Final Results and Q1 Trading Update

Company statement of changes in equity

for the year ended 31 December 2020

 

	Called up share capital £	Retained earnings £	Share premium £	Other reserves £	Total equity £
Balance as at 1 January 2019	258,228	8,537,181	4,039,800	20,973,761	33,808,970
Profit and total comprehensive income	-	3,323,903	-	-	3,323,903
Dividends	-	(2,220,757)	-	-	(2,220,757)
Deferred tax on share-based payments	-	-	-	81,322	81,322
Share-based payments charge	-	-	-	441,709	441,709
Total transactions with owners	-	(2,220,757)	-	523,031	(1,697,726)
Balance as at 31 December 2019	258,228	9,640,327	4,039,800	21,496,792	35,435,147
Profit and total comprehensive income	-	4,025,324	-	-	4,025,324
Dividends	-	(542,278)	-	-	(542,278)
Share-based payments charge	-	-	-	68,023	68,023
Total transactions with owners	-	(542,278)	-	68,023	(474,255)
Balance as at 31 December 2020	258,228	13,123,373	4,039,800	21,564,815	38,986,216

 

 

 

 

Consolidated statement of cash flows

for the year ended 31 December 2020

 

	Notes	2020 £	2019 £
Cash flows from operating activities
Cash generated from operations	A	6,377,977	5,705,243
Interest paid		-	(41,380)
Tax paid		(971,869)	(973,361)
Net cash from operating activities		5,406,108	4,690,502
Cash flows from investing activities
Purchase of subsidiary net of cash acquired		(81,250)	-
Purchase of intangible assets		-	(73,467)
Purchase of tangible assets		(17,259)	(7,960)
Assisted acquisitions support		(155,034)	(386,332)
Loan made	29	-	(200,000)
Loan repaid	29	200,000	-
Interest received		10,701	11,012
Net cash used in investing activities		(42,842)	(656,747)
Cash flows from financing activities
Repayment of bank loan		-	(1,600,000)
Equity dividends paid		(542,278)	(2,220,757)
Principal paid on lease liabilities		(58,239)	(56,533)
Interest paid on lease liabilities		(3,328)	(2,990)
Net cash used in financing activities		(603,845)	(3,880,280)
Increase in cash and cash equivalents		4,759,421	153,475
Cash and cash equivalents at beginning of year		4,011,463	3,857,988
Cash and cash equivalents at end of year		8,770,884	4,011,463

 

 

 

 

Notes to the consolidated statement of cash flows

for the year ended 31 December 2020

 

A. Reconciliation of profit before income tax to cash generated from operations

 

	2020 £	2019 £
Cash flows from operating activities
Profit before income tax	4,804,869	3,994,194
Depreciation of property, plant and equipment	28,284	33,989
Amortisation of intangibles	590,546	611,820
Amortisation of prepaid assisted acquisitions support	213,030	174,149
Amortisation of right-of-use assets	55,799	54,769
Share-based payments charge	68,023	441,709
Finance costs	3,328	38,310
Finance income	(10,701)	(11,012)
Operating cash flow before changes in working capital	5,753,178	5,337,928
Increase in trade and other receivables	(18,142)	(186,734)
Increase in trade and other payables	642,941	554,049
Cash generated from operations	6,377,977	5,705,243

 

 

 

 

 

Company statement of cash flows

for the year ended 31 December 2020

 

	Notes	2020 £	2019 £
Cash flows from operating activities
Cash generated from operations	C	(659,534)	(812,137)
Interest paid		-	(41,380)
Net cash used in operating activities		(659,534)	(853,517)
Cash flows from investing activities
Purchase of subsidiary net of cash acquired		(81,250)	-
Interest received		6	22
Loan made	29	-	(200,000)
Loan repaid	29	200,000
Equity dividends received		4,610,000	4,670,000
Net cash generated from investing activities		4,728,756	4,470,022
Cash flows from financing activities
Repayment of bank loan		-	(1,600,000)
Equity dividend paid		(542,278)	(2,220,757)
Net cash used in financing activities		(542,278)	(3,820,757)
Increase in cash and cash equivalents		3,526,944	(204,252)
Cash and cash equivalents at beginning of year		1,073,774	1,278,026
Cash and cash equivalents at end of year		4,600,718	1,073,774

 

 

 

 

Notes to the Company statement of cash flows

for the year ended 31 December 2020

 

C. Reconciliation of profit before income tax to cash generated from operations

 

	2020 £	2019 £
Cash flows from operating activities
Profit before income tax	3,898,029	3,390,952
Share-based payments charge	84,690	345,931
Finance costs	-	35,320
Finance income	(6)	(22)
Equity dividend received	(4,610,000)	(4,670,000)
Operating cash flow before changes in working capital	(627.287)	(897,819)
Increase in trade and other receivables	(162,520)	(25,241)
Increase in trade and other payables	130,273	110,923
Cash used in operations	(659,534)	(812,137)

 

 

 

 

Notes to the consolidated and Company financial statements

for the year ended 31 December 2020

 

1. General information

The principal activity of The Property Franchise Group PLC and its Subsidiaries is that of a UK residential property franchise business. The Group operates in the UK. The Company is a public limited company incorporated and domiciled in the UK and listed on AIM. The address of its head office and registered office is 2 St Stephen's Court, St Stephen's Road, Bournemouth, Dorset, UK.

 

2. Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") in conformity with the requirements of the Companies Act 2006 and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. The consolidated financial statements have been prepared under the historical cost convention.

 

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5.

 

The presentational currency of the financial statements is in British pounds and amounts are rounded to the nearest pound.

 

Going concern

The Group has produced detailed budgets, projections and cash flow forecasts which incorporate the recently acquired Hunters Property PLC business. These have been stress tested to understand the impacts of reductions in revenue and costs. The Directors have concluded after reviewing these budgets, projections and forecasts, making appropriate enquiries of the business and having considered uncertainties under the current economic environment as a result of the Covid-19 pandemic, that there is a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing the financial statements.

 

Changes in accounting policies

a) New standards, amendments and interpretations effective from 1 January 2020

The following new or amended standards are mandatory for the first time for the period beginning 1 January 2020 and have been adopted in the annual financial statements for the year ended 31 December 2020:

 

Standard	Key requirements
IAS 1     IAS 8	Presentation of Financial Statements (Amendment -Definition of Material)   Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Definition of Material)
IFRS 3	Business Combinations (Amendment - Definition of Business)
	Revised Conceptual Framework for Financial Reporting

 

b) New standards, amendments and interpretations not yet effective

We do not consider there to be any relevant new standards, amendments to standards or interpretations that have been issued, but are not effective for the financial year beginning on 1 January 2020, which would have a material impact on the financial statements.

 

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.    

 

3. Basis of consolidation

The Group financial statements include those of the Parent Company and its Subsidiaries, drawn up to 31 December 2020. Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

 

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquire and the equity interests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred.

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by Subsidiaries have been adjusted to conform to the Group's accounting policies.

 

4. Significant accounting policies

Revenue recognition

Performance obligations and the timing of revenue recognition

Revenue represents income, net of VAT, from the sale of franchise agreements, resale fees and Management Service Fees levied to franchisees monthly based on their turnover, and other income being the provision of ad hoc services and ongoing support to franchisees.

 

Traditional brands:

Fees from the sale of franchise agreements are not refundable. These fees are for the use of the brand along with initial training and support and promotion during the opening phase of the new office. As such the Group has some initial obligations that extend beyond the receipt of funds and signing of the franchise agreement so an element of the fee is deferred and released as the obligations are discharged, usually between 1 to 4 months after receipt of funds, which is the typical period of on-boarding for new franchisees.

 

Resale fees are recognised in the month that a contract for the resale of a franchise is signed. Upon signing of the contract all obligations have been completed.

 

Management Service Fees are recognised on a monthly basis and other income is recognised when the services and support is provided to the franchisee. There are no performance obligations associated with levying the Management Service Fees. For ad hoc services and support all performance obligations have been fulfilled at the time of revenue recognition.

 

EweMove:

Fees from the sale of franchise agreements for the EweMove brand are not refundable. Some new franchisees pay a higher fee to include the first 12 months' licence fee, in this scenario the licence fee element of the initial fee is deferred and released over the first 12 months of trading of the franchise where no monthly licence fees are payable. The franchise fee is for the use of the brand along with initial support and promotion during the opening phase of the new franchise. As such the Group has some initial obligations that extend beyond the receipt of funds and signing of the franchise agreement so an element of the fee is deferred and released as the obligations are discharged, usually between 1 to 4 months after receipt of funds, which is the typical period of on-boarding for new franchisees.

 

Management Service Fees consist of monthly licence fees and completion fees. Licence fees are recognised on a monthly basis, completion fees are recognised when sales or lettings transactions complete and other income is recognised when the services and support are provided to the franchisee. There are no additional performance obligations associated with levying the licence fee and completion fees beyond providing access to the systems, brand and marketing support. For ad hoc services and support all performance obligations have been fulfilled at the time of revenue recognition.

 

Financial services commissions:

Financial services commissions received by Auxilium Partnership Limited are recognised upon receipt, being a point in time when the Group has met its obligations in delivering a customer to the insurance partners. A provision is made for the best estimate of future clawbacks resulting from policies being subsequently cancelled, however this is not material to the financial statements. There is no vat applicable to financial services commissions.

                                                                         

Operating profit

Profit from operations is stated before finance income, finance costs and tax expense.

 

Business combinations

On the acquisition of a business, fair values are attributed to the identifiable assets and liabilities and contingent liabilities unless the fair value cannot be measured reliably in which case the value is subsumed into goodwill. Where the fair values of acquired contingent liabilities cannot be measured reliably, the assumed contingent liability is not recognised but is disclosed in the same manner as other contingent liabilities.

 

Goodwill is the difference between the fair value of the consideration and the fair value of identifiable assets acquired. Goodwill arising on acquisitions is capitalised and subject to an impairment review, both annually and when there is an indication that the carrying value may not be recoverable.

 

Intangible assets

Intangible assets with a finite life are carried at cost less amortisation and any impairment losses. Intangible assets represent items which meet the recognition criteria of IAS 38, in that it is probable that future economic benefits attributable to the assets will flow to the entity and the cost can be measured reliably.

 

In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group.

 

Amortisation charges are included in administrative expenses in the Statement of Comprehensive Income. Amortisation begins when the intangible asset is first available for use and is provided at rates calculated to write-off the cost of each intangible asset over its expected useful life, on a straight-line basis, as follows:

Brands - CJ Hole, Parkers, Ellis & Co	Indefinite life
Brands - EweMove	21 years
Customer lists	5 years
Master franchise agreements - Whitegates, CJ Hole, Parkers, Ellis & Co	25 years
Master franchise agreements - EweMove	15 years
Technology - Ewereka	5 years
Technology - Websites and CRM system	3 years

 

Acquired trade names are identified as separate intangible assets where they can be reliably measured by valuation of future cash flows. The trade names CJ Hole, Parkers and Ellis & Co are assessed as having indefinite lives due to their long trading histories.

 

Acquired customer lists are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. This valuation also assesses the life of the particular relationship. The life of the relationship is assessed annually.

 

Customer lists are being written off over a remaining life of 5 years.

 

Acquired master franchise agreements are identified as a separate intangible asset as they are separable and can be reliably measured by valuation of future cash flows. The life of the relationship is assessed annually. Master franchise agreements are being written off over a remaining life of 15-25 years as historical analyses shows that, on average, 4% - 10% of franchises will change ownership per annum.

 

The cost of the new brand websites launched in 2017 have been capitalised and are being amortised over 3 years from launch date, being the expected period over which the websites are expected to generate economic benefit.

 

The cost of the CRM system was capitalised in 2019 and is being amortised over 3 years from launch date, being the expected period over which the CRM system is expected to generate economic benefit.

 

Subsequent to initial recognition, intangible assets are stated at deemed cost less accumulated amortisation and impairment charges, with the exception of indefinite life intangibles.

 

Impairment of non-financial assets

In respect of goodwill and intangible assets that have an indefinite useful lives, management are required to assess whether the recoverable amount of each exceeds their respective carrying values at the end of each accounting period.

 

In respect of intangible assets with definite lives, management are required to assess whether the recoverable amount exceeds the carrying value where an indicator of impairment exists at the end of each accounting period.

 

The recoverable amount is the higher of fair value less costs to sell and value in use.

 

Impairment losses represent the amount by which the carrying value exceeds the recoverable amount; they are recognised in profit or loss. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. Where an indicator of impairment exists against a definite life asset and a subsequent valuation determines there to be impairment, the intangible asset to which it relates is impaired by the amount determined.

 

An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

 

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.

 

The master franchise agreement is assessed separately for impairment as an independent asset that generates cash inflows that are largely independent of those from other assets.

 

Investment in subsidiaries

Investments in subsidiaries are stated in the Parent Company's balance sheet at cost less any provisions for impairments.

 

Property, plant and equipment

Items of property, plant and equipment are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is charged so as to write-off the cost of assets over their estimated useful lives on the following bases:

Fixtures, fittings and office equipment	15% reducing balance
Computer equipment	over 3 years
Short leasehold improvements	over the lease term

 

Right-of-use assets

Right of use assets relate to operating leases that have been brought onto the balance sheet under IFRS 16. They are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

• lease payments made at or before commencement of the lease;

• initial direct costs incurred; and

• the amount of any provision recognised where the group is contractually required to dismantle, remove or restore the leased asset

 

Subsequent to initial measurement right-of-use assets are amortised on a straight-line basis over the remaining term of the lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term.

 

Lease liabilities

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the Group's incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.

 

On initial recognition, the carrying value of the lease liability also includes:

• amounts expected to be payable under any residual value guarantee;

• the exercise price of any purchase option granted in favour of the group if it is reasonable certain to assess that option;

• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.

 

Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made.

 

Prepaid assisted acquisitions support

Prepaid assisted acquisitions support represents amounts payable to franchisees in relation to their acquisition of qualifying managed property portfolios and amounts payable to brokers for assisting with the acquisition of those portfolios. The payments are recognised as an asset and amortised to the profit and loss account over 5 years. The amounts payable to franchisees are amortised as a reduction in revenue, whereas amounts payable to brokers are amortised through cost of sales.

 

Income taxes

Income tax currently payable is calculated using the tax rates in force or substantively enacted at the reporting date. Taxable profit differs from accounting profit either because some income and expenses are never taxable or deductible, or because the time pattern that they are taxable or deductible differs between tax law and their accounting treatment.

 

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except if it arises from transactions or events that are recognised in other comprehensive income or directly in equity.

 

Deferred tax

Deferred income taxes are calculated using the liability method on temporary differences, at the tax rate that is substantively enacted at the balance sheet date. Deferred tax is generally provided on the difference between the carrying amount of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets.

 

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement. For share-based payments the deferred tax credit is recognised in the income statement to the extent that it offsets the share-based charge, with any remaining element after offset being shown in the statement of changes in equity.

 

Cash and cash equivalents

Cash and cash equivalents are defined as cash balances in hand and in the bank (including short-term cash deposits).

 

Financial assets

The Group and Company only have financial assets comprising trade and other receivables and cash and cash equivalents in the Consolidated Statement of Financial Position.

 

These assets arise principally from the provision of goods and services to customers (eg. trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision. for impairment.

 

Impairment of financial assets

Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, 12 month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

 

Financial liabilities

Financial liabilities are comprised of trade and other payables, borrowings and other short-term monetary liabilities, which are recognised at amortised cost.

 

Trade payables, other payables and other short-term monetary liabilities, are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

 

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

 

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

 

Share-based payments

The Company issues equity-settled share-based payments to employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments are amortised through the Consolidated Statement of Comprehensive Income over the vesting period of the options, together with a corresponding increase in equity, based upon the Company's estimate of the shares that will eventually vest.

 

Fair value is measured using the Black-Scholes option pricing model taking into account the following inputs:

·  the exercise price of the option;

·  the life of the option;

·  the market price on the date of the grant of the option;

·  the expected volatility of the share price;

·  the dividends expected on the shares; and

·  the risk free interest rate for the life of the option.

 

The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

 

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market conditions and recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

 

5. Critical accounting estimates and judgements and key sources of estimation uncertainty

The Company makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that 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.

 

Impairment of intangible assets

The Group is required to test, where indicators of impairment exist or there are intangible assets with indefinite lives, whether intangible assets have suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Key assumptions for the value in use calculation are described in note 15.

 

Share-based payment charge ("SBPC")

The aggregate fair value expense of each grant is determined through using the Black-Scholes model detailed above and an estimate for the attainment of the non-market based performance conditions in FY20, FY21 and FY22. The estimate of earnings per share ("EPS"), the non-market based performance measure, in FY20 was based on actual financial performance, FY21 was based on budget and FY22 relies on a projection of earnings taking into account available market data and performance trends.

 

At this juncture 68% of the options based on FY21 performance are expected to vest and 65% of the options based on the FY22 performance are expected to vest.

 

6. Segmental reporting

 

Following the acquisition of a majority share in Auxilium Partnership Limited on 7 January 2020 the directors consider there now to be two operating segments, being Property Franchising and Other.

 

For the year ended 31 December 2020:

				Property Franchising			Other		Total
				£			£		£
Revenue					11,016,921		447,574		11,464,495
Segment profit before tax					4,766,843		38,026		4,804,869

 

For the year ended 31 December 2019:

				Property Franchising		Other		Total
				£		£		£
Revenue				11,350,327		-		11,350,327
Segment profit before tax				3,994,194		-		3,994,194

 

The Other segment related to Financial Services. There was no inter-segment revenue in any period.

 

 

7. Revenue

 

	2020 £	2019 £
Property Franchising segment:   Management Service Fees	9,364,702	9,661,737
Franchise sales	145,068	194,702
Other	1,507,151	1,493,888
	11,016,921	11,350,327
Other segment:
Financial Services commissions	447,574	-
	11,464,495	11,350,327

 

All revenue is earned in the UK and no customer represents greater than 10% of total revenue in either of the years reported.

 

Other revenue relates to ad hoc services and ongoing support to franchisees.

 

See note 20 for details of accrued income and note 24 for details of deferred income.

 

See note 18 for the value of prepaid assisted acquisitions support amortised as a deduction from Management Service Fees.

 

8. Administrative expenses

Administrative expenses relate to those expenses that are not directly attributable to any specific sales activity.

 

Administrative expenses for the year were as follows:

 

	2020 £	2019 £
Employee costs (see note 9)	3,737,457	3,097,124
Marketing and digital costs	334,459	571,931
Property costs	130,271	129,082
General administrative costs	817,943	1,355,551
Amortisation	646,345	666,589
	5,666,475	5,820,277

 

9. Employees and Directors

Average numbers of employees (including Directors), employed during the year:

 

	Group		Company
	2020	2019	2020	2019
Administration	41	39	-	-
Management	10	9	2	2
	51	48	2	2

 

Employee costs (including Directors) during the year amounted to:

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Wages and salaries	3,267,477	2,711,683	580,482	554,213
Social security costs	398,013	328,693	66,863	62,245
Pension costs	71,967	56,748	15,166	10,544
	3,737,457	3,097,124	662,511	627,002
Share-based payments charge	68,023	441,709	84,960	345,931

 

Key management personnel are defined as Directors and executives of the Group. Details of the remuneration of the key management personnel are shown below:

 

	2020 £	2019 £
Wages and salaries	1,953,378	1,497,467
Social security costs	251,191	193,729
Pension costs	42,625	30,513
	2,247,194	1,721,709
Share-based payments charge	71,954	402,498

 

Details of the Directors' emoluments are disclosed in the Directors' remuneration report on pages 42 to 44. The share-based payments charge for the current year has been charged to the Statement of Comprehensive Income, of this £85,451 (2019: £340,697) relates to Directors.

 

10. Operating profit

 

	2020 £	2019 £
The operating profit is stated after charging:
Depreciation	28,284	33,989
Amortisation - intangibles	590,546	611,820
Amortisation - prepaid assisted acquisitions support	213,030	174,149
Amortisation - leases	55,799	54,769
Share-based payments charge	68,023	441,709
Auditor's remuneration (see below)	58,000	50,000
Staff costs (note 9)	3,737,457	3,097,124
Audit services
- Audit of the Company and consolidated accounts	58,000	50,000
	58,000	50,000

 

11. Finance income and costs

 

	2020 £	2019 £
Finance income:
Bank interest	6,227	5,696
Other similar income	4,474	5,316
	10,701	11,012

 

	2020 £	2019 £
Finance costs:
Bank interest	-	35,320
Interest expense on lease liabilities	3,328	2,990
	3,328	38,310

 

12. Taxation        

 

	2020 £	2019 £
Current tax	1,035,649	943,765
Adjustments in respect of previous periods	3,141	(31,329)
Current tax total	1,038,790	912,436
Deferred tax credit on acquired business combinations	(12,759)	(75,557)
Deferred tax credit on share-based payments	(12,924)	(75,091)
Deferred tax total	(25,683)	(150,648)
Total tax charge in statement of comprehensive income	1,013,107	761,788

 

The tax assessed for the period is higher (2019: higher) than the standard rate of corporation tax in the UK. The difference is explained below.

 

	2020 £	2019 £
Profit on ordinary activities before tax	4,804,869	3,994,194
Profit on ordinary activities multiplied by the effective standard rate of corporation tax in the UK of 19%	912,925	758,897
Effects of:
Expenses not deductible for tax purposes	2,053	10,344
Depreciation in excess of capital allowances	12,420	23,876
Effect of change in deferred tax rate from 17% to 19%	82,568	-
Adjustments in respect of previous periods	3,141	(31,329)
Total tax charge in respect of continuing activities	1,013,107	761,788

 

 

13. Earnings per share

 

Earnings per share is calculated by dividing the profit for the financial year by the weighted average number of shares during the year.

 

 

 

	2020 £	2019 £
Profit for the financial year attributable to owners of the parent	3,782,568	3,232,406
Amortisation on acquired intangibles	498,441	498,441
Share-based payments charge	68,023	441,709
Adjusted profit for the financial year	4,349,032	4,172,556

 

Weighted average number of shares
Number used in basic earnings per share	25,822,750	25,822,750
Dilutive effect of share options on ordinary shares	519,817	870,179
Number used in diluted earnings per share	26,342,567	26,692,929
Basic earnings per share	14.6p	12.5p
Diluted earnings per share	14.4p	12.1p
Adjusted basic earnings per share	16.8p	16.2p
Adjusted diluted earnings per share	16.5p	15.6p

 

There were options over 2,379,800 ordinary shares outstanding at 31 December 2020; 300,000 had not yet vested and have performance conditions which will determine whether they vest or not in the future; 64,800 vested in a previous year and were exercisable at 31 December 2020, and it can be determined that 503,750 of the remaining 2,015,000 options (25%) will vest based on these financial statements. The average share price during the year ended 31 December 2020 was above exercise price of the options that had either vested or were due to vest based on these financial statements. For these reasons in 2020 there is a dilutive effect of share options on the earnings per share calculation.

 

In 2019 there were options over 2,209,800 ordinary shares outstanding at 31 December 2019; 2,145,000 had not yet vested and had performance conditions which would determine whether they vest or not in the future. The remaining option over 64,800 ordinary shares was exercisable at 31 December 2019 and the average share price during the year ended 31 December 2019 was above the exercise price. For these reasons in 2019 there is a dilutive effect of share options on the earnings per share calculation.

 

The charge relating to share-based payments that have a dilutive effect is immaterial and therefore the earnings used in the diluted earnings per ordinary share calculation are the earning per ordinary share calculation before dilution.

 

 

14. Dividends

 

	2020 £	2019 £
Final dividend for 2019
No dividend paid (2019: 6.0p per share paid 28 May 2019)	-	1,549,365
Interim dividend for 2020
2.1p per share paid 23 September 2020 (2019: 2.6p per share paid 1 October 2019)	542,278	671,392
Total dividend paid	542,278	2,220,757

 

A dividend of 6.6p per share was paid in lieu of a final dividend for 2020 on 23 February 2021, the total amount paid was £1,704,302.

 

15. Intangible assets

 

	Master Franchise Agreement £	Brands £	Technology £	Customer lists £	Goodwill £	Total £
Cost
Brought forward 1 January 2019	7,803,436	1,972,239	274,210	214,940	7,226,160	17,490,985
Additions	-	-	63,467	10,000	-	73,467
Carried forward 31 December 2019	7,803,436	1,972,239	337,677	224,940	7,226,160	17,564,452
Additions (note 29)	-	-	-	-	184,426	184,426
Carried forward 31 December 2020	7,803,436	1,972,239	337,677	224,940	7,410,586	17,748,878
Amortisation & Impairment
Brought forward at 1 January 2019	1,738,702	155,694	128,155	143,679	-	2,166,230
Charge for year	413,174	66,726	109,642	22,278	-	611,820
Carried forward 31 December 2019	2,151,876	222,420	237,797	165,957	-	2,778,050
Charge for year	413,174	66,726	75,810	34,836	-	590,546
Carried forward 31 December 2020	2,565,050	289,146	313,607	200,793	-	3,368,596
Net book value
At 31 December 2020	5,238,386	1,683,093	24,070	24,147	7,410,586	14,380,282
At 31 December 2019	5,651,560	1,749,819	99,880	58,983	7,226,160	14,786,402

 

The carrying amount of goodwill relates to 5 (2019: 4) cash generating units and reflects the difference between the fair value of consideration transferred and the fair value of assets and liabilities purchased.

 

Business combinations completed in October 2014

Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisitions of Xperience Franchising Limited ("XFL") and Whitegates Estate Agency Limited ("WEAL") is based on the cash flows derived from the actual revenues and operating margins for 2020 and projections through to 31 December 2022. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%.

 

The cash flows arising were discounted by the weighted average cost of capital which included a small companies' risk premium to allow for factors such as illiquidity in the shares. These discount rates were 13.5% for XFL and 15.0% for WEAL, the latter higher rate reflecting WEAL's smaller size and more volatile earnings. This resulted in a total value for each company of the identifiable intangible assets that exceeded the carrying values of the respective companies' goodwill.

 

The Directors do not consider goodwill to be impaired. The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use to fall below the carrying value and hence impair the goodwill.

 

The master franchise agreements are being amortised over 25 years. The period of amortisation remaining at 31 December 2020 was 18 years 10 months.

 

The brand names under which XFL trades of C J Hole, Parkers and Ellis & Co have been in existence for between 72 years and 170 years. Management see them as strong brands with significant future value and has deemed them to have indefinite useful lives as there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. As a consequence, management annually assess whether the carrying value of these brands have been impaired.

 

The Relief-from-Royalty-Method was used to value the brand names. Looking at independent research of royalty rates, management selected pre-tax royalty rates of between 3% and 5% for the above brand names.

 

The after tax royalty rates were then applied to the projected cash flows of each brand. The projected cash flows being the forecast growth in current revenues using market data through to 31 December 2022. Thereafter projected revenue growth was assumed to decline linearly to a long-term growth rate of 2.2%. The after tax cash flows determined through this process were then discounted at 13.5% to determine a value for each brand name. This discount rate approximated the Company's WACC as the risk profile of the brand names was seen as commensurate with that of the overall Company. The values derived exceeded their carrying values.

 

The Directors believe that no reasonably possible change in assumptions at the year end will cause the value in use of the brands names CJ Hole, Parkers and Ellis & Co to fall below their carrying values and hence impair their intangible values.

 

The Whitegates brand was valued in a similar manner and deemed to have an immaterial value when the acquisition was made principally due to its lack of profitability over preceding years. It is therefore not recognised separately.

 

Business combination completed in September 2016

Goodwill is assessed for impairment by comparing the carrying value to the value in use calculations. The value in use of the goodwill arising on the acquisition of EweMove Sales & Lettings Ltd ("ESL") is based on the cash flows derived from the actual revenues and operating margins for 2020 and projections through to 31 December 2025. Thereafter projected revenue growth was assumed to be 2.2% per annum.

 

A period of projected cash flows exceeding 5 years was deemed appropriate because the business has only been operating for 7 years, is continuing to recruit relatively high levels of new franchisees, each new franchisee should grow significantly in the first 5 years of operation and it has yet to develop the operational efficiencies of a mature franchisor.

 

The revenue growth rates used in the valuation range from 28% in FY21 to 4% in FY25.The growth rate in FY21 is high because revenue was lower in FY20 as a result of Covid-19.

 

The cash flows arising were discounted by the weighted average cost of capital being 15,35% which included a small companies' risk premium to allow for factors such as illiquidity in the shares. This resulted in the value in use exceeding the carrying value of the goodwill and separately identifiable intangible assets. The enterprise's overall value exceeds the cash generating unit's carrying value.

 

The useful life of the master franchise agreement was assessed as 15 years and remains unchanged. The period of amortisation remaining at 31 December 2020 was 10 years 8 months.

 

The remaining useful life of the brand name was also reviewed. It continues to attract and recruit the same level of franchisees as in previous years and to attract higher numbers of customers. Given these 2 factors the remaining useful life of the brand was considered to be unaltered at 21 years. The period of amortisation remaining at 31 December 2020 was 16 years and 8 months.

 

The carrying value of EweMove the identified cash generating unit, was £9.1m at 31 December 2020 whereas the recoverable amount was assessed to be £11.5m at the same date. Headroom of £2.4m therefore existed at the year end.

 

The following table reflects the level of movements required in revenue or costs which could result in a potential impairment per the value in use calculation of goodwill. A further percentage (fall)/increase, of the magnitude indicated in the table below, in any one of the key assumptions set out above would result in a removal of the headroom in the value in use calculation for goodwill in 2020. Thus, if the discount rate increased by 24% to 19%, an impairment change would result against goodwill, all other assumptions remaining unchanged.

 

Assumption	Judgement	Sensitivity
Discount rate	As indicated above the rate used is 15.35%	24%
Revenue - FY21 to FY25	The range of growth rates for FY21 to FY25 are stated above	(60%)
Direct costs - all years	Assumed to be 23% of revenue for all years	36%
Indirect costs - all years	Assumed to be 45% of revenue in FY21 and then decline linearly to 38% of revenue in FY24 onwards	23%
Direct and indirect costs - all years	As indicated above for direct and indirect costs	14%

 

Business combination completed in January 2020

Details of the Acquisition of Auxilium Partnership Limited can be found in note 29.

 

 

Goodwill and indefinite life intangible assets have been allocated for impairment testing purposes to the following cash generating units.

 

The carrying values are as follows:

 

	Goodwill		Brands
	2020 £	2019 £	2020 £	2019 £
Xperience Franchising Limited	912,716	912,716	571,000	571,000
Whitegates Estate Agency Limited	400,501	400,501	-	-
Martin & Co (UK) Limited	75,000	75,000	-	-
EweMove Sales & Lettings Ltd	5,837,943	5,837,943	-	-
Auxilium Partnership Limited	184,426	-	-	-
	7,410,586	7,226,160	571,000	571,000

 

Website costs included in technology

In 2017 new websites were launched for each of the 5 traditional brands. The costs associated with these websites have been capitalised as intangible assets as the purpose of the websites is to generate leads and revenue for the network.

 

Company

No goodwill or customer lists exist in the Parent Company.

 

16. Property, plant and equipment

Group

	Short leasehold improvements £	Office equipment £	Fixtures & fittings £	Total £
Cost
Brought forward 1 January 2019	37,034	130,340	161,107	328,481
Additions	-	7,380	580	7,960
Carried forward 31 December 2019	37,034	137,720	161,687	336,441
Acquisitions	-	1,613	1,082	2,695
Additions	-	14,564	-	14,564
Carried forward 31 December 2020	37,034	153,897	162,769	353,700
Depreciation
Brought forward 1 January 2019	25,575	71,383	127,939	224,897
Charge for year	3,703	20,688	9,598	33,989
Carried forward 31 December 2019	29,278	92,071	137,537	258,886
Charge for year	3,702	19,774	4,808	28,284
Carried forward 31 December 2020	32,980	111,845	142,345	287,170
Net book value
At 31 December 2020	4,054	42,052	20,424	66,530
At 31 December 2019	7,756	45,649	24,150	77,555

 

 

17. Leases

 

The Group's has operating leases for its office premises in Bournemouth and Cleckheaton. Under IFRS16, which was adopted on 1 January 2019 these operating leases are accounted for by recognising a right-of-use asset and a lease liability,

                               

 

Right-of-use assets

 

		Land and Buildings £	Total £
At 1 January 2019		74,523	74,523
Additions		54,826	54,826
Amortisation		(54,769)	(54,769)
Carried forward 31 December 2019		74,580	74,580
Additions		67,021	67,021
Amortisation		(55,799)	(55,799)
Carried forward 31 December 2020		85,802	85,802

 

 

Lease liabilities

 

		Land and Buildings £	Total £
At 1 January 2019		79,456	79,456
Additions		54,133	54,133
Interest expenses		2,990	2,990
Lease payments		(58,830)	(58,830)
Carried forward 31 December 2019		77,749	77,749
Additions		67,021	67,021
Interest expenses		3,328	3,328
Lease payments		(61,567)	(61,567)
Carried forward 31 December 2020		86,531	86,531

 

 

Maturity analysis of lease liabilities as at 31 December 2020:

 

	Up to 3 months	Between 3 and 12 months	Between 1 and 2 years	Between 2 and 5 years
	£	£	£	£
Lease liabilities	10,271	30,814	29,556	15,890

 

 

18. Prepaid assisted acquisitions support

Group

				Total £
Cost
Brought forward 1 January 2019				575,877
Additions				386,332
Disposals				(8,071)
Carried forward 31 December 2019				954,138
Additions				155,034
Carried forward 31 December 2020				1,109,172
Amortisation
Brought forward 1 January 2019				122,041
Charge for year - to revenue				119,457
Charge for year - to cost of sales				54,692
Carried forward 31 December 2019				296,190
Charge for year - to revenue				168,510
Charge for year - to cost of sales				44,520
Carried forward 31 December 2020				509,220
Net book value
At 31 December 2020				599,952
At 31 December 2019				657,948

 

Cashback and broker's commission is presented as prepaid assisted acquisitions support

The additions represent sums provided to franchisees that have made qualifying acquisitions to grow their lettings' portfolios. The cashback sum provided is based on a calculation of the estimated increase in MSF as a result of the acquisition and the sum provided for broker's commission is based on the charge payable to the broker. In providing these sums the Group ensures that franchisees are contractually bound to the relevant franchisor for a period in excess of that required for the economic benefits to exceed the sums provided.

 

Company

No prepaid assisted acquisitions support exists in the Parent Company.

 

19. Investments

Company

 

	Shares in Group undertakings £
Cost
At 1 January 2019	33,803,886
Capital contribution to subsidiaries - share options	95,778
At 31 December 2019	33,899,664
Acquisition of Auxilium Partnership Limited	200,000
Capital contribution to subsidiaries - share options	(16,667)
At 31 December 2020	34,082,997
Net book value
At 31 December 2020	34,082,997
At 31 December 2019	33,899,664

 

The Property Franchise Group PLC was incorporated on 7 October 2013. On the 10 December 2013 a share for share exchange acquisition took place with Martin & Co (UK) Limited; 17,990,000 ordinary shares in The Property Franchise Group PLC were exchanged for 100% of the issued share capital in Martin & Co (UK) Limited.

 

On 31 October 2014 the Company acquired the entire issued share capital of Xperience Franchising Limited and Whitegates Estate Agency Limited for a consideration of £6,110,284.

 

On 5 September 2016 the Company acquired the entire issued share capital of EweMove Sales & Lettings Ltd, and its dormant subsidiary Ewesheep Ltd, for an initial consideration of £8m. Of the total consideration, £2.1m represented contingent consideration, of which £0.5m was paid out on 30 July 2017 and £0.5m was paid out on 31 December 2017. No further sums are due.

 

On 7 January 2020 the Company acquired the entire issued share capital of Auxilium Partnership Limited for a total cash consideration of £0.2m.

 

Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited, EweMove Sales & Lettings Ltd and Ewesheep Ltd are exempt from the requirements of the Companies Act 2006 relating to the audit of accounts under section 479A of the Companies Act 2006.

 

At the year-end The Property Franchise Group PLC has guaranteed all liabilities of Martin & Co (UK) Limited, Xperience Franchising Limited, Whitegates Estate Agency Limited and EweMove Sales & Lettings Ltd. The value of the contingent liability resulting from this guarantee is unknown at the year-end.

 

The carrying value of the investment in EweMove has been considered for impairment through value in use calculations and it was determined that no impairment was required in the year ended 31 December 2020.

 

The carrying values of the other investments (all companies except for EweMove) have been considered for impairment and it has been determined that the value of the discounted future cash inflows exceeds the carrying value. Thus, there is no impairment charge.

 

The Company's investments at the balance sheet date in the share capital of companies include the following, which all have their registered offices at the same address as the Company:

 

Subsidiaries

 

	Share class	% ownership and voting rights	Country of incorporation
Martin & Co (UK) Limited	Ordinary	100	England
Xperience Franchising Limited	Ordinary	100	England
Whitegates Estate Agency Limited	Ordinary	100	England
EweMove Sales & Lettings Ltd	Ordinary	100	England
Ewesheep Ltd*	Ordinary	100	England
MartinCo Limited	Ordinary	100	England
Aux Group Limited	Ordinary	85	England
Auxilium Partnership Limited*	Ordinary	72	England

 

*    indirectly owned

 

20. Trade and other receivables

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Trade receivables	212,262	233,601	3,192	2,172
Less: provision for impairment of trade receivables	(155,668)	(153,814)	-	-
Trade receivables - net of impairment provisions	56,594	79,787	3,192	2,172
Loans to franchisees	49,058	78,411	-	-
Other receivables	5,287	202,607	137	200,137
Amounts due from Group undertakings	-	-	45,413	-
Prepayments and accrued income	1,181,610	1,122,204	34,979	29,609
Tax receivable	-	-	137,404	189,985
	1,292,549	1,483,009	221,125	421,903

 

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Group's historical credit losses experienced over the previous year. Forward looking factors are considered to the extent that they are deemed material.

 

The Group is entitled to the revenue by virtue of the terms in the franchise agreements and can force the sale of a franchise to recover a debt if necessary.

 

Ageing of trade receivables

The following is an analysis of trade receivables that are past due date but not impaired. These relate to a number of customers for whom there is no recent history of defaults. The ageing analysis of these trade receivables is as follows:

 

	2020 £	2019 £
Group
Not more than 3 months	31.834	33,634
More than 3 months but not more than 6 months	-	-
More than 6 months but not more than 1 year	-	-
	31,834	33,634

 

The Directors consider that the carrying value of trade and other receivables represents their fair value.

 

The Group does not hold any collateral as security for its trade and other receivables.

 

Included within "Prepayments and accrued income" is accrued income of £841k (2019: £704k) in relation to Management Service Fees for some of our brands that are invoiced at the beginning of the month following the month to which they relate and EweMove license fees.

 

21. Called up share capital

 

	2020		2019
	Number	£	Number	£
Group
Authorised, allotted issued and fully paid ordinary shares of 1p each	25,822,750	258,228	25,822,750	258,228
Company
Authorised, allotted issued and fully paid ordinary shares of 1p each	25,822,750	258,228	25,822,750	258,228

 

 

22. Share premium

 

	Number of shares	Share capital £	Share premium £
At 31 December 2019 and 31 December 2020	25,822,750	258,228	4,039,800

 

 

23. Other reserves

 

	Merger reserve £	Share-based payment reserve £	Other reserve   £	Total £
Group
1 January 2019	2,796,984	186,877	-	2,983,861
Share-based payment charge	-	441,709	-	441,709
Deferred tax on share-based payments	-	-	81,322	81,322
1 January 2020	2,796,984	628,586	81,322	3,506,892
Share-based payment charge	-	68,023	-	68,023
Deferred tax on share-based payments	-	-	-	-
31 December 2020	2,796,984	696,609	81,322	3,574,915
Company
1 January 2019	20,786,884	186,877	-	20,973,761
Share-based payment charge	-	441,709	-	441,709
Deferred tax on share-based payments	-	-	81,322	81,322
1 January 2020	20,786,884	628,586	81,322	21,496,792
Share-based payment charge	-	68,023	-	68,023
Deferred tax on share-based payments	-	-	-	-
31 December 2020	20,786,884	696,609	81,322	21,564,815

 

Merger reserve

Acquisition of Martin & Co (UK) Limited

The acquisition of Martin & Co (UK) Limited by The Property Franchise Group PLC did not meet the definition of a business combination and therefore, falls outside of the scope of IFRS 3. This transaction was in 2013 and accounted for in accordance with the principles of merger accounting.

 

The consideration paid to the shareholders of the subsidiary was £17,990,000 (the value of the investment). As these shares had a nominal value of £179,900, the merger reserve in the Company is £17,810,000.

 

On consolidation the investment value of £17,990,000 is eliminated so that the nominal value of the shares remaining is £179,900 and, as there is a difference between the Company value of the investment and the nominal value of the shares purchased in the subsidiary of £100, this is also eliminated, to generate a merger reserve in the Group of £179,800.

 

Acquisition of EweMove Sales & Lettings Ltd

The consideration for the acquisition of EweMove Sales & Lettings Ltd included the issue of 2,321,550 shares to the vendors at market price. A merger reserve of £2,796,984 is recognised in the Group and the Company being the difference between the value of the consideration and the nominal value of the shares issued as consideration.

 

Share-based payment reserve

The share-based payments reserve comprises charges made to the income statement in respect of share-based payments and related deferred tax impacts under the Group's equity compensation scheme.

 

 

24. Trade and other payables

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Trade payables	176,389	741,576	36,870	38,659
Other taxes and social security	1,274,002	575,600	-	-
Other payables	248,229	118,546	-	-
Accruals and deferred income	1,051,728	564,453	109,971	22,839
	2,750,348	2,000,175	146,841	175,487

 

The Directors consider that the carrying value of trade and other payables approximates their fair value.

 

Included in "Accruals and deferred income" is deferred income of £nil (2019: £7k) in relation to charges levied on franchisees in advance and EweMove licence fees.

 

25. Deferred tax

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Balance at beginning of year	(1,140,227)	(1,372,196)	215,293	30,101
Movement during the year:
Statement of changes in equity	-	81,322	-	81,322
Statement of comprehensive income	25,683	150,647	12,924	75,091
Other	-	-	-	28,779
Balance at end of year	(1,114,544)	(1,140,227)	228,217	215,293

 

Deferred taxation has been provided as follows:

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Accelerated capital allowances	6,951	(18,956)	28,779	28,779
Share-based payments	199,438	186,514	199,438	186,514
Acquired business combinations	(1,320,933)	(1,307,785)	-	-
	(1,114,544)	(1,140,227)	228,217	215,293

 

 

26. Financial instruments

Financial instruments - risk management

The Group is exposed through its operations to the following financial risks:

·  Credit risk

·  Liquidity risk

·  Interest rate risk

 

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

 

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.

 

Principal financial instruments

The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:

·  Receivables

·  Loans to franchisees

·  Cash at bank

·  Trade and other payables

·  Borrowings

 

Financial assets

Financial assets measured at amortised cost:

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Loans and receivables:
Trade receivables	56,594	79,787	3,192	2,172
Loans to franchisees	49,058	78,411	-	-
Other receivables	5,287	202,607	137	200,137
Cash and cash equivalents	8,770,884	4,011,463	4,600,718	1,073,774
Accrued income	840,619	703,774	-	-
Amount owed by Group undertakings	-	-	45,413	-
	9,722,442	5,076,042	4,649,460	1,276,083

 

Financial liabilities

Financial liabilities measured at amortised cost:

 

	Group		Company
	2020 £	2019 £	2020 £	2019 £
Other financial liabilities:
Trade payables	176,389	741,576	36,870	38,659
Other payables	248,229	118,546	-	-
Accruals	1,051,984	557,951	109,971	22,839
Amounts owed to Group undertakings	-	-	-	113,989
	1,476,602	1,418,073	146,841	175,487

 

 

All of the financial assets and liabilities above are recorded in the statement of financial position at amortised cost.

 

General objectives, policies and processes

The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the finance function. The Board receives monthly reports from the finance function through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.

 

The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:

                                                                                                                                                                                            

Capital management policy

The Board considers capital to be the carrying amount of equity and debt. Its capital objective is to maintain a strong and efficient capital base to support the Group's strategic objectives, provide progressive returns for shareholders and safeguard the Group's status as a going concern. The principal financial risks faced by the Group are liquidity risk and interest rate risk. The Directors review and agree policies for managing each of these risks. These policies remain unchanged from previous years.

 

The Board monitors a broad range of financial metrics including growth in MSF, operating margin, EBITDA, return on capital employed, and balance sheet gearing.

 

It manages the capital structure and makes changes in light of changes in economic conditions. In order to maintain or adjust the capital structure, it may adjust the amount of dividends paid to shareholders.

 

Credit risk

Credit risk is the risk of financial loss to the Group if a franchisee or counterparty to a financial instrument fails to meet its contractual obligations. It is Group policy to assess the credit risk of new franchisees before entering contracts and to obtain credit information during the franchise agreement to highlight potential credit risks.

 

The highest risk exposure is in relation to loans to franchises and their ability to service their debt. The Directors have established a credit policy under which franchisees are analysed for creditworthiness before a loan is offered. The Group's review includes external ratings, when available, and in some cases bank references. The Group does not consider that it currently has significant concentration of credit risk with loans extended to franchisees of £49k.

 

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

 

In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future development, the Group monitors forecast cash inflows and outflows on a monthly basis.

 

Interest rate risk

The Group's exposure to changes in interest rate risk relates solely to interest earning financial assets as the Group has repaid all it's borrowings in the year.

 

Fair values of financial instruments

The fair value of financial assets and liabilities is considered the same as the carrying values.

 

27. Share-based payments

Enterprise Management Incentive ("EMI") Share Option Scheme 2017 and ("EMI") Share Option Scheme 2018

During the year ended 31 December 2017 the Company implemented an Enterprise Management Incentive scheme as part of the remuneration for all staff and granted options over 2,290,000 ordinary shares at an exercise price of £0.01 each.

 

The options over 2,290,000 ordinary shares were granted to different classes of employees at different times as follows:

 

1.  Executive Directors were granted options over 1,500,000 ordinary shares on 9 June 2017

2.  Staff were granted options over 185,000 ordinary shares on 20 July 2017

3.  Leadership team recruits in FY17 were granted options over 605,000 ordinary shares on 14 September 2017

 

During the year ended 31 December 2017 an option was forfeited over 150,000 shares following the departure of an employee. At 31 December 2017 options over 2,140,000 ordinary shares existed.

 

During the year ended 31 December 2018 options over 175,000 shares were forfeited following the departure of employees. At 31 December 2018 options over 1,965,000 ordinary shares existed.

 

These options have a vesting condition based on EPS targets for the year ended 31 December 2019. The share-based payment charge recognised in the year ended 31 December 2017 in respect of these options was reversed in the year ended 31 December 2018 because none of these options were expected to vest because performance of the parallel options (see below) was expected to be better.

 

On 1 August 2018 employees with options in the EMI Share Option Scheme 2017 were granted options in a parallel scheme, over the same number of shares, and with the same EPS target, but these are exercisable 1 year later, after the approval of the financial statements for the year ending 2020. Participants will only be able to exercise one of their options. The total number of parallel options granted was 1,965,000.

 

On 1 August 2018 new employees who did not have options in the EMI Share Option Scheme 2017 were granted options over 155,000 shares at an exercise price of £0.01 each.

 

During the year ended 31 December 2020 options over 30,000 shares were forfeited (2019: 170,000) and no options were granted (2019: 95,000).

 

At 31 December 2020 options over 2,015,000 (2019: 2,045,000) ordinary shares existed.

 

These options have a vesting condition based on an EPS target for the year ended 31 December 2020.

 

The weighted average contractual life remaining of these options is 4 months.

 

Management has used the actual performance for FY20 to determine that 25% options will vest based the achievement of the EPS condition.It is expected that with an exercise price of £0.01 all holders will exercise as soon as the options vest. The Group announced its results on 27 April 2021.

 

The estimated fair value of the options over 2,015,000 ordinary shares at 31 December 2020 was £308,792. This fair value, moderated for the extent to which the options are expected to vest, is spread as a charge between grant and the assumed vesting date. Accordingly, a share-based payments charge of £6,038 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2020, which is the cumulative share-based payments charge at 31 December 2020 of £611,410 less the cumulative share-based payments charge recognised at 31 December 2019 of £605,372.

 

Enterprise Management Incentive ("EMI") Share Option Scheme 2019

On 6 August 2019 a new EMI Share Option Scheme 2019 was introduced and an option over 100,000 ordinary shares at an exercise price of £0.01 each was granted to a director under this scheme. 

 

This option has a vesting condition based on an EPS target for the year ended 31 December 2021.

 

The weighted average contractual life remaining of this option is 1 year and 4 months.

 

It is expected that with an exercise price of £0.01, should the EPS condition be met, the holder will exercise as soon as the option vests. The Group announces its results usually within the first 10 days of April. So, it has been assumed that the options will be exercised on 30 April 2022.

 

Management has used the budget for FY21, the market outlook and projections for FY22 to determine, at 31 December 2020, the achievement of the EPS condition.

 

The estimated fair value of the option over 100,000 ordinary shares at 31 December 2020 was £102,296. This fair value, moderated for the extent to which the option is expected to vest, is spread as a charge between grant and the assumed vesting date. Accordingly, a share-based payments charge of £29,369 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2020 being the difference between the cumulative share based payments charge at 31 December 2020 of £52,583 and the cumulative charge recognised at 31 December 2019 of £23,214.

 

Enterprise Management Incentive ("EMI") Share Option Scheme 2020

On 23 July 2020 a new EMI Share Option Scheme 2020 was introduced and an option over 100,000 ordinary shares each at an exercise price of £0.01 each was granted to two directors under this scheme. 

 

This option has a vesting condition based on two performance conditions; basic earnings per share adjusted for exceptional income/costs and share based payments ("adjusted EPS") and total shareholder return over the 3 years to 31 December 2022. Each performance condition will apply to 50% of the award being made. In respect of both performance conditions, growth of 15% over the three year period will be required for threshold vesting of the awards, with growth of 35% or higher required for all of the awards to vest.  The shares will be awarded on a sliding scale for growth between 15% and 35%. None of the awards will vest for adjusted EPS growth below 15% over the period.

 

The following principal assumptions were used in the valuation of the grant made in the year ended 31 December 2020 using the Black-Scholes option pricing model:

 

Assumptions
Date of vesting							30/04/2023
Share price at grant							£1.80
Exercise price							£0.01
Risk free rate							0.1%
Dividend yield							4.90%
Expected life							2.77 years
Share price volatility							31.00%

 

The weighted average contractual life remaining of this option is 2 year and 4 months.

 

Expected volatility is a measure of the amount by which a share price is expected to fluctuate during a period. The assumptions used in valuing each grant are based on the daily historical volatility of the share price over a period commensurate with the expected term assumption.

 

The risk free rate of return is the implied yield at the date of grant for a zero coupon UK government bond with a remaining term equal to the expected term of the options.

 

It's expected that with an exercise price of £0.01, should the EPS condition be met, the holder will exercise as soon as the option vests. The Group announces its results usually within the first 10 days of April. So, it has been assumed that the options will be exercised on 30 April 2023.

 

EPS is measured as the basic earnings per share excluding any exceptional income/costs and any share-based payments charges. Further details can be found in the Directors' remuneration report on pages 42 to 44.

 

Management has used the budget for FY21, the market outlook and projections for FY22 to determine, at 31 December 2020, the achievement of the EPS condition.

 

The estimated fair value of the option over 200,000 ordinary shares at 31 December 2020 was £137,016. This fair value, moderated for the extent to which the option is expected to vest, is spread as a charge between grant and the assumed vesting date. Accordingly, a share-based payments charge of £32,616 has been recognised in the Statement of Comprehensive Income in the year ended 31 December 2020.

 

 

Enterprise Management Incentive ("EMI") Share Option Scheme 2013

At 31 December 2019 all the conditions for the scheme had been fulfilled.

 

The maximum term of the vested but unexercised option granted is 10 years from the grant date. The option allows the holder to purchase 64,800 ordinary shares at an exercise price stated of £1.385.

 

 

Movement in the number of ordinary shares under options for all schemes was as follows:

 

	2020 £		2019 £
		Weighted average exercise price		Weighted average exercise price
Number of share options
Outstanding at the beginning of the year	2,209,800	£0.0503	2,184,800	£0.0508
Forfeited	(30,000)	£0.01	(170,000)	£0.01
Granted	200,000	£0.01	195,000	£0.01
Outstanding at the end of the year	2,379,800	£0.0474	2,209,800	£0.0503

 

The outstanding options at 31 December 2020 comprised 2,315,000 options with an exercise price of £0.01 and 64,800 options with an exercise price of £1.385. The 64,800 options were exercisable at 31 December 2020, 2,015,000 are exercisable on the announcement of these financial statements for the year ended 31 December 2020 and the remaining 300,000 options were not yet exercisable.

 

The outstanding options at 31 December 2019 comprised 2,145,000 options with an exercise price of £0.01 and 64,800 options with an exercise price of £1.385. The 64,800 options were exercisable at 31 December 2019 and the remaining options were not yet exercisable.

 

The weighted average remaining contractual life of options is 0.39 years (2019: 1.5 years).

 

28. Related party disclosures

Transactions with Directors

Dividends

During the year the total interim and final dividends paid to the Directors and their spouses were as follows:

 

	2020 £	2019 £
Interim and final dividend (ordinary shares of £0.01 each)
Richard Martin	168,839	842,536
Ian Wilson (retired 30 April 2020)	-	127,221
Paul Latham	1,050	4,300
David Raggett	4,755	19,556
	174,644	993,613

 

Directors' emoluments

Included within the remuneration of key management and personnel detailed in note 9, the following amounts were paid to the Directors:

 

	2020 £	2019 £
Wages and salaries	1,040,413	729,624
Social security costs	132,923	92,363
Pension contribution	19,230	20,000
	1,192,566	841,987

 

Details of Directors' interests in share options are disclosed in the Directors' remuneration report on pages 42 to 44.

 

29. Acquisitions

 

The Board are pursuing a strategy to develop financial services as a revenue stream to complement lettings and sales MSF. In 2019 the opportunity arose to buy a majority share in a Auxilium Partnership Limited, a life assurance buyers club, headed up by Mark Graves, who has a wealth of knowledge and contacts in the financial services industry. The intention was for Mark to help develop a financial services franchise.

 

On 7 January 2020 the Group took an 85% share in Aux Group Limited, a newly incorporated holding company, which on the same date bought a 85% of the share capital of Auxilium Partnership Limited. The minority shareholder of each of these companies is Mark Graves.

 

The consideration was £200,000.

 

The fair value of the identifiable assets and liabilities acquired and the consideration paid and payable are set out below:

	£
Office and computer equipment	2,695
Trade and other receivables	8,600
Cash	118,750
Trade and other payables	(114,471)
Net assets acquired	15,574
Goodwill	184,426
Consideration	200,000
Satisfied by:
Repayment of loan made to Mark Graves in 2019	200,000
Total	200,000

 

 

Post acquisition results

			Total
			£
Revenue			447,574
Profit before tax since acquisition included in the Consolidated statement of comprehensive income			38,026

 

 

30. Events after the reporting date

 

Effective 19 March 2021 the Group acquired the entire issued share capital of Hunters Property PLC, a competitor property franchisor with a network of 200 offices across the UK. Consideration of £26.1m was paid which comprised of each Hunters shareholder receiving 0.1655 New shares in The Property Franchise Group PLC and 43.2 pence in cash. It is likely that the majority of consideration will be attributed to intangible fixed assets including master franchise agreements, brands, technology and goodwill.

 

Due to the proximity of the acquisition to the date the financial statements were authorised for issue by the Board, it has not been possible to provide all of the information required for disclosure in accordance with IFRS 3 'Business Combinations'. The main areas of non-disclosure include a qualitative description of the factors which make up goodwill and a fair value of the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed. Further disclosure of the items required under IFRS 3 will be included in the June 2021 half year report.

 

On 25 March 2021 the Board decided to sell Auxilium Partnership Limited back to Mark Graves (a director and minority shareholder of this company). The business was bought in January 2020, just before the arrival of the new CEO, and the Group has now decided to pursue a different approach to its financial services strategy.