share-based payments to certain employees, which are measured at fair value at the date of grant and expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. For those share schemes with market-related vesting conditions, the fair value is determined using the Monte Carlo model at the grant date. For share options issued with EPS (non-market) performance vesting conditions, the fair value of the underlying vehicle is equal to the grant date share price discounted by the expected dividend yield to reflect the lack of dividend accrual over the vesting period. For all other share awards, those with pure employment conditions attached, the fair value is determined by reference to the market value of the shares at the grant date or (where they have an exercise price) by using the Black Scholes model. For all share schemes with non-market vesting conditions, the likelihood of vesting has been taken into account when determining the relevant charge. Vesting assumptions are reviewed during each reporting period to ensure they reflect current expectations.

1.18 Equity

Ordinary shares

Ordinary shares are classified as equity. There are no restrictions on the distribution of capital and the repayment of capital.

Cumulative translation reserve

Exchange differences arising on translation of the foreign-controlled entities are recognised in Other Comprehensive Income and accumulated in a separate reserve within equity. The cumulative amount would be reclassified to profit or loss if the entity was disposed of.

Own shares

Own shares represent the shares of the parent company Alfa Financial Software Holdings PLC that are held by the employee benefit trust. Own shares are recorded at cost and deducted from equity.

1.19 Earnings per share

Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of Alfa by the weighted average number of ordinary shares outstanding during the year (excluding own shares held).

Diluted earnings per share

Diluted earnings per share is calculated in line with the basic earnings per share calculation above except that the weighted average number of shares includes all potentially dilutive options granted by the reporting date as if those options had been exercised on the first day of the accounting period or the date of the grant, if later. The shares have no right to voting or to dividends while held in trust.

 

2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group's accounting policies.

This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted in future periods due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgements is included in other notes, together with information about the basis of calculation for each affected line item in the financial statements.

2.1 Critical judgements in applying the Group's accounting policies

Revenue recognition - Assessing performance obligations

The Group is required to make an assessment as to whether the implementation process, which includes customised licence, implementation revenue streams as well as any maintenance fees during this phase, forms one or a number of performance obligations. Since the residual value method is used for the customised licence revenue (as explained in note 1.5), the estimation of fair value of implementation revenue will impact the contract consideration assigned to the customised licence.

In addition, the Group is also required to make an assessment as to whether each contract contains an expectation to deliver multiple separate instances of the customised licence which may form separate groups of distinct performance obligations. In doing the above, the Group assesses each software implementation contract as to whether the underlying software requires significant modification or customisation by the Group in order to meet the customer's requirements before Alfa Systems can be utilised by the customer. Therefore judgement is required in determining which efforts relate to the implementation process and which efforts could be determined to be development services which change or enhance the underlying code. In making this judgement, the Group assesses the contractual terms and the original project plan for the implementation but also uses historical evidence of what constitutes core implementation work.

Internally generated software development - Assessing whether a project meets criteria of IAS 38

The Group is required to make an assessment of each ongoing project in order to determine at what stage a project meets the criteria outlined in the Group's accounting policies. Such assessment may, in certain circumstances, require significant judgement. In making this judgement, the Group evaluates, amongst other factors, the stage at which technical feasibility has been achieved, management's intention to complete and use or sell the product, the likelihood of success, the availability of technical and financial resources to complete the development phase and management's ability to measure reliably the expenditure attributable to the project. Research and product development expenditure incurred on minor or major upgrades, or other changes in software functionality, does not satisfy the criteria where it is considered that the product is not substantially new in its design or functional characteristics. Such expenditure is therefore recognised as an expense.

2.2 Key sources of estimation uncertainty

Revenue recognition - Estimates feeding through to the customised licence

The customised licence and its associated material right are both impacted by the following estimates:

-      Assigning a stand-alone selling price for implementation services day rates: the Group assesses the value of the implementation services delivered by assessing the effective day rate for an implementation contract, taking into account all revenue streams from implementation contracts against day rates of similar projects in the same geographies;

-      Estimating the appropriate life of customer relationship: the Group calculates the material right deferral of the customised licence based on the total customer relationship life. This is also the time over which the material right will be spread; and

-      Determining the split of maintenance amount between support efforts and right to use: the Group must estimate what percentage of the total maintenance fee relates to the customised licence.

Management reassesses estimates and applies them to new projects prospectively. A variation of 5% to 10%, or an increase in expected customer life by a year, in the above, results in an impact on revenue for the year ranging between an increase / decrease of £0.4m.

2.3 Other sources of estimation uncertainty

Revenue recognition -Number of forecast implementation and development days

The Group estimates the number of days required to complete the relevant software customisation effort at the outset of each project and on an ongoing basis including at each consolidated statement of financial position date. Estimates of total project days required for a relevant project are based on historical evidence of past implementations, knowledge of the customer's systems being replaced and scope of customisation being requested. The Group applies the percentage-of-completion method when calculating implementation and development services revenue and updates estimates at each quarter end accordingly. Therefore, a significant movement in total planned days would result in volatility in implementation and customised licence revenue.

 

 

 

 

 

 

 

 

3. FINANCIAL RISK MANAGEMENT

In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

 

Area	Exposure arising from	Measurement	Management
Market risk - foreign exchange	Contracted revenue and costs denominated in a currency other than the entity's functional currency; and Monetary assets and liabilities denominated in a currency other than the entity's functional currency.	Cash flow forecasting and foreign exchange sensitivity	Natural hedging from localised cost base and prompt conversion of foreign currency cash balances into pound sterling
Credit risk - cash balances	Cash and cash equivalents	Credit ratings	Diversification of bank deposits
Credit risk - customer receivables	Trade receivables and accrued income	Ageing analysis Credit ratings	Credit checks and contractual payment terms
Liquidity	Cash and cash equivalents	Cash flow forecasting	Collection of upfront licence fees, ageing analysis of customer receivables

The Group's overall risk management policy focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group has used financial instruments to hedge certain risk exposures in the past. Risk management is carried out by the finance function under policies approved by the Chief Financial Officer. The finance function identifies, evaluates and mitigates financial risks when deemed necessary.

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and maintain an optimal capital structure.

3.1 Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risks arising from various currencies, primarily with respect to those described below. Revenue is predominantly denominated in pounds sterling and US dollars. Operating costs are influenced by the currencies of the countries where the Group's subsidiaries are based and pounds sterling and the US dollars are the currencies in which most operating costs are denominated.

The split by currency in relation to trade receivables is set out in note 20.

The Group's exposure to foreign currency risk in relation to revenue is set out in note 5.4.

The Group has not entered into or utilised any form of hedging against foreign currency exposure during the current or prior period, nor does the Group have any outstanding commercial foreign exchange contracts at 31 December 2021 or 31 December 2020.

A 10% increase in the USD:GBP exchange rate in the year ended 31 December 2021 would have increased revenue and profit by 4% and 8% respectively.

3.2 Credit risk

a. Credit risk related to transactions with financial institutions

Credit risk with financial institutions is managed by the Group's finance function in accordance with a Board approved policy. Management is not aware of any significant risks associated with financial institutions as a result of cash and cash equivalents deposits (including short-term investments) and financial derivative transactions.

b. Credit risks related to customer trade receivables

Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, change of strategy and default or delinquency in payments are considered indicators that a trade receivable could be impaired. Given the complexity, the size and the length of certain software implementation of related projects, a delay in the settlement of an open trade receivable does not necessarily constitute objective evidence that the trade receivable is impaired.

The Group's customer base predominantly consists of large financial institutions that are financially sound. The responsibility for customer credit risk management rests with management of the Group. Payment terms are set in accordance with practices in the different geographies and end-markets served, typically being 30 days from the date of the invoice. Trade receivables are actively monitored and managed. Collection risk is mitigated through the use of upfront payments of licences and maintenance. Historically, there has been a de minimis level of customer default as a result of the long history of dealing with the Group's customer base and an active credit monitoring function. Where applicable, credit limits may be established based on internal or external rating criteria, which take into account such factors as the financial condition of the customers, their credit history and the risk associated with their industry segment.

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and accrued income. To measure the expected credit losses, trade receivables and accrued income have been grouped based on shared credit risk characteristics and the days past due. The accrued income relates to unbilled work in progress and has substantially the same risk characteristics as the trade receivables for the same types of contracts, other than where the Group has collected upfront payments in the form of licence fees at the start of a software implementation contract. The Group has concluded that the expected loss rates for trade receivables are less than the loss rates for the accrued income.

The expected loss rates of trade receivables are based on the payment profiles of customer invoices over a period of 36 months before 31 December 2021 or 31 December 2020 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates would then be adjusted to reflect current or forward-looking information in relation to any macroeconomic factors affecting the ability of the customers to settle the receivables.

The Group has not identified any current factors or forward-looking information which would be relevant to the historical loss rates as all trade receivables have been collected in the past 24 months. Therefore on this basis, the loss allowance as at 31 December 2021 and 31 December 2020 was immaterial for both trade receivables and accrued income.

See note 20 - Trade receivables for the ageing of trade receivables and significant customer credit risk exposure.

3.3 Liquidity risk

The Group's principal objective when managing capital is 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.

The capital structure of the Group consists of cash and cash equivalents (note 22) and equity attributable to equity holders of the parent.

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.

The Group manages its exposure to liquidity risk through short and long-term forecasts and by seeking to align the maturity profiles of its financial assets with its financial liabilities. The Group's policy is to maintain an adequate level of liquidity to meet its liabilities expected to be settled in the short or near term, under both normal and stressed conditions.

The following table details the remaining contractual maturity of the Group's financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows.

 

	31 December 2021
£m	Carrying value	Less than 6 months	Between 6 to 12 months	Between 1 to 2 years	Between 2 to 5 years	More than 5 years
Trade and other payables	6.9	6.9	-	-	-	-
Lease liabilities - future lease payments	20.3	1.3	1.4	2.7	7.4	7.5

 

	31 December 2020
£m	Carrying value	Less than 6 months	Between 6 to 12 months	Between 1 to 2 years	Between 2 to 5 years	More than 5 years
Trade and other payables	5.6	5.6	-	-	-	-
Lease liabilities - future lease payments	21.1	1.2	1.2	2.4	6.9	9.4

 

4. SEGMENTS AND PRINCIPAL ACTIVITIES

4.1 Revenue by stream

The Group assesses revenue by type of activity, being Subscription, Software and Services, as summarised below:

£m	2021	2020 (restated*)
Software	13.6	20.0
Subscription	23.5	18.1
Services	46.1	40.8
Total revenue	83.2	78.9

*      To better reflect the nature and type of revenue, changes have been made to the classification and allocation of revenue line items. The comparative disclosures for the December 2020 reporting period have also been amended to reflect a fair base for comparability. These changes have had no impact on the total revenue or the profit before tax that were disclosed at the end of December 2020.

4.2 Operating profit

The following table reconciles profit for the period attributable to equity holders to Operating Profit for the periods presented:

 

£m	2021	2020
Profit for the year	19.2	20.3
Adjusted for:
Net income from joint venture	0.1	-
Taxation	4.6	2.9
Finance income	-	(0.1)
Finance expense	0.8	0.8
Operating profit	24.7	23.9

4.3 Non-current assets geographical information

Non-current assets attributable to each geographical market:

 

£m	2021	2020
UK	42.6	44.0
USA	1.2	0.7
Rest of World	0.6	0.1
Total non-current assets	44.4	44.8

Revenue by geographical market is contained within note 5.3.

5. REVENUE FROM CONTRACTS WITH CUSTOMERS

5.1 Customer concentration

Customers with revenue accounting for more than 10% of total revenue in the current year are as follows:

 

£m	2021	2020
Customer A	10%	12%

See note 20 for outstanding trade receivables from those customers with revenue accounting for more than 10% of total revenue.

5.2 Timing of revenue

The Group derives revenue from the transfer of goods and services as follows over time and at a point in time in the following revenue segments:

 

2021 £m	Services	Software	Subscription	Total revenue
At a point in time - time and materials	25.2	5.6	-	30.8
At a point in time - fixed price	-	2.1	-	2.1
Over time - time and materials	19.8	4.1	-	23.9
Over time - fixed price	1.1	1.8	23.5	26.4
Total revenue	46.1	13.6	23.5	83.2

 

2020 £m (restated)*	Services	Software	Subscription	Total revenue
At a point in time - time and materials	19.4	5.1	-	24.5
At a point in time - fixed price	0.2	5.7	0.8	6.7
Over time - time and materials	18.8	8.0	-	26.8
Over time - fixed price	2.4	1.2	17.3	20.9
Total revenue	40.8	20.0	18.1	78.9

All goods and services are sold directly to customers.

*      To better reflect the nature and type of revenue, changes have been made to the classification and allocation of revenue line items. The comparative disclosures for the December 2020 reporting period have also been amended to reflect a fair base for comparability. These changes have had no impact on the total revenue or the profit before tax that were disclosed at the end of December 2020.

 

 

 

5.3 Revenue geographical information

Revenue attributable to each geographical market based on where the customer mainly utilises its instance of Alfa, or where the service is rendered, is as follows:

 

£m	2021	2020
UK	30.0	25.8
USA	28.9	29.2
Rest of EMEA (excl UK)	18.7	21.3
Rest of World	5.6	2.6
Total revenue	83.2	78.9

5.4 Revenue by currency

Revenue by contractual currency is as follows:

 

£m	2021	2020
GBP	35.9	33.3
USD	30.0	30.4
Euro	11.6	12.6
Other	5.7	2.6
Total revenue	83.2	78.9

5.5 Liabilities from contracts with customers

 

£m	2021	2020
Contract liabilities - deferred licence	5.3	1.9
Contract liabilities - deferred maintenance	5.7	5.1
Total contract liabilities	11.0	7.0

Contract liabilities - deferred licence

The majority of the Group's software implementation customers are invoiced an upfront perpetual software licence at the commencement of the implementation project. Customers generally require additional development efforts over the life of the implementation project in order to customise the underlying code within Alfa Systems. Together these two elements form the Group's customised licence performance obligation. The fair value of this performance obligation is determined using the residual method as set out in note 1.5b and this fair value is recognised as the development effort is expended, on a percentage of completion basis.

As such the deferred licence contract liability balance as at 31 December 2021 represents any amounts received in advance for the customised licence performance obligation being satisfied (including any unrecognised software licence amounts that were received upfront). Additionally, where an option over the right to use Alfa Systems in the future exists, the value of this is also included within the deferred licence contract liability. The contract liability relating to the material right value is increased over the life of the implementation project in line with the percentage of completion of the development efforts and then released on a straight-line basis over the expected remaining customer life post completion of the implementation project.

The deferred licence contract liability balance will increase during the year as a result of:

•      any new upfront software licence payments;

•      any write back in previously recognised revenue as a result of project extensions or re-plans; and

•      any additional material right balances that are added during the year.

The deferred licence contract liability balance will decrease during the year as a result of:

•      increasing percentage of completion of development efforts; and

•      any release of material right balances following the completion of the implementation project.

Contract liabilities - deferred maintenance

The majority of the Group's customers are invoiced annually in advance for the maintenance and support service provided by the Group. As such, the deferred maintenance contract liability balance will increase during the year as a result of billing and invoices becoming due, and will decrease as the Group satisfies its associated performance obligations. The deferred maintenance contract liability balance as at 31 December 2021 therefore represents the Group's unsatisfied period maintenance performance obligation for which the revenue has been invoiced in advance.

5.6 Unsatisfied Performance Obligations

During 2020, the Group entered into a new one-off five-year contract with a customer to renew its software licence and maintenance agreements. The total amount of the contract price from this non-cancellable contract that relates to the performance obligations that are unsatisfied at 31 December 2021 is £8.4m (2020: £10.6m). We expect to recognise £2.2m in each of the next three financial years and then the remaining £1.8m in the final financial year of the contract, being 2025.

In addition, the Group has unsatisfied or partially satisfied performance obligations at 31 December 2021 that relate to the licence customisation for those customers that have ongoing implementation projects, or implementation projects that commenced in early 2022 and for which contracts were agreed prior to 31 December 2021. This performance obligation includes the delivery of the related software licence and any development efforts which will change the underlying code. Linked to certain of these ongoing and future projects, and also to certain implementation projects completed during 2021, the Group also has unsatisfied or partially satisfied performance obligations at 31 December 2021 that relate to the option over the right to use Alfa Systems, and in particular any material right in respect of discounts to be received by customer in future periods.

The above includes certain amounts recognised as contract liabilities. The transaction price allocated to these unsatisfied or partially satisfied performance obligations as at 31 December 2021 is £11.1m (2020: £9.0m). This amount is expected to be recognised over the remaining life of the implementation projects, in respect of the licence and development efforts, and over the expected customer life (following the completion of the implementation project) in respect of the option over the right to use Alfa Systems.

These unsatisfied or partially satisfied performance obligations are based on management's best judgement and may be impacted in the future by a number of factors including:

•      any possible contract modifications,

•      currency fluctuations;

•      external market factors; and

•      changes to the overall forecast project plan including the overall life of the implementation project and any required development efforts.

The Group applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about the unsatisfied performance obligations that have original expected durations of one year or less. This includes those performance obligations linked to ongoing services for all project types (i.e. subscription, software and services).

The Group also applies the practical expedient in paragraph B16 of IFRS 15 and does not disclose the amount of the transaction price allocated to the unsatisfied contract performance obligations where consideration will be received directly corresponding to the value of the performance obligation in the future and this consideration aligns to the value received to date for the corresponding performance obligation. This includes those performance obligations linked to our software implementation services.

The Group has variable consideration in the form of contract banding for its licence and maintenance volumes. It is included it in the transaction price only to the extent that it is highly probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

6. OPERATING PROFIT

The following items have been included in arriving at operating profit in the table below:

£m	2021	2020 (restated)
Research and development costs*	1.6	1.5
Depreciation of property, plant and equipment	0.4	0.5
Depreciation of right-of-use lease assets	1.9	1.7
Amortisation of intangible assets	0.8	0.8
Share-based payments (inc. social security contributions)	1.5	1.5

*      To better reflect the nature of research and development expenditure and align with capitalised development costs, changes have been made to the classification of expense line items. Research and development costs are now primarily made up of costs incurred as part of the Group's internal research and development activities, where as previously this line item included broader costs. The comparative disclosures for the December 2020 reporting period have also been amended to reflect a fair base for comparability.

 

7. PERSONNEL RELATED COSTS

 

£m	2021	2020
Wages and salaries	31.8	30.0
Social security contributions (on wages and salaries)	3.9	3.4
Pension costs	2.1	2.0
Profit share pay *	3.1	2.7
Share-based payments **	1.5	1.5
Total employment costs	42.4	39.6

*      Profit share pay refers to a pool of money (that equates to 10% of the Group's pre-tax profits) which is shared amongst the employees, excluding Directors and some other senior managers, as a percentage of basic salary. The amount disclosed includes the related social security contributions.

**     This includes the related social security contributions.

 

Average monthly number of people employed based on location of home office (including Executive Directors)	2021	2020
UK	282	255
USA	71	66
Rest of World	30	20
Total average monthly number of people employed	383	341

 

 

 

 

8. KEY MANAGEMENT

Key management compensation (including Executive Directors):

 

£m	2021	2020
Wages, salaries and short-term benefits	3.1	2.6
Social security contributions	0.4	0.3
Post-employment benefits	0.1	0.1
Share-based payments *	0.9	0.2
Total key management compensation	4.5	3.2

*      This includes the related social security contributions.

Key management personnel consists of the Company Leadership Team and the Executive Directors. Directors' remuneration is detailed in the Remuneration Report.

 

9. AUDITOR'S REMUNERATION

The Group obtained the following services from the Group's auditor as detailed below:

 

£m	2021	2020
Audit fees
Deloitte LLP
Audit fees relating to prior year	-	0.1
RSM UK Audit LLP
Audit of the consolidated financial statements	0.2	0.2
Audit of subsidiaries	0.2	0.2
Total audit fees	0.4	0.5
Audit-related assurance fees
RSM UK Audit LLP	0.1	0.1
Total audit-related assurance fees	0.1	0.1
Non-audit services
Total audit and non-audit-related services	0.5	0.6

 

10. FINANCE INCOME AND EXPENSE

 

£m	2021	2020
Finance income
Interest income on cash or short-term bank deposits	-	0.1

 

£m	Note	2021	2020
Finance expense
Interest on lease liability	24	(0.8)	(0.8)
Total finance expense		(0.8)	(0.8)

 

 

 

 

 

11. INCOME TAX EXPENSE

Analysis of charge for the year

 

£m	2021	2020
Current tax
Current tax on profit for the year	4.5	4.5
Adjustment in respect of prior years	(0.5)	(1.4)
Foreign tax on profit of subsidiaries for the current year	0.3	0.6
Current tax	4.3	3.7
Deferred tax
Origination and reversal of temporary differences	(0.1)	(0.3)
Adjustment in respect of prior years	0.6	(0.5)
Effect of changes in tax rates	(0.2)	-
Deferred tax	0.3	(0.8)
Total tax charge in the year	4.6	2.9

The effective tax rate for the year is higher (2020: lower) than the standard rate of corporation tax in the UK. The effective tax rate for the year ended 31 December 2021 was 19.3% (2020: 12.5%). The effective tax rate for the year is impacted by adjustments in respect to prior years totalling £0.1m (2020: favourable adjustment of £1.9m), due to increased tax costs for the prior year of £0.2m, an adjustment in respect to deferred tax on share awards of £0.5m, less the benefit of the UK R&D tax claim for 2020 of £0.6m (2020: predominately due to the benefit of UK R&D tax claims for 2018 and 2019). Excluding the impact of adjustments in respect to prior years, the effective tax rate for the year was 18.9% (2020: 20.7%). The overall tax charge for the year is reconciled as follows:

Analysis of charge for the year

 

£m	2021	2020
Profit on ordinary activities before taxation	23.8	23.2
Profit on ordinary activities at the standard rate of corporation tax - 19%	4.5	4.4
Tax effects of:
Effect of different tax rates of subsidiaries operating in other jurisdictions	0.1	0.2
Expenses not deductible for tax purposes	-	0.1
Adjustment in respect of prior years	0.1	(1.9)
Impact of tax rate changes	(0.2)	-
Other	0.1	0.1
Total tax charge for the year	4.6	2.9

 

12. EARNINGS PER SHARE

 

	2021	2020
Profit attributable to equity holders of Alfa (£m)	19.2	20.3
Weighted average number of shares outstanding during the year	296,709,610	293,824,145
Basic earnings per share (pence per share)	6.49	6.93
Weighted average number of shares outstanding including potentially dilutive shares	301,505,177	300,069,048
Diluted earnings per share (pence per share)	6.39	6.79

 

The weighted average number of ordinary shares in issue excludes 3,290,390 (2020: 6,175,855) shares held by employee benefit trust. The diluted number of ordinary shares outstanding, including share awards, is calculated on the assumption of conversion of all 5,470,741 (2020: 6,139,161) potentially dilutive ordinary shares.

 

13. FINANCIAL ASSETS AND LIABILITIES

 

£m	Note	2021	2020
Finance assets
Financial assets at amortised cost:
Trade receivables	20	6.0	5.8
Other financial assets at amortised cost	21	7.3	5.8
Cash and cash equivalents	22	23.1	37.0
Total financial assets		36.4	48.6
Finance liabilities
Financial liabilities at amortised cost:
Trade and other payables	23	6.9	5.6
Lease liabilities	24	17.1	17.5
Total finance liabilities		24.0	23.1

 

14. GOODWILL

 

£m	2021	2020
Cost
At 1 January	24.7	24.7
At 31 December	24.7	24.7

The recoverable amount of goodwill has been determined based on value-in-use calculations using cash flow projections from financial budgets and forecasts for a five-year period using a pre-tax discount rate of 11% (2020: 11%). Cash flows beyond these periods have been extrapolated using a steady 2% (2020: 2%) average growth rate. This growth rate does not exceed the long-term average growth rate for the markets in which the Group operates. Management believes that any reasonable change in any of the key assumptions on which the recoverable amount is based would not cause the reported carrying amount to exceed the recoverable amount of the CGU.

 

 

 

 

 

 

 

 

 

 

15. OTHER INTANGIBLE ASSETS

£m	Computer software	Internally generated software	Total
Cost
At 1 January 2020	1.4	1.5	2.9
Additions	0.1	0.7	0.8
At 31 December 2020	1.5	2.2	3.7
Amortisation
At 1 January 2020	0.5	0.2	0.7
Charge for the year	0.3	0.5	0.8
At 31 December 2020	0.8	0.7	1.5
Net book value
At 31 December 2020	0.7	1.5	2.2
Cost
At 1 January 2021	1.5	2.2	3.7
Additions	0.1	0.9	1.0
At 31 December 2021	1.6	3.1	4.7
Amortisation
At 1 January 2021	0.8	0.7	1.5
Charge for the period	0.1	0.7	0.8
At 31 December 2021	0.9	1.4	2.3
Net book value
At 31 December 2021	0.7	1.7	2.4

Significant movement in other intangible assets

During 2021, Alfa developed new internally generated software at a cost of £0.9m (2020: £0.7m). This software will be amortised over three to five years.

The total research and product development expense for the period was £1.6m (2020: £1.5m restated - see note 6).

 

 

16. PROPERTY, PLANT AND EQUIPMENT

 

£m	Fixtures and fittings	IT equipment	Total
Cost
At 1 January 2020	1.2	3.2	4.4
Additions	0.1	0.2	0.3
Disposals	(0.1)	(0.1)	(0.2)
At 31 December 2020	1.2	3.3	4.5
Depreciation
At 1 January 2020	0.7	2.6	3.3
Charge for the year	0.1	0.4	0.5
Disposals	(0.1)	(0.1)	(0.2)
At 31 December 2020	0.7	2.9	3.6
Net book value			-
At 31 December 2020	0.5	0.4	0.9
Cost
At 1 January 2021	1.2	3.3	4.5
Additions	-	0.3	0.3
Disposals	-	(0.1)	(0.1)
At 31 December 2021	1.2	3.5	4.7
Depreciation
At 1 January 2021	0.7	2.9	3.6
Charge for the year	0.1	0.3	0.4
Disposals	-	(0.1)	(0.1)
At 31 December 2021	0.8	3.1	3.9
Net book value
At 31 December 2021	0.4	0.4	0.8

 

 

 

17. RIGHT-OF-USE ASSETS

 

£m	Motor vehicles	Property	Total
Cost
At 1 January 2020	0.2	17.9	18.1
Additions	0.1	0.1	0.2
Disposals	(0.1)	(0.1)	(0.2)
At 31 December 2020	0.2	17.9	18.1
Depreciation
At 1 January 2020	0.1	1.6	1.7
Charge for the year	0.1	1.6	1.7
Disposals	(0.1)	-	(0.1)
At 31 December 2020	0.1	3.2	3.3
Net book value
At 31 December 2020	0.1	14.7	14.8
Cost
At 1 January 2021	0.2	17.9	18.1
Additions	0.2	1.3	1.5
At 31 December 2021	0.4	19.2	19.6
Depreciation
At 1 January 2021	0.1	3.2	3.3
Charge for the year	0.1	1.8	1.9
At 31 December 2021	0.2	5.0	5.2
Net book value
At 31 December 2021	0.2	14.2	14.4

The Group recognised the following amounts in the consolidated statement of profit or loss and comprehensive income in relation to leases under IFRS 16:

 

£m	2021	2020
Depreciation	(1.9)	(1.7)
Interest expense	(0.8)	(0.8)
Short‑term lease expense	(0.2)	(0.2)

Sub-lease rentals

One of the leased properties is sub-leased to tenants under operating leases, with rentals payable quarterly. Minimum lease payments receivable on these sub-leases of property are as follows:

 

£m	2021	2020
Within one year	-	0.4
Later than one year but not later than 5 years	-	-
Later than 5 years	-	-
Total sub-lease payments receivable	-	0.4
Income from sub-lease in the year	0.5	0.5

 

 

 

18. DEFERRED INCOME TAX

The provision for deferred tax consists of the following deferred tax assets/(liabilities) relating to accelerated capital allowances and short-term timing differences in relation to accruals and share-based payments.

 

£m	2021	2020
Balance as at 1 January	1.8	0.6
Effect of changes in tax rates	0.2	-
Adjustments in respect of prior period	(0.6)	0.5
Deferred income taxes recognised in the consolidated statement of profit or loss and comprehensive income	0.1	0.3
Deferred tax on share-based payments recognised in reserves	0.3	0.4
Foreign exchange movements	-	-
Balance as at 31 December	1.8	1.8
Consisting of:
Depreciation in excess of capital allowances	-	(0.1)
Other timing differences	1.8	1.9
Balance as at 31 December	1.8	1.8

Deferred income tax liabilities have not been recognised for the withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries as the Group is able to control the timing of these temporary differences and it is probable that they will not reverse in the foreseeable future. Unremitted earnings totalled £3.4m at 31 December 2021 (2020: £3.1m).

 

19. INTERESTS IN JOINT VENTURE

At the beginning of May 2020, the Group formed Alfa iQ, a joint venture established to greatly enhance Alfa's ability to develop artificial intelligence solutions for the auto and equipment finance industry. The joint venture was set up 51:49 between Alfa and Bitfount, a company founded by Blaise Thomson. The financial and operating activities of the Group's joint venture are jointly controlled by the participating shareholders. The participating shareholders have rights to the net assets of the joint venture through their equity shareholdings.

The interest in the joint venture consists of part investment and part loan to joint venture accounted for as set out in note 1.2.

Investment

 

£m	2021	2020
Carrying amount as at 1 January	0.3	-
Carrying amount as at 6 May 2020 (i.e. on establishment of the joint venture)	-	0.3
Share of net loss from the joint venture	(0.1)	-
Carrying amount as at 31 December	0.2	0.3

Loan to joint venture

 

£m	2021	2020
Carrying amount as at 1 January	0.1	-
Carrying amount as at 6 May 2020 (i.e. on establishment of the joint venture)	-	0.1
Interest	-	-
Carrying amount as at 31 December	0.1	0.1

The total loss from interest in joint venture is £0.1m (2020: £0.0m) and the total interest in the joint venture is £0.3m (2020: £ 0.4m).

 

20. TRADE RECEIVABLES

 

£m	2021	2020
Trade receivables	6.0	5.8
Provision for impairment	-	-
Trade receivables - net	6.0	5.8

Ageing of trade receivables

 

Ageing of net trade receivables £m	2021	2020
Within agreed terms	4.1	5.6
Past due 1-30 days	1.2	0.1
Past due 31-90 days	0.6	-
Past due 91+ days	0.1	0.1
Trade receivables - net	6.0	5.8

The Group believes that the unimpaired amounts that are past due are fully recoverable as there are no indicators of future delinquency or potential litigation.

Currency of trade receivables

 

£m	2021	2020
GBP	4.9	1.8
USD	0.9	3.1
Other	0.2	0.9
Trade receivables - net	6.0	5.8

Trade receivables due from significant customers

Customers with revenue accounting for more than 10% of total revenue in the current year have outstanding trade receivables as follows:

 

£m	2021	2020
Customer A	0.8	0.6

As at issuance of these financial statements, all amounts relating to customers accounting for more than 10% of total revenue had been collected.

Impairment and risk exposure

Information about the impairment of trade receivables and the Group's exposure to market risk (specifically foreign currency risk) and credit risk can be found in note 3.

 

21. OTHER RECEIVABLES HELD AT AMORTISED COST

 

£m	2021	2020
Accrued income	6.3	5.0
Prepayments	3.2	2.1
Other receivables	1.0	0.8
Total other receivables held at amortised cost	10.5	7.9

Accrued income represents fees earned but not yet invoiced at the reporting date which has no right of offset with contract liabilities - deferred licence amounts.

Accrued income increased by £1.3m. The current year balance represents unbilled professional fees work in progress, as well as £0.5m in relation to subscription and £0.5m of one-off licence revenue items where there is contractual agreement to invoice in subsequent periods.

Prepayments include £1.1m of deferred costs in relation to costs to fulfil contracts - see note 1.5.

 

22. CASH AND CASH EQUIVALENTS

 

£m	2021	2020
Cash at bank and in hand	23.1	37.0
Cash and cash equivalents	23.1	37.0

Currency of cash and cash equivalents

 

£m	2021	2020
GBP	14.9	28.5
USD	4.4	4.8
AUD	1.3	1.1
Euro	2.0	2.1
Other	0.5	0.5
Cash and cash equivalents	23.1	37.0

 

23. CURRENT AND NON-CURRENT LIABILITIES

 

£m	2021	2020
Trade payables	0.8	0.9
Other payables	8.5	7.2
Corporation tax	1.8	1.3
Contract liabilities - deferred licence	5.3	1.9
Contract liabilities - deferred maintenance	5.7	5.1
Lease liabilities (note 24)	17.1	17.5
Provisions for other liabilities	1.4	1.4
Total current and non-current liabilities	40.6	35.3
Less non-current portion	(16.6)	(17.2)
Total current liabilities	24.0	18.1

Other payables includes amounts relating to other tax and social security of £2.4m (2020: £2.5m).

 

 

 

 

 

 

 

24. LEASE LIABILITIES

The following table sets out the reconciliation of the lease liabilities from 1 January to the amount disclosed at 31 December:

 

£m	2021	2020
Lease liabilities recognised at 1 January	17.5	19.0
Additions	1.5	0.2
Interest charge	0.8	0.8
Payments made on lease liabilities	(2.7)	(2.5)
At 31 December	17.1	17.5

Additions to lease liabilities include extensions to existing lease agreements.

Below is the maturity analysis of the lease liabilities:

 

£m	2021	2020
Non-current	15.2	15.8
Current	1.9	1.7
Total lease liabilities	17.1	17.5
No later than one year	2.7	2.4
Between one year and 5 years	10.1	9.3
Later than 5 years	7.5	9.4
Total future lease payments	20.3	21.1
Total future interest payments	(3.2)	(3.6)
Total lease liabilities	17.1	17.5

The group's net debt is made up of cash and cash equivalents and lease liabilities. The movement during the year in lease liabilities is set out above. Movements in cash and cash equivalents are set out in the Cash flow statement. These are the only changes in liabilities arising from financing activities in the year.

 

25. PROVISION FOR OTHER LIABILITIES

 

£m
At 1 January 2020	0.7
Provided in the period	0.7
At 31 December 2020	1.4
Provided in the period	0.7
Utilised in the period	(0.1)
Released in the period	(0.6)
At 31 December 2021	1.4

Provisions for other liabilities comprise amounts for office dilapidations, employer taxes on share-based payments and legal matters. It is expected that these will be utilised by as follows: £0.5m in 2022, £0.2m in 2030 and £0.7m over various years.

 

 

 

 

 

26. SHARE CAPITAL

	2021		2020
Issued and fully paid	Shares	£m	Shares	£m
Ordinary shares - 0.1 pence	300,000,000	0.3	300,000,000	0.3
Balance as at 31 December	300,000,000	0.3	300,000,000	0.3

No additional shares have been issued or cancelled in the year ended 31 December 2021.

 

27. TRANSLATION RESERVE

 

£m	2021	2020
At 1 January	0.1	-
Currency translation of subsidiaries	(0.1)	0.1
At 31 December	-	0.1

 

28. OWN SHARES

£m	2021	2020
Balance at 1 January	-	-
Acquired in the year	4.6	-
Issued on exercise of options	(1.2)	-
Balance at 31 December	3.4	-

The own shares reserve represents the cost of shares in Alfa Financial Software Holdings PLC purchased in the market and held by the Group's employee benefit trust to satisfy options under the Group's share options plans (see Note 1.2). The number of ordinary shares held by the employee benefit trust at 31 December 2021 was 2,590,260 (2020: 552,783). As at 31 December 2021, the Group held 0.86% (2020: 0.18%) of its own called-up share capital.

 

29. SHARE AWARDS

The Group recognised total expenses relating to share-based payment of £1.5m (2020: £1.5m) in the current year. Of this, £1.5m (2020: £1.5m) relates to equity-settled LTIP schemes and £0.0m (2020: £nil) relates to Employee Share Save schemes. See further detail below.

The outstanding share schemes are made up of the following:

Grant date	Plan	Expiry date	Exercise price	Share options 31 December 2021	Share options 31 December 2020
June 2014/2015	LTIP	4 annual tranches from 1 June 2018	0p	-	1,197,503
June 2018	LTIP	June 2021	0p	-	1,378,178
November 2019	LTIP	November 2022	0p	1,113,909	1,205,036
June 2020	LTIP	June 2023	0p	2,322,473	2,358,444
April 2021	LTIP	April 2024	0p	1,121,104	-
November 2021	LTIP	October 2024	0p	60,872	-
November 2021	UK Employee ShareSave	January 2025	1.536p	774,659	-
November 2021	US Employee ShareSave	January 2024	1.670p	77,724	-

 

The weighted average share price at the date of exercise for share options exercised during the period was 130.4p (2020: 74.3p). The options outstanding at 31 December 2021 had a weighted average exercise price of 24.1p (at 31 December 2020: nil), and a weighted average remaining contractual life of 1.7 years (2020: 2.3 years). The opening weighted average exercise price at 1 January 2021 was nil (1 January 2020: nil). The weighted average exercise price of options forfeited and exercised during the year was nil (31 December 2020: nil).

A. LTIPs

The 2019 LTIP awards granted are conditional on employment only; the fair value of these awards has been calculated using the grant date share price as a proxy for fair value of the option adjusted for any dividends over the period. There are no market or non-market performance conditions attached to the option scheme and, as such, no performance conditions are included in the fair value calculation.

The 2020 LTIP awards granted are conditional on performance conditions, 50% based on EPS performance (non-market condition) and 50% on TSR (market condition) as well as a three-year employment fulfilment. The fair value of these awards has been determined using the Monte Carlo model at the grant date.

On 30 April 2021 the Group awarded an LTIP conditional on performance conditions, 50% based on EPS performance (non-market condition) and 50% on TSR (market condition) as well as a three-year employment fulfilment. For those share schemes with market-related vesting conditions, the fair value is determined using the Monte Carlo model at the grant date. For share options issued with EPS (non-market) performance vesting conditions, the fair value of the underlying option is equal to the grant date share price. The following table lists the inputs to the model used for the awards granted in the year ended 31 December 2021 based on information at the date of grant:

 

LTIP awards (granted in April)	TSR element	EPS element
Share price at date of grant	136p	136p
Award price	0p	0p
Volatility	60.3%	-
Embedded TSR	6.9%	-
Average correlation	41.1%	-
Life of award	3 years	3 years
Risk-free rate	0.12%	-
Fair value per award	73.6p	136.0p

On 30 November 2021, the Group awarded to certain employees an LTIP conditional on employment only. The fair value of these awards is equal to the closing share price on the date of grant (192 pence), discounted by the expected 12-month dividend yield to reflect the lack of dividend accrual over the vesting period (three years). The expected price volatility is based on the historic volatility (based on the remaining life of the scheme), adjusted for any expected changes to future volatility due to publicly available information.

All of these Company schemes, as well as any non-cyclical awards, are equity-settled by award of ordinary shares.

The total share-based payment charge relating to Alfa Financial Software Holdings PLC shares for the year is split as follows:

 

£m	2021	2020
Employee share schemes - value of services	1.1	1.3
Expense in relation to fair value of social security liability on employee share schemes	0.4	0.2
Total cost of employee share schemes	1.5	1.5

 

 

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

	2021	2020
Outstanding at 1 January	6,139,161	6,482,950
Conditionally awarded in year	2,034,359	2,358,444
Exercised	(2,575,681)	(2,592,919)
Forfeited or expired in year	(127,098)	(109,314)
Outstanding at 31 December	5,470,741	6,139,161
Exercisable at the end of the year	-	-

B. Employee ShareSave Scheme

On 30 November 2021, the Group launched an Employee ShareSave Scheme - the Save As You Earn (SAYE) scheme in the UK and Employee Stock Purchase Plan (ESPP) scheme in the US. Under these schemes, eligible employees can save up to a set limit each month. At the end of the savings period (three years for SAYE and two years for ESPP), employees can choose whether or not they wish to buy the shares at the option price or take back their savings as cash. The option price is the share price at the start of the plan with a 20% discount for the UK scheme and 15% discount for the US scheme. The fair value of these awards have been determined using the Monte Carlo model at the grant date. The expected price volatility is based on the historic volatility (based on the remaining life of the scheme), adjusted for any expected changes to future volatility due to publicly available information.

 

	31 December 2021
	SAYE		ESPP
	Number of share options	Exercise price	Number of share options	Exercise price
Outstanding at beginning of year	-	-	-	-
Granted during the year	774,659	153.6p	77,724	167.0p
Outstanding at the end of the year	774,659	153.6p	77,724	167.0p
Exercisable at the end of the year	-	-	-	-

 

	SAYE 31 December 2021	ESPP 31 December 2021
Share price	205.0p	205.0p
Exercise price	153.6p	167.0p
Expected volatility	57.5%	57.2%
Expected life	36 months	24 months
Risk-free rate	0.51%	0.45%
Expected dividend yields	2.45%	2.33%

 

30. UNRECOGNISED ITEMS

30.1 Contingencies and commitments

The Group has no capital commitments, no material contingent liabilities and no contingent assets.

30.2 Events occurring after the reporting period

On 18 January 2022 the Group announced the launch of a share buyback programme. Refer to the Company website for more details. There have been no other reportable subsequent events.

31. DIVIDENDS

A 2020 ordinary dividend of 1 pence per share was paid on 2 July 2021 amounting to £3.0m (2020: £nil).

A special dividend of 10 pence per share was paid on 5 November 2021 amounting to £29.7m (2020: £44.2m).

Subject to approval at the Annual General Meeting on 12 May 2022, a 2021 dividend of 1.1 pence per share will be paid on 24 June 2022 to holders on the register on 27 May 2022. The ordinary shares will be quoted ex-dividend on 26 May 2022.

 

32. RELATED PARTIES

32.1 Controlling shareholder

The ultimate parent undertaking is CHP Software and Consulting Limited (the 'Parent'), which is the parent undertaking of the smallest and largest group in relation to these consolidated financial statements. The ultimate controlling party is Andrew Page.

32.2 Basis of consolidation

The principal subsidiaries and joint ventures of the Group and the Group percentage of equity capital are set out below. All these are consolidated within the Group's financial statements.

 

	Registered address and country of incorporation	Principal activity	Held by Company 2021	Held by Group 2021	Held by Company 2020	Held by Group 2020
Alfa Financial Software Group Limited	Moor Place, 1 Fore Street Avenue, London, EC2Y 9DT, UK	Holding company	100%	100%	100%	100%
Alfa Financial Software Limited	Moor Place, 1 Fore Street Avenue, London, EC2Y 9DT, UK	Software and services	-	100%	-	100%
Alfa Financial Software Inc	350N Old Woodward Avenue, Birmingham, MI 48009, USA	Software and services	-	100%	-	100%
Alfa Financial Software Australia Pty Limited	Lisgar House, Level 3, 32 Carrington Street, Sydney, NSW, 2000, Australia	Services	-	100%	-	100%
Alfa Financial Software NZ Limited	Level 1 Building B, 600 Great South Road, Greenlane, Auckland 1051, New Zealand	Services	-	100%	-	100%
Alfa Financial Software GmbH	Bockenheimer Landstraße 20, 60323 Frankfurt am Main, Germany	Software and services	-	100%	-	100%
Alfa iQ	Moor Place, 1 Fore Street Avenue, London, EC2Y 9DT, UK	Software and services	-	51%	-	51%

Alfa iQ was established in May 2020 - see note 19 for more detail.

 

32.3 Transactions with related parties

See note 8 for further detail on monies paid to key management (including Directors).

Dividends to the amount of £21.7m were paid to the Parent (2020: £29.6m).

Dividends of 1 pence and 10 pence per share were paid to all shareholders in 2021 (2020: 15 pence per share). Directors and other key management received dividends based on their beneficial interest in the shares of the Company.

The balances outstanding from the Parent at 31 December 2021 and 2020 were £nil and £nil respectively.

In the prior period the Group invested £0.4m in Alfa iQ consisting of: a capital contribution of £0.3m; and an interest-free loan fair valued at £0.1m. At 31 December 2021 the value of the investment is carried at £0.2m (2020: £0.3m) and the loan fair valued at £0.1m (2020: £0.1m).

In the current period, the Group entered into a rental agreement with CHP Software and Consulting Limited for rental of a meeting room on the 9th floor of Moor Place for £0.03m per annum (2020: £nil) and at 31 December 2021 there was £nil balance outstanding from, or to, the Parent (2020: £nil).

There were no other outstanding receivable balances from related parties at the end of the reporting period.

 

33. OFFSETTING ASSETS AND LIABILITIES

Assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position where Alfa currently has a legally enforceable right to offset the recognised amounts, and there is an intention to realise the asset and settle the liability simultaneously.

The following table presents the recognised assets and liabilities that are offset as at 31 December 2021 and 31 December 2020 in the consolidated statement of financial position.

 

31 December 2021 £m	Gross amounts	Amounts offset	Net amounts presented
Accrued income	14.0	(7.7)	6.3
Contract liabilities - deferred licence	(13.0)	7.7	(5.3)

 

31 December 2020 £m	Gross amounts	Amounts offset	Net amounts presented
Accrued income	12.6	(7.6)	5.0
Contract liabilities - deferred licence	(9.5)	7.6	(1.9)

 

 

 

 

 

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties which could have a material impact on the long-term performance of Alfa Financial Software Holdings PLC and its subsidiaries are set out in our 2020 Annual Report available on our website. No new risks were added or removed in our 2021 Annual Report.

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The responsibility statement below has been prepared in connection with the annual report and financial statements for the year ended 31 December 2021. Certain parts thereof are not included within this Preliminary Announcement. The Directors confirm that to the best of their knowledge:

-     the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

-     the strategic report, contained within the annual report and financial statements for the year ended 31 December 2021, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

This directors are responsible for the maintenance and integrity of the corporate and financial information included on the Alfa Financial Software Holdings PLC websites.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

This responsibility statement was approved by the Board of Directors and is signed on its behalf by:

 

 

Andrew Denton

Chief Executive Officer

8 March 2022