Notes to the Financial Statements

 

1. Basis of preparation

 

1.1  General information

 

The consolidated financial statements of Distribution Finance Capital Holdings plc (the "Company" or "DFCH plc") include the assets, liabilities, and results of its wholly owned subsidiary, DF Capital Bank Limited (the "Bank"), together form the "Group".

 

DFCH plc is registered and incorporated in England and Wales whose company registration number is 11911574. The registered office is St James' Building, 61-95 Oxford Street, Manchester, England, M1 6EJ. The Company's ordinary shares are listed on the Alternative Investment Market ("AIM") of the London Stock Exchange.

 

The principal activity of the Company is that of an investment holding company. The principal activity of the Group is as a specialist personal savings and commercial lending bank group. The Group provides niche working capital funding solutions to dealers and manufacturers across the UK, enabled by competitively priced personal savings products.

               

These financial statements are presented in pounds sterling, which is the currency of the primary economic environment in which the Group operates, and are rounded to the nearest thousand pounds, unless stated otherwise.

 

1.2 Basis of preparation

 

Both the Group consolidated financial statements and the Company financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards ("IFRSs") as issued by the International Accounting Standards Board ("IASB") and the UK adopted IFRS. The consolidated and Company financial statements are prepared on a going concern basis and under the historical cost convention except for the treatment of certain financial instruments.

 

All intra-group transactions, balances, income, and expenses are eliminated within the consolidated financial statements within this Annual Report and Financial Statements. The consolidated financial statements contained in this Annual Report consolidate the statements of total comprehensive income, statements of financial position, cash flow statements, statements of changes in equity and related notes for Distribution Finance Capital Holdings plc and DF Capital Bank Limited, which together form the "Group", which have been prepared in accordance with applicable IFRS accounting standards. Subsidiaries are consolidated from the date on which control is transferred to the Group. Accounting policies have been applied consistently throughout the Group and its subsidiary.

 

By including the Company financial statements, here together with the Group consolidated financial statements, the Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.

 

1.3 Adoption of new and revised standards and interpretations

 

During the year ended 31 December 2021, the Group did not adopt any new standards and amendments to existing standards which were effective for accounting periods starting on or after 1 January 2021. A number of other new and revised standards issued by the International Accounting Standards Board also came into effect on 1 January 2021, but they do not have a material effect on the Group's financial statements and are not further disclosed. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

The Group assessed the following new standards, amendments and interpretations which have had no material impact on the financial statements as follows:

 

a.     Amendments to IAS 12 'Income taxes': 'Income Tax Consequences of Payments on Instruments Classified as Equity'

b.     'Interest Rate Benchmark Reform': Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7 'Financial Instruments: Disclosures'

c.     Amendment to IFRS 16: COVID-19 rent concessions

 

 

1.4 Principal accounting policies

 

The principal accounting policies adopted in the preparation of this financial information are set out below. These policies have been applied consistently to all the financial periods presented.

 

1.5 Going concern

 

The financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has adequate resources to continue operating in the foreseeable future.  In making this assessment the Directors have considered the Group's current available capital and liquidity resources, the business financial projections and the outcome of stress testing. Based on this review, the Directors believe that the Group is well placed to manage its business risks successfully within the expected economic outlook. Accordingly, the Directors have adopted the going concern basis in preparing the financial statements.

 

Information on the Group's business strategy, performance and outlook are detailed in the Chairman's Statement, Chief Executive Officer's review and Chief Financial Officer's review. The Risk Overview sections further detail the key risks faced by the Group and mitigants and provides an overview of the Group's Risk Management Framework.

 

1.6 Critical accounting estimates and judgements

In accordance with IFRS, the Directors of the Group are required to make judgements, estimates and assumptions in certain subjective areas whilst preparing these financial statements. The application of these accounting policies may impact the reported amounts of assets, liabilities, income and expenses and actual results may differ from these estimates.

 

Any estimates and underlying assumptions used within the statutory financial statements are reviewed on an ongoing basis, with revisions recognised in the period in which they are adjusted, and any future periods affected.

 

Further details can be found in note 3 on the critical accounting estimates and judgements used within these financial statements.

 

1.7 Foreign currencies

The financial statements are expressed in Pound Sterling, which is the functional and presentational currency of the Group.

 

Transactions in foreign currencies are translated to the Group's functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the statement of income.

 

1.8 New accounting standards issued but not yet effective

The Group assesses on an ongoing basis the impact of new accounting standards which are not yet effective at the reporting date and the likely impact of the new accounting standard on the financial statements. At 31 December 2021, the Group has applied all new IFRS standards and foresees no additional standards with a likely material impact to consider at this time.

 

2. Summary of significant accounting policies

 

2.1 Revenue recognition

 

Net interest income

Interest income and expense for all financial instruments except for those classified as held for trading or measured or designated as at fair value through profit and loss ("FVTPL") are recognised in "Net interest income" as "Interest income" and "Interest expenses" in the income statement using the effective interest method.

 

The effective interest rate ("EIR") is the rate that exactly discounts estimated future cash flows of the financial instrument through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. The future cash flows are estimated taking into account all the contractual terms of the instrument.

 

The calculation of the EIR includes all fees and points paid or received between parties to the contract that are incremental and directly attributable to the specific lending arrangement, transaction costs, and all other premiums or discounts.

 

In calculating the EIR, management have taken into consideration the behavioural characteristics of the underlying loans in the lending portfolio which includes evaluating the expected duration of loans and any additional behavioural fees.

 

The interest income/expense is calculated by applying the EIR to the gross carrying amount of non-credit impaired financial assets (that is, to the amortised cost of the financial asset before adjusting for any expected credit loss allowance), or to the amortised cost of financial liabilities.

 

For credit-impaired financial assets, as defined in the financial instruments accounting policy, the interest income is calculated by applying the EIR to the amortised cost of the credit-impaired financial assets (that is, to the gross carrying amount less the allowance for expected credit losses ("ECLs").

 

Fee income

All fee income relates to fees charged directly to customers based on their credit facility. These fees do not meet the criteria for inclusion within interest income.  The Group satisfies its performance obligations as the services are rendered.  These fees are billed in arrears of the period they relate to.

 

Fee income is recognised in accordance with IFRS 15 which sets out the principles to follow for revenue recognition which takes into consideration the nature, amount, timing and uncertainty of revenue and cash flows resulting from a contract with a customer. The accounting standard presents a five-step approach to income recognition to enable the Group to recognise the correct amount of income in the corresponding period(s):

 

·      the contract has been approved by the parties to the contract;  

·      each party's rights in relation to the goods or services to be transferred can be identified;  

·      the payment terms for the goods or services to be transferred can be identified;  

·      the contract has commercial substance; and  

·      it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected

 

All other income is currently recognised under IFRS 9 under the effective interest rate methodology, however, when new fees are implemented, they will be assessed as to whether they fall under IFRS 9 (EIR) or IFRS 15. IFRS 9 and IFRS 15 have been applied consistently to all the financial periods presented.

 

Other income from financial instruments

For financial instruments that are classified as FVTPL, any interest or fee income is included in the statement of comprehensive income within the fair value gain or loss.

 

Debt securities are measured at fair value through other comprehensive income. The securities are measured at their closing bid prices at the reporting date with any unrealised gain or loss recognised through other comprehensive income. Once the assets have been disposed, the corresponding realised gain or loss is transferred from other comprehensive income into the income statement.

 

The Group presently holds no financial instruments for trading or hedging purposes, nor has it designated any items as FVTPL.

 

Other operating income/(expense)

Other operating income predominantly consists of UK government grant monies (including repayments of previously awarded monies) and other minor income received by the Group.

 

2.2 Other expense from financial instruments

Any interest or fees incurred in servicing liabilities carried at FVTPL are included in the profit and loss account within "Net gain/(loss) from financial instruments at FVTPL".

 

2.3 Property, plant and equipment

All property, plant and equipment is stated at historical cost (or deemed historical cost) less accumulated depreciation, and less any identified impairment. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. 

 

Depreciation is provided on all property, plant and equipment at rates calculated to write each asset down to its estimated residual value on a straight-line basis at the following annual rates:

 

Fixtures & fittings                                                - 3 years

Computer equipment                                         - 3 years

Telephony & communications                           - 3 years

Leasehold improvements                                   - 3 years

 

Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. All current lease agreements have a maximum lease term of 5 years. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.

 

Useful economic lives and estimated residual values are reviewed annually and adjusted as appropriate.

 

The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds less any costs of disposal and the carrying amount of the asset, which is recognised in the Income Statement.

 

2.4 Intangible assets

 

Computer software

Computer software which has been purchased by the Group from third party vendors is measured at initial cost less accumulated amortisation and less any accumulated impairments.

Computer software is estimated to have a useful life of 3 years with no residual value after the period. These assets are amortised on a straight-line basis with the useful economic lives and estimated residual values being reviewed annually and adjusted as appropriate.

 

Internally generated intangible assets

Internally generated intangible assets are only recognised by the Group when the recognition criteria have been met in accordance with IAS 38: Intangible Assets as follows:

 

·              expenditure can be reliably measured;

·              the product or process is technically and commercially feasible;

·              future economic benefits are likely to be received;

·              intention and ability to complete the development; and

·              view to either use or sell the asset in the future.

The Group will only recognise an internally generated asset should it meet all the above criteria. In the event of a development not meeting the criteria it will be recognised within the consolidated income statement in the period incurred.

 

Capitalised costs include all directly attributable costs to the development of the asset. Internally generated assets are measured at capitalised cost less accumulated amortisation less accumulated impairment losses. The internally generated asset is amortised at the point the asset is available for use or sale. The asset is amortised on a straight-line basis over the useful economic life with the remaining useful economic life and residual value being assessed annually.

 

Internally generated assets are amortised on a straight-line basis over a period of 3-5 years with no expected residual balance.

 

Any subsequent expenditure on the internally generated asset is only capitalised if the cost increases the future economic benefits of the related asset. Otherwise, all additional expenditure should be recognised through the income statement in the period it occurs.

 

2.5 Financial instruments

 

Initial recognition

Financial assets and financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

 

Financial assets and financial liabilities are initially measured at fair value.  Transaction costs that are directly attributable to the acquisition or issue of the financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are respectively added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.  Transaction costs that are directly attributable to the acquisition of financial assets and financial liabilities at FVTPL are recognised immediately in the consolidated income statement.

 

Financial assets

 

Classification and reclassification of financial assets

Recognised financial assets within the scope of IFRS 9 are required to be classified as subsequently measured at amortised cost, fair value through other comprehensive income (FVTOCI) or fair value through profit or loss (FVTPL) on the basis of both the Group's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.

 

Financial assets are reclassified if, and only if, the business model under which they are held is changed. There has been no such change in the allocation of assets to business models in the periods under review.

 

I.             Loans and advances to customers

Loans and advances to customers are held within a business model whose objective is to hold those financial assets in order to collect contractual cash flows. Further, the contractual terms of the loan agreements give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 

 

Accordingly, loans and advances to customers are subsequently measured at amortised cost.  After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in interest and similar income in the income statement. The losses arising from impairment are recognised in the income statement and disclosed with any other similar losses within the line item "Net impairment losses on financial assets". 

 

II.            Fair value through other comprehensive income (FVTOCI)

FVTOCI financial assets includes debt securities in the form of UK Treasury Bills and UK Gilts. These assets are not classified as: loans and receivables; held-to-maturity investments; or financial assets at fair value through profit or loss.

 

Regular purchases and sales of debt securities are recognised on the trade date at which the Group commits to purchase or sell the asset.

 

III.           Trade receivables

Trade receivables do not contain any significant financing component and accordingly are recognised initially at transaction price, and subsequently measured at amortised cost less accumulated impairment allowance.

 

 

IV.           Other receivables

 

Other receivables are held only to collect contractually due payments of principal (and exceptionally interest charges due on late settlement). Where the fair value of these transactions is materially similar to the transaction price, each is recognised initially at the contracted amount, and subsequently measured at amortised cost less accumulated impairment allowance.

 

 

 

 

 

V.            Cash and cash equivalents

 

Cash and cash equivalents comprise cash balances and demand deposits with a maturity date of less than three months from recognition. These balances are readily convertible into cash and subject to an insignificant risk of changes in value. Cash and cash equivalents are measured at amortised cost less accumulated impairment allowance.

 

Impairment

The Group recognises loss allowances for expected credit losses ("ECLs") on the following financial instruments that are not measured at FVTPL:

 

·      Loans and advances to customers

·      Other receivables*

·      Trade receivables*, and

·      Loan commitments

*IFRS 9 permits entities to apply a 'simplified approach' for trade receivables, contract assets and lease receivables. The simplified approach permits entities to recognise lifetime expected losses on all these assets without the need to identify significant increases in credit risk. The Group has adopted this simplified approach for assessing trade and other receivables balances. The Group confirms these trade and other receivable balances do not contain a significant financing component.

 

With the exception of purchased or originated credit impaired ("POCI") financial assets (which are considered separately below), ECLs are measured through loss allowances calculated on the following bases.

 

ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as the present value of the difference between the cash flows due to the Group under the contract and the cash flows that Distribution Finance Capital expects to receive arising from the weighting of future economic scenarios, discounted at the asset's EIR.

 

The Group measures ECL on an individual basis, or on a collective basis for portfolios of loans that share similar economic risk characteristics. The loss allowance is measured as the difference between the contractual cash flows and the present value of the asset's expected cash flows using the asset's original EIR, regardless of whether it is measured on an individual basis or a collective basis.

 

A financial asset that gives rise to credit risk, is referred to (and analysed in the notes to this financial information) as being in "Stage 1" provided that since initial recognition (or since the previous reporting date) there has not been a significant increase in credit risk, nor has it has become credit impaired.

 

For a Stage 1 asset, the loss allowance is the "12-month ECL", that is, the ECL that results from those default events on the financial instrument that are possible within 12 months from the reporting date.

 

A financial asset that gives rise to credit risk is referred to (and analysed in the notes to this financial information) as being in "Stage 2" if since initial recognition there has been a significant increase in credit risk (SICR) but it is not credit impaired.

 

For a Stage 2 asset, the loss allowance is the "lifetime ECL", that is, the ECL that results from all possible default events over the life of the financial instrument.

 

A financial asset that gives rise to credit risk is referred to (and analysed in the notes to this financial information) as being in "Stage 3" if since initial recognition it has become credit impaired.

 

For a Stage 3 asset, the loss allowance is the difference between the asset's projected exposure at default (EAD) and the present value of estimated future cash flows discounted at an applicable EIR. Further, the recognition of interest income is constrained relative to the amounts that are recognised on Stage 1 and Stage 2 assets, as described in the revenue recognition policy set out above.

 

If circumstances change sufficiently at subsequent reporting dates, an asset is referred to by its newly appropriate Stage and is re-analysed in the notes to the financial information.

 

Where an asset is expected to mature in 12 months or less, the "12-month ECL" and the "lifetime ECL" have the same effective meaning and accordingly for such assets the calculated loss allowance will be the same whether such an asset is at Stage 1 or Stage 2. In order to determine the loss allowance for assets with a maturity of 12 months or more, and disclose significant increases in credit risk, the Group nonetheless determines which of its financial assets are in Stages 1 and 2 at each reporting date. 

 

Significant increase in credit risk - policies and procedures for identifying Stage 2 assets

Whenever any contractual payment is past due, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition in order to determine whether credit risk has increased significantly.

 

See note 31 for further details about how the Group assesses increases in significant credit risk.

 

Definition of a default

Critical to the determination of significant increases in credit risk (and to the determination of ECLs) is the definition of default. Default is a component of the probability of default (PD), changes in which lead to the identification of a significant increase in credit risk, and PD is then a factor in the measurement of ECLs. 

 

The Group's definition of default for this purpose is:

 

·      A counterparty defaults on a payment due under a loan agreement and that payment is more than 90 days overdue; or

·      The collateral that secures, all or in part, the loan agreement has been sold or is otherwise not available for sale and the proceeds have not been paid to the lending company; or

·      A counterparty commits an event of default under the terms and conditions of the loan agreement which leads the lending company to believe that the borrower's ability to meet its credit obligations to the lending company is in doubt.

The definition of default is similarly critical in the determination of whether an asset is credit-impaired (as explained below).

 

Credit-impaired financial assets - policies and procedures for identifying Stage 3 assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. IFRS 9 states that evidence of credit-impairment includes observable data about the following events:

·      A counterparty is 90 days past due for one or more of its loan receivables;

·      significant financial difficulty of the borrower or issuer;

·      a breach of contract such as a default (as defined above) or past due event, or

·      The Group, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to the borrower a concession that the Group would not otherwise consider.

The Group assesses whether debt instruments that are financial assets measured at amortised cost or at FVTOCI are credit-impaired at each reporting date.  When assessing whether there is evidence of credit-impairment, the Group takes into account both qualitative and quantitative indicators relating to both the borrower and to the asset. The information assessed depends on the borrower and the type of the asset.  It may not be possible to identify a single discrete event - instead, the combined effect of several events may have caused financial assets to become credit-impaired.

 

See note 31 for further details about how the Group identifies credit impaired assets.

 

Purchased or originated credit-impaired ("POCI") financial assets

POCI financial assets are treated differently because they are in Stage 3 from the point of original recognition.  It is not in the nature of the Group's business to purchase financial assets originated by other lenders, nor has the Group to date originated any loans or advances to borrowers that it would define as credit impaired.

 

Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL are presented in the statement of financial position as follows:

·      For financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets; and

·      For loan commitments: as a provision.

 

Revisions to estimated cash flows

Where cash flows are significantly different from the original expectations used to determine EIR, but where this difference does not arise from a modification of the terms of the financial instrument, the Group revises its estimates of receipts and adjusts the gross carrying amount of the financial asset to reflect actual and revised estimated contractual cash flows. The Group recalculates the gross carrying amount of the financial asset as the present value of the estimated future contractual cash flows discounted at the financial instrument's original EIR.

 

The adjustment is recognised in the consolidated income statement as income or expense.

 

Modification of financial assets

A modification of a financial asset occurs when the contractual terms governing a financial asset are renegotiated without the original contract being replaced and derecognised.  A modification is accounted for in the same way as a revision to estimated cash flows, and in addition;

·      Any fees charged are added to the asset and amortised over the new expected life of the asset, and

·      The asset is individually assessed to determine whether there has been a significant increase in credit risk.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

 

On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in the income statement.

On derecognition of a financial asset other than in its entirety (e.g., when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in the consolidated statement of comprehensive income. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.

Write-offs

Loans and advances are written off when the Group has no reasonable expectation of recovering the financial asset; either in its entirety or a portion of it. This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. A write-off constitutes a derecognition event. The Group may apply enforcement activities to financial assets written off. Recoveries resulting from enforcement activities will result in impairment gains.

 

Financial liabilities

 

Financial liabilities and equity

Debt and equity instruments that are issued are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

 

A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Group or a contract that will or may be settled in the Group's own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Group's own equity instruments. Gains or losses on financial liabilities are recognised in the consolidated statement of comprehensive income.

 

 

 

Equity instruments

The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Where an instrument contains no obligation on the Group to deliver cash or other financial assets, or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group, or where the instrument will or may be settled in the Group's own equity instruments but includes no obligation to deliver a variable number of the Group's own equity instruments, then it is treated as an equity instrument. Accordingly, the Group's share capital are presented as components of equity and any dividends, interest or other distributions on capital instruments are also recognised in equity. Any related tax is accounted for in accordance with IAS 12.

 

Financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities.

 

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss may include financial liabilities held for trading. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term.

 

During the periods presented the Group has held no financial liabilities for trading, nor designated any financial liabilities upon initial recognition as at fair value through profit or loss.

 

Other financial liabilities - loans and borrowings

Interest bearing loans and borrowings are measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in "Interest and similar expenses" in the Income Statement.

 

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.

 

Impairment of non-financial assets

The carrying amounts of the Group's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets ('the cash-generating unit').

 

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit ('CGU) exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of CGUs are allocated to reduce the carrying amounts of assets in the unit (or group of units) on a pro rata basis.

 

An impairment loss is reversed if and only if the reasons for the impairment have ceased to apply.

 

Impairment losses recognised in prior periods are assessed at each reporting date for any indication that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

 

2.6 Current and deferred income tax

 

Income tax on the result for the period comprises current and deferred income tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

 

Current tax is the expected tax payable or receivable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous periods.

 

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date.

 

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 

2.7 Employee benefits - pension costs

 

A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and will have a legal or constructive obligation to pay further amounts. Contributions to defined contribution schemes are charged to the statement of comprehensive income as they become payable in accordance with the rules of the scheme. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position.

 

2.8 Share based payments

 

The Group has a number of long-term incentive share schemes for all employees, including some Directors, whereby they have been granted equity-settled share-based payments in the Group. The share schemes all have vesting conditions with some schemes for senior management being subject to specific performance conditions. All share schemes are equity settled share-based payments.

 

The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the employees become unconditionally entitled to the awards (the vesting period). Fair value is measured by use of the Black-Scholes option pricing model. The variables used in the model are adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

 

The share-based payments are recognised as staff costs in the income statement and expensed on a straight-line basis over the vesting period, based on estimates of the number of shares which may eventually vest. The amount recognised as an expense is adjusted to reflect differences between expected and actual outcomes, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and specific performance conditions at the vesting date. The change in estimations, if any, is recognised in the income statement at the time of the change with a corresponding adjustment in equity through the retained earnings account.

 

See note 9 for further details on the share schemes.

 

2.9 Leasing

 

The Group presently is only a lessee with lease agreements with third-party suppliers. It does not hold any lessor contracts with customers. 

 

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer for which these are deemed as right-of-use assets. The lessee is required to recognise a right-of-use asset representing the Group right of use and control over the leased asset. Furthermore, the Group is required to recognise a lease liability representing its obligation to make lease payments over the relevant term of the lease. The Group will recognise both interest expense and depreciation charges, which equate to the finance costs of the leases.

 

Furthermore, the classification of cash flows will also be affected because operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

 

Lease liability

The lease liability is initially measured at the present value of the lease payments that are not paid at that date. The Group assesses on a lease-by-lease payments the contractual terms of the lease and likelihood of the Group enacting on available extension and break clauses within the lease in order to determine the expected applicable term of the lease. Once determined, the Group analyses the expected future payments of the lease over this applicable term, which are discounted. The interest rate used to discount the cashflows is the interest rate implicit to the lease agreement. Where this is not available, the Group has applied their incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Group would have to pay to borrow, over a similar term and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

 

Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst other variables. The interest expense of the lease liability is calculated under the effective interest rate where the interest expense equates to the lease payments over the remaining term.

 

Right-of-use asset

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability.

 

The cost at initial recognition is calculated as the initial lease liability plus initial direct costs, expected restoration costs and remaining prepayment balances at the commencement date.

 

The right-of-use asset is subsequently measured at cost, less accumulated depreciation, and any accumulated impairment losses. Any remeasurement of the lease liability results in a corresponding adjustment to the right-of-use asset.

 

The Company calculates depreciation of the right-of-use asset in accordance with IAS 16 'Property, Plant and Equipment' and is consistent with the depreciation methodology applied to other similar assets. All leases are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the right-of-use asset.

 

Restoration costs will be estimated at initial application and added to the right-of-use asset and a corresponding provision raised in accordance with IAS 37 'Provisions, contingent liabilities, and contingent assets. Any subsequent change in the measurement of the restoration provision, due to a revised estimation of expected restoration costs, is accounted for as an adjustment of the right-of-use asset.

 

Short-term leases and leases of low value assets

The Group leases some smaller asset classes, such as computer hardware, which either has a value under £5,000 per annum or has a lease period of 12 months or shorter. For such leases, the Group has elected under IFRS 16 rules to treat these as operating leases and hold off-balance sheet. These leases are charged to the income statement on a straight-line basis over the lease term.

 

2.10 Provisions for commitments and other liabilities

 

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

 

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (discounted at the Company's weighted average cost of capital when the effect of the time value of money is material).

 

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset only if it is virtually certain that reimbursement will be received, and the amount of the receivable can be measured reliably.

 

2.11 Operating segments

 

IFRS 8 Operating segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on the Group's internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

The Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group.

However, in accordance with IFRS 8, the Group will continue to monitor its activities to ensure any further reportable segments are identified and the appropriate reporting and disclosures are made.

 

2.12 Earnings per share

 

In accordance with IAS 33, the Group will present on the face of the statement of comprehensive income basic and diluted EPS for:

-    Profit or loss from continuing operations attributable to the ordinary equity holders of the Company; and

-    Profit or loss attributable to the ordinary equity holders of the Company for the period for each class of ordinary shares that has a different right to share in profit for the period.

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the period.

 

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other dilutive potential ordinary shares.

 

2.13 Merger relief

 

Merger relief is relief granted under the Companies Act 2006 section 612 which removes the requirement for the Company to recognise the premium on issued shares to acquire another company within the share premium account. Merger relief is recognised where all the following criteriaare satisfied:

 

§ The Company secures at least a 90% equity holding of all share classes in another company as part of the arrangement; and

§ The Company provides either of the following as consideration for the allotment of shares in the acquired company:

o  Issue or transfer of equity shares in the Company in exchange for equity shares in the acquired company; or

o  The cancellation of any such shares in the acquired company that the Company does not already hold.

2.14 Merger accounting

 

Business combination and merger accounting

Where there is a change in control and ownership of the Group but represented a combination of businesses under common control, this is deemed outside the scope of IFRS 3 Business Combinations, and the Group must consider other applicable accounting standards.

 

FRS 102 provides accounting guidance for transactions of this nature and provides prescriptive guidance in the form of Merger Accounting and in particular using the book value accounting method in order to prepare the consolidated financial statement for the Group.

 

The principles of merger accounting are as follows:

§ Assets and liabilities of the acquired entity are stated at predecessor carrying values. Fair value measurement is not required;

§ No new goodwill arises in merger accounting; and

§ Any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity at the date of transaction is included in equity in retained earnings or in a separate "Merger Reserve" account.

By way of using the merger accounting methodology for preparing these consolidated financial statements, comparative information will be prepared as if the Group had existed and been formed in prior periods. The Directors agree this will enable informative comparatives to users given the underlying activities and management structure of the Group remain largely unchanged following the formation of the Group.

 

Merger reserve

Where merger accounting has been applied this prescribes that any difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity at the date of transaction is included in equity in retained earnings or in a separate reserve account. Therefore, on consolidation of the Group financial statements, the difference between the consideration paid and the book value of the acquired entity is recognised as a Merger Reserve, in accordance with relevant accounting standards relating to businesses under common control.

 

2.15 Own Shares

 

Own equity instruments of the Group which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity. Consideration paid or received on the purchase, sale, issue, or cancellation of the Group's own equity instruments is recognised directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue, or cancellation of own equity instruments.

 

3. Critical accounting judgements and key sources of estimation uncertainty

 

The preparation of financial information in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses.

 

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:

 

i.      Expected credit losses loan impairment

The Group applies a number of assumptions and estimations within its impairment loss model to calculate the expected credit losses of its loan portfolio. Although these assumptions and estimates are validated against historical performance where possible, the Group is acutely aware that IFRS 9 is a forward-looking process which should not be driven solely by past performance. Consequently, the Group is required to make informed decisions in regards to expected credit losses and impairment allowances over the foreseeable future.

 

Although there are many factors which impact the Group's impairment modelling, the following areas are deemed to have a material impact on the financial statements:

 

COVID-19

 

At 31 December 2021, the Group maintained an overlay to its PD modelling to reflect residual uncertainty due to COVID-19 as it can be reasonably expected that further disruption to dealers and their supply chains could be expected over the foreseeable future. Further, the Group has observed dealers becoming higher leveraged due to the impact of COVID-19, which may take some time to reduce to previous levels. This increase in debt leverage may leave dealers vulnerable to expected increases in interest rates to counter inflationary pressure in 2022, which may increase the level of defaults observed by the Group.

 

An overlay has not been applied to the Group's LGD modelling as during COVID-19, the Group has observed increased asset prices due to limited supply and high demand for its funded assets. 

 

Definition of default

 

The Group aligns its definition of default to the regulatory definition for default in all periods presented. The Group applies the regulatory guideline of 90+ days in arrears and also uses internal and external information, along with financial and non-financial information, available to the Group to determine whether a default event has either occurred or is perceived to have occurred.

 

Should a default event occur the Group applies a probationary ("cooling off") period to Stage 3 counterparties before being transferred back to either stage 1 or 2. The probationary period is typically 3 months but is extended up to 12 months for more severe scenarios. During the probationary period the counterparty must no longer meet the criteria for Stage 3 inclusion for the entire applicable period.

 

Probability of default (PD)

 

The majority of the Group's loan portfolio has an expected behavioural term of less than 12 months. As such, there is not a material difference between the 12-month PD for Stage 1 exposures and the lifetime PD for Stage 2 exposures. The Group's impairment model uses both external Delphi credit ratings and internal credit risk ratings to assess the PD of each counterparty at the reporting date.

 

At the beginning of the COVID-19 pandemic in the UK in H1 2020 the Group observed record high defaults and applied an overlay to its PD assumptions to reflect the likely increase in stage 1 and 2 PDs.  The level of defaults improved during H2 2020 and during 2021 the Group has seen historically low default events.  When assessing PD modelling, the Group utilises both historical default data and managerial judgement to formulate its forward-looking PD modelling.  Although recent default and arrears performance may suggest an improved economic outlook, the Group remains cautious to its PD modelling as COVID-19 government support measures unwind and counter inflationary measures are likely to be expected during 2022 which may drive an increase in default activity. Resultantly, the Group continues to use external PD information for its PD modelling and although having partially released the Covid-overlay applied during 2020 given the improvement in economic conditions for the UK economy and the Group's customer base, continues to apply a COVID-19 overlay to its PD modelling to reflect managerial expectation that current strong default performance will not likely continue for the foreseeable future.

 

A 100% deterioration in PDs (excluding Stage 3 exposures, which are already in default) would result in an additional impairment charge of £881,000 (2020: £540,000).

 

Loss given default (LGD)

 

As a collateralised lender, the Group's expected credit losses impairment can be materially impacted by its LGD modelling and the assumptions used by the Group to calculate appropriate collateral haircuts in a default scenario. The Group continually monitors historic LGD performance on defaulted cases, which is fed back into its LGD modelling to improve the LGD modelling output.

 

The Group's LGD modelling identifies key drivers of loss for the Group based on individual asset, borrower and loan receivable identifiers. A key driver of loss occurs when a customer sells a funded asset without repaying the Group in full - this is commonly referred to as "Sold Out of Trust". In such scenarios, the Group has analysed its historical default data where assets have been sold out of trust to assess the likely recovery in such events. The Group also applies probabilities of such events occurring in the future to calculate a probability-weighted LGD. The Group conducts similar exercises for all key drivers of LGD. Due to limited historical loss data, the Group supplements the formulation of LGD haircuts with managerial quantitative assessments as required.  

 

For the year ended 31 December 2021, the Group has not applied a COVID-19 overlay to its LGD modelling given there is heightened demand, in addition to limited supply, for its funded assets. In certain sectors, such as leisure goods and motor vehicles, the Group has observed rising asset prices from the point of funding which materially improves its LGD position. The Group anticipates these to be short-term market forces so has remained cautious in its LGD modelling.

 

A 10% reduction in the expected discounted cashflows from the collateral held by the Group would result in an additional impairment charge of £618,000 (2020: £400,000).

 

Multiple economic scenarios

 

The Group considers four economic scenarios within its impairment modelling whereby the Group stresses PD and LGD inputs in accordance with expected macro-economic and managerial outlooks. This provides an ECL impairment allowance for each scenario which is multiplied by the likelihood of occurrence over the next 12-month period from the reporting date to give a probability weighted ECL.

 

When formulating the multiple economic scenarios, the Group considers both macro-economic factors and other specific drivers which may trigger a certain stress scenario. After which, the Group applies managerial judgment supported by external research to assess the impact these factors will have upon PD, LGD and the likeliness of these events occurring over the following 12-month period.

 

During the year ended 31 December 2021, the Group has observed historically low default and arrears activity, which has driven a lower modelled PD from the prior year. This improvement has migrated the Group's baseline close to the 'Improved' PD scenario as presented in 30 June 2021 interim (unaudited) results.  Consequently, the Group has amended the 'Improved' PD scenario. The Group has also decreased the probability of the 'Improved' scenario occurring over the next 12-month period as well as increasing the probability of the 'Baseline' scenario accordingly. See below for the updated economic stress scenarios:

	Probability Weighting	ECL Impairment	ECL Coverage1
Scenario	%	£'000	%
Severe	5%	4,868	1.94%
Poor	20%	2,753	1.10%
Baseline	60%	1,315	0.52%
Improved	15%	898	0.36%

 

¹ ECL Coverage is calculated by dividing the ECL impairment by the Exposure at Default (EAD). EAD is typically higher than the gross loan receivable balance.

 

In the event one of the above scenarios occurred and applied a 100% probability weighting, the impact on the impairment allowances would be as follows:

 

	31 December 2021	31 December 2020
Scenario	£'000	£'000
Severe	3,150	1,091
Poor	1,035	391
Baseline	(403)	(157)
Improved	(820)	(414)

 

4. Interest and similar income

			2021	2020
			£'000	£'000
On loans and advances to customers			13,296	11,206
On loans and advances to banks			5	17
On employee loan agreements			-	10
On debt securities - measured at FVOCI*			(42)	-
Total interest and similar income			13,259	11,233

*In the year ended 31 December 2020, £4,800 of interest income relating to debt securities measured at FVTOCI was recorded in fair value movements on debt securities in other comprehensive income.

 

5. Operating segments

 

It is the Director's view that the Group's products and the markets to which they are offered are so similar in nature that they are reported as one class of business. All customers are currently UK-based only. As a result, it is considered that the chief operating decision maker uses only one segment to control resources and assess the performance of the entity, while deciding the strategic direction of the Group.

 

 

 

 

 

6.  Interest and similar expenses

 

In the year ended 31 December 2021, the Group was solely funded by customer deposits and Group reserves.  The Group settled in full its financial liabilities held by TruFin Holdings Limited and wholesale funders before the end of 2020. See note 28 and 29 for further detail of the movements in customer deposits and financial liabilities during the year.

 

	2021	2020
	£'000	£'000
Customer deposits	2,338	279
Interest paid to related parties	-	913
Wholesale funding interest	-	7,982
Total interest and similar expense	2,338	9,174

 

 

7.  Fee income

	2021	2020
	£'000	£'000
Facility-related fees	466	168
Total fee income	466	168

 

8.  Staff costs

 

Analysis of staff costs:

	2021	2020
	£'000	£'000
Wages and salaries	7,372	7,959
Share based payments	362	322
Contractor costs	24	75
Social security costs	921	1,054
Pension costs arising on defined contribution schemes	442	395
Total staff costs	9,121	9,805

 

Contractor costs are recognised within personnel costs where the work performed would otherwise have been performed by employees. Contractor costs arising from the performance of other services is included within other operating expenses.

 

Average number of persons employed by the Group (including Directors):

	2021	2020
	No.	No.
Management	11	12
Finance	7	7
Risk	17	13
Sales & Marketing	14	15
Operations	30	30
Technology	11	11
Total average headcount	90	88

 

 

 

 

 

 

 

 

 

Directors' emoluments:

 

	Fees/basic salary	Bonuses	Employer pension contributions	Benefits in kind	Long term incentive schemes	2021 total	2020 total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Executive Directors:
Carl D'Ammassa	433	191	43	6	-	673	775
Gavin Morris	248	91	24	7	-	370	275
Henry Kenner1	-	-	-	-	-	-	210
	681	282	67	13	-	1,043	1,260
Non-executive Directors:
Mark Stephens	150	-	-	-	-	150	150
Carole Machell	100	-	-	-	-	100	100
Thomas Grathwohl	100	-	-	-	-	100	100
Stephen Greene2	-	-	-	-	-	-	-
Haakon Stenrød2	-	-	-	-	-	-	-
John Baines3	133	-	-	-	-	133	200
James van den Bergh4	-	-	-	-	-	-	61
	483	-	-	-	-	483	611
Total Director remuneration	1,164	282	67	13	-	1,526	1,871

 

 

¹ Henry Kenner resigned on 13 May 2020.

² Stephen Greene and Haakon Stenrød hold their position as Non-Executive Directors by virtue of major shareholders (Arrowgrass Master Fund Ltd and Watrium AS, respectively) exercising their rights to appoint Directors under their Relationship Agreements.  They are compensated by these respective shareholders. Stephen Greene resigned on 17 December 2021.

³ John Baines resigned on 19 May 2021.

⁴ James van den Bergh resigned on 13 May 2020.

 

Carl D'Ammassa's fees/basic salary of £433,000 comprises basic salary of £425,000 and pay in lieu of holiday not taken of £8,000. The pension for the year ended 31 December 2021 to Carl D'Ammassa and Gavin Morris of £43,000 and £24,000 respectively is the sum of payments made to these individuals in lieu of Group pension contributions.

 

Carl D'Ammassa and Gavin Morris have received share options as part of long-term incentive schemes of which none of these options have vested as at 31 December 2021. Further details of these share option schemes can be found in note 9.

 

 

 

 

9. Share based payments

The Group has the following share options scheme for employees which have been granted and remain outstanding at 31 December 2021:  

Plan	No. of options outstanding 31 December 2021	Options outstanding value 31 December 2021 £'000	Grant dates	Vesting dates	Exercise price	Performance conditions attached	Settlement method	Charge for year ended 31 December 2021 £'000
General Award 2020	287,500	52	Jun-20	Jun-23	Nil	No	Equity	34
General Award 2021	216,000	21	Jun-21	Jun-24	Nil	No	Equity	22
Manager CSOP Award	385,298	21	Aug-20	Jun-21 Jun-22 Jun-23	40.5p	No	Equity	10
Manager PSP Award	853,334	327	Aug-20	Aug-20 Jun-21 Jun-22	Nil	No	Equity	140
CEO Recruitment Award	900,000	187	Jun-20	Jun-23	Nil	Yes	Equity	133
Senior Manager 2020 Award	885,000	57	Jun-20	Jun-23	Nil	Yes	Equity	4
Senior Manager 2021 Award	114,370	19	Jun-21	Sep-22 Jun-24	Nil	No	Equity	19
TOTAL	3,641,502	684						362

 

All awards are equity-settled, and the shares awarded for all schemes are Distribution Finance Capital Holdings plc over ordinary shares of £0.01 each of the current share capital of the Company which are listed on the Alternative Investment Market (AIM). The awards were granted to employees and Directors within the Group with the majority of the employees being employed by DF Capital Bank Limited.

 

 

 

 

During the year ended 31 December 2021, the movements in share options granted, forfeited, and exercised were as follows:

	Options outstanding at start of year	Options granted during the year	Options forfeited during the year	Options exercised during the year	Options outstanding at end of the year
Plan	No.	No.	No.	No.	No.
Year ended 31 December 2021
General Award 2020	320,000	-	32,500	-	287,500
General Award 2021	-	240,000	24,000	-	216,000
Manager CSOP Award	385,298	-	-	-	385,298
Manager PSP Award	853,334	-	-	-	853,334
CEO Recruitment Award	900,000	-	-	-	900,000
Senior Manager 2020 Award	985,000	-	100,000	-	885,000
Senior Manager 2021 Award	-	114,370	-	-	114,370
Total	3,443,632	354,370	156,500	-	3,641,502
Year ended 31 December 2020
General Award 2020	-	355,000	35,000	-	320,000
Manager CSOP Award	-	385,298	-	-	385,298
Manager PSP Award	-	853,334	-	-	853,334
CEO Recruitment Award	-	900,000	-	-	900,000
Senior Manager 2020 Award	-	985,000	-	-	985,000
Total	-	3,478,632	35,000	-	3,443,632

 

Based on the fair value of the options at their respective grant date, taking into consideration any restrictive vesting criteria, including performance conditions, the estimated weighted average fair value at the grant date for the different schemes is as follows:

 

	2021	2020
Plan	pence	pence
General Award 2020	37.50	37.50
General Award 2021	61.00	-
Manager CSOP Award	8.00	8.00
Manager PSP Award	40.50	40.50
CEO Recruitment Award	37.50	37.50
Senior Manager 2020 Award	37.50	37.50
Senior Manager 2021 Award	61.00	-
Average weighted fair value at grant date	37.38	34.97

 

The terms of the individual schemes are as follows:

 

General Award

In the year ended 31 December 2021, nil cost options over ordinary shares of £0.01 each of the current share capital of the Company were granted to all employees (excluding Directors). These options vest over a 3-year period and are not subject to specific performance conditions.

 

Recruitment Award

On his appointment on 9 March 2020, Carl D'Ammassa was granted 900,000 nil cost options by way of a Recruitment Award.  This award, granted utilising unallocated shares held in the Employee Benefit Trust, was made with a number of performance conditions in place. Having assessed the performance of the CEO through 2021, the Committee agreed that the final performance conditions relating to 400,000 shares have been satisfied in full and the entire share award shall vest in June 2023, subject to Carl's on-going employment with the Group.

 

 

 

Senior Manager Award

Nil cost options over ordinary shares of £0.01 each of the current share capital of the Company were granted to certain senior managers.  All of these share awards have been granted in line with our PSP rules and have performance conditions aligned to financial performance, risk management and cultural objectives.

 

In the year ended 31 December 2021, Senior Managers who recently joined the Group or were promoted were granted nil-cost share options. These have no performance conditions and vest over a period of 1 to 3 years.

 

Manager PSP and CSOP Award

 

In the year ended 31 December 2020, the Group executed a reorganisation of its existing share capital and employee loan agreements whereby managers and former managers were awarded share options so that they were not disadvantaged by this exercise. PSP scheme nil cost options and Company Share Option Scheme shares ("CSOP") were issued over ordinary shares of £0.01 each of the share capital of the Company. The CSOP Options have an exercise price per share of 40.5p equal to the market value of Ordinary Shares as at the time of grant and the PSP Options are nil cost options. The PSP and CSOP Options will become exercisable on the same timeline, and in the same proportions, that the corresponding original Ordinary Shares would have become freely transferable on the terms on which they were held. The Options are not subject to the satisfaction of performance conditions. The fair value of the CSOP was measured at the grant date using the Black-Scholes model.

 

No further awards under this scheme were granted in the year ended 31 December 2021.

 

One Director, Gavin Morris, holds 19,733 PSP nil cost options and 74,074 CSOP Options.

 

10.  Other operating expenses

		2021	2020
	Note	£'000	£'000
Finance costs	11	19	17
Depreciation	16,17	259	290
Amortisation of intangible assets	18	314	237
Loss on disposal of fixed assets	16	3	3
Loss on disposal of intangible assets	18	-	57
Professional services expenses		1,858	2,009
IT-related expenses		1,688	1,379
Other operating expenses		1,245	1,190
Total other operating expenses		5,386	5,182

 

11.  Finance costs

	2021	2020
	£'000	£'000
Interest on lease liabilities	19	17
Total finance costs	19	17

 

  

 

 

12.  Provisions

 

Analysis for movements in other provisions:

	Leasehold dilapidations	Onerous supplier contracts	Social security payments	Severance payments	Total
	£'000	£'000	£'000	£'000	£'000
Year ended 31 December 2021
At start of year	58	25	-	-	83
Additions	70	-	-	-	70
Utilisation of provision	(29)	(16)	-	-	(45)
Unused amounts reversed	(29)	(9)	-	-	(38)
Unwinding of discount	3	-	-	-	3
At end of year	73	-	-	-	73
Year ended 31 December 2020
At start of year	91	-	105	337	533
Additions	-	25	-	1	26
Utilisation of provision	(26)	-	-	(338)	(364)
Unused amounts reversed	(7)	-	(105)	-	(112)
At end of year	58	25	-	-	83

 

Leasehold dilapidations

During the year ended 31 December 2021, the Group exited its former headquarters at 196 Deansgate, Manchester whereby it utilised £29,000 of the provision on dilapidation costs and released the remaining £29,000 of the £58,000 provision held at 1 January 2021.

 

The Group entered into two new lease agreements for offices during the year ended 31 December 2021, including its new headquarters office, for which it recognised £70,000 for discounted expected restoration costs payable at the end of the lease. This has been included as part of the initial costs on the right-of-use asset - see note 17 for further details.

 

Onerous supplier contracts

At 31 December 2020 the Group was in the process of cancelling an unused supplier contract and recognised £25,000 for expected residual cost. In the year ended 31 December 2021, the Group has settled this obligation with the supplier at £16,000 and released £9,000 as unused provision.

 

13. Net impairment loss on financial assets

	2021	2020
	£'000	£'000
Movement of impairment allowance in the year	384	(107)
Write-offs	173	1,403
Write-back of amounts written-off	(1)	(2)
Total net impairment losses on financial assets	556	1,294

 

See note 19 on further analysis of the movement in impairment allowances on loans and advances to customers.

 

Analysis of write-offs:

		2021	2020
	Note	£'000	£'000
Realised losses on loan receivables	19	98	1,206
Realised losses on trade receivables	21	54	6
Realised losses on other receivables		-	20
Recovery transaction costs		39	200
Bad debt VAT relief		(18)	(29)
Total write-offs		173	1,403

 

14.  Loss before taxation

 

Loss before taxation is stated after charging:

	2021	2020
	£'000	£'000
Depreciation of property, plant and equipment	105	132
Depreciation of right-of-use assets	154	158
Amortisation of intangible assets	314	237
Loss on disposal of property, plant and equipment	3	3
Loss on disposal of intangible assets	-	58
Allowance for credit impaired assets	384	(107)
Staff costs	9,121	9,805
Auditor's remuneration	253	316
	10,334	10,602

 

Analysis of auditor's remuneration:

	2021	2020
	£'000	£'000
Audit services
Fees payable to the Company's auditor for the audit of the Company's annual accounts	50	46
Fees payable to the Company's auditor for the audit of its subsidiaries	153	139
Fees paid to the Company's auditors relating to prior periods	-	83
Total audit services fees	203	268
Assurance services
Interim review	50	48
Total assurance services fees	50	48
Total auditor's remuneration	253	316

 

 

15.  Taxation

 

Analysis of tax charge recognised in the period:

	2021	2020
	£'000	£'000
Current tax charge/(credit)	-	-
Deferred tax charge/(credit)	-	-
SME R&D tax relief	(59)	-
Total tax charge/(credit)	(59)	-

 

  

 

Reconciliation of loss before tax to total tax credit recognised:	2021	2020
	£'000	£'000
Loss before taxation	(3,735)	(13,625)
Loss before tax multiplied by the standard
rate of corporation tax in the UK of 19% (2020:19%)	(710)	(2,589)
Adjustments:
Disallowable expenses	50	57
Other short-term timing differences for which no deferred tax asset has been recognised	50	38
Current year losses for which no deferred tax asset has been recognised	610	2,494
Total tax credit	-	-

 

Current tax on profits reflects UK corporation tax levied at a rate of 19% for the year ended 31 December 2021 (31 December 2020: 19%) and the banking surcharge levied at a rate of 8% on the profits of banking companies chargeable to corporation tax after an allowance of £25 million per annum.

 

Expenses that are not deductible in determining taxable profits/losses include impairment losses, amortisation of intangible assets, depreciation of fixed assets, client and staff entertainment costs, and professional fees which are capital in nature.

 

On 24 May 2021, the Government substantively enacted legislation to increase the corporation tax rate from 19% to 25% from 1 April 2023. In November 2021, the government announced that the bank surcharge would reduce from 8% to 3% from 1 April 2023, together with an increase in the surcharge annual allowance from £25m to £100m. These changes were not substantively enacted into legislation at the reporting date and so have not been reflected in these financial statements. The Group has assessed the impact of these changes and concluded that they will not have an impact on the Group's deferred tax balances when recognised.

 

A deferred tax asset is only recognised to the extent the Group finds it probable that future taxable profits will be available against which to be utilised against prior taxable losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The Group has not recognised a deferred tax asset in the period given the uncertainty in relation to generating future taxable profits which can be offset against unused taxable losses. As at 31 December 2021, the Group has estimated £7.3 million (31 December 2020: £7.05 million) of unused tax credits for which a deferred tax asset has not been recognised against.

 

 

 

16.  Property, plant and equipment

	Leasehold Improvements	Furniture, Fixtures & Fittings	Computer Hardware	Telephony & Communications	Total
	£'000	£'000	£'000	£'000	£'000
Cost
As at 1 January 2020	26	137	229	6	398
Additions	-	-	32	-	32
Disposals	-	-	(14)	-	(14)
As at 31 December 2020	26	137	247	6	416
Additions	10	24	34	-	68
Disposals	(3)	(9)	(5)	-	(17)
As at 31 December 2021	33	152	276	6	467
Accumulated depreciation
As at 1 January 2020	11	56	84	5	156
Charge for the year	9	43	79	1	132
Eliminated on disposals	-	-	(11)	-	(11)
As at 31 December 2020	20	99	152	6	277
Charge for the year	6	34	65	-	105
Eliminated on disposals	(2)	(9)	(3)	-	(14)
As at 31 December 2021	24	124	214	6	368
Carrying amount
At 31 December 2020	6	38	95	-	139
At 31 December 2021	9	28	64	-	99

 

17.  Right-of-use assets

	Buildings
	£'000
Cost
As at 1 January 2020	823
Additions	-
Disposals	-
Lease modifications	(416)
As at 31 December 2020	407
Additions	789
Disposals	-
Lease modifications	(58)
As at 31 December 2021	1,138
Accumulated depreciation
At 1 January 2020	185
Charge for the year	158
Eliminated on disposals	-
At 31 December 2020	343
Charge for the year	154
Eliminated on disposals	-
At 31 December 2021	497
Carrying Amount
At 31 December 2020	64
At 31 December 2021	641

 

During the year ended 31 December 2021 the Group is engaged in leasing agreements for office premises and IT equipment. IT equipment leases fall below the USD 5,000 IFRS 16 threshold and, resultantly, the Group have opted not to classify these leases as right-of-use assets.

 

During the year ended 31 December 2021, the Group signed two new office premise leases in Manchester and London. The Manchester office at St James' Building, 61-95 Oxford Street, Manchester, M1 6EJ being the new headquarters of the Group. At initial recognition of the two leases, the Group recognised additions to the right-of-use asset of £786,000 (excluding £3,000 of discount unwinding during the year). When assessing the future lease payments of each lease, the Group has used the most likely termination date of the lease either up to the contractual break date or contractual term end date. The Group has estimated the restoration costs to return the premises to an as found condition at the end of the agreements and have added this into the right-of-use initial recognition amount. The corresponding amount of which is added into provisions - see note 12 for further details. Any directly attributable costs for acquiring the right-of-use assets have been added to the right-of-use asset.

 

A lease modification of £29,000 was made due to a rent-free period being granted on a prior existing lease which lapsed during 2021. A further modification of £29,000 was made for unused restoration costs for exited offices during the year - see note 12.

 

The maturity analysis of lease liabilities is presented in note 27.

 

Amounts recognised in the income statement:

	2021	2020
	£'000	£'000
Depreciation expense on right-of-use assets	154	158
Interest expense on lease liabilities	19	17
Expense relating to short-term leases	-	-
Expense relating to leases of low value assets	6	5
Expenses relating to variable lease payments not included in measurement of lease liability	92	55
Total amounts recognised in the income statement	271	235

 

Some of the property leases in which the Group is the lessee contain variable lease payment terms relating to service charges and insurance costs which are included within the contractual terms of the lease agreement. The breakdown of the lease payments for these property leases are as follows:

                                                                                                                                                                         

	2021	2020
	£'000	£'000
Buildings:
Fixed payments	147	164
Variable payments	73	54
Total lease payments	220	218

 

  

 

 

18. Intangible assets

	Computer Software
	£'000
Cost
At 1 January 2020	1,066
Additions from internal development	226
Additions from separate acquisitions	-
Disposals	(103)
At 31 December 2020	1,189
Additions from internal development	280
Additions from separate acquisitions	306
Disposals	-
At 31 December 2021	1,775
Accumulated amortisation
At 1 January 2020	204
Charge for the year	237
Eliminated on disposals	(46)
At 31 December 2020	395
Charge for the year	314
Eliminated on disposals	-
At 31 December 2021	709
Carrying amount
At 31 December 2020	794
At 31 December 2021	1,066

 

In the year ended 31 December 2021, the Group capitalised £152,000 (2020: £130,000) of consultancy costs, £35,000 of third-party purchased software (2020: £nil) and £93,000 (2020: £95,500) of employee costs in relation to the development of software platforms aimed at improving the commercial lending processes, customer journey for commercial clients and development of retail customer deposits platform. The amortisation period for these software costs is within a range of 3-5 years following an individual assessment of the asset's expected life. The Group performed an impairment review at 31 December 2021 and concluded an impairment of £nil (2020: £57,000).

 

19. Loans and advances to customers

	2021	2020
	£'000	£'000
Gross carrying amount	249,454	113,259
Less: impairment allowance	(1,718)	(1,288)
Less: effective interest rate adjustment	(531)	(634)
Total loans and advances to customers	247,205	111,337

 

Refer to note 31 for details on the expected maturity analysis of the gross loans receivable balance.

Refer to note 13 and 31 for further details on the impairment losses recognised in the periods.

 

 

 

 

Ageing analysis of gross loan receivables:

	2021	2020
	£'000	£'000
Unimpaired:
Not yet past due	247,974	112,510
Past due: 1 - 30 days	105	21
Past due: 31 - 60 days	834	5
Past due: 61 - 90 days	-	14
Past due: 90+ days	-	-
Total unimpaired	248,913	112,550
Impaired:
Impaired, not yet past due and past due 1 - 90 days	377	578
Impaired, past due 90+ days	164	131
Total impaired	541	709
Total gross loan receivables	249,454	113,259

 

 

Analysis of gross loans and advances to customers:

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2021	103,823	8,726	710	113,259
Transfer to Stage 1	2,038	(2,038)	-	-
Transfer to Stage 2	(19,388)	19,388	-	-
Transfer to Stage 3	(134)	(569)	703	-
Net lending/(repayment)	152,993	(15,922)	(778)	136,293
Write-offs	(5)	-	(93)	(98)
	135,504	859	(168)	136,195
As at 31 December 2021	239,327	9,585	542	249,454
Loss allowance coverage at 31 December 2021	0.48%	1.62%	77.68%	0.69%

 

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2020	201,993	4,585	2,871	209,449
Transfer to Stage 1	3,639	(2,597)	(1,042)	-
Transfer to Stage 2	(36,584)	38,725	(2,141)	-
Transfer to Stage 3	(3,152)	(2,418)	5,570	-
Net lending/(repayment)	(62,048)	(29,569)	(3,367)	(94,984)
Write-offs	(25)	-	(1,181)	(1,206)
	(98,170)	4,141	(2,161)	(96,190)
As at 31 December 2020	103,823	8,726	710	113,259
Loss allowance coverage at 31 December 2020	0.62%	0.56%	83.66%	1.14%

 

 

 

Analysis of impairment losses on loans and advances to customers:

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2021	645	49	594	1,288
Transfer to Stage 1	20	(20)	-	-
Transfer to Stage 2	(139)	139	-	-
Transfer to Stage 3	-	(1)	1	-
Remeasurement of impairment allowance	(13)	93	77	157
Net lending/(repayment)	629	(105)	(175)	349
Write-offs	-	-	(76)	(76)
Total movement in loss allowance	497	106	(173)	430
As at 31 December 2021	1,142	155	421	1,718

 

	Stage 1	Stage 2	Stage 3	Total
	£'000	£'000	£'000	£'000
As at 1 January 2020	340	41	1,028	1,409
Transfer to Stage 1	309	(57)	(252)	-
Transfer to Stage 2	(80)	89	(9)	-
Transfer to Stage 3	(97)	(16)	113	-
Remeasurement of impairment allowance	408	247	884	1,539
Net lending/(repayment)	(224)	(255)	(6)	(485)
Write-offs	(11)	-	(1,164)	(1,175)
Total movement in loss allowance	305	8	(434)	(121)
As at 31 December 2020	645	49	594	1,288

 

20.  Debt securities

	2021	2020
	£'000	£'000
FVOCI debt securities:
Treasury bills	53,085	49,011
UK government gilts	55,782	17,590
Total FVOCI debt securities	108,867	66,601
Analysis of movements during the year:
At 1 January	66,601	7,994
Purchased debt securities	350,980	120,721
Proceeds from sold or maturing securities	(308,504)	(62,107)
Interest income	(42)	-
Realised gains/losses	(3)	15
Unrealised losses	(165)	(22)
At 31 December	108,867	66,601
Maturity profile of debt securities:
Within 12 months	24,602	49,011
Over 12 months	84,265	17,590

 

The securities are valued at fair value through other comprehensive income ("FVTOCI") using closing bid prices at the reporting date.

 

In accordance with IFRS 9, all debt securities were assessed for impairment and treated as Stage 1 assets in both reporting periods.

 

Refer to note 31 for details of the maturity profile of these securities.

 

21.  Trade and other receivables

	2021	2020
	£'000	£'000
Trade receivables	355	261
Impairment allowance	(75)	(121)
	280	140
Other debtors	278	207
Taxation asset	59	-
Accrued income	192	63
Prepayments	324	744
	853	1,014
Total trade and other receivables	1,133	1,154

 

All trade receivables are due within one year, refer to note 31 for the expected maturity profile.

 

The trade receivable balances are assessed for expected credit losses (ECL) under the 'simplified approach', which requires the Group to assess all balances for lifetime ECLs and is not required to assess significant increases in credit risk.

 

Ageing analysis of trade receivables:

	2021	2020
	£'000	£'000
Unimpaired:
Not yet past due	276	106
Past due: 1 - 30 days	7	15
Past due: 31 - 60 days	1	11
Past due: 61 - 90 days	-	13
Past due: 90+ days	-	-
	284	145
Impaired:
Impaired, not yet past due and past due 1 - 90 days	10	45
Impaired, past due 90+ days	61	71
	71	116
Total gross trade receivables	355	261

 

Analysis of movement of impairment losses on trade receivables:

	2021	2020
	£'000	£'000
Balance at 1 January	121	107
Amounts written off	(26)	(6)
Amounts recovered	-	-
Change in loss allowance due to new trade and other receivables originated net of those derecognised due to settlement	(20)	20
Balance at 31 December	75	121

 

 

 

 

22.  Notes to the cash flow statement

 

Cash and cash equivalents:

	2021	2020
	£'000	£'000
Cash held at bank	29,597	21,233
Total cash and cash equivalents	29,597	21,233

 

Adjustments for non-cash items and other adjustments included in the income statement:

 

		2021	2020
	Note	£'000	£'000
Depreciation of property, plant and equipment	16	105	132
Depreciation of right-of-use assets	17	154	158
Loss on disposal of property, plant and equipment	16	3	3
Amortisation of intangible assets	18	314	237
Loss on disposal of intangible assets	18	-	57
Share based payments	9	362	322
Impairment allowances on receivables	13	556	1,294
Movement in other provisions	12	(10)	(450)
Interest income on debt securities	20	42	(15)
Finance costs	11	19	17
Unwind of discount	12	3	-
Lease modifications		-	76
Interest in suspense		(102)	228
Total non-cash items and other adjustments		1,446	2,059

 

Net change in operating assets:

	2021	2020
	£'000	£'000
(Increase)/decrease in loans and advances to customers	(136,202)	94,321
(Increase)/decrease in other assets	(42)	2,443
(Increase)/decrease in operating assets	(136,244)	96,764

 

 

Net change in operating liabilities:

		2021	2020
		£'000	£'000
Increase in customer deposits		150,874	145,982
Increase/(decrease) in other liabilities		837	(1,332)
Increase in financial liabilities		-	12,283
Repayment of financial liabilities		-	(176,006)
Increase/(decrease) in operating liabilities		151,711	(19,073)

 

 

  

 

Changes in liabilities arising from financing activities:

 

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated cash flow statement as cash flows from financing activities.

 

			Non-cash changes
	1 January 2021	Financing cash flows	Recognition of lease liabilities	Interest expense on lease liabilities	Lease modification	31 December 2021
	£'000	£'000	£'000	£'000	£'000	£'000
Lease liabilities (see note 27)	57	(147)	604	19	(29)	504
Total liabilities from financing activities	57	(147)	604	19	(29)	504

 

 

			Non-cash changes
	1 January 2020	Financing cash flows	Recognition of lease liabilities	Interest expense on lease liabilities	Lease modification	31 December 2020
	£'000	£'000	£'000	£'000	£'000	£'000
Lease liabilities (see note 27)	537	(164)	-	18	(334)	57
Total liabilities from financing activities	537	(164)	-	18	(334)	57

 

 

 

23.  Investment in subsidiaries

 

Subsidiary	Principal Activity	Shareholding %	Class of shareholding	Country of incorporation	Registered Address
DF Capital Bank Limited	Financial Services	100%	Ordinary	UK	St James' Building, 61-95 Oxford St, Manchester, M1 6EJ

 

 

During the year ended 31 December 2021, there were no changes to the ownership of subsidiaries of the Group (2020: none).

 

24.  Equity

	2021	2020	2021	2020
	No.	No.	£'000	£'000
Authorised:
Ordinary shares of 1p each	179,369,199	106,641,926	1,793	1,066
Allotted, issued and fully paid: Ordinary shares of 1p each	179,369,199	106,641,926	1,793	1,066

 

  

 

 

Analysis of the movements in equity:

	Date	No. of shares	Issue Price	Share Capital	Share Premium	Merger Relief	Total
		#	£	£'000	£'000	£'000	£'000
Balance at 1 January and 31 December 2020		106,641,926		1,066	-	94,911	95,977
Issue of new shares	22-Feb-21	72,727,273	0.55	727	39,273	-	40,000
Balance at 31 December 2021		179,369,199		1,793	39,273	94,911	135,977

 

In February 2021, the Group executed a conditional placing of new ordinary shares with certain new and existing institutional and other investors in respect of 72,727,273 new ordinary shares of one penny each ("Ordinary Shares") in Distribution Finance Capital Holdings plc at a price of 55 pence per placing share. The placing raised £40.0 million of additional capital before expenses and approximately £38.6 million after expenses. The placing was subject to shareholder approval at a general meeting on 22 February 2021 by which all of the Resolutions were duly passed on a poll at the General Meeting. The enlarged share capital is comprised of 179,369,199 ordinary shares with one voting right per share and 50,000 non-voting redeemable preference shares of £1 each.

 

 

25.  Own shares

 

At 31 December 2021 the Group's Employee Benefit Trust held 2,963,283 (2020: 2,963,283) ordinary shares in Distribution Finance Capital Holdings plc to meet obligations under the Company's share and share option plans. The shares are stated at cost and their market value at 31 December 2021 was £1,452,009 (2020: £1,896,501).

 

	2021	2020
	£'000	£'000
At 1 January	(364)	-
Employee Benefit Trust	-	(364)
At 31 December	(364)	(364)

 

26.  Merger reserve

 

There were no movements relating to the merger reserve account during years ended 31 December 2021 and 31 December 2020.

 

27.  Lease liabilities

	2021	2020
	£'000	£'000
At 1 January	57	537
Initial recognition	604	-
Interest expense	19	18
Interest payments	(147)	(164)
Lease modification	(29)	(334)
At 31 December	504	57

 

During the year ended 31 December 2021, the Group signed two new office premise lease agreements. In the period the Group added £604,000 at initial recognition to the lease liabilities. See note 17 for further details. During the year ended 31 December 2021, the Group made lease repayments of £147,000 and recognised finance costs of £19,000. Furthermore, as disclosed in note 17, the Group recognised a lease modification of £29,000 due to a rent concession granted in the period.

 

The fair value of the Group's lease obligations as at 31 December 2021 is estimated to be £503,816 (2020: £57,056) using a 5% discount rate. The 5% discount rate is equivalent to the Group's incremental borrowing rate which would be incurred for the financing of a similar asset under similar terms as the lease arrangement.

 

The Group does not face a significant liquidity risk with regard to its lease liabilities. Lease liabilities are monitored within the Group's treasury function.

 

All lease obligations are denominated in currency units.

 

The maturity analysis of lease liabilities is as follows:

	2021	2020
	£'000	£'000
Analysed as:
Non-current	109	57
Current	395	-
	504	57
Maturity Analysis:
Year 1	131	58
Year 2	161	-
Year 3	184	-
Year 4	79	-
Year 5	-	-
Onwards	-	-
	555	58
Less: unearned interest	(51)	(1)
Total lease liabilities	504	57

 

 

28.  Customer deposits

	2021	2020
	£'000	£'000
Retail deposits	296,856	145,982
Total customer deposits	296,856	145,982
Amounts repayable within one year	249,930	60,132
Amounts repayable after one year	46,926	85,850
	296,856	145,982

 

Refer to note 31 for the maturity profile of the customer deposit balances.

 

29.  Financial liabilities

	2021	2020
	£'000	£'000
Loans with related parties	-	-
Wholesale funding	-	-
Lease liabilities	504	57
Preference shares	50	50
Total financial liabilities	554	107

 

Loans with related parties:

 

During the year ended 31 December 2020, following the granting of the Group's banking licence by the PRA, the Group fully repaid the loan agreement (including accrued interest) to TruFin Holdings Limited in December 2020. For the period ended 31 December 2021, the Group is now solely funded by customer deposits and equity reserves.

Wholesale funding:

 

Following the Group being granted the banking licence, the Group raised sufficient customer deposits to fully repay its wholesale funders in November 2020.

 

Lease liabilities:

 

See note 27 for further details on the lease liabilities of the Group.

 

Preference shares:

 

In April 2019, a sole member decision was granted the allocation of 50,000 non-voting paid up redeemable preference shares of £1.00 each. The preference shares have no attached interest rate, dividends or return on capital. These preference shares are deemed as paid in full with the Director undertaking to pay the consideration of the preference shares by 31 December 2022. The preference shares have no contractual maturity date but will be redeemed in the future out of the proceeds of any issue of new ordinary shares by the Company or when it has available distributable profits. Given these characteristics the preference shares are recognised as a non-current liability with no equity component.

 

The maturity profile of the financial liabilities are as follows:

	2021	2020
	£'000	£'000
Current liabilities	109	57
Non-current liabilities	445	50
Total financial liabilities	554	107

 

Reconciliation of movement in financial liabilities:

	Loans with related parties	Wholesale funding	Preference shares	Lease liabilities	Total
	£'000	£'000	£'000	£'000	£'000
Balance at 1 January 2020	13,925	150,151	50	537	164,663
Cash flows arising from financing activities:
Wholesale funding drawdowns	-	12,283	-	-	12,283
Wholesale funding repayments	-	(162,051)	-	-	(162,051)
Amounts repaid to related parties	(13,955)	-	-	-	(13,955)
Interest paid	(883)	(8,365)	-	-	(9,248)
Repayment of lease liabilities	-	-	-	(164)	(164)
	(14,838)	(158,133)	-	(164)	(173,135)
Non-cash changes:
Lease modifications	-	-	-	(334)	(334)
Interest expense	913	7,982	-	18	8,913
	913	7,982	-	(316)	8,579
Balance at 31 December 2020	-	-	50	57	107
Cash flows arising from financing activities:
Repayment of lease liabilities	-	-	-	(147)	(147)
	-	-	-	(147)	(147)
Non-cash changes:
Additions	-	-	-	604	604
Lease modifications	-	-	-	(29)	(29)
Interest expense	-	-	-	19	19
	-	-	-	594	594
Balance at 31 December 2021	-	-	50	504	554

 

 

30.  Trade and other payables

	2021	2020
	£'000	£'000
Current liabilities
Trade payables	282	624
Social security and other taxes	275	2,044
Other creditors	2,422	778
Pension contributions	-	32
Accruals	2,032	709
Total current liabilities	5,010	4,187
Non-current liabilities
Social security and other taxes	57	74
Total non-current liabilities	57	74
Total trade and other payables	5,067	4,261

 

31.  Financial instruments

 

The Directors have performed an assessment of the risks affecting the Group through its use of financial instruments and believe the principal risks to be: Treasury (covering capital management, liquidity and interest rate risk); and Credit risk.

 

This note describes the Group's objectives, policies and processes for managing the material risks and the methods used to measure them. The significant accounting policies regarding financial instruments are disclosed in note 2.

 

Capital management

 

The Group manages its capital to ensure that it will be able to continue as a going concern while providing an adequate return to shareholders.

 

The capital structure of the Group consists of financial liabilities (see note 29) and equity (comprising issued capital, merger relief, reserves, own shares and retained earnings - see notes 24 to 26).

 

As a regulated banking Group, the Group is required by the Prudential Regulation Authority (PRA) to hold sufficient regulatory capital. The Group is required by the PRA to conduct an Internal Capital Adequacy Assessment Process ("ICAAP") to assess the appropriate amount of regulatory capital to be held by the Group in regards to its risk weighted assets ("RWAs") and the Group's risk management framework. The ICAAP identifies all key risks to the Bank and how the Group manages these risks. The document outlines the capital resources of the Group, its perceived capital requirements, and capital adequacy over a 3-year period. Within this process the Group conducts a stress testing process to identify key risks, the potential capital requirements and whether the Group has sufficient capital buffers to sustain such events. The Group uses the Standardised Approach for calculating the capital requirements for credit risk and the Basic Indicator Approach for operational risk. The ICAAP is approved by the Group Board at least annually.

  

 

 

The regulatory capital resources of the Group were as follows:

	2021	2020
	£'000	£'000
Tier 1 Capital
Ordinary share capital	1,793	1,066
Share premium	39,273	-
Other reserves recognised for CET1 capital	74,302	74,302
Own shares	(364)	(364)
Retained loss	(28,946)	(24,115)
Other	(2,303)	(2,303)
Intangible assets	(1,066)	(794)
Common Equity Tier 1 (CET1) capital	82,690	47,792
Tier 2 capital	-	-
Total regulatory capital	82,690	47,792

 

During the year ended 31 December 2021, the Group raised additional capital through a £40 million placing which materially increased its regulatory capital position. Refer to note 24 for further details.

 

The return on assets of the Group (calculated as loss after taxation divided by average total assets) was -1% (2020: -7%).

 

Information disclosure under Pillar 3 of the Capital Requirements Directive is published on the Group's website at www.dfcapital-investors.com

 

Principal financial instruments

 

The principal financial instruments to which the Group is party, and from which financial instrument risk arises, are as follows:

 

·      Loans and advances to customers, primarily credit risk, interest rate risk, and liquidity risk;

·      Debt securities, source of credit risk, liquidity risk and interest rate risk;

·      Trade receivables, primarily credit risk, and liquidity risk;

·      Cash and cash equivalents, which can be a source of credit risk but are primarily liquid assets available to further business objectives or to settle liabilities as necessary;

·      Trade and other payables, primarily credit risk;

·      Customer deposits, primarily interest rate risk and liquidity risk;

·      Financial liabilities which are used as sources of funds and to manage liquidity risk but also creates interest rate risk.

 

 

 

 

 

 

 

Summary of financial assets and liabilities:

 

Below is a summary of the financial assets and liabilities held on the Group's statement of financial position at the reporting dates. These values are reflected at their carrying amounts at the respective reporting date:

	Loans and receivables	Fair value through Other Comprehensive Income	Liabilities at amortised cost	Total
31 December 2021	£'000	£'000	£'000	£'000
Assets
Cash and equivalents	29,597	-	-	29,597
Loans and advances to customers	247,205	-	-	247,205
Debt securities	-	108,867	-	108,867
Trade receivables	280	-	-	280
Other receivables	337	-	-	337
Total financial assets	277,419	108,867	-	386,286
Non-financial assets	-	-	-	2,322
Total assets	277,419	108,867	-	388,608
31 December 2021
Liabilities
Preference shares	-	-	50	50
Customer deposits	-	-	296,856	296,856
Other financial liabilities	-	-	504	504
Trade payables	-	-	282	282
Other payables	-	-	2,753	2,753
Total financial liabilities	-	-	300,445	300,459
Non-financial liabilities	-	-	-	2,105
Total liabilities	-	-	300,445	302,550

 

	Loans and receivables	Fair value through Other Comprehensive Income	Liabilities at amortised cost	Total
31 December 2020	£'000	£'000	£'000	£'000
Assets
Cash and equivalents	21,233	-	-	21,233
Loans and advances to customers	111,337	-	-	111,337
Debt securities	-	66,601	-	66,601
Trade receivables	140	-	-	140
Other receivables	207	-	-	207
Total financial assets	132,917	66,601	-	199,518
Non-financial assets	-	-	-	1,804
Total assets	132,917	66,601	-	201,322
31 December 2020
Liabilities
Preference shares	-	-	50	50
Customer deposits	-	-	145,982	145,982
Other financial liabilities	-	-	57	57
Trade payables	-	-	624	624
Other payables	-	-	2,928	2,928
Total financial liabilities	-	-	149,641	149,641
Non-financial liabilities	-	-	-	792
Total liabilities	-	-	149,641	150,433

 

Analysis of financial instruments by valuation model

 

The Group measures fair values using the following hierarchy of methods:

·      Level 1 - Quoted market price in an active market for an identical instrument

·      Level 2 - Valuation techniques based on observable inputs. This category includes instruments valued using quoted market prices in active markets for similar instruments, quoted prices for similar instruments that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data

·      Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). 

Financial assets and liabilities that are not measured at fair value:

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2021	£'000	£'000	£'000	£'000	£'000
Financial assets not
measured at fair value
Loans and advances to customers	247,205	247,205	-	-	247,205
Trade receivables	280	280	-	-	280
Other receivables	337	337	-	-	337
Cash and equivalents	29,597	29,597	29,597	-	-
	277,419	277,419	29,597	-	247,822
31 December 2021
Financial liabilities not
measured at fair value
Preference shares	50	50	-	-	50
Customer deposits	296,856	296,856	-	-	296,856
Other financial liabilities	504	504	-	-	504
Trade payables	282	282	-	-	282
Other payables	2,753	2,753	-	-	2,753
	300,445	300,445	-	-	300,445

 

	Carrying amount	Fair value	Level 1	Level 2	Level 3
31 December 2020	£'000	£'000	£'000	£'000	£'000
Financial assets not
measured at fair value
Loans and advances to customers	111,337	111,337	-	-	111,337
Trade receivables	140	140	-	-	140
Other receivables	207	207	-	-	207
Cash and equivalents	21,233	21,233	21,233	-	-
	132,917	132,917	21,233	-	111,684
31 December 2020
Financial liabilities not
measured at fair value
Preference shares	50	50	-	-	50
Customer deposits	145,982	145,982	-	-	145,982
Other financial liabilities	57	57	-	-	57
Trade payables	624	624	-	-	624
Other payables	2,928	2,928	-	-	2,928
	149,641	149,641	-	-	149,641

 

Fair values for level 3 assets were calculated using a discounted cash flow model and the Directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost are approximate to their fair values.

 

Loans and advances to customers

 

Due to the short-term nature of loans and advances to customers, their carrying value is considered to be approximately equal to their fair value. These items are short term in nature such that the impact of the choice of discount rate would not make a material difference to the calculations.

 

Trade and other receivables, other borrowings and other liabilities

 

These represent short-term receivables and payables and as such their carrying value is considered to be equal to their fair value.

 

There are no financial liabilities included in the statement of financial position that are measured at fair value.

 

Financial assets and liabilities included in the statement of financial position that are measured at fair value:

 

	Level 1	Level 2	Level 3
31 December 2021	£'000	£'000	£'000
Financial assets
measured at fair value
Debt securities	108,867	-	-
	108,867	-	-
	Level 1	Level 2	Level 3
31 December 2020	£'000	£'000	£'000
Financial assets
measured at fair value
Debt securities	66,601	-	-
	66,601	-	-

 

Debt securities

 

The debt securities carried at fair value by the Company are treasury bills and government gilts. Treasury bills and government gilts are traded in active markets and fair values are based on quoted market prices. 

 

There were no transfers between levels during the periods, all debt securities have been measured at level 1 from acquisition.

 

Financial risk management

 

The Group's activities and the existence of the above financial instruments expose it to a variety of financial risks.

 

The Board has overall responsibility for the determination of the Group's risk management objectives and policies. The overall objective of the Board is to set policies that seek to reduce ongoing risk as far as possible without unduly affecting the Group's competitiveness and flexibility. 

 

The Group is exposed to the following financial risks:

 

·      Credit risk

·      Liquidity risk

·      Interest rate risk

Further details regarding these policies are set out below.

 

Credit risk

 

Credit risk is the risk that a customer or counterparty will default on its contractual obligations resulting in financial loss to the Group. One of the Group's main income generating activities is lending to customers and therefore credit risk is a principal risk.  Credit risk mainly arises from loans and advances to customers.  The Group considers all elements of credit risk exposure such as counterparty default risk, geographical risk and sector risk for risk management purposes.

 

Credit risk management

The Group has a dedicated credit risk function, which is responsible for individual credit assessment, portfolio management, collections and recoveries.  Furthermore, it manages the Group's credit risk by:

 

·      Ensuring that the Group has appropriate credit risk practices, including an effective system of internal control;

·      Identifying, assessing and measuring credit risks across the Group from an individual instrument to a portfolio level;

·      Creating relevant policies to protect the Group against the identified risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to continually monitor exposures against internal risk limits;

·      Limiting concentrations of exposure by type of asset, counterparty, industry, credit rating, geographic location;

·      Establishing a robust control framework regarding the authorisation structure for the approval and renewal of credit facilities;

·      Established practises to identify and manage risks within the portfolio;

·      Developing and maintaining the Group's risk grading to categorise exposures according to the degree of risk default. Risk grades are subject to regular reviews; and

·      Developing and maintaining the Group's processes for measuring Expected Credit Loss (ECL) including monitoring of credit risk, incorporation of forward-looking information and the method used to measure ECL.

 

Significant increase in credit risk

 

The Group continuously monitors all assets subject to Expected Credit Loss as to whether there has been a significant increase in credit risk since initial recognition, either through a significant increase in Probability of Default ("PD") or in Loss Given Default ("LGD").

 

The following is based on the procedures adopted by the Group for the year ended 31 December 2021:

 

Granting of credit

The commercial team prepare a Credit Application which sets out the rationale and the pricing for the proposed loan facility, and confirms that it meets the Group's product, manufacturer programme and pricing policies. The Application will include the proposed counterparty's latest financial information and any other relevant information but as a minimum:

 

·      Details of the limit requirement e.g. product, amount, tenor, repayment plan etc,

·      Facility purpose or reason for increase,

·      Counterparty details, background, management, financials and ratios (actuals and forecast),

·      Key risks and mitigants for the application,

·      Conditions, covenants & information (and monitoring proposals) and security (including comments on valuation),

·      Pricing,

·      Confirmation that the proposed exposure falls within risk appetite,

·      Clear indication where the application falls outside of risk appetite.

 

Other information which can be considered includes (where necessary and available):

·      Existing counterparty which has met all obligations in time and in accordance with loan agreements,

·      Counterparty known to credit personnel who can confirm positive experience,

·      Additional security, either tangible or personal guarantees where there is verifiable evidence of personal net worth,

·      A commercial rationale for approving the application, although this mitigant will generally be in addition to at least one of the other mitigants.   

The credit risk function will analyse the financial information, obtain reports from a credit reference agency, allocate a risk rating, and make a decision on the application. The process may require further dialogue with the Business Development Team to ascertain additional information or clarification.

 

Each mandate holder is authorised to approve loans up to agreed financial limits and provided that the risk rating of the counterparty is within agreed parameters. If the financial limit requested is higher than the credit authority of the first reviewer of the loan facility request, the application is sent to the next credit authority level with a recommendation.

 

Transactional Credit Committee considers all applications that are outside the credit approval mandate of the Director - Credit due to the financial limit requested. There is an agreed further escalation to the Board Risk Committee for the largest transactions which fall outside of the Transactional Credit Committee.

 

Identifying significant increases in credit risk

The short tenor of the current loan facilities reduces the possible adverse effect of changes in economic conditions and/or the credit risk profile of the counterparty.

 

The Group nonetheless measures a change in a counterparty's credit risk mainly on payment performance and end of contract repayment behaviour. The regular collateral audit process and interim reviews may highlight other changes in a counterparty's risk profile, such as the security asset no longer being under the control of the borrower.  The Group views a significant increase in credit risk as:

·      A two-notch reduction in the Company's counterparty's risk rating, as notified through the credit rating agency alert system.

·      a presumption that an account which is more than 30 days past due has suffered a significant increase in credit risk. IFRS 9 allows this presumption to be rebutted, but the Group believes that more than 30 days past due to be an appropriate back stop measure and therefore has not rebutted the presumption.

·      A counterparty defaults on a payment due under a loan agreement.

·      Late contractual payments which although cured, re-occur on a regular basis.

·      Counterparty confirmation that it has sold Group financed assets but delays in processing payments.

·      Evidence of a reduction in a counterparty's working capital facilities which has had an adverse effect on its liquidity.

·      Evidence of actual or attempted sales out of trust or of double financing, of assets funded by the Group.

 

An increase in significant credit risk is identified when any of the above events happen after the date of initial recognition.

 

Identifying loans and advances in default and credit impaired

The Group's definition of default for this purpose is:

·      A counterparty defaults on a payment due under a loan agreement and that payment is more than 90 days overdue;

·      A counterparty commits an event of default under the terms and conditions of the loan agreement which leads the lending company to believe that the borrower's ability to meet its credit obligations to the lending company is in doubt; or

·      The Group is made aware of a severe deterioration of the credit profile of the customer which is likely to impede the customers' ability to satisfy future payment obligations.

In the normal course of economic cyclicality, the short tenor of the loans extended by the Group means that significant economic events are unlikely to influence counterparties' ability to meet their obligations to the Group. COVID-19 has presented unique challenges for most SME lenders and the Group has assessed these new challenges and its impacts on customers' ability to meet their obligations within the Strategic Report of this Annual Report.

 

Exposure at default (EAD)

Exposure at default ("EAD") is the expected loan balance at the point of default. Where a receivable is not classified as being in default at the reporting date, the Group have included reasonable assumptions to add unaccrued interest and fees up to the receivable becoming 91 days past due, which is considered to be the point of default.

 

 

 

 

Expected credit losses (ECL)

The ECL on an individual loan is based on the credit losses expected to arise over the life of the loan, being defined as the difference between all the contractual cash flows that are due to the Group and the cash flows that it expects to receive.  This difference is then discounted at the original effective interest rate on the loan to reflect the disposal period of such assets underlying the original contract.

Regardless of the loan status stage, the aggregated ECL is the value that the Group expects to lose on its current loan book having assessed each loan individually.

To calculate the ECL on a loan, the Group considers:

1.     Counterparty PD; and

2.     LGD on the asset

 

whereby: ECL = EAD x PD x LGD

 

Forward looking information

In its ECL models, the Group applies sensitivity analysis of forward-looking economic inputs. When formulating the economic scenarios, the Group considers both macro-economic factors and other specific drivers which may trigger a certain stress scenario. The impact of movements in these macro-economic factors are assessed on a 12-month basis from the reporting date (31 December).

 

Maximum exposure to credit risk:

	2021	2020
	£'000	£'000
Cash and equivalents	29,597	21,233
Loans and advances to customers	247,205	111,337
Trade and other receivables	617	347
	277,419	132,917

 

Collateral held as security:

	2021	2020
	£'000	£'000
Fully collateralised
Loan-to-value* ratio:
Less than 50%	1,698	3,285
51% to 70%	13,106	9,166
71% to 80%	29,724	20,269
81% to 90%	29,302	27,143
91% to 100%	175,125	52,804
	248,955	112,667
Partially collateralised (loans over 100% loan-to-value)	-	68
Unsecured lending	499	524

 

* Calculated using wholesale collateral values. Wholesale collateral values represent the invoice total (including applicable VAT) from the invoice received from the supplier of the product. The wholesale amount is less than the recommended retail price (RRP) of the product.

 

The Group's lending activities are asset based so it expects that the majority of its exposure is secured by the collateral value of the asset that has been funded under the loan agreement. The Group has title to the collateral which is funded under loan agreements. The collateral includes boats, motorcycles, recreational vehicles, caravans, light commercial vehicles, industrial and agricultural equipment. The collateral has low depreciation and is not subject to rapid technological changes or redundancy. There has been no change in the Group's assessment of collateral and its underlying value in the reporting period.

 

The assets are generally in the counterparty's possession, but this is controlled and managed by the asset audit process.  The audit process checks on a periodic basis that the asset is in the counterparty's possession and has not been sold out of trust or is otherwise not in the counterparty's control.  The frequency of the audits is initially determined by the risk rating assessed at the time that the borrowing facility is first approved and is assessed on an ongoing basis.

 

Additional security may also be taken to further secure the counterparty's obligations and further mitigate risk. Further to this, in many cases, the Group is often granted, by the counterparty, an option to sell-back the underlying collateral.

 

Based on the Group's current principal products, the counterparty repays its obligation under a loan agreement with the Group at or before the point that it sells the asset. If the asset is not sold and the loan agreement reaches maturity, the counterparty is required to pay the amount due under the loan agreement plus any other amounts due. In the event that the counterparty does not pay on the due date, the Group's customer management process will maintain frequent contact with the counterparty to establish the reason for the delay and agree a timescale for payment. Senior Management will review actions on a regular basis to ensure that the Group's position is not being prejudiced by delays.

 

In the event the Group determines that payment will not be made voluntarily, it will enforce the terms of its loan agreement and recover the asset, initiating legal proceedings for delivery, if necessary. If there is a shortfall between the net sales proceeds from the sale of the asset and the counterparty's obligations under the loan agreement, the shortfall is payable by the counterparty on demand.  

 

Concentration of credit risk

The Group maintains policies and procedures to manage concentrations of credit at the counterparty level and industry level to achieve a diversified loan portfolio.

 

Credit quality

 

An analysis of the Group's credit risk exposure for loan and advances per class of financial asset, internal rating and "stage" is provided in the following tables.  A description of the meanings of Stages 1, 2 and 3 was given in the accounting policies set out above.

	Stage 1	Stage 2	Stage 3	2021 Total
31 December 2021	£'000	£'000	£'000	£'000
Credit rating
Above average (Risk rating 1-2)	142,119	-	-	142,119
Average (Risk rating 3-5)	77,286	8,758	-	86,044
Below average (Risk rating 6+)	19,922	827	542	21,291
Gross carrying amount	239,327	9,585	542	249,454
Loss allowance	(1,142)	(155)	(421)	(1,718)
Carrying amount	238,185	9,430	121	247,736

 

	Stage 1	Stage 2	Stage 3	2020 Total
31 December 2020	£'000	£'000	£'000	£'000
Credit rating
Above average (Risk rating 1-2)	52,978	-	-	52,978
Average (Risk rating 3-5)	42,271	8,092	-	50,363
Below average (Risk rating 6+)	8,574	634	710	9,918
Gross carrying amount	103,823	8,726	710	113,259
Loss allowance	(645)	(49)	(594)	(1,288)
Carrying amount	103,178	8,677	116	111,971

 

See note 19 for analysis of the movements in gross loan receivables and impairment allowances in terms of IFRS 9 staging.

 

 

 

 

 

 

 

Analysis of credit quality of trade receivables:

	2021	2020
	£'000	£'000
Status at reporting date
Not past due, nor impaired	276	106
Past due but not impaired	8	39
Impaired	71	116
Total gross carrying amount	355	261
Loss allowance	(75)	(121)
Carrying amount	280	140

 

See note 21 for analysis of the movements in gross trade receivables and impairment allowances in terms of IFRS 9 staging.

 

Amounts written off

The contractual amount outstanding on financial assets that were written off during the reporting period and are still subject to enforcement activity is £49,000 at 31 December 2021 (31 December 2020: £931,000).

 

Liquidity risk

 

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows which is inherent in all finance operations and can be affected by a range of Group-specific and market-wide events.

 

Liquidity risk management

The Group has in place a policy and control framework for managing liquidity risk. The Group's Asset and Liability Management Committee (ALCO) is responsible for managing the liquidity risk via a combination of policy formation, review and governance, analysis, stress testing, limit setting and monitoring. The ALCO meets on a monthly basis to review the liquidity position and risks.

 

The Bank has a comprehensive suite of liquidity management processes in place, which allow the Bank to monitor liquidity risk on a daily basis. Daily liquidity reporting is supplemented by Early Warning Indicators and a Liquidity Contingency Plan.

 

Liquidity stress testing

Stress Testing is a key risk management tool for the Bank and is used to inform the setting of risk appetite limits and required buffers.

 

A range of liquidity stress scenarios has been conducted (as detailed in the Internal Liquidity Adequacy Assessment Process "ILAAP" document), which demonstrates that the Group's liquidity profile is sufficient to withstand a severe stress.

 

Maturity analysis for financial assets  

 

The following maturity analysis is based on expected gross cash flows:

 

	Carrying amount	Gross nominal inflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2021	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Financial assets
Cash and equivalents	29,597	29,597	29,597	-	-	-	-
Loans and advances	247,205	249,240	24,953	56,140	128,226	39,921	-
Debt securities	108,867	108,085	24,600	38,000	22,485	23,000	-
Trade receivables	280	355	355	-	-	-	-
Other receivables	337	337	9	59	9	260	-
	386,286	387,614	79,514	94,199	150,720	63,181	-

 

	Carrying amount	Gross nominal inflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2020	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Financial assets
Cash and equivalents	21,233	21,233	21,233	-	-	-	-
Loans and advances	111,337	113,259	28,315	37,163	44,194	3,587	-
Debt securities	66,601	66,000	-	15,000	34,000	17,000	-
Trade receivables	140	261	261	-	-	-	-
Other receivables	207	207	20	1	36	150	-
	199,518	200,960	49,829	52,164	78,230	20,737	-

 

Maturity analysis for financial liabilities

 

The following maturity analysis is based on contractual gross cash flows:

 

 

	Carrying amount	Gross nominal outflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2021	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Financial liabilities
Preference shares	50	50	-	-	-	50	-
Customer deposits	296,856	299,371	4,684	29,798	217,159	47,730	-
Other financial liabilities	504	555	4	31	96	424	-
Trade payables	282	282	282	-	-	-	-
Other payables	2,753	2,864	2,666	-	35	163	-
	300,445	303,122	7,636	29,829	217,290	48,367	-
Loan commitments	-	3,892	3,892	-	-	-	-

 

 

 

 

	Carrying amount	Gross nominal outflow	Less than 1 month	1 - 3 months	3 months to 1 year	1 - 5 years	>5 years
31 December 2020	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Financial liabilities
Preference shares	50	50	-	-	-	50	-
Customer deposits	145,982	147,982	-	663	59,793	87,526	-
Other financial liabilities	57	58	-	29	29	-	-
Trade payables	624	624	624	-	-	-	-
Other payables	2,928	3,135	1,893	959	-	283	-
	149,641	151,849	2,517	1,651	59,822	87,859	-
Loan commitments	-	3,766	3,766	-	-	-	-

 

 

 

 

Market risk

Market risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices will reduce the Group's income or the value of its assets.

 

The principal market risk to which the Group is exposed is interest rate risk.

 

Interest rate risk management

The Group is exposed to the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of the change in market interest rates.

 

The Group's borrowings are either fixed rate, or administered, (being products where the rate is set at the DFC's discretion).  The Group has no exposure to LIBOR.  These borrowings fund loans and advances to customers at fixed rate. 

 

The limited average duration of the loan and deposit book provide a natural mitigant against interest rate risk.  Additionally, DFC are in the process of setting up swap lines, which will allow the Bank to use interest rate swaps as a further mitigation tool for interest rate risk.

 

The portfolio sensitivity to interest rate shocks is tested against a range of scenarios including the six prescribed scenarios per the European Bank Authority ("EBA") guidelines on the management of interest rate risk arising from non-trading book activities.

 

The impact of changes in interest rates has been assessed in terms of economic value of equity (EVE) and profit or loss. Economic value of equity (EVE) is a cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows.  This is a long-term economic measure used to assess the degree of interest rate risk exposure.

 

The estimate that a 200bps upward and downward movement in interest rates would have impacted the economic value of equity (EVE) is as follows:

	2021	2020
	£'000	£'000
Change in interest rate (basis points)
Sensitivity of EVE +200bps	15	982
Sensitivity of EVE -200bps	6	(1,047)

 

The estimate of the effect on the next 12 months net interest income using a 200bps upward and 200bps downward movement in interest rates is as follows:

 

	2021	2020
	£'000	£'000
Change in interest rate (basis points)
Sensitivity of profit +200bps	2,998	1,680
Sensitivity of profit -200bps	147	(84)

 

In preparing the sensitivity analyses above, the Group makes certain assumptions consistent with the expected and contractual re-pricing behaviour as well as behavioural repayment profiles under the two interest rate scenarios.

 

 

 

 

32.  Earnings per share

 

Analysis of number of shares in the periods:

	2021	2020
	No.	No.
Number of shares
At period end	179,369,199	106,641,926
Basic
Weighted average number of shares in issue in the year	168,808,800	106,641,926
Diluted
Effect of weighted average number of options outstanding for the year	-	-
Diluted weighted average number of shares and options for the year	168,808,800	106,641,926

 

Earnings attributable to equity holders:

	2021	2020
	£'000	£'000
Earnings attributable to ordinary shareholders
Loss after tax attributable to the shareholders	(3,676)	(13,603)

 

 

Earnings per share calculation:

	2021	2020
	pence	pence
Earnings per share
Basic	(2)	(13)
Diluted	(2)	(13)

 

33.  Related party disclosures

 

In the year ended 31 December 2021, a number of Directors and significant shareholders agreed to subscribe for ordinary shares of Distribution Finance Capital Holdings plc through the placing on 22 February 2021 with a nominal price of 1p per share and purchase price of 55 pence per share. See note 24 for further details on the placing. Related parties were allocated shares in the placing transaction as follows:

 

Related Party	Relationship	Allocated number of  ordinary shares
Carl D'Ammassa	Director	90,909
Gavin Morris	Director	54,545
Thomas Grathwohl	Director	33,312
John Baines	Director	202,698
Arrowgrass Masterfund Limited	Significant shareholder	18,181,818
Watrium AS	Significant shareholder	7,272,727

 

 

Directors' emoluments are disclosed in note 8 of these financial statements.

 

Some Directors have invested in the savings product offered by the Bank.  All deposits were aligned to the products and rates offered to the general market.

 

 

34. Subsequent events

 

There have been no significant events after the date of the Statement of Financial Position up to the date of signing that require disclosure in accordance with FRS 102.