Notes to the audited condensed consolidated financial statements

1.            General information

ScS Group plc (the "Company") is incorporated and domiciled in the UK (Company registration number 03263435). The address of the registered office is 45-49 Villiers Street, Sunderland, SR1 1HA. The principal activity of the Company and its subsidiaries (the "Group") is the provision of upholstered furniture and flooring, trading under the name ScS.

The 2020 audited financial statements for the Group have been filed with Companies House.

2.            Basis of preparation

The Board approved the preliminary announcement on 4 October 2021.

The results for the financial year ended 31 July 2021, including comparative financial information, have been  prepared and approved by the directors in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 (IFRS) and the applicable legal requirements of the Companies Act 2006. Additionally, the Financial Conduct Authority's Disclosure Guidance and Transparency Rules require the directors to prepare the group financial statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 July 2021 or 25 July 2020, but is derived from those accounts. Statutory accounts for 2020 have been delivered to the Registrar of Companies, and those for 2021 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

Other than noted below the same accounting policies and methods of computation are followed as in the latest published audited accounts for the year ended 25 July 2020, which are available on the Group's website at www.scsplc.co.uk

                Going concern

At the time of approving the financial statements, the Board is required to formally assess that the business has adequate resources to continue in operational existence for the foreseeable future and as such can continue to adopt the 'going concern' basis of accounting.

Liquidity

The most significant factor in considering whether current resources are adequate is to consider the Group's liquidity. At 31 July 2021, the Group's cash balance totalled £87.7m, and £15.4m was owed as trade payables for goods delivered. The Group has no drawn down debt, and further liquidity is available through the £20.0m CLBILS revolving credit facility (RCF) granted on 25 August 2020. This facility is committed for a term of 36 months and would be renegotiated well in advance of this maturity date. The RCF is subject to certain covenants in respect of fixed charge cover, liquidity, leverage and capital spending.

Cash flows

As part of the Group's ongoing review of going concern, the directors have reviewed the results for the 12 months to 31 July 2021 and have modelled cash flow forecasts under the following scenarios:

·      A 'base case' scenario to July '24 that includes assumptions in relation to customer demand, the availability of product and the estimated continued impact of the recovery of the UK economy on the Group's performance. We assume no further lockdown periods or direct impact on our store and distribution operation. We expect order levels to return to those experienced pre-pandemic, and assume continued availability of product and no other significant impacts of COVID-19.

·      A 'severe but plausible' downside sensitivity scenario which sees a further wave of COVID-19 during winter which requires a further UK lockdown. We have assumed stores are required to close for our key winter trading period - from Boxing Day until the end of January 2022, although distribution operations continue to be permitted. Stores reopen in February 2022, with a limited period of additional demand, although we have prudently assumed only a third of lost orders are recovered.

The Group has included within the severe but plausible model associated reductions in marketing, management and staff bonus costs and sales-related commission payments.

The government continues to provide government support through reduced business rates to 31 March 2022. The modelled scenarios include the benefit of the reduced business rates. No additional government or landlord support (such as a further extension of the furlough scheme) has been included to support the modelled scenarios.

Throughout the 'severe but plausible downside' scenario, the Group would have significant cash headroom, with the cash low point at the end of July 2022 still being substantial at £47.6m, before use of the £20m RCF. Furthermore, forecasts show sufficient headroom on all of the financial covenants and no requirement for any additional sources of financing (including any drawdown on the RCF).

Many of our large suppliers operate using credit insurance, which they use to support their payment terms with the Group. As these credit insurers are consistently reviewing their support for the companies involved a severe economic climate could mean that they withdraw their support for the Group. This could create working capital challenges for our suppliers, requiring them to request earlier payment dates. The Group has modelled the impact of the full withdrawal of this insurance, and noted that the cash headroom available ensures this does not pose a further risk to the Group's going concern basis.

For the reasons set out in detail above, the Board believe that it remains appropriate to prepare the Group financial statements on a going concern basis.

New standards, amendments and interpretations

The following accounting standards, interpretations and amendments have been adopted in the year:

Amendments to IFRS 3                                        Definition of a Business

Amendments to IFRS 9, IAS 39 and IFRS 7       Interest Rate Benchmark Reform

Amendments to IAS 1 and IAS 8                        Definition of Material

Amendments to IFRS 16 COVID-19                   Related Rent Concessions

Conceptual Framework                                      Amendments to References to the Conceptual Framework in IFRS Standards

None of the items listed above have had any material impact on the amounts reported in this consolidated set of financial statements.

Critical accounting judgements and estimates

The preparation of the financial statements requires judgements, estimates and assumptions to be made that affect the reported value of assets, liabilities, revenues and expenses. The nature of estimation and judgement means that actual outcomes could differ from expectation.

Discount rates utilised within IFRS 16 accounting has been removed as a critical accounting estimate following completion of the adoption of IFRS 16 'Leases'. This was added as a critical accounting estimate in the FY20 financial statements due to the significance of the liabilities (and corresponding right-of-use assets) which were brought on to the balance sheet on transition. This is no longer considered as a critical accounting estimate following the completion of the transition to IFRS 16 as the impact of the discount rate on lease additions and modifications during the year, and the level of estimation required in determining the discount rates, was not significant.

Going concern has been removed as a critical accounting judgement.

Critical accounting estimates and assumptions

Management consider that accounting estimates and assumptions made in relation to the following items have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial period.

Stock provisions

The Group holds £17,328,000 of inventory at the year end, and the majority of this stock is held for display in store. Due to the nature of this stock, it will often be subject to the wear and tear associated with use in a showroom environment, and some items may have also been in store for an extended period of time. As such, this stock is often unable to achieve the same margin as the 'special order' stock purchased and delivered directly to our customers, and may occasionally be sold at a level lower than cost following a business decision to refresh the range or better utilise the space. The Group's policy in relation to stock provisioning is therefore to provide for obsolete, slow-moving and defective stock, and therefore ensure that stock is held at the most appropriate estimate of net realisable value.

In determining an estimate of this value, management has made judgements in respect of the quality of the Group's products and saleability, and applied a provision based on historic sales levels. Whilst management considers that the methodologies and assumptions adopted in the valuation are supportable, reasonable and robust, because of the inherent uncertainty of the sale price of stock currently held, those estimated values may differ from the final sale and the total differences could potentially be significant.

Impairment of property, plant and equipment and right-of-use assets

Management consider each store to be a cash-generating unit. At each balance sheet date, the Group reviews the carrying amounts of it's right-of-use assets and property plant and equipment to determine whether there is any indication of impairment at a store following poor performance. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use. Value in use is calculated from cash flow projections based on the Group's internal budgets, which are then extrapolated over the remaining store lease length, and management's expectations of estimated growth rates.

The key estimates for the value in use calculations are those regarding the discount rate used and expected changes to future cash flows. Management sets the budgets based on past experiences and expectations of future changes in the market and estimates discount rate using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units, deriving from the Group's post-tax weighted average cost of capital. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount.

An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or CGU in prior years. A reversal of an impairment loss is recognised as income immediately. Where impairment losses have previously been treated as exceptional, a related impairment reversal is also treated as exceptional.

3.            Segmental information

The directors have determined the operating segments based on the operating reports reviewed by the senior management team (the executive directors and the other directors of the trading subsidiary, A. Share & Sons Limited) that are used to assess both performance and strategic decisions. The directors have identified that the senior management team are the chief operating decision makers in accordance with the requirements of IFRS 8 'Segmental reporting'.

The directors consider the business to be one main type of business generating revenue; the retail of upholstered furniture and flooring. All segment revenue, profit before taxation, assets and liabilities are attributable to the principal activity of the Group and other related services. All revenues are generated in the United Kingdom, and recognised at the point in time the goods and any associated warranty contracts have been delivered to the customer. Warranty services, once sold, are subsequently provided by third parties. There have been no changes to the director's determination of segments since those disclosed in the Annual Report 2020.

Analysis of gross sales is as follows:

4.            Exceptional items included within administrative expenses

In order to provide a clearer understanding of underlying profitability, underlying operating profit excludes exceptional items, which relate to costs that, either by their size or nature, require separate disclosure in order to give a fuller understanding of the Group's financial performance. Exceptional items, booked to operating costs, comprised the following:

Impairment reversal/(charge)

Current year exceptional items include a credit of £4,242,000 which relates to the reversal of previous impairment to the Group's stores. The majority of the current year credit reverses the impairment taken in the prior year as a consequence of reduced forecasts following the impact of COVID-19, with an additional element reversing historic store impairment following stronger forecast store performance as a result of encouraging trading and increased opportunities in our markets. This has been split between the right-of-use asset (£2,932,000) and tangible assets (£1,310,000), apportioned based on net book value.

In the prior year exceptional costs disclosed of £3,376,000 related to an impairment charge being recognised on the assets associated with a number of our stores. This was split between the right-of-use asset (£2,619,000) and tangible assets (£757,000), apportioned based on net book value.

Restructuring costs

In the prior year exceptional costs disclosed of £613,000 were in relation to amounts payable for loss of office incurred as a result of restructuring, predominantly relating to the centralisation of administrative support from each of our individual stores to our head office in Sunderland.

5.            Finance costs

6.            Finance income

7.            Taxation

The total tax charge for the financial year of £3.6m (2020: credit of £0.9m) comprises a corporation tax charge of £4.9m (2020: credit of £0.7m) and a deferred tax credit of £1.3m (2020: £0.2m). The tax charge is an effective rate of 15.9%, which is lower (2020: 28.8% - higher) than if the standard rate of corporation tax had been applied, mainly due to an increase in the deferred tax asset relating to management share options outstanding but unexercised at year end, and the increase in the rate used to measure the Group's deferred tax asset.

The UK corporation tax standard rate for the period was 19% (2020: 19%). The UK Government in its 2021 Budget announced that the main UK corporate rate would be maintained at 19% until 31 March 2023, before being increased to 25% from 1 April 2023.These changes were substantively enacted at the balance sheet date and hence have been reflected in the measurement of deferred tax balances resulting in deferred tax being calculated using an effective rate of 22%.

8.            Earnings/(loss) per share

A total of 1,598,815 potential ordinary shares were not included within the calculation of diluted earnings per share as at 25 July 2020 as they were antidilutive.

9.            Trade and other payables current

The fair value of financial liabilities approximates their carrying value due to short maturities. Financial liabilities are denominated in pounds sterling.

10.          Dividend

                An interim dividend of 3.0p (2020: £nil) per ordinary share was declared by the Board of Directors on 16 June 2021. The strength of the Group's balance sheet, coupled with the robust trading experienced since showrooms re-opened in April 2021, provided the Board with the confidence to recommence dividends and as such a final dividend of 7.0p (2020: £nil) has been proposed and, if approved, will be recorded within the financial statements for the year ended 30 July 2022.

11.          Treasury shares and share buyback

During the financial year, the Group's Employee benefit Trust purchased 200,000 ordinary shares of 0.1 pence each in the Group at an average price of 204.4 pence per ordinary share for the purpose of satisfying management share incentive awards.

Subsequently, 19,861 of these shares were used in satisfaction of the exercise of vested share options, with the remaining 257,414 held as treasury shares.