56 Franchise Brands plc Annual Report and Accounts 2018 1 Accounting policies continued • Adjustment Two (National Advertising Funds): National Advertising Funds are collected from franchisees under their agreements and then spent on their behalf on advertising which benefits the underlying franchise networks. These funds have not previously been recognised as revenue under IAS18. The Directors did not believe that the Group met the criteria for recognising revenue due to the fact that the Group is not exposed to the risks and rewards of the transactions. The management of the funds does not result in any profit or loss for the Group as all funds received are expended on behalf of the networks. With the adoption of IFRS15 the Directors have concluded that the Group will recognise the costs expended by the funds in the year, and will recognise an equal amount as revenue, with any difference from the amount of cash received from our franchisees as accrued or deferred revenue within the balance sheet. This is because it is the Group which controls the expenditure of the funds, rather than the franchisees. Overall, there is no effect on profit. In the current period the inclusion of the fund expenditure as income has increased revenue by £1.1m (2017: £0.6m) and has increased administration expenses by the same amount of £1.1m (2017: £0.6m). The revenue which we are recognising in respect of the national advertising fund is included in the total of MSF for the purposes of income categorisation. In line with the transitional arrangements within IFRS15 we have restated our previous period figures to show the effect of the new standard. Year ended 31 December 2017 Original numbers £'000 Adjustment One £'000 Adjustment Two £’000 Final numbers £'000 Revenue 24,292 (65) 640 24,867 Cost of sales (15,198) 46 – (15,152) Total administrative expenses (8,882) – (640) (9,522) Finance expense (277) – – (277) Tax expense (47) 4 – (43) Profit after tax (112) (15) – (127) Basic Earnings per share (p) (0.16) (0.02) – (0.18) Diluted Earnings per share (p) (0.16) (0.02) – (0.18) Assets Original numbers £'000 Adjustment One £'000 Adjustment Two £’000 Final numbers £'000 Intangible assets 27,025 – – 27,025 Property, plant and equipment 162 – – 162 Inventories 252 – – 252 Trade and other receivables 9,670 (1,526) – 8,144 Cash 3,245 – – 3,245 Trade and other payables (7,132) 726 – (6,406) Loans and borrowings (9,419) – – (9,419) Obligations under finance leases (86) – – (86) Deferred tax liability (526) 152 – (374) Total net assets 23,191 (648) – 22,543 At the time of publication of these financial statements, the following standards and interpretations, which have not been applied in these financial statements, were in issue but not yet effective: IFRS16 Leases (effective 1 January 2019) IFRS16 replaces IAS17 ‘Leases’ and substantively changes the accounting for operating leases. Where a contract meets IFRS16’s definition of a lease, lease agreements will give rise to the recognition of a non-current asset representing the right to use the leased item, and a loan obligation for future lease payables. Lease costs will be recognised in the form of depreciation of the right to use asset and interest on the lease liability, which may impact the phasing of operating profit and profit before tax, compared to existing cost profiles and presentation in the income statement, and will also impact the classification of associated cash flows. The detailed assessment of the impact on the Group is ongoing, with the current focus being on assessing the completeness of lease contracts. The adoption is expected to have a significant impact on the presentation of the Group’s assets and liabilities, mainly relating to property and vehicle leases. Our initial assessment is that the standard will increase lease assets by £1.2m, and increase lease liabilities by a similar value, but will have an immaterial overall effect on profit and earnings. NOTES FORMING PART OF THE FINANCIAL STATEMENTS continued For year ended 31 December 2018