2019 Half Year Report

Condensed consolidated statement of comprehensive income

For the six months to 30 June 2019 (unaudited)

 

	Note	Unaudited 6 months to 30 June 2019	Unaudited 6 months to 30 June 2018 (restated)	Year to 31 December 2018 (restated)
		£m	£m	£m
Transaction revenue	4	62.5	50.3	112.9
Servicing revenue		15.2	11.3	24.9
Net investment income		1.0	-	-
Other revenue		2.7	1.4	4.1
Net revenue		81.4	63.0	141.9
People costs		(45.5)	(38.3)	(79.2)
Marketing costs		(35.2)	(24.7)	(57.8)
Depreciation and amortisation		(7.1)	(6.1)	(12.5)
Loan repurchase charge		(4.2)	(1.4)	(2.6)
IPO advisor costs (exceptional)		-	(1.9)	(5.9)
Other costs		(20.7)	(17.5)	(34.7)
Operating expenses	5	(112.7)	(89.9)	(192.7)
Operating loss		(31.3)	(26.9)	(50.8)
Finance income		1.0	0.3	0.9
Finance costs	6	(0.5)	(0.5)	(1.0)
Loss before taxation		(30.8)	(27.1)	(50.9)
Income tax	7	(0.2)	-	1.4
Loss for the period		(31.0)	(27.1)	(49.5)
Other comprehensive income
Items that may be reclassified subsequently to profit and loss:
Exchange differences on translation of foreign operations		1.0	0.8	2.4
Total comprehensive loss for the period		(30.0)	(26.3)	(47.1)
Total comprehensive loss attributable to:
Owners of the parent		(30.0)	(26.3)	(47.1)
Loss per share
Basic and diluted loss per share	8	(8.9p)	(10.6p)	(18.2p)

 

The six months to June 2018 and the year to December 2018 have been restated for the impact of IFRS 16 "Leases" - refer to note 2.
 

Condensed consolidated balance sheet

As at 30 June 2019 (unaudited)

			Unaudited 30 June 2019	Unaudited 30 June 2018 (restated)	31 December 2018 (restated)
	Note		£m	£m	£m
Non-current assets
Goodwill	9		42.3	41.5	42.3
Intangible assets	10		23.7	17.9	21.5
Property, plant and equipment	11		25.3	26.9	25.2
Investments in associates	12		5.6	-	-
Investment in loans (other)	13		2.0	0.2	0.3
			98.9	86.5	89.3
Current assets
Investment in loans (curing)	13		2.6	5.1	4.7
Investment in loans (bond products)	13		177.3	-	-
Trade and other receivables			27.8	19.5	23.0
Cash and cash equivalents			270.0	65.2	333.0
			477.7	89.8	360.7
Total assets			576.6	176.3	450.0
Current liabilities
Trade and other payables			24.3	17.9	19.3
Borrowings	14		146.8	-	-
Lease liabilities	11		5.6	3.9	5.0
Short-term provisions	15		3.5	4.1	3.8
			180.2	25.9	28.1
Non-current liabilities
Long-term provisions	15		0.9	0.7	0.8
Lease liabilities	11		18.4	22.8	20.1
Total liabilities			199.5	49.4	49.0
Equity
Share capital			0.4	0.2	0.3
Share premium account			292.2	278.2	291.8
Foreign exchange reserve			16.7	14.1	15.7
Share options reserve			10.1	15.8	6.0
Retained earnings			57.7	(181.4)	87.2
Total equity			377.1	126.9	401.0
Total equity and liabilities			576.6	176.3	450.0

 

The six months to June 2018 and the year to December 2018 have been restated for the impact of IFRS 16 "Leases" - refer to note 2.

 

These condensed interim financial statements were approved by the Board on 8 August 2019. They were signed on behalf of the Board by:

 

 

S Glithero

Director

 

 

Condensed consolidated statement of changes in equity

For the six months to 30 June 2019 (unaudited)

	Note	Share capital	Share premium account	Foreign exchange reserve	Share options reserve	Retained earnings / (accumulated losses)	Total equity
		£m	£m	£m	£m	£m	£m
Balance at 1 January 2018 as previously reported		0.2	278.0	13.3	13.9	(153.2)	152.2
Impact of change in accounting policy		-	-	-	-	(1.1)	(1.1)
Restated balance as at 1 January 2018		0.2	278.0	13.3	13.9	(154.3)	151.1
Loss for the period (restated)		-	-	-	-	(27.1)	(27.1)
Other comprehensive income: (restated)
Exchange differences on translation of foreign operations		-	-	0.8	-	-	0.8
Transactions with owners
Issue of share capital		-	0.2	-	-	-	0.2
Employee share schemes - value of employee services		-	-	-	1.9	-	1.9
Unaudited balance at 30 June 2018 (restated)		0.2	278.2	14.1	15.8	(181.4)	126.9
Balance at 31 December 2018 as previously reported		0.3	291.8	15.7	6.0	88.6	402.4
Impact of change in accounting policy		-	-	-	-	(1.4)	(1.4)
Restated balance as at 1 January 2019		0.3	291.8	15.7	6.0	87.2	401.0
Loss for the period		-	-	-	-	(31.0)	(31.0)
Other comprehensive income:
Exchange differences on translation of foreign operations		-	-	1.0	-	-	1.0
Transactions with owners
Issue of share capital		0.1	0.4	-	-	-	0.5
Transfer of share option costs		-	-	-	(1.5)	1.5	-
Employee share schemes - value of employee services		-	-	-	5.6	-	5.6
Unaudited balance at 30 June 2019		0.4	292.2	16.7	10.1	57.7	377.1

 

The six months to June 2018 and the year to December 2018 have been restated for the impact of IFRS 16 "Leases" - refer to note 2.

 

 

Condensed consolidated statement of cash flows

For the six months to 30 June 2019 (unaudited)

	Note	Unaudited 6 months to 30 June 2019	Unaudited 6 months to 30 June 2018 (restated)	Year to 31 December 2018 (restated)
		£m	£m	£m
Net cash outflow from operating activities	16	(18.1)	(15.4)	(24.7)
Investing activities
Purchase of intangible assets		(5.9)	(4.7)	(11.0)
Purchase of property, plant and equipment		(2.2)	(1.3)	(2.3)
Investment in loans		(175.5)	(1.7)	(1.1)
Investment in associate		(5.6)	-	-
Interest received		0.9	0.3	0.9
Net cash outflow from investing activities		(188.3)	(7.4)	(13.5)
Financing activities
Bank borrowings		145.5	-	-
Preferred dividend payment		-	-	(0.5)
Proceeds on the issue of Ordinary shares on IPO		-	-	300.0
Payment of IPO advisor costs		-	-	(15.0)
Proceeds from the exercise of share options		0.5	0.2	1.1
Payment of lease liabilities		(2.8)	(1.4)	(3.8)
Net cash inflow / (outflow) from financing activities		143.2	(1.2)	281.8
Net (decrease)/increase in cash and cash equivalents		(63.2)	(24.0)	243.6
Cash and cash equivalents at the beginning of the period		333.0	88.9	88.9
Effect of foreign exchange rate changes		0.2	0.3	0.5
Cash and cash equivalents at the end of the period		270.0	65.2	333.0

 

The six months to June 2018 and the year to December 2018 have been restated for the impact of IFRS 16 "Leases" - refer to note 2.

 

 

 

Notes to the interim financial statements

For the six months to 30 June 2019 (unaudited)

1. Basis of preparation

General information

Funding Circle Holdings plc ('the Company') is a public limited company which is listed on the London Stock Exchange and is domiciled and incorporated in the United Kingdom under the Companies Act 2006. The Company's registered office is 71 Queen Victoria Street, London, EC4V 4AY.

These interim financial statements have been prepared as at, and for the six months to 30 June 2019. The comparative financial information presented has been prepared as at, and for the six months to 30 June 2018 and year to 31 December 2018.

The interim financial information presented as at, and for the six months to, 30 June 2019 comprise the Company and its subsidiaries (together referred to as the "Group"). The consolidated financial statements of the Group as at, and for the year to, 31 December 2018 are available on request from the Company's registered office and via the Company's website.

Going concern

The Group made a total comprehensive loss of £30.0 million during the six months to 30 June 2019 (30 June 2018: loss of £26.3 million). The cash and cash equivalent balance of the Group as at 30 June 2019 was £270.0 million (31 December 2018: £333.0 million).

The interim financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future (which has been taken as 12 months from the date of approval of the interim financial statements).

The Group has prepared detailed cash flow forecasts for the next 12 months. The Directors have made inquiries of management and considered budgets and cash flow forecasts for the Group and have, at the time of approving these interim financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.

Basis of preparation

These interim financial statements, which have been reviewed and not audited, have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, "Interim Financial Reporting" as adopted by the EU. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year to 31 December 2018 which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the EU, including International Accounting Standards (IAS) and interpretations issued by the International Financial Reporting Standard Interpretations Committee (IFRS-IC).

The financial information included in these interim financial statements does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 (the 'Act'). The statutory accounts for the year to 31 December 2018 have been reported on by the Company's auditors and were delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditor's report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 of the Act.

 

 

 

Significant changes in the current reporting period

The financial position and performance of the Group was affected by the following events and transactions during the six months to 30 June 2019:

 

i)   Asset backed securities ("ABS") bonds

 

During the period, the Group has commenced bond programmes. In the initial "warehousing phase" of the programmes the Group has invested in SME loans using both its cash and amounts borrowed under a credit facility with lending institutions. The loans are held within a special purpose warehouse vehicle which is consolidated in the Group's balance sheet. Once the warehouse vehicle reaches sufficient scale, the SME loans will be sold into a special purpose vehicle ("SPV") financed through the issuance of loan notes to third party investors. As at 30 June 2019, no SME loans have been sold to the SPV.

 

During the warehousing phase the Group earns interest income and assumes credit and interest rate risk on loans held by the Group. The Group also incurs interest expense on the drawn credit facility as well as gains/losses from changes in the fair value of the SME loans retained on its balance sheet. These items are shown within revenue with further details outlined in note 4.

 

ii)  Private Funds

 

During the period, the Group has established a European private fund for its Developing Markets which is used to acquire loans originated on the Funding Circle platform. In order to establish the fund the Group provided seed capital. Further institutional investors have subsequently invested in this vehicle. As at 30 June 2019, the Group's interest in the fund was 24% and its investment has been accounted for as an associate. The Group's interest is expected to decline over time.

 

 

 

 

 

 

 

2. Changes in significant accounting policies

The accounting policies, methods of computation and presentation adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the consolidated financial statements for the year to 31 December 2018, except for the adoption of new standards effective as of 1 January 2019 as disclosed on page 20. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

New accounting standards and interpretations (adopted full retrospectively)

The Group has adopted the following new and amended IFRSs from 1 January 2019 on a full retrospective basis.

Standard / interpretation	Content	Applicable for financial years beginning on/after
IFRS 16	Leases	1 January 2019

 

IFRS 16 Leases was issued in January 2016 and was endorsed by the EU in 2017. The standard is effective for annual periods beginning on or after 1 January 2019 and sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model.

The Group adopted IFRS 16 using the full retrospective method of adoption with the date of initial application of 1 January 2019. The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('short term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets').

The impact of IFRS 16 - Leases has resulted in the Group recording its current property leases on the balance sheet as a right-of-use asset and a corresponding lease obligation. The leases impacted were previously treated as operating expenses. The change in recognition has resulted in increased depreciation charges, a reduction in lease costs in the income statement and an increase in finance costs.

Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor.

Upon recognition, the Company's weighted average incremental borrowing rate used in measuring lease liabilities across the Group was 4%.

The following tables summarise the impact of adopting IFRS 16 on the Group's condensed consolidated statement of comprehensive income and condensed consolidated statement of cash flows for the six-month period to 30 June 2019 and the condensed consolidated balance sheet as at 30 June 2019.

 

 

Impact of the change in accounting policies on the Condensed Consolidated interim statement of comprehensive income (unaudited)

 

	Six months to 30 June 2019			Six months to 30 June 2018			Year to 31 December 2018
	Amounts without adoption of IFRS16	IFRS 16	As reported	As originally presented	IFRS 16	Restated	As originally presented	IFRS 16	Restated
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Transaction revenue	62.5	-	62.5	50.3	-	50.3	112.9	-	112.9
Servicing revenue	15.2	-	15.2	11.3	-	11.3	24.9	-	24.9
Net investment income	1.0	-	1.0	-	-	0.0	-	-	0.0
Other revenue	2.7	-	2.7	1.4	-	1.4	4.1	-	4.1
Net revenue	81.4	-	81.4	63.0	-	63.0	141.9	-	141.9
People costs	(45.5)	-	(45.5)	(38.3)	-	(38.3)	(79.2)	-	(79.2)
Marketing costs	(35.2)	-	(35.2)	(24.7)	-	(24.7)	(57.8)	-	(57.8)
Depreciation and amortisation	(4.7)	(2.4)	(7.1)	(4.1)	(2.0)	(6.1)	(8.2)	(4.3)	(12.5)
Loan repurchase charge	(4.2)	-	(4.2)	(1.4)	-	(1.4)	(2.6)	-	(2.6)
IPO advisor costs (exceptional)	-	-	-	(1.9)	-	(1.9)	(5.9)	-	(5.9)
Other costs	(23.5)	2.8	(20.7)	(19.9)	2.4	(17.5)	(39.8)	5.1	(34.7)
Operating expenses	(113.1)	0.4	(112.7)	(90.3)	0.4	(89.9)	(193.5)	0.8	(192.7)
Operating loss	(31.7)	0.4	(31.3)	(27.3)	0.4	(26.9)	(51.6)	0.8	(50.8)
Finance income	1.0	-	1.0	0.3	-	0.3	0.9	-	0.9
Finance costs	-	(0.5)	(0.5)	-	(0.5)	(0.5)	-	(1.0)	(1.0)
Loss before taxation	(30.7)	(0.1)	(30.8)	(27.0)	(0.1)	(27.1)	(50.7)	(0.2)	(50.9)
Income tax	(0.2)	-	(0.2)	-	-	-	1.4	-	1.4
Loss for the period	(30.9)	(0.1)	(31.0)	(27.0)	(0.1)	(27.1)	(49.3)	(0.2)	(49.5)
Other comprehensive income:
Items that may be reclassified subsequently to profit and loss:
Exchange differences on translation of foreign operations	1.0	-	1.0	0.8	-	0.8	2.4	-	2.4
Total comprehensive loss for the period	(29.9)	(0.1)	(30.0)	(26.2)	(0.1)	(26.3)	(46.9)	(0.2)	(47.1)
Total comprehensive loss attributable to:
Owners of the parent	(29.9)	(0.1)	(30.0)	(26.2)	(0.1)	(26.3)	(46.9)	(0.2)	(47.1)
Loss per share
Basic and diluted loss per share	(8.9p)	-	(8.9p)	(10.6p)	-	(10.6p)	(18.2p)	-	(18.2p)

 

Impact of the change in accounting policies on the Condensed Consolidated interim balance sheet (unaudited)

 

	As at 30 June 2019			As at 30 June 2018			As at 31 December 2018
	Amounts without adoption of IFRS16	IFRS 16	As reported	As originally presented	IFRS 16	Restated	As originally presented	IFRS 16	Restated
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Non-current assets
Goodwill	42.3	-	42.3	41.5	-	41.5	42.3	-	42.3
Intangible assets	23.7	-	23.7	17.9	-	17.9	21.5	-	21.5
Property, plant and equipment	6.5	18.8	25.3	5.0	21.9	26.9	5.3	19.9	25.2
Investment in associate	5.6	-	5.6	-	-	-	-	-	-
Investment in loans (others)	2.0	-	2.0	0.2	-	0.2	0.3	-	0.3
	80.1	18.8	98.9	64.6	21.9	86.5	69.4	19.9	89.3
Current assets
Investments in loans (curing)	2.6	-	2.6	5.1	-	5.1	4.7	-	4.7
Investments in loans (bond products)	177.3	-	177.3	-	-	-	-	-	-
Trade and other receivables	27.8	-	27.8	19.5	-	19.5	23.0	-	23.0
Cash and cash equivalents	270.0	-	270.0	65.2	-	65.2	333.0	-	333.0
	477.7	-	477.7	89.8	-	89.8	360.7	-	360.7
Total assets	557.8	18.8	576.6	154.4	21.9	176.3	430.1	19.9	450.0
Current liabilities
Trade and other payables	28.1	(3.8)	24.3	21.5	(3.6)	17.9	23.1	(3.8)	19.3
Borrowings	146.8	-	146.8	-	-	-	-	-	-
Lease liabilities	-	5.6	5.6	-	3.9	3.9	-	5.0	5.0
Short-term provisions	3.5	-	3.5	4.1	-	4.1	3.8	-	3.8
	178.4	1.8	180.2	25.6	0.3	25.9	26.9	1.2	28.1
Non-current liabilities
Long-term provisions	0.9	-	0.9	0.7	-	0.7	0.8	-	0.8
Lease liabilities	-	18.4	18.4	-	22.8	22.8	-	20.1	20.1
Total liabilities	179.3	20.2	199.5	26.3	23.1	49.4	27.7	21.3	49.0
Equity
Share capital	0.4	-	0.4	0.2	-	0.2	0.3	-	0.3
Share premium account	292.2	-	292.2	278.2	-	278.2	291.8	-	291.8
Foreign exchange reserve	16.7	-	16.7	14.1	-	14.1	15.7	-	15.7
Share options reserve	10.1	-	10.1	15.8	-	15.8	6.0	-	6.0
Retained earnings	59.1	(1.4)	57.7	(180.2)	(1.2)	(181.4)	88.6	(1.4)	87.2
Total equity	378.5	(1.4)	377.1	128.1	(1.2)	126.9	402.4	(1.4)	401.0
Total equity and liabilities	557.8	18.8	576.6	154.4	21.9	176.3	430.1	19.9	450.0

 

 

Impact of the change in accounting policies on the Condensed Consolidated statement of cash flows (unaudited)

	Six months to 30 June 2019			Six months to 30 June 2018			Year to 31 December 2018
	Amounts without adoption of IFRS16	IFRS 16	As reported	As originally presented	IFRS 16	Restated	As originally presented	IFRS 16	Restated
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Net cash outflow from operating activities	(20.9)	2.8	(18.1)	(16.8)	1.4	(15.4)	(28.5)	3.8	(24.7)
Investing activities
Purchase of intangible assets	(5.9)	-	(5.9)	(4.7)	-	(4.7)	(11.0)	-	(11.0)
Purchase of property, plant and equipment	(2.2)	-	(2.2)	(1.3)	-	(1.3)	(2.3)	-	(2.3)
Investment in associate	(5.6)	-	(5.6)	-	-	-	-	-	-
Investment in loans	(175.5)	-	(175.5)	(1.7)	-	(1.7)	(1.1)	-	(1.1)
Interest received	0.9	-	0.9	0.3	-	0.3	0.9	-	0.9
Net cash outflow from investing activities	(188.3)	-	(188.3)	(7.4)	-	(7.4)	(13.5)	-	(13.5)
Financing activities
Bank borrowings	145.5	-	145.5	-	-	-	-	-	-
Preferred dividend payment	-	-	-	-	-	-	(0.5)	-	(0.5)
Proceeds on the issue of Ordinary shares on IPO	-	-	-	-	-	-	300.0	-	300.0
Payment of IPO costs	-	-	-	-	-	-	(15.0)	-	(15.0)
Proceeds from the exercise of share options	0.5	-	0.5	0.2	-	0.2	1.1	-	1.1
Payment of lease liabilities	-	(2.8)	(2.8)	-	(1.4)	(1.4)	-	(3.8)	(3.8)
Net cash inflow from financing activities	146.0	(2.8)	143.2	0.2	(1.4)	(1.2)	285.6	(3.8)	281.8
Net increase in cash and cash equivalents	(63.2)	-	(63.2)	(24.0)	-	(24.0)	243.6	-	243.6
Cash and cash equivalents at the beginning of the period	333.0	-	333.0	88.9	-	88.9	88.9	-	88.9
Effect of foreign exchange rate changes	0.2	-	0.2	0.3	-	0.3	0.5	-	0.5
Cash and cash equivalents at the end of the period	270.0	-	270.0	65.2	-	65.2	333.0	-	333.0

 

 

 

Impact of the change in accounting policies on Segmental Information (unaudited)

 

	Six months to 30 June 2018			Year to 31 December 2018
	As originally presented	IFRS 16	Restated	As originally presented	IFRS 16	Restated
	£m	£m	£m	£m	£m	£m
United Kingdom	9.8	1.4	11.2	21.8	2.8	24.6
United States	(5.1)	0.7	(4.4)	(7.4)	1.7	(5.7)
Developing Markets	(3.8)	0.3	(3.5)	(7.4)	0.6	(6.8)
Segment Adjusted EBITDA	0.9	2.4	3.3	7.0	5.1	12.1
Product development	(12.2)	-	(12.2)	(24.5)	-	(24.5)
Corporate costs	(5.0)	-	(5.0)	(11.0)	-	(11.0)
Adjusted EBITDA	(16.3)	2.4	(13.9)	(28.5)	5.1	(23.4)
Depreciation and amortisation	(4.1)	(2.0)	(6.1)	(8.2)	(4.3)	(12.5)
Share-based payments and social security costs	(4.7)	-	(4.7)	(8.6)	-	(8.6)
Foreign exchange loss	(0.3)	-	(0.3)	(0.4)	-	(0.4)
Exceptional items	(1.9)	-	(1.9)	(5.9)	-	(5.9)
Operating Loss	(27.3)	0.4	(26.9)	(51.6)	0.8	(50.8)

 

 

Summary of new accounting policies

Consolidation of special purpose entities ("SPEs")

 

Subsidiaries are those entities, including structured entities, over which the Group has control. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the investee. The Group has power over an entity when it has existing rights that give it the current ability to direct the activities that most significantly affect the entity's returns. Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual arrangements.

 

The Group assesses whether it controls special purpose entities ('SPE') and the requirement to consolidate them under the criteria of IFRS 10. Control is determined to exist if the Group has the power to direct the activities of each entity (for example, managing the performance of the underlying assets and raising debt on those assets which is used to fund the Group) and uses this control to obtain a variable return (for example, retaining the residual risk on the assets). Structures that do not meet these criteria are not treated as subsidiaries and the assets are derecognised when they are sold.

 

Where the Group manages the administration of its securitised assets and is exposed to the risks and rewards of the underlying assets through its continued investment or where the Group does not retain a direct ownership interest in an SPE, but the Directors have determined that the Group controls those entities, they are treated as subsidiaries and are consolidated.

 

Net investment income

 

Net investment income from financial instruments measured at fair value through profit or loss includes:

 

·      Interest income from SME loans that the Group holds on balance sheet ("Investment income");

·      Interest payable on funds borrowed to finance the acquisition of underlying loan investments ("Investment expense");

·      Gains/losses from changes in the fair value of financial assets held on balance sheet; and

·      Gains/losses from changes in fair value of interest rate hedging instruments.

 

Borrowings

 

Borrowings (draw downs under the credit facility) are recognised initially at fair value, being their issue proceeds net of transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective interest rate method.

 

Investment in loans (bond products)

 

Investment in loans (bond products) have been classified as financial assets at fair value through profit or losses. The above classification is because all such loans are acquired principally for selling in the short term. They are initially measured at fair value on the balance sheet with the subsequent measurement at fair value with all gains and losses being recognised in profit or loss.

 

 

Leases

 

At inception of a contract, the Group assesses whether or not a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. When a lease is recognised in a contract the Group recognises a right-of-use asset and a lease liability at the lease commencement date.

Right-of-use assets are initially measured at cost, comprising the initial measurement of the lease liability, less any lease incentives. Subsequently, right-of-use assets are measured at cost, less any accumulated depreciation and any accumulated impairment losses, and are adjusted for certain re-measurements of the lease liability. Depreciation is calculated on a straight-line basis over the length of the lease.

 

The lease liability is initially measured at the present value of lease payments, discounted using the Group's incremental borrowing rate. Subsequently, the lease liability is measured by increasing the carrying amount to reflect interest on the lease liability and reducing it by the lease payments made. The lease liability is re-measured when there is a change in scope.

The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as expenses on a straight-line basis over the lease term.

 

Investment in associates

 

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Group's investment in its associate is accounted for using the equity method.

 

Under the equity method of accounting, the investments are initially recognised at cost. This is adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses of the investee in the profit or loss. It is presented within operating expenses on the grounds of materiality. The Group's share of movements in other comprehensive income of the investee are recognised in other comprehensive income. Dividends received or receivable from associates are recognised as a reduction in the carrying amount of the investment.

 

When the Group's share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity.

 

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

 

After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognises the loss within the statement of comprehensive income.

 

Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.

 

 

 

 

 

3. Critical accounting estimates and judgments

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

 

The significant judgments and estimates applied by the Group in the interim financial statements have been applied on a consistent basis with the financial statements for the year to 31 December 2018.

The following are the critical estimates that the Directors have made in the process of applying the Group's accounting policies and have the most significant effect on the amounts recognised in the interim financial statements.

a)    Estimated impairment of assets (note 9)

The Group tests annually whether goodwill has suffered any impairment. All other assets are tested for impairment where there are indicators of impairment.

The recoverable amount of cash generating units have been determined based on value in use calculations. The use of this method requires the estimate of future cash flows expected to arise from the continuing operation of the cash generating unit and the choice of a suitable discount rate in order to calculate the present value. Actual outcomes could vary significantly from these estimates. Following the announcement on 2 July 2019 that revenue projections had reduced, the Group has undertaken an impairment assessment as at 30 June 2019. This exercise did not identify any impairments.

b)    Loan repurchase provision (note 15)

In certain circumstances, in the less mature markets, Funding Circle has entered into arrangements with institutional investors to assume the credit risk on the loan investments made by the institutional investors. The Group must make its best estimate for the expected credit loss ("ECL") for these commitments at each reporting date.

Significant estimation is required in assessing individual loans and when applying statistical models for collective assessments, using historical trends from past performance as well as forward-looking information. The most significant estimation is with delinquencies and default rates on performing loans. If the annual rates were to change by 0.5%, the provision would change by £0.3 million.

c)    Fair value of financial instruments (note 22)

At 30 June 2019, the carrying value of the Group's financial instrument assets held at fair value was £287.9 million (31 December 2018: £154.7 million).

In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the Consolidated Statement of Financial Position at fair value using a three level hierarchy. Financial instruments categorised as level 1 are valued using quoted market prices and therefore there is minimal judgement applied in determining fair value. However, the fair value of financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation estimation techniques including discounted cash flow analysis and valuation models. The most significant estimation is with respect to discount rates, default rates and levels of prepayment of principal.
 

4. Segmental information

IFRS 8 Operating segments requires the Group to determine its operating segments based on information which is provided internally. Based on the internal reporting information and management structures within the Group, it has been determined that there are three geographic operating segments supported by two centralised cost segments.  Reporting on this basis is reviewed by the Global Leadership Team ('GLT') which is the chief operating decision-maker ('CODM'). The GLT is made up of the Executive Directors and Key Management and is responsible for the strategic decision-making of the Group. 

 

The five reportable segments consist of the three geographic segments: United Kingdom, United States and Developing Markets; plus the two centralised cost segments: global product development and corporate costs. The Developing Markets segment includes the Group's less mature marketplaces in Germany and the Netherlands.

 

The GLT measures the performance of each segment by reference to a non-GAAP measure, Adjusted EBITDA which is defined as profit/loss before finance income and costs, taxation, depreciation and amortisation ("EBITDA"); and additionally excludes share-base payment charges and associated social security costs, foreign exchange and exceptional items (comprising IPO costs). Together with Operating profit/loss, Adjusted EBITDA is a key measure of Group performance as it allows better interpretation of the underlying performance of the business.

 

Capital expenditure is predominantly managed centrally and depreciation and amortisation are not allocated to individual segments for decision making and accordingly have not been allocated to segments.

 

 

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Revenue from continuing operations
United Kingdom	53.0	42.8	93.6
United States of America	21.9	15.0	37.1
Developing Markets	6.5	5.2	11.2
Total revenue	81.4	63.0	141.9

 

During 2017 management took the decision to cease originating loans to property developers. This activity only took place in the United Kingdom and to aid interpretation of revenue trends the following analysis is provided:

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Supplementary analysis:
Other business loans	53.0	42.5	93.2
Property loans	-	0.3	0.4
United Kingdom revenue	53.0	42.8	93.6

 

 

Adjusted EBITDA and Operating loss	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
United Kingdom	13.9	11.2	24.6
United States	(6.7)	(4.4)	(5.7)
Developing Markets	(6.0)	(3.5)	(6.8)
Segment Adjusted EBITDA	1.2	3.3	12.1
Product development	(14.3)	(12.2)	(24.5)
Corporate costs	(6.6)	(5.0)	(11.0)
Adjusted EBITDA	(19.7)	(13.9)	(23.4)
Depreciation and amortisation	(7.1)	(6.1)	(12.5)
Share-based payments and social security costs	(4.5)	(4.7)	(8.6)
Foreign exchange loss	-	(0.3)	(0.4)
IPO advisor costs (exceptional)	-	(1.9)	(5.9)
Operating loss	(31.3)	(26.9)	(50.8)

 

Revenue by type

In addition to the segmental reporting of revenue, the table below sets out revenue by its type:

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Transaction revenue	62.5	50.3	112.9
Servicing revenue	15.2	11.3	24.9
Net investment income
Investment income	2.2	-	-
Investment expense	(0.9)	-	-
Fair value gains/(losses)	(0.3)	-	-
Other revenue	2.7	1.4	4.1
Net revenue	81.4	63.0	141.9

 

 

5. Operating expenses

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Depreciation	3.5	3.1	6.4
Amortisation	3.6	3.0	6.1
Rental income and other recharges	(0.1)	(0.4)	(0.8)
Operating lease rentals
- Other assets	-	-	0.1
- Land and buildings	-	-	0.1
People costs (including contractors)	45.5	38.3	79.2
Marketing costs (excluding employee costs)	35.2	24.7	57.8
Data and technology costs	4.9	4.4	9.2
Loan repurchase charge	4.2	1.4	2.6
Foreign exchange loss	-	0.3	0.4
IPO advisor costs (exceptional)	-	1.9	5.9
Other expenses	15.9	13.2	25.7
Total operating expenses	112.7	89.9	192.7

Exceptional items in 2018 related to advisor costs associated with the IPO related costs. The 2018 IPO costs of £5.9 million allocated to profit and loss represented the portion of directly attributable costs relating to the secondary shares traded on Admission and other costs attributable to the Listing. In addition, further IPO costs of £9.1 million were deducted from share premium.

 

6. Finance costs

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Interest on lease liabilities	0.5	0.5	1.0
Total finance costs	0.5	0.5	1.0

 

 

 

7. Taxation

The Group calculates the period income tax expense using the tax rate that would be applicable to the expected total annual earnings. The estimated average annual tax rate used for the six months to 30 June 2019 (excluding the tax charge on RDEC) is nil%, compared to nil% for the six months to 30 June 2018. The major components of income tax expense in the condensed consolidated statement of comprehensive income are:

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Current tax
Tax charge on RDEC	0.2	-	-
Research and development tax credit	-	-	(1.4)
Total current tax	0.2	-	(1.4)
Total tax charge/(credit)	0.2	-	(1.4)

 

The Group continues to be in a loss making position, however, credits receivable in respect of Research and Development Expenditure Credits (RDEC) are received net of corporation tax. The above tax charge represents the amount of tax deducted from the gross RDEC credit receivable. In the previous year, the Research and Development tax credit of £1.4 million was under the small companies regime and was not subject to tax. 

The Group has unrelieved tax losses that are available for offset against future taxable profits. The Group has not recognised a deferred tax asset in respect of these losses as there is not sufficient visibility of suitable profits being generated to utilise these losses.

 

8. Losses per share

	30 June	30 June	31 December
	2019	2018 (restated)	2018 (restated)
	£m	£m	£m
Loss attributable to owners of the parent	(31.0)	(27.1)	(49.5)
Weighted average number of ordinary shares in issue (million)	346.7	255.6	271.3
Basic and dilutive loss per share	(8.9p)	(10.6p)	(18.2p)

 

 

 

 

9. Goodwill

		£m
Cost and carrying amount
At 1 January 2018		41.3
Exchange differences		0.2
At 30 June 2018		41.5
Exchange differences		0.8
At 31 December 2018		42.3
Exchange differences		-
At 30 June 2019		42.3

 

The annual goodwill impairment assessment was performed at 31 December 2018. Following a change in the Group's revenue forecasts, the Group has undertaken an interim goodwill impairment review.

Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units ("CGUs") that are expected to benefit from that business combination. At the balance sheet date, the Group had two CGUs, being Funding Circle USA ("FCUSA") and its subsidiaries and Funding Circle Continental Europe ("FCCE")) and its subsidiaries to which goodwill is attached.

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
FCUSA	11.7	11.3	11.7
FCCE	30.6	30.2	30.6
Total	42.3	41.5	42.3

 

The impairment test involved comparing the carrying value of the net assets held for use to their recoverable amount. The recoverable amount represents the higher of the entity's fair value net of selling costs and its value in use. The impairment was assessed using value in use calculations.

The Group prepared a five-year management plan for its operations with the cashflows based on the following assumptions:

-     revenue growth at a compound growth rate of 42% and 35% for FCUSA and FCCE respectively;

-     pre-tax discount rates of 11.8% and 13.3% for FCUSA and FCCE respectively;

-     revenues beyond the five-year period extrapolated using an estimated growth rate of 2.0% for both CGUs.

The review did not identify any impairment to the goodwill due to adequate levels of headroom of the expected recoverable amount over the carrying amount. There are no CGUs for which management considers a reasonably possible change in a key assumption would give rise to an impairment. However, as the FCCE CGU is less established further sensitivity analysis was performed. If the forecast EBITDA was worse in each of the five years by over 30% the carrying value of the net assets would approximate the value in use.

 

10. Intangible assets

	Capitalised development costs	Computer software	Other intangibles	Total
	£m	£m	£m	£m
Net book value
At 30 June 2018 (unaudited)	17.5	0.2	0.2	17.9
At 31 December 2018	20.8	0.5	0.2	21.5
At 30 June 2019 (unaudited)	23.3	0.4	-	23.7

 

 

11. Property, plant and equipment

As disclosed in note 2, the Group has adopted IFRS 16, effective from 1 January 2019, using the fully retrospective approach and comparative information has therefore been restated. The Group has right-of-use assets which comprise of property leases held by the Group. Information about leases for which the Group is a lessee is presented below.

Analysis of property, plant and equipment between owned and leased assets

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Property, plant and equipment (owned)	6.5	5.0	5.3
Right-of-use assets	18.8	21.9	19.9
	25.3	26.9	25.2

 

Right-of-use assets

	Property	Total
	£m	£m
Opening balance at 1 January 2018 (restated)	22.7	22.7
Additions	1.3	1.3
Depreciation	(2.1)	(2.1)
Closing balance at 30 June 2018 (restated)	21.9	21.9
Additions	0.2	0.2
Depreciation	(2.2)	(2.2)
Closing balance at 31 December 2018 (restated)	19.9	19.9
Additions	1.7	1.7
Disposals	(0.4)	(0.4)
Depreciation	(2.4)	(2.4)
Closing balance at 30 June 2019	18.8	18.8

 

Lease liabilities - maturity analysis

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
No later than one year	5.6	3.9	5.0
Later than one year and no later than five years	16.5	17.7	16.6
Later than five years	1.9	5.1	3.5
Total	24.0	26.7	25.1

 

 

 

 

 

Lease liabilities

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Current	5.6	3.9	5.0
Non-current	18.4	22.8	20.1
Total	24.0	26.7	25.1

 

12. Interest in associates

During the six month period to June 2019, the Group set up and invested in a European Private Fund. The Group's interest in the fund as at 30 June 2019 was 24.4% and this is accounted for as an investment in an associate under IAS 28. The investment in associate is held at cost and the share of associate losses for the six month period to 30 June 2019 were £45,000.

13. Investments in loans

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Non-current
Investment in loans (other) - amortised cost	2.0	0.2	0.3
Current
Investment in loans (curing) - FVTPL	2.6	5.1	4.7
Investment in loans (bond products) - FVTPL	177.3	-	-
	181.9	5.3	5.0

 

14. Borrowings

During 2019, the Group entered into revolving credit facility agreements of up to £220 million and $180 million for the Group's UK and US ABS programmes respectively. As at 30 June 2019, the amounts drawn in the UK and US totalled £71.5 million and $95.8 million, interest is payable on the borrowings in the UK and the US at 1.50% plus 1 month LIBOR and 2.5% plus the 3 month commercial paper rate respectively.
 

 

15. Provisions

	Dilapidation	Loan repurchase	Other provisions	Total
	£m	£m	£m	£m
At 1 January 2018	0.4	2.5	0.8	3.7
Charge	0.3	1.4	1.0	2.7
Amount utilised	-	(1.0)	(0.6)	(1.6)
At 30 June 2018	0.7	2.9	1.2	4.8
Charge	0.1	1.2	-	1.3
Amount utilised	-	(1.0)	(0.5)	(1.5)
At 31 December 2018	0.8	3.1	0.7	4.6
Charge	0.1	4.2	-	4.3
Amount utilised	-	(4.4)	(0.1)	(4.5)
At 30 June 2019	0.9	2.9	0.6	4.4

 

Current and non-current

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Current provisions	3.5	4.1	3.8
Non-current provisions	0.9	0.7	0.8
Total	4.4	4.8	4.6

 

The dilapidation provision represents an estimated cost for dismantling the customisation of offices and restoring the leasehold premises to its original state at the end of the tenancy period. The provision is expected to be utilised by 2025.

Loan repurchase provision

In certain circumstances, in the less mature markets, Funding Circle has entered into arrangements with institutional investors to assume the credit risk on the loan investments made by the institutional investors. Under the terms of the agreements, the Group is required either to make payments when the underlying borrower fails to meet its obligation under the loan contract or buy the defaulted loan from the investors at its carrying value. In return for these commitments, the Group is entitled to the excess returns or additional income which is recorded as other revenue.

Under IFRS 9, the Group is required to provide for these loan repurchases under the expected credit loss ("ECL") model.

The provision related to each loan arranged is based on the ECLs associated with the probability of default of that loan in the next 12 months unless there has been a significant increase in credit risk of that loan since origination. The Group assumes there has been a significant increase in credit risk if outstanding amounts on the loan investment exceed 30 days, in line with the rebuttable presumption per IFRS 9.

The Group defines a default, classified within non-performing, as a loan investment with any outstanding amounts exceeding a 90-day due date. Under the financial guarantee contracts, this is the point at which there is an obligation for the Group to make a payment under the contract or buy back the loan. If the loan is bought back by the Group, at the point of buy back, the financial asset associated with the purchase meets the definition of purchased or originated credit impaired ("POCI"); this element of the reserve is therefore based on lifetime ECLs.

The Group bands each loan investment using an internal risk rating and assesses credit losses on a collective basis.

		Performing:	Underperforming:		Non-performing:		Total loan repurchase provision
		12-month ECL	Lifetime ECL		Lifetime ECL
		£m	£m		£m		£m
At 1 January 2018		1.6	0.3		0.6		2.5
Provision against new loans originated		1.8	0.3		-		2.1
Provision against loans transferred from performing		(0.1)	0.1		1.6		1.6
Amounts utilised		-	-		(2.0)		(2.0)
Loans repaid		(0.4)	-		-		(0.4)
Change in probability of default		(0.8)	0.1		-		(0.7)
At 31 December 2018		2.1	0.8		0.2		3.1
Provision against new loans originated		2.4	0.1		-		2.5
Provision against loans transferred from performing		-	(0.4)		1.4		1.0
Amounts utilised		(2.9)	-		(1.5)		(4.4)
Loans repaid		(0.1)	-		-		(0.1)
Change in probability of default		0.5	0.3		-		0.8
At 30 June 2019		2.0	0.8		0.1		2.9
As at 1 January 2018	Expected credit loss rate (%)			Basis for recognition of loan repurchase provision		Loan repurchase provision (£m)
Performing	4			12 month ECL		1.6
Underperforming	59			Lifetime ECL		0.3
Non-performing	100			Lifetime ECL		0.6
				Total		2.5
As at 31 December 2018
Performing	1			12 month ECL		2.1
Underperforming	67			Lifetime ECL		0.8
Non-performing	100			Lifetime ECL		0.2
				Total		3.1
As at 30 June 2019
Performing	2			12 month ECL		2.0
Underperforming	84			Lifetime ECL		0.8
Non-performing	100			Lifetime ECL		0.1
				Total		2.9

 

The percentages applied above are based on the Group's past experience as well as forward-looking information, namely: macroeconomic forecasts such as changes in interest rates, GDP and inflation; delinquencies; and loss trends.

The items that the model is most sensitive to are delinquencies and default rates.
 

16. Cash outflow from operations

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Loss before taxation	(30.8)	(27.1)	(50.9)
Adjustments for:
Depreciation of property, plant and equipment	3.5	3.1	6.4
Amortisation of intangible assets	3.6	3.0	6.1
Interest receivable	(1.0)	(0.3)	(0.9)
Interest payable	0.5	0.5	1.0
Non-cash employee benefits expense - share based payments and associated social security costs	4.4	4.7	8.1
IPO costs re-allocated to financing activities	-	-	5.9
Tax (charge)/credit	(0.2)	-	1.4
Fair value loss on investment in SME loans	0.3	-	-
Movement in provisions	(0.2)	1.0	0.2
Changes in working capital:
Movement in trade and other receivables	(4.4)	(6.4)	(8.1)
Movement in trade and other payables	6.2	6.1	6.1
Net cash outflow from operating activities	(18.1)	(15.4)	(24.7)

 

Reconciliation to free cash flow

Free cash flow has been redefined and represents net cash flows from operating and investing activities, as well as including the payment of lease liabilities and excluding the purchase of loans. The purchase of loans are mainly through the ABS warehouses which are primarily funded through bank borrowings. Pre IFRS 16 and new investor products, it was presented as the net cash flow from operating and investing activities.

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Net cash outflow from operating activities	(18.1)	(15.4)	(24.7)
Net cash outflow from investing activities	(188.3)	(7.4)	(13.5)
Add back:
Investment in loans	175.5	1.7	1.1
Investment in associate	5.6	-	-
Deduct:     Payment of lease liabilities	(2.8)	(1.4)	(3.8)
Free cash flow	(28.1)	(22.5)	(40.9)

 

 

17. Cash and cash equivalents

	30 June	30 June	31 December
	2019	2018	2018
		(restated)	(restated)
	£m	£m	£m
Cash and cash equivalents	270.0	65.2	333.0

 

The cash and cash equivalents balance is made up of cash, money market funds and bank deposits. The carrying amount of these assets is approximately equal to the fair value. Included within cash and cash equivalents above is restricted cash of £1.2 million (31 December 2018: £0.4 million). At 30 June 2019, cash equivalents relating to money market funds totalled £108.0 million (31 December 2018: £150.0 million).

 

18. Related party transactions

The basis of remuneration of key management personnel remains consistent with that disclosed in the 2018 Annual Report and Accounts. There were no other related party transactions which had a material impact on these interim financial statements.

 

 

19. Contingent liabilities

There are currently no contingent liabilities expected to have a material adverse financial impact on the Group's consolidated and condensed results or net assets.

 

20. Financial risk management

The Group's financial risks and risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at and for the year to 31 December 2018.

 

21. Events occurring after the reporting period

There have been no events subsequent to the balance sheet date that require disclosure.

 

 

22. Fair value measurement of financial instruments

Financial risks arising from financial instruments are analysed into credit risk, liquidity risk, market risk (including currency risk, interest rate risk and other price risk) and foreign exchange risk. These interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements. Details of how these risks are managed are discussed in the Funding Circle Holdings plc's financial statements for the year to 31 December 2018.

There has not been a significant change in the Group's financial risk management processes or policies since the year end.

The definitions, details of the inputs and the valuation techniques in determining the fair values of the Group financial instruments are shown in the Funding Circle Holdings plc financial statements for the year to 31 December 2018.

The Group's finance department performs the valuations of financial assets and liabilities required for financial reporting purposes, including Level 3 fair values. 

There have been no changes in the valuation techniques for any of the Group's financial instruments held at fair value in each of the periods presented. Investments in loans (curing) are all classified as Level 2 under IFRS as the loans are only retained on balance sheet for 2-3 days. Investments in loans (bond products) are classified as Level 3 and are valued on a discounted cash flow basis.

There were no transfers between Level 1, Level 2 and Level 3 fair value measurements (year to 31 December 2018 and period to 30 June 2018: none).

The fair value of the following financial assets and liabilities approximate their carrying amount:

·      Investments in loan securities

·      Investments in associates

·      Trade and other receivables

·      Cash and cash equivalents

·      Trade and other payables; and

·      Provisions

 

Categorisation of financial assets and financial liabilities

The table shows the carrying amounts of financial assets and financial liabilities by category of financial instrument:

	30 June 2019			30 June 2018			31 December 2018
	Assets at fair value through profit and loss	Amortised cost	Total	Assets at fair value through profit and loss	Amortised cost	Total	Assets at fair value through profit and loss	Amortised cost	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Investments in loans (other)	-	2.0	2.0	-	0.2	0.2	-	0.3	0.3
Investment in loans (curing)	2.6	-	2.6	5.1	-	5.1	4.7	-	4.7
Investment in loans (bond products)	177.3	-	177.3	-	-	-	-	-	-
Investment in associate	-	5.6	5.6	-	-	-	-	-	-
Trade and other receivables	-	27.8	27.8	-	19.5	19.5	-	23.0	23.0
Cash and cash equivalents	108.0	162.0	270.0	65.2	-	65.2	150.0	183.0	333.0
	287.9	197.4	485.3	70.3	19.7	90.0	154.7	206.3	361.0
Liabilities
Trade and other payables	-	(24.3)	(24.3)	-	(17.9)	(17.9)	-	(23.1)	(23.1)
Borrowings	-	(146.8)	(146.8)	-	-	-	-	-	-
Lease liabilities	-	(24.0)	(24.0)	-	(26.7)	(26.7)	-	(25.1)	(25.1)
Provisions	-	(4.4)	(4.4)	-	(4.8)	(4.8)	-	(4.6)	(4.6)
	-	(199.5)	(199.5)	-	(49.4)	(49.4)	-	(52.8)	(52.8)

 

Financial instruments measured at amortised cost

Financial instruments measured at amortised cost, rather than fair value, include cash and cash equivalents, trade and other receivables, investments in loan securities (excluding those held in the warehousing phase of the bond programme and those held under cure period), investment in associate and trade and other payables. Due to their short-term nature, the carrying value of each of the above financial instruments approximates their fair value.

 

 

Financial instruments measured at fair value

IFRS 13 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement.

Disclosure of fair value measurements by level is according to the following fair value measurement hierarchy:

The fair value hierarchy has the following levels:

•     level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

•     level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liabilities, either directly or indirectly; and

•     level 3 inputs are unobservable inputs for the asset or liability.

 

	Fair value measurement using
	30 June 2019			30 June 2018			31 December 2018
	Quoted prices in active markets (level 1)	Significant observable inputs (level 2)	Significant unobservable inputs (level 3)	Quoted prices in active markets (level 1)	Significant observable inputs (level 2)	Significant unobservable inputs (level 3)	Quoted prices in active markets (level 1)	Significant observable inputs (level 2)	Significant unobservable inputs (level 3)
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Financial assets
Investments in loans (curing)	-	2.6	-	-	5.1	-	-	4.7	-
Investment in loans (bond products)	-	-	177.3	-	-	-	-	-	-
Cash and cash equivalents	108.0	-	-	-	-	-	150.0	-	-
	108.0	2.6	177.3	-	5.1	-	150.0	4.7	-

 

Loan investments held under cure period were originated during the last week of the respective reporting periods. As a result fair value is assumed to be equal to the outstanding principal amount.

The fair value of loan investments (bond products) has been estimated by discounting future cash flows of the loans using discount rates that reflect the changes in market interest rates and observed market conditions at the reporting date. The estimated fair value and carrying amount of the loan investments (bond products) was £177.3 million at 30 June 2019 (2018: £nil).

 

 

The most relevant significant unobservable input relates to the discount rate applied to the fair value calculation, details of which are set out below.

Description	Fair value (£m)	Unobservable input	Inputs	Relationship of unobservable inputs to fair value
Investment in loans - Bond products	177.3	Risk-adjusted discount rate	c.6%	A change in the discount rate by 50 bps would increase/decrease fair value by £1.2 million

 

Fair value movements on loan investments (bond products) are recognised through the profit and loss account in Net Investment Income as part of Revenue.

A reconciliation of loan investments (bond products) is shown as follows:

Investment in loans (bond products) - FVTPL	£m
Balance as at 1 January 2019	-
Additions	175.8
Net loss on the change in fair value of financial asset at fair value through profit or loss during the year	(0.3)
Foreign exchange gain	1.8
Balance as at 30 June 2019	177.3

 

Financial risk factors

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers and cash and cash equivalents held at banks.

The Group's maximum exposure to credit risk by class of financial asset is as follows:-

	30 June	30 June	31 December
	2019	2018	2018
	£m	£m	£m
Non-current
Investment in loans	2.0	0.2	0.3
Current
Investment in loans	179.9	5.1	4.7
Trade and other receivables
- Trade receivables	3.2	2.7	1.2
- Other receivables	9.7	4.7	6.5
- Prepayments	6.9	5.9	6.0
- Accrued income	2.0	1.2	3.6
- Rent and other deposits	6.0	5.0	5.7
Cash and cash equivalent	270.0	65.2	333.0

 

Investments in loans in current assets include:

·      investment in loans (curing) which are loans held on average for 2 days before the physical transfer of monies from investors. The risk of financial loss is deemed minimal; and

·      investment in loans (bond products) which are loans held in the warehouse phase of the ABS programme prior to securitisation. These are exposed to credit risk in a similar manner to the SME loans that are held directly by third parties investing through Funding Circle's platform.

Trade receivables represent invoiced amount in respect of servicing fees due from institutional investors. The risk of financial loss is deemed minimal because the counterparties are well established financial institutions.

Ongoing credit evaluation is performed on the financial condition of other receivable and, where appropriate, a provision for impairment is recorded in the financial statements.

Other receivables includes amounts receivable in respect of credit impaired debts acquired by the Group. The carrying amount of these loans are stated net of impairment charges, represents the Group's maximum exposure to credit risk as no collateral or other credit enhancements are held.

The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's position.

The Group's liquidity position is monitored and reviewed on an ongoing basis by the Directors. As the investments in loan securities held within the ABS warehouses are planned to be securitised within a short time horizon these are classified as current assets.

Interest rate risk

a)    Interest rate risk sensitivity analysis - non trading interest (fixed rate)

Interest on loan note investments is fixed until the maturity of the investment. 

b)    Interest rate risk sensitivity analysis - non trading interest (floating rate)

Interest on cash and cash deposit balances are subject to movements in Libor. The Directors monitors interest rate risk and note that interest rates remain at historical low. The Directors believe that any reasonable increase in the Libor rate would not significantly impact the Group.

Interest on borrowings are subject to movements in Libor and the 3 month commercial paper rate. However, the Group has taken out interest rate caps to mitigate the risk of interest rate rises.

 

 

23. Principal risks and uncertainties

 

Set out below are the principal risks and uncertainties that the Group faces.

Principal risk	Impact
Strategic risk Strategic risk is defined as the failure to build a sustainable, diversified and profitable business that can successfully adapt to environment changes due to the inefficient use of Funding Circle available resources	Marketplace funding - Investor funding shortfall or failure to maintain a diversified investor base may impact Funding Circle's operations and ability to originate new loans. The ability to attract investors and secure sufficient funding from existing or new investors depends on, among other things, Funding Circle's ability to continue to provide attractive investor returns, compliance with the terms and conditions of funding agreements with investors, effective maintenance and scaling of financial, risk management and compliance controls and procedures.
	Economic environment - Financial risk that is associated with macroeconomic or political factors that may affect Funding Circle's financial and/or credit performance.
Credit risk Credit risk is the risk of suffering financial loss should any borrower fail to fulfil their contractual repayment obligations. The Group holds loans in ABS programmes and has invested in private funds and is exposed to credit risk for the period of the investment. Credit risk performance also affects the returns received by our investors and the attractiveness of Funding Circle SME loans as an investment. Hence, credit of loans is managed on behalf of both the Group and investors with the utmost care and attention to deliver credit performance in line with expectations.	Portfolio risk management - Errors in borrower acquisition, credit approval, scoring models and credit risk management processes may result in increasing defaults and loss rates not aligned to the Group's or investors' expectations.
Regulatory, reputation and conduct risk Regulatory, reputation and conduct risk is defined as engaging in activities that detract from Funding Circle's goal of being a trusted and reputable financial services company with products, services and processes designed for customer success and delivered in a way that will not cause customer detriment or regulatory censure.	Regulatory risk - That Funding Circle's ability to effectively manage its regulatory relationships is compromised or diminished, that the Group's governance and controls framework is not satisfactory given business growth or there is business interruption by reason of non-compliance with regulation or the introduction of business-impacting regulation.
	Reputation/brand risk - Operational or performance failures could lead to could lead to negative publicity that could adversely affect the Group's brand, business, results, operations, financial condition or prospects.
	Client detriment - Funding Circle's activities (or the failure to satisfactorily perform its activities) could impact the delivery of fair customer outcomes.

 

 

Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.	Information security - Failure to protect the confidential information of Funding Circle's borrowers, investors and IT systems may lead to financial loss, reputational damage and regulatory censure.
	Financial crime - Risk of regulatory breach, financial loss or reputational damage arising from a failure to adequately manage or prevent money laundering, terrorist financing, bribery and corruption, or to comply with sanctions regulations
	Technology risk - Failure of technology platform, could have a material adverse impact on Funding Circle's business, results of operations, financial condition or prospects
	Client money risk - Failure of Funding Circle to adequately protect and segregate client money may lead to financial loss, reputational damage and regulatory censure

 

 

 

Independent review report to Funding Circle Holdings plc

Report on the consolidated interim financial statements

Our conclusion

We have reviewed Funding Circle Holdings plc's consolidated interim financial statements (the 'interim financial statements') in the half-yearly report of Funding Circle Holdings plc for the 6 month period ended 30 June 2019. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

What we have reviewed

The interim financial statements comprise:

•       the condensed consolidated balance sheet as at 30 June 2019;

•       the condensed consolidated statement of comprehensive income;

•       the condensed consolidated statement of cash flows for the period then ended;

•       the consolidated statement of changes in equity for the period then ended; and

•       the notes to the interim financial statements

 

The interim financial statements included in the half-yearly report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The half-yearly report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the half-yearly report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom.

A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the half yearly report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

8 August 2019