Franchise Brands plc Annual Report and Accounts 2018 55 Financial Statements Governance Strategic Report 1 Accounting policies General information Franchise Brands plc (the “Company”, and together with its subsidiaries, the “Group”), is a public company incorporated in England and Wales under the Companies Act 2006 with Company Number 10281033. The principal activity of the Group is franchising and related activities. The principal activity of the Company is that of a holding company of a group of companies engaged in franchising and related activities. Basis of consolidation The consolidated financial statements incorporate the results and net assets of the Company and its subsidiary undertakings. Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date control ceases. All inter-company transactions and balances between Group entities are eliminated upon consolidation. Basis of preparation The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS") and interpretations as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31 December 2018 and applied in accordance with the Companies Act 2006. The Group’s consolidated financial statements are prepared under the historical cost convention. The principal accounting policies adopted are set out below and have been consistently applied to all the years presented. The Group’s financial statements are presented in sterling and all values are rounded to the nearest thousand pounds (£’000s) except where indicated. The Group’s financial statements have been prepared on a going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue in existence for the foreseeable future. Please refer to the Directors’ Report for further details. Adoption of New Standards At the beginning of the period the Group adopted IFRS9 Financial Instruments: Classification and Measurement, the new accounting standard on Financial Instruments and IFRS15 Revenues from Contracts with Customers, the new accounting standard on revenue. In respect of IFRS9 this has changed the way in which we account for our provision against trade receivables. Under the IFRS9 “expected credit loss” model, a credit event no longer has to occur before credit losses are recognised. Having re-reviewed the provision which existed at 31 December 2017 under the new methodology, the Directors have concluded that no adjustment would have been made under the forward-looking expected default rates; the expected default rates were materially the same as the historical default rates with the major exception of Carillion, where the forward-looking expected default would have been higher at 31 December 2017 than the historical default rate. However, the Carillion debt was fully provided for in the 2017 accounts as a post balance sheet event. Therefore no restatement has taken place with respect to the adoption of IFRS9. In respect of IFRS15 we have applied a fully retrospective approach. We have restated our previous period figures to show the effect of the new standard. There have been two changes derived from the adoption of the standard. • Adjustment One (Metro Rod): IFRS15 has resulted in a timing shift of the revenue recognition point based on the assessment of control being transferred and when we have a legal and enforceable right for payment. The Directors believe that invoicing is a key performance obligation, which we undertake on behalf of our franchise network and customers. Given the requirements of our Facilities Management customers, the Directors believe that revenue will only be received once invoicing has been completed in accordance with these requirements. Therefore, our revenues should only be recognised at the point at which the invoice has been raised, rather than the point at which the underlying job is completed (as under IAS18). The shift has not had a significant impact in terms of the financial statements as the Company sees approximately the same number of jobs being reported into the relevant period as previously. However, it has a larger effect on the statement of financial position as it reduces down the level of accrued income by £1.8m (2017: £2.1m) and the related accrued costs of £0.9m (2017: £0.7m) and creates a contract asset balance of £0.8m (2017: £0.6m) where franchisees have been paid for work in advance of the work being invoiced to third party customers. The change also created a deferred tax asset of £0.2m which was utilised during the year to decrease the current tax liability. NOTES FORMING PART OF THE FINANCIAL STATEMENTS For year ended 31 December 2018